Committee on Ways and Means, Subcommittee on Oversight, 3-18-99 Testimony

Statement of Tim Trankina
Chief Operating Officer, Peachtree Settlement Funding, Norcross, Georgia

Testimony Before the Subcommittee on Oversight,
of the House Committee on Ways and Means

Hearing on Tax Treatment of Structured Settlements

March 18, 1999

Mr. Chairman and Members of the Committee:

My name is Timothy J. Trankina and I am the founder and Chief Executive Officer of Peachtree Settlement Funding (PSF). PSF is a niche finance company specializing in providing liquidity to individuals holding high quality illiquid assets, including structured settlements. I appear before you today along with John E. Chapoton, a partner with the law firm of Vinson & Elkins located here in Washington, and the former Assistant Secretary of Treasury for Tax Policy from 1981 to 1984.

Structured settlement is a term of art used to describe the settlement of a tort claim by way of a series of future installment payments. These payments are made at fixed dates in the future and are often monthly payments or lump sums although virtually any type of payment arrangement can be structured. The use of structured settlements has grown in popularity over the last 15 years as insurers have aggressively marketed them as a cost effective settlement tool. The settling accident victim is often given a choice between a lump sum (for example $100,000) or a series of future payments (e.g. $1,000 per month for 240 months). Since the present value of the future payments is usually not disclosed to the victim, they will often accept the installment payments under the mistaken belief that they are worth more than the lump sum (ie. they believe, wrongly, that $1,000 per month for 240 months is worth $240,000 when in fact it is worth considerably less).

While structured settlements are often very useful as settlement tools, they suffer from one very serious drawback - inflexibility. Thus, several years into a structured settlement payout, a victim's life circumstances will have changed such that they need or desire a lump sum. Settlement Purchasers such as Peachtree fill this void by re-financing a portion of the future payment in order to give the accident victim the lump sum they desire now. Contrary to the message being "spun" by the proponents of the excise tax, on average, we charge discount rates of 18- 20% per annum. These rates are consistent with credit cards and other "b" and "c" lenders rates.

As you may or may not know, the National Association of Settlment Purchasers (NASP) is a trade group made up of companies and individual small businesspeople who are involved in the secondary market for structured settlements. NASP members provide liquidity for individuals who are receiving structured settlement payments over a long period of time. This liquidity is provided either by way of a loan, secured by a pledge of the individual's right to receive the structured settlement payments, or by way of an outright assignment of the right to receive the structured settlement payments. While most firms (and all NASP members) already provide financial disclosures and rights of recission in their contracts, settlement purchasers support broad consumer protection legislation to require full and complete disclosure from everyone.

In order to appreciate the complexity of the structured settlement area, I have attached a brief Structured Settlement Overview. NASP and its members have no quarrel with and have in fact supported true consumer protection legislation. However, HR 263 is really a ban of the sale of structured settlements in the guise of a consumer protection bill. The particular shortcomings of the bill can be summarized as follows:

1. Settlements that did not require court approval when they were set up should not require court approval to re-finance. HR 263 imposes needless and burdensome conditions of the rights of an individual to use their money as they see fit. The typical structured settlement claimant is seeking less than $20,000 when they re-finance their settlement with a NASP member. Requiring court approval can easily cost the consumer 10% or more of that sum in attorney's fees and court costs. Moreover, in the three states that require court approval (CT, KY and IL) the insurance industry routinely files 40 and 50 page briefs and objections to the transfers. How could an individual possibly afford to combat the insurance industry in court ??? Succinctly stated, transfer of settlements that were not approved by a court in the first place should not require court approval to re-finance.

2. Sales Shouldn't be Limited to the Desperate and The Needy. This bill would tell the courts that only a claimant facing "imminent financial hardship" could sell. In other words, the richest guy in town can't negotiate a sale - even with court permission; but the fellow who's desperate - who faces "imminent financial hardship" - can. That's discriminatory and arbitrary (and perhaps backward). The court should be asking, "what is in the best interest of the claimant?"

3. Bank Lending Should Be Excluded. The bill was supposed to be about unregulated "factoring" transactions, but by its terms, it also covers loans and bank lending. We already have plenty of regulations dealing with lending by banks and finance companies. This will make it difficult (if not impossible) for banks to make secured loans to people who are getting payments like this over time. And it will make it difficult for personal injury law firms to secure affordable credit.

4. Claimants Deserve These Protections Whenever Asked to Choose Between Cash and Payment Over Time. Whenever a personal injury claimant is asked to choose between up-front cash and payment over time, the claimant should be: (1) advised to consult with a lawyer or other professional advisor; (2) told what they are getting and what they are giving up; and (3) told what the interest rate or discounted value is. The disclosures should be made and claimants advised to consult counsel when they are considering a sale and when getting into a settlement in the first place. That's only fair. In its current form, this bill will be seen as a one-sided effort to protect insurance companies at claimants' expense, leaving claimants without any meaningful disclosure requirements or safeguards at the "front-end" -- and no meaningful opportunity to cash out when and if their circumstances later change.

There is an enormous amount of misinformation, disinformation and demagoguery regarding structured settlement purchasers and the financial terms of the transactions we engage in. Attached as exhibit "B" is a three page document which separates fact from fiction. I have also attached a document entitled "What's this Fight Really All About" and one regarding the "tax issue" as exhibits "C" and "D" respectively. It is also important to note that the individuals with whom we do business are not catastrophically injured. They are normal working people who have a need or desire for a lump sum of money now rather than in the future. The following statistics bear this out:

• More than 85% of structured settlement recipients are not disabled and are gainfully employed.

• 92% of claimants are "satisfied" or "very satisfied" with the re-financing of their settlement which they accomplished with the help of Settlement Purchasers.

• The average person who re-finances a structured settlement is 33 years old, employed with a household income of nearly $25,000.

• More than 50% of structured settlements have a present value of $30,000 or less.

(Source: Best's Review - November 1998)

In conclusion, Settlement purchasers such as Peachtree provide a valuable financial alternative to thousands of people annually. We encourage and will support meaningful regulation that protects consumers. However, as presently drafted, HR 263 will effectively ban our business. Additionally, it will deny Americans access to a valuable financial alternative. As presently drafted, HR 263 will sacrifice the interests of ordinary Americans on the alter of insurance company special interests.

Structured Settlement Overview

The National Association of Settlement Purchasers ("NASP") is a trade group made up of companies and individual small businesspeople who are involved in the secondary market for structured settlements. NASP members provide liquidity for individuals who are receiving structured settlement payments over a long period of time. This liquidity is provided either by way of a loan, secured by a pledge of the individual's right to receive the structured settlement payments, or by way of an outright assignment of the right to receive the structured settlement payments. While most firms (and all NASP members) already provide financial disclosures and rights of recission in their contracts, settlement purchasers support broad consumer protection legislation to require full and complete disclosure from everyone.

The National Structured Settlement Trade Association ("NSSTA") has circulated legislation in the form of a so called model act. This legislation was drafted by the NSSTA, who has vowed to put the settlement purchasers out of business. For your information, the NSSTA is made up of independent brokers and insurance companies who make billions of dollars each year in connection with structured settlements. Estimates of the premiums received each year by insurance companies in connection with the issuance of annuities used to fund structured settlements are between 3 and 5 billion dollars annually. The NSSTA brokers that "consult" with the parties during the settlement negotiations (usually with the defendant, defense counsel and/or property and casualty insurance carrier for the defendant) and attempt to persuade one or both of the parties to settle the case by way of a structured settlement. They earn commissions and fees from the insurance companies by brokering the purchase of an annuity to fund the payments due and payable under the structured settlement agreement.

I. A typical structured settlement.

While structured settlements can take several forms. Below is a brief description of what I would consider to be a typical structured settlement transaction. I've also attached a diagram as Exhibit A that may be helpful.

1. An individual (the "Plaintiff") is involved in, for example, an automobile accident with another individual or company (the "Defendant").

2. The Plaintiff may file a lawsuit against the Defendant or simply file a claim with his own automobile insurance company or against the casualty insurance carrier for the Defendant. (It is important to note that all structured settlements do not necessarily arise from a lawsuit. Often, claims against property and casualty insurance carriers that have not resulted in a lawsuit are resolved by way of a structured settlement. Nevertheless, for purposes of our example, let's assume that the Plaintiff has retained a lawyer and filed a lawsuit against the Defendant.)

3. The Defendant's property and casualty carrier will retain an attorney to provide a defense for the Defendant.

4. As is the case with almost all litigation, the parties agree to settle; in this case let's say they agree to settle by way of a structured settlement.

5. Under a structured settlement agreement, the Defendant will contractually agree to pay the Plaintiff (i) an up front cash payment (which almost always goes to pay the Plaintiff's attorneys fees, court costs, medical expenses, etc.) and (ii) future periodic payments. The future periodic payments may be monthly payments, annual payments, every five years, or any combination of these and more. The available payment options are limited only by the creativity and negotiating skills of the parties. The parties execute a settlement agreement, whereby the Defendant and/or the Defendant's property and casualty insurance company agree to make the future periodic payments to the Plaintiff in return for a release by the Plaintiff of all claims and causes of action against the Defendant and the Defendant's insurer.

6. Often, the Defendant and/or the Defendant's insurer will execute a Qualified Assignment, whereby the Defendant and/or the Defendant's insurer will assign to a third party (the "Assignment Company") the obligation to make the payments due under the settlement agreement. The Assignment Company is typically, but not always, an affiliate or subsidiary of a large insurance company.

7. Typically, the Qualified Assignment arrangement is contemplated and described in the Settlement Agreement and the Plaintiff contractually agrees to permit the Defendant and/or the Defendant's insurer to assign their obligation to make the future periodic payments due under the Settlement Agreement to the Assignment Company. Often, the Plaintiff actually signs the Qualified Assignment and the Defendant and/or the Defendant's insurer is released from any obligation to make the periodic payments called for by the Settlement Agreement.

8. The Assignment Company will then purchase an annuity from a life insurance company ("Life Insurance Company") to fund its obligations to make the payments due under the Settlement Agreement and/or Qualified Assignment. Often, the Assignment Company purchases the annuity from an affiliated life insurance company. For example, Safeco Assigned Benefits Service Company, an Assignment Company, will often purchase an annuity from Safeco Life Insurance Company to fund its obligations to make structured settlement payments.

9. The Assignment Company is the "owner" of the annuity, Life Insurance Company is the "issuer," and the Plaintiff is identified as the "payee," "annuitant" and/or "primary beneficiary." The Settlement Agreement often, but not always, will provide that the Assignment Company may, at its option, purchase an annuity from Life Insurance Company to fund the Assignment Company's obligation to make the periodic payments.

10. Life Insurance Company will then make the annuity payments directly to the Plaintiff, as payee, annuitant and/or beneficiary under the annuity, at the direction of the Assignment Company, as owner of the annuity.

11. NASP members come into the equation by providing the Plaintiff (i.e. the (annuitant/payee/beneficiary under the Annuity) liquidity, in the form of assignments or loans secured by the Plaintiff's right to receive all or a portion of the payments due under the Settlement Agreement and annuity. For example, a NASP member may accept an assignment of the Plaintiff's right to receive certain payments due in connection with the structured settlement arrangement or may loan the Plaintiff money, in return for a pledge of the Plaintiff's right to receive the payments due under the settlement agreement and/or annuity.

This is not the exclusive method by which structured settlements arise, but certainly the most common. For example, there is no requirement that a structured settlement involve an Assignment Company or an annuity. As discussed in more detail below, the Assignment Companies, Life Insurance Companies and structured settlement brokers enjoy tremendous economic benefits from structuring these transactions in the above manner, which helps explain why this structure is so valuable. Nevertheless, defendants in litigation and their property and casualty insurance companies may simply agree with plaintiffs and claimants to settle a case which calls for a payout of the settlement amount over time. That would be considered a structured settlement, but would not involve a Qualified Assignment company and would not fall under Section 130 of the Internal Revenue Code (see below). The defendant or property and casualty carrier may bypass the Assignment Company and simply purchase an annuity directly to fund its obligation under the settlement agreement or simply make the future periodic payments directly to the plaintiff/claimant out of its own funds. Structured settlements that predated 1986 (and the enactment of certain tax provisions) typically did not involve Qualified Assignments.

II. The Tax Code.

The structured settlement business generated by the members of the NSSTA exists, almost entirely, because of the presence of two provisions of the Internal Revenue Code. Sections 104 and 130. Section 104 provides that monies received by individuals on account of personal injury, sickness or death is excludable from the gross income of the taxpayer receiving said monies. This exclusion applies whether the monies are received in a lump sum or over a period of time. Hence, monies received under a structured settlement are not taxable to the Plaintiff. This section of the Code dates back to 1939 and is well-established. The exclusion from gross income applies to all monies received as a result of personal injury, sickness or death as long as there was some physical injury.

The other relevant provision of the Internal Revenue Code is Section 130, which conveys certain tax benefits on the insurance companies that enter into structured settlements. This provision was not enacted until 1986 and resulted from intense lobbying by insurance companies and structured settlement companies. It provides that an entity that accepts, by way of a "qualified assignment," the obligation to make structured settlement payments to an injured claimant shall not be taxed on the amount paid to said party by the defendant to assume such obligation, provided that the Assignment Company (i) assumes the liability from a person who was a party to the suit or settlement agreement; (ii) the periodic payments are fixed and determinable as to amount and time of payment; (iii) the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of the payments; (iv) the assignee's obligation is no greater than the obligation of the person who assigned the liability; (v) the periodic payments are excludable from the gross income of the recipient under Section 104; and (vi) the amount received by the assignee for assuming the periodic payment obligation is used to purchase a "qualified funding asset." A quailed funding asset is defined as an annuity contract issued by a life insurance company or an obligation of the United States (such as treasury bills). It allows NSSTA broker members to "sell" structured settlements more effectively and amounts to a huge tax benefit for the insurance companies, which own the Qualified Assignment companies.

As a result of Section 130, much of the 5-8 billion dollars received by Assignment Companies each year to assume the obligation of defendants and property and casualty carriers to make the periodic payments due under structured settlements is not taxable to the entities that receive these payments. While it is true that the Assignment Companies use most or all of this money to purchase "qualified funding assets," it is important to note that almost all of these qualified funding assets are purchased from affiliated life insurance companies (parent or sister companies). Thus, the life insurance companies get to sell their annuity products at very competitive rates. For those life insurance companies that own property and casualty companies and also issue annuities to fund structured settlements, the they have a potentially very large and lucrative captive customer.

III. Who benefits from structured settlements?

The transaction provides a great many benefits to the players that are not always recognized or appreciated by those unfamiliar with the transaction.

a. It is widely reported that insurance companies (i.e. the property and casualty carriers) are able to settle personal injury claims for 15-20% less than it would typically cost them to settle such claims by way of a cash payment. Benefit to the insurance industry.

b. The plaintiff's lawyer almost always receives their fee up front, out of the cash portion of the settlement; otherwise you can be sure that plaintiff's lawyers would be reluctant to put their clients into structured settlements. Benefit to plaintiff's lawyers.

c. Structured settlement brokers who structure the settlement and place the annuity with the insurance company earn a fee in connection with the transaction. Benefit to structured settlement brokers [i.e. NSSTA members]. (Note: the vast majority of these structured settlement brokers represent the defendant/property and casualty insurance carrier. Thus, their incentive is to settle the case as cheaply as possible for the defendant/insurance carrier, to insure additional business with the casualty carrier.)

d. The Assignment Company receives cash compensation from the defendant/property and casualty carrier for agreeing to assume the obligations to make the future structured settlement payments and said compensation is not taxable. Benefits the Assignment Company.

e. Life Insurance Company gets to sell their annuity policies at very competitive rates. In turn, they put that money to work on investments earning large returns for themselves which far exceed the rate at which the annuities were placed. Benefits Life Insurance Company. (Currently, rates for annuities to fund structured settlement payments are around 5.5 to 6%. It is not difficult to see the large profits the Life Insurance Companies enjoy if they are taking in 4 Billion Dollars per year in annuity premiums that yield [to the Plaintiff} 6% per year and then invest the money and earn a return of 10 % or higher.)

IV. Problems with structured settlements.

The problems with structured settlement transaction are as follows:

a. They are inflexible. In order to prevent the claimant from being in "constructive receipt" of the annuity payments, Section 130 of the Internal Revenue Code provides that payments cannot be increased, decreased, accelerated or deferred. Thus, once the Plaintiff agrees to the structured settlement, they are stuck with it. If the Plaintiff has a change in his life circumstances (i.e. death, divorce, serious illness, etc.), which was not (and could not have been) anticipated at the time of the structured settlement, the Plaintiff is unable to access or liquidate his structured settlement payments to address those issues. If the Plaintiff has a financial emergency (i.e. unexpected medical procedure not covered by insurance, bankruptcy, foreclosure, etc.) they would be unable to access their funds to address the emergency. If the Plaintiff wanted to access their structured settlement payments to continue or finish their education; buy, improve, or remodel a home; or start a business; pay off debts; avoid foreclosure or bankruptcy, etc. they are precluded from doing so.

b. Structured settlements require the parties to anticipate far into the future. It is impossible for a Plaintiff and his counsel to look into the future and anticipate, with any degree of certainty, what the person's financial situation and needs will be.

c. No states have regulations requiring disclosure of the terms of the structured settlements, such as the present value of the future payments due under the structured settlement, the discount rate used to calculate the present value, the total amount of payments to be paid (so a comparison can be made of the present value vs. the total future payments), etc. Plaintiffs do not always fully understand the ramifications of a structured settlement and the Defendants and insurance brokers an insurance companies who forge structured settlements on these Plaintiff's and their counsel are not in a big hurry to explain the transaction in its entirety, particularly with respect to the present value of the future payments.

d. Often, structured settlements are negotiated with individuals who are not represented by counsel. That is a particularly true when a person files a claim with their own insurance company. In fact, there are several pending class actions against insurance companies for discouraging their insured's from retaining counsel to represent them in connection with personal injury claims. In fact, in one state one insurance company was cited for practicing law without a license by providing legal advice to claimants regarding their claims. In cases where the Plaintiff is not represented by counsel, the problems caused by the absence of any meaningful regulations requiring disclosure, representation by counsel, etc. when structured settlements are originally proposed are exacerbated.

V. Business Practices of Insurance Companies and Structured Settlement Brokers.

For your information, the structured settlement brokers and insurance companies who make hundreds of millions of dollars per year on structured settlements and who are proposing the legislation to eradicate our business have some skeletons in their own closet.

a. As indicated above, structured settlements have numerous benefits for the property and casualty insurance carrier and defendants who settle litigation with structured settlements (cheaper to settle and a reduction in attorneys fees); the brokers who structure the settlement (they earn a fee for selling the annuity to fund the structured settlement payments); the plaintiff's lawyer (who settles the case without having to go to trial and who receives his/her fee up front, in cash); and the life insurance company/assignment company (who accepts the obligation to make the payments and gets to sell an annuity [they receive cash tax free, sell an annuity at relatively low fixed rate [i.e. currently about 6%], and are able to earn a return on the money they receive for issuing the annuity]).

b. There are few, if any consumer protection regulations imposed on the front end of a structured settlement transaction, such as required disclosures, court approval, mandatory review by an attorney or financial advisor, etc.

c. Insurance companies and structured settlement brokers representing defendants in structured settlement negotiations use questionable practices in trying to persuade defendants to accept structured settlements. For instance:

(i) Travelers Insurance is currently a defendant in a class action case in Connecticut involving claims of fraud, deceptive trade practices, civil conspiracy, breach of fiduciary duty, etc. The plaintiff's class are recipients of structured settlements. The Complaint in that case quotes liberally from Travelers' structured settlement manual as follows:

-- "Essentially, when a claimant has a reduced life expectancy and a substandard age rating has been obtained, the more life contingent benefits provided in the structure offer, the higher the savings on the claim."

-- "The primary objective in expanding use of structured settlements is to maximize their value as a tool to reduce both claim loss and expense costs."

These quotes from Travelers own manual illustrates the motives of the insurance companies in promoting structured settlements. Moreover, the allegations in the Connecticut class action lawsuit were that Travelers received illegal kickbacks and rebates from structured settlement brokers in exchange for directing business to said brokers. Thus, the structured settlement brokers would rebate part of the commission they earned for arranging a structured settlement through or for Travelers in return for Travelers' agreement to direct business to the brokers who agreed to make such rebates. (It is my understanding that rebating is prohibited by statute in virtually every state in the country.)

(ii) Insurance companies, defendants, and structured settlement brokers endeavor to "back-load" structured settlement contracts and, as evidenced above, increase the life contingent component in the structured settlement agreements. For example, it is not uncommon for structured settlement agreements to call for periodic payments every five (5) years or so to, with the payments increasing substantially toward the end of the agreement. We've seen deals that call for a payment of $ 10,000 in Year 5, $ 15,000 in year 10, $ 25,000 in year 15, $ 50,000 in year 20, $ 100,000 in year 25, and $ 100,000 in year 30. The deal may be "sold" by the defendant, insurance company and/or structured settlement broker as a $ 300,000 settlement (referring to the total amount of payments), yet the true value of these future payments, assuming an 8% discount rate, is around $ 57,000.

-- Another example involves an actual structured settlement involving one of our clients in Oregon from 1991. Our customer's parent settled this case when our customer was 16 years old. The settlement documents specifically refer to a settlement of $ 581,173.82, broken down as follows:

• Cash payment of $ 110,443, of which $ 50,136 went to the plaintiff's attorney, $ 41,443 went to reimburse his health insurance company for money paid to medical providers related to the accident, and $ 18,863 was paid to the plaintiff's father to reimburse him for his out-of-pocket medical expenses (probably the deductible) and to replace the plaintiff's car.

• The remaining $ 470,730.82 was structured over a period of 19 years. The plaintiff was to receive $ 15,000 in January 1996, when he was 22 years old; $ 30,000 in January 2003, when he was 29 years old; and $ 425,730.82 in January 2010, when he was 36 years old. This deal was marketed and sold to the plaintiff and his father as a $ 581,173.82 settlement. In reality, the settlement resulted in reimbursement of the plaintiff's health insurance provider, a replacement car for the plaintiff, and future payments over a period of 19 years that had a present value, assuming an 8% discount rate, of $ 120,770.

-- Other examples involve monthly payments of $ 125 per month, payments every five years of $ 5,000 per year, four annual payments of $ 12,000 each, etc. Claims adjusters and attorneys representing property and casualty carriers will often tell the claimant/plaintiff (particularly when they are not represented by counsel) that the only way the case can be settled is by way of a structured settlement. We are involved in a deal right now, where the plaintiff's attorney has been told point blank by Liberty Mutual that they will not settle his client's case except by way of a structured settlement. They have offered three (3) payments that total approximately $ 16,300, to be paid in the years 2004, 2006, and 2009. The present value of those payments, assuming an 8% discount rate is $ 9,203.

The point of these examples is not that parties should not have the right to settle a claim or case on any terms that they deem appropriate. The point is that the insurance companies and structured settlement brokers often argue, in their ongoing effort to put us out of business, that structured settlements were created to serve important public policies such as to settle cases involving catastrophically injured individuals who have long term and continuing medical needs and physical disabilities with little or no ability to provide for themselves or their families. They contend or imply that structured settlements are used exclusively or mostly where the claimant/plaintiff is disabled and unable to work such that he or she is dependent on the monies he receives under the structured settlement agreement for future medical expenses and to support himself and his family. That simply is not true.

Certainly, there are structured settlements that involve catastrophic injuries. However, for the vast majority of structured settlements the overriding reasons underlying the decision to settle the case by way of a structured settlement are that they are a tool that promotes the settlement of claims and disputes because (I) the defendant and/or casualty carrier can settle the claim for less money than if it was settled by way of a structured settlement; (ii) the structured settlement broker earns a fee, (iii) the life insurance company is able to sell an annuity; and (iv) the plaintiff and the plaintiff's counsel are able to avoid a lengthy and expensive trial and resolve their dispute. There is nothing wrong with these reasons underlying structured settlements, but it is disingenuous for our opponents to suggest that these are not important reasons underlying the use of structured settlements. Furthermore, any suggestion by the opposition that all (or even a majority) of structured settlements involve individuals who have sustained catastrophic injuries which require long-term care is simply inaccurate, deceptive, and misleading. Remember, these insurance companies that have suddenly developed this pro-consumer interest in preserving and protecting the long term well-being of these injured claimants are, in many cases, the same people who tried like heck to defeat the claimants in court. Since when were insurance companies the bastion of consumer protection?

d. Another argument that the insurance companies and structured settlement brokers advance in support of their efforts to shut down our business are as follows:

•structured settlement recipients are unsophisticated in financial matters and by structuring the settlement so as to spread the payments over time, the recipients will not receive a large lump sum which they are likely to dissipate prematurely, leaving them and their family destitute, unable to work, and a ward of the state.

Response: This argument presumes that all structured settlement recipients are unsophisticated in financial matters and will prematurely dissipate a cash settlement. Not true. Occasionally, the settlement agreement provides that the plaintiff's attorney shall receive their fee over time as part of the structured settlement. (That does not happen too often, because attorneys appreciate the time value of money.) There simply is no correlation between being unsophisticated in financial matters and being the recipient of a structured settlement, unless one were to assume that someone who was unsophisticated in financial matters would be more likely to accept a structured settlement in the first place instead of a cash settlement. If that were true, then it would seem to me that these transactions cry out for some basic consumer protection and disclosure regulations on the front end. If structured settlement recipients are so unsophisticated in financial matters and so seriously injured, as our opposition claims, what is so wrong with requiring the insurance companies and structured settlement brokers who sell these products, which call for payments to people 20, 30, 40, even 50 years down the road, to provide some basic information about these structured settlements. (Insurance companies can and do go broke.) One could argue that an injured claimant deserves and needs more information about structured settlements on the front end, when they are considering releasing their claim in return for the unsecured promise of future payments that may come due far out in the future, than they need on the back end, when deciding to assign five or six years of payments in order to address an immediate need or when they desire to pledge their right to receive said payments as collateral for a small personal loan. Yet, the insurance industry opposes all suggestions for basic disclosures to be provided claimants when faced with the decision of accepting a structured settlement.

The vast majority of structured settlements involve accidents where the claimant/plaintiff did not sustain catastrophic or permanent injuries and/or where the plaintiff has recovered from their injuries. (NASP members typically do not enter into transactions with individuals who are both unemployed and unemployable.) In addition, structured settlements are often used to settle wrongful death cases (where the recipient of the payments is not the person who was physically injured). I've even seen cases where a structured settlement was used to resolve a same sex sexual harassment case.

Furthermore, simply because the person sustained serious or permanent injuries does not necessarily mean: (I) that they cannot lead a productive life; (ii) that they cannot provide for themselves and/or their family; (iii) that they are unsophisticated in financial matters; (iv) that they received a large structured settlement that was designed to provide for them for the rest of their life; or (v) that they would not benefit from having the opportunity to assign or pledge all or a portion of their right to receive structured settlement payments to address a personal need, situation or emergency. Some examples:

• We closed a transaction with a young man in Arizona who had sustained a spinal injury that left him a paraplegic. Because of the nature of the accident (i.e. no liability by the defendant and/or the defendant who was liable had no money and/or the plaintiff was partially at fault) this person's structured settlement was rather small (the original settlement called for $ 15,000 per year for 10 years). However, this young man was self-sufficient and able to work. He was completing his education and preparing to take the CPA exam. He wanted some money to purchase a new handicapped van, complete his education, and prepare for a new job. He had four (4) annual payments remaining and assigned them to us for a lump sum payment of around $ 41,000.

• Another gentlemen who was our customer had sustained serious injuries and was physically disabled. He desired to put a down payment on a house and do some work on it to make it handicapped accessible. He also wanted to purchase a handicapped van. Although this gentleman had not fully recovered from his injuries, such that he could hold down a full time job, he was working toward that goal. His immediate objective was to gain some independence by purchasing his own home and transportation. (Previously, he had been living with his parents.) He was receiving over $ 7,500 per month from his structured settlement, which was increasing 3% per year. He wanted to assign $ 1500 per month for 8 years so that he could raise funds to start these projects. He was represented by counsel throughout the process and was very much in favor of proceeding with the transaction. Without the option to complete a transaction with Settlement Capital, this fellow would have had no other alternative.

• There are numerous examples. We completed a transaction with a gentlemen who wanted to purchase a mobile home park. (He had recovered from his injuries and was working, but wanted to go into business for himself.) We completed a transaction with a lady who was working for AT&T and making $ 52,000 per year, but wanted to raise some money to send her daughter to Tulsa University. We loaned her $ 16,000, secured by her structured settlement payments. Another client was about to get married and she and her fiancee had saved approximately $ 15,000 for her wedding. A few weeks prior to the wedding, there was an unexpected death in her family. She had to use the money for her wedding to pay for the funeral. Her parents had settled a case for her when she was a child and she was scheduled to receive a $ 30,000 payment in approximately two (2) years. She was able to assign that payment to us and use the proceeds for her wedding. She was neither disabled nor unsophisticated. Everyone in our industry has been able to complete transactions with individuals to help them purchase a house, improve their home, start a business, continue their education, avoid foreclosure or bankruptcy, consolidate debts, pay off tax liens and child-support obligations, etc. The list is endless.

Query: If the insurance companies and structured settlement brokers are so concerned about the welfare of the structured settlement recipient, why do they back-load their structured settlement agreements and push life contingency payments. If they are concerned about the claimant dissipating large settlements, why do they back-load their deals with huge lump sum payments far in the future (i.e. $ 500,000 due in 2012, $ 1,000,000 due in 2020, etc.). Why do the news letters of the structured settlement brokers and NSSTA members emphasize selling the "gross value" and "aggregate total value of the payments" in settlement negotiations? In an article in a recent NSSTA newsletter, addressing overcoming objections to structures, the emphasis was on the use of "gross dollars" to compare a structure to a cash offer. Why won't they support legislation that requires that a person consult with counsel prior to entering into a structured settlement? The answer is that they want to destroy our business and continue to operate their business in a manner that maximizes their ability to place structured settlements and earn billions of dollars, while denying the consumer the right to make an informed choice or have control of their financial future.

• In a public hearing before the Texas State Senate Judiciary Committee in Texas in April of last year, a structured settlement broker and member of the NSSTA testified that there was not enough disclosure and information provided to the plaintiff in structured settlement negotiations. He testified that too often the property and casualty insurance carrier who has insured the defendant insists on placing the annuity to fund the structured settlement with an affiliated life company, even though another life company is offering a better rate and even though doing so might not be as beneficial to the claimant. He cited an example involving one case in which he was involved where the cost of the "in-house" annuity was $ 350,000 and a competing offer was around $ 260,000. (The point was if the property and casualty carrier was willing to purchase an annuity from its own affiliate for $ 350,000, they should have been willing to pay the same to another life insurance company, meaning the claimant/plaintiff could have received more structured settlement payments for the same cost from another independent life company.) He commented that some structured settlement brokers are only licensed by certain life companies, meaning any structured settlements involving said brokers would necessarily be placed with the life companies with which the broker was licensed, regardless of the benefits to the claimant/plaintiff. Other property and casualty companies have an approved list of companies with whom they will do business, further limiting the choices of the consumer. He also commented on problems with rate and age adjustments in connection with structured settlements. Finally, and perhaps most importantly, he complained about the practice of "rebating" which he stated was not uncommon in the structured settlement industry. He said that this practice never benefits the consumer. He concluded by saying that any legislation that requires disclosure and more information to be provided to the injured claimant and his attorney would be a positive development. Remember all of these comments were made by a structured settlement broker and member of the NSSTA in a public hearing and under oath. His statements closely followed the allegations asserted against Travelers in the Connecticut class action cases.

In short, the insurance industry, NSSTA, and structured settlement brokers preach consumer protection and public policy in their efforts to discredit and destroy our industry, while ignoring their own problems and resisting any efforts to address and/or regulate their industry. Contrary to their stated positions, their true interest is to expand their market and continue to earn billions of dollars without being subject to disclosure requirements and other consumer protection provisions and regulation and without the presence of the secondary market to educate the public or otherwise challenge them. (Remember, none of their proposed legislation imposes any regulation on them and, most notably, does not apply to a commutation of the future benefits due under the structured settlement to the Plaintiff by the Assignment Company and/or Life Insurance Company. In other words, we would be subject to extremely onerous disclosure and court order provisions to complete our transactions with our customers, while they would not be subject to such requirements, meaning they would have a substantial competitive advantage in completing such transactions. Sounds like a legislative monopoly to me.)

VI. Why the NSSTA, Structured Settlement Brokers, and the Insurance Industry Wish to Destroy Us.

There is no simple answer to this question. They will tell you that secondary market transactions threaten the tax benefits which structured settlement recipients and the parties obligated to make structured settlement payments enjoy under the Internal Revenue Code. That is, I believe, a red herring. There is no reported case, rule, regulation, IRS ruling or other authority that supports their contention that these transactions threaten their tax status. In fact, the only case to address the matter was a Third Circuit case, which rejected this proposition.

They will, of course, argue consumer protection and claim that the secondary market is ripping off consumers and charging exorbitant and unconscionable discount rates. That is also untrue. While discount rates are high, relative to mortgage rates and the prime rate, they are in line with credit card rates and other relatively risky lending. Discount rates range from 12% to as high as 25%, but the vast majority of deals are completed in the range of 16% to 22%. To be absolutely fair and frank, there certainly are some transactions where the discount rate exceeds 25%, rising to 30 or even 35%, but those involve very short and small transactions. (For example, someone may be scheduled to receive 2 annual $ 5,000 payments over the next two years and seek to raise some cash now. Our industry members do have a cost of capital [maybe 7,8, 9, or 10%], therefore to make the transaction economical, the annuitant might receive $ 6,700 at a discount rate of 31.41%. While that rate might seem a bit high, compared to the prime rate of interest, the fact is that our customers do not have access to traditional sources of capital. Moreover, the actual dollar difference between a rate of say 21.5%, which you might be able to get on a credit card and the 31.41% rate, would be $ 800. When you are dealing with transactions this small and this short-term, the actual dollars is what is important. Due to the risk inherent in our transactions and the cost of bringing in a transaction, we simply cannot do deals this size at these types of rates.)

Our opposition often argues that our customers receive 10 or 20 cents on the dollar. In this particular case, while the rate is relatively high, the annuitant receives 68 cents on the dollar. In a longer term transaction, say a $ 25,000 payment due in five years, the transaction could be completed at a rate of 15.5% and the annuitant would receive less than 50 cents on the dollar. The point is that you must be careful when comparing transactions, interest rates, and dollar amounts. You must not compare apples to oranges.

It is important to note, however, that when these transactions are completed by way of a loan, as some NASP members do, they are bound by usury limits. In Texas, the usury limit is an 18% effective rate, which means that our transactions are completed at a contract rate of interest of around 16.5%. Furthermore, lenders are required to provide disclosures of effective interest rates, etc. as required under applicable state law and the Federal Truth-in-Lending laws, may not charge fees or points, and must allow pre-payment of the loan without penalty.

All NASP members would support regulation of our industry which would require disclosures, that the seller/borrower be represented by counsel, and other consumer protection provisions. I believe NASP would also support a reasonable court/administrative agency review process, as long as the procedure was not too expensive and time consuming for the borrower/seller and as long as the standards of review were reasonable. In short, we support true "consumer protection" regulation, but not laws that give the insurance industry control over our customers and our business and which, in effect, regulate us out of business.

I believe the true motivation behind the insurance industries' opposition to our business is that by virtue of the fact that we exist, we necessarily educate the public and plaintiff's attorneys as to the true value of structured settlements, which is something our opponents cannot accept. We also have raised the profile of their industry and highlighted the profits they are earning and the tax boondoggle that they enjoy in Congress. A representative of the NSSTA once said to me that they have been told by their leadership that they must destroy us or we will destroy them. While I disagree with that statement, the fact that that is how they feel should give you some insight as to why they are fighting us.

We happen to believe our arguments are compelling and our position is reasonable and makes sense. However, we recognize that our opponents have done a good job of painting us as immoral companies who prey on widows, orphans, and the weak and uninformed. That simply is not true. Our objective is to survive and thrive in a reasonably regulated industry.

What are Structured Settlements Really About ???

On August 12, 1998, a hearing was held in the Circuit Court for Montgomery County, Maryland in the matter of Stone Street Capital v. Deborah L. Jackson, Civil No. 176131. In this hearing, Counsel for State Farm Insurance company discussed the reasons for pursuing structured settlements in personal injury case. Following is an excerpt from the transcript on this hearing:

THE COURT: Why is it, by the way, that traditionally these [structured settlement annuity contracts] are non-assignable?

COUNSEL FOR STATE FARM: There are a lot of reasons. One is to protect the victim usually of personal injury. The whole reason for setting up these -

THE COURT: Protect them from what?

COUNSEL FOR STATE FARM: The whole reason for setting up these structured payments is so that they do not get a lump sum; they do not get $300,000 up front. These people-

THE COURT: No it is not. The reason for setting up these structured payments are so that the insurance companies can settle out cheaper.

COUNSEL FOR STATE FARM: That is one reason.

THE COURT: All right, come on-

COUNSEL FOR STATE FARM: I am not going to deny that.

THE COURT: They are not looking out for a plaintiff in a personal injury case. Please.

COUNSEL FOR STATE FARM: That is one reason that Your Honor has said. It is more cost effective for the insurance company-

THE COURT: That is the reason. That is the reason.

COUNSEL FOR STATE FARM: Okay.

How Insurers Abuse Structured Settlements

The attached are examples of structured settlements. These example show how, when they are being set up, the insurance industry abuses them and how the true economics of a structured settlement are buried, hidden and obscured to make them seem more appealing to the plaintiff lawyer and his client⁽¹⁾.

Exhibit: Explanation/Comments:

1. Examples of actual insurance company settlement documents showing the amount they paid for the annuity and the future value of the settlement. This is why structured settlements "seem" like a great deal for the claimant when they are really a great deal for the insurer.

2. Attorney accidentally took his fee on the future value of the settlement.

3. Christy's proposal states that the value of the settlement is $222,000. In fact discounted at 10% it is really worth only $140,000 an overstatement of more than 58% !

4. The proposal for Rose states that the value of $630.89 per month for 240 months is $151,413. Discounted to present value at 10% per annum it is only worth $63,000 - an overstatement of the value of more than 140% !!

5. The Mr. & Mrs. Gibbons settlement proposal says that they are guaranteed $830,000. However, the real economic value of the guaranteed portion of the settlement is half that amount !!!

6. This settlement agreement wrongly sets forth the settlement values suggesting that the client is settling for over $413,000 when in fact the settlement is a mere $129,000.

7. The settlement foisted on this 19 year old accident victim tells her the settlement is worth $1,594,918 when in fact, it is only worth $341,166 in present value - this settlement proposal overstates the true value of the settlement by an astounding 367.4 % !!!

8. The settlement proposal for Kimberly sets out the actual cost of the annuities being purchased. With this information we can see that the yield she is receiving on the annuities purchased is a miserly 3.452% for the monthly annuity and 4.253% for the one paying the lump sum whereas, in 1993, United States Treasury Bonds were yielding over 7%.

9. Here again, due to lack of information, the attorney over-charged his client by taking a fee on the entire future value of the settlement.

10. This comparison is so utterly misleading and incorrect as to need almost no commentary. First, yields on U.S. Treasury securities at the time (7/'93) were over 7%. Thus, the annual payment would have been closer to $46,800. Second, the tax code specifically allows one to fund a structured settlement with U.S. Govt. securities - thus there would be no taxes due! Third, A U.S. Govt. bond is risk free whereas, a commercial annuity has default risk (see First Executive Life, Mutual Benefit Life, Confederation Life, etc.).

11. As a result of the death of her father, a structured settlement was used to provide for the care of Bobbyjo Plank (12 years old at the time). It provides her monthly payments of $2,250. However, they don't start until 43 years latter !!! The true value of this settlement discounted at a mere 5% is less than $64,000. How, pray tell, was this structured settlement designed to care for her ???

More examples available upon request.

PEOPLE WITH STRUCTURED SETTLEMENTS NEED PROTECTION, ALL RIGHT

FROM THE INSURANCE COMPANIES!

You may have heard talk about how people who have been awarded structured settlements as compensation for some injury need protection from settlement purchasers. They say these helpless people C who have been crippled or maimed and who rely on their settlement payments for sustenance C are being preyed upon by unscrupulous businessmen who want to dupe them into selling these lifelines for only a tiny fraction of what they=re worth. Through H.R.4314, which was introduced at the end of July, they are demanding that a 50 percent excise tax be imposed on such transactions to drive settlement purchasing companies out of business and prevent recipients from Afoolishly@ dissipating their awards.

Nonsense. The facts tell a much different story. Not only is the vast majority of people who have sold their structured payments for a lump sum not disabled, but as we=ll see, they=re happy with the choices they have made. Speaking of choices, other facts suggest that the insurance companies who are behind these structured settlements in the first place have not always been up-front with recipients, and have kept some pretty important information to themselves. Maybe that=s why they=re working so hard to keep exclusive control over this industry.

Let=s look at the facts:

C Nearly a third (32 percent) of recipients were not allowed to choose for themselves whether or not they wanted a structured settlement instead of a lump some. Some of these were minors at the time their cases were settled, and in some cases the insurance carrier made a Atake it or leave it@ offer.

Almost half the time (48 percent), the actual mathematical value (called present value) of the settlement was not explained to the claimant.

Almost as often (43 percent of the cases), claimants were not advised that their future scheduled payments were absolutely inflexible.

Astoundingly, 12 percent of structured settlement recipients were not represented by counsel when they agreed to the settlement.

So it appears that the insurance companies have a lot of explaining to do. But what about their claims that they=re now just trying to help protect defenseless recipients.

Again, let=s look at the facts:

C More than 85 percent of structured settlement recipients are gainfully employed and suffer no long term disability. (So much for preying on the defenseless!)

34 percent of those who exchange their settlements for lump sums use the proceeds to buy or renovate a home, 31 percent pay off debts or pay for educational/vocational education, 9 percent use the proceeds for a medical procedure or existing medical bills, 16 percent use the funds to open or expand a business. (So much for frivolously dissipating their awards!)

92 percent are Asatisfied@ or Avery satisfied@ with the refinancing they were able to accomplish with the help of the settlement purchasing industry. (So much for supposedly shady tactics!)

The average discount rate charged by settlement purchasers is 18 - 22 percent C about the rate credit cards charge. (So much for outrageous interest rates!)

Bottom Line, the facts simply aren=t what the insurance companies would have you believe. If you really want to help injured people who have been awarded structured settlements, take your time and demand a carefully crafted consumer protection bill that mandates full and understandable disclosure of financial details at every stage in the process C beginning when settlements are first agreed to, and continuing through any future transfer - and also recognizes the right of recipients to change their minds as their needs and circumstances change and to choose to sell their annuity payments for a lump sum if that=s what they want.

WHY WON'T THE BIG INSURANCE COMPANIES TELL THE TRUTH

ABOUT STRUCTURED SETTLEMENTS?

There=s been talk recently about how Congress ought to impose an extreme new 50 percent excise tax on settlement purchasing companies in order to protect people who have been awarded structured settlements. The big insurance companies who support this scheme, known as H.R. 263, have created a string of myths in their rush to ram this unfair tax through. The problem is, their myths don=t hold up in the light of day. Let=s look at those myths and the facts they leave out:

Myth: Structured settlements are essential for the long-term financial health of seriously injured people.

Truth: More than 85 percent of people receiving structured settlements have full-time jobs or are capable of working. They don=t suffer from long-term disabilities.

The average size of a structured settlement is only $75,000 - not nearly enough to pay for the long-term care of someone who=s been critically injured.

Myth: People who sell some or all of their structured settlements just squander the money, like the woman who allegedly wanted to cash in her settlement to help her new boyfriend buy a new motorcycle.

Truth: Far from squandering the money, of the people who exchange their monthly payments for lump sums:

34 percent use the money to buy or renovate a home.

31 percent pay off existing debts and child support obligations. In fact, settlement purchasers require that tax liens, child support and alimony are paid as part of their contracts.

14 percent pay medical expenses.

11 percent open or expand a business.

Myth: Structured settlements were designed to prevent people from quickly dissipating their awards.

Truth: The real reason the big insurance companies push structured settlements is their incredible profitability. Consider this, from The Travelers Structured Settlements Manual:

"The primary objective in expanding the use of structured settlements is to maximize their value as a tool to reduce both claim loss and expense costs."

"Essentially, when a claimant has a reduced life expectancy and a substandard rating has been obtained, the more life contingent benefits provided in the structured offer, the higher the savings on the claim."

In other words, the sooner a person with a structured settlement dies, the less the insurance company has to pay. That=s why they=re pushing structured settlements C not some altruistic desire to protect people from themselves. Why won=t the big insurance companies tell the truth? They can=t afford to. Don't let them use Congress to put an entire industry out of business.

1. Over 20% of all structured settlements involve clients with no attorney representation !

[THE ATTACHMENTS ARE BEING RETAINED IN THE COMMITTEE FILES.]