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September 4, 2014

Much ado about… something?

Filed under: Structured settlements — Peter Arnold

On the Friday before Labor Day (read: the government either wanted to bury it or someone was in a pre-holiday rush to clear out old business), the Internal Revenue Service (IRS) released Private Letter Ruling 143928-13, dated April 14, 2014 and authored by Mike Montemurro, Chief, Branch 4 at the IRS’ Office of the Associate Chief Counsel (Income tax & Accounting).  Montemurro’s letter, apparently requested by Pacific Life, approved favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the S&P 500 Index performance. The letter also included the possibility of a commutation pursuant to a Notice of Hardship.

Not surprisingly, this PLR touched a nerve among the structured settlement industry’s commentariat. The industry’s ever-tenacious Watchdog offered insights here and former NSSTA President Pat Hindert suggested a “game-changing” aspect to the commutation language here.

While I respect Pat tremendously – after all, his book Structured Settlements & Periodic Payments is rightly the main textbook for NSSTA’s certification class – I don’t see this language having such a major future impact. Somewhat like Barack Obama’s self-described views on gay marriage, the IRS’ view on the secondary market has been “evolving” in recent years.

A few years ago, Montemurro himself spoke at a NSSTA meeting about structures and the secondary market and his comments that day presaged his language in the new PLR.  Under gentle questioning from Drinker Biddle’s estimable Mike Miller about the assignability of periodic payments, Montemurro replied, in part:

We went through this before [Section] 5891 came into effect. The assignment companies were concerned that if they had these factoring transactions, it could blow up the old [Section] 130 deal.

Certainly the transaction has to be valid under state law. It’s always an assumption that the transaction is going to be enforceable under state law. And one thing we always assume in these rulings too is that these things are ‘sales’ of the periodic payments because there’s another way you could phrase these things and that is that they’re secured loans, where you’d end up with a different answer.

It’s actually important for state law because these [transactions] can be for usurious rates and that causes problems.

We’re very careful to make sure that it has to be an enforceable obligation under state law. We always assume in these transactions that taxpayers are treating them as sales, not as loans [although the IRS] won’t rule on whether it’s a sale or a loan [because] it becomes very difficult to make the distinction.

In short, Montemurro offered a pretty clear recognition of Section 5891’s acceptance of structured settlement sales. In subsequent comments that day, he reaffirmed the IRS’ approval in concept of these transfers, subject to IRC rules. Hence, Montemurro’s PLR, while important, doesn’t strike me as going significantly further than he did in that NSSTA presentation.

Incidentally, if anyone is interested in Montemurro’s comments on this or other topics – for example, non-qualified assignments and single-claimant 468(b) – let me know.

P.S.: To anyone in PacLife’s management who’s reading this, You have the best life company team in the structured settlement industry.

August 18, 2014

The structured settlement industry’s coming changes

Filed under: Structured settlements — Peter Arnold

Thanks to everyone who offered comments about my recent blog warning that lobbying Congress to tighten Section 5891 rules governing transfers of future structured settlement payment rights could backfire on the structured settlement industry.

The most interesting feedback (aside from a couple of seriously intriguing PDFs sent anonymously) involved my contention of a coming integration of the structured settlement’s primary and secondary/factoring markets.  That trend, which actually has already begun, has huge implications for any future lobbying effort because it directly affects Congress’ perception that the primary and secondary markets are separate and distinct.

Most who reached out either denied this trend (no, really) or minimized it.  Sorry but they’re both wrong.

To understand what’s driving this change, start with a remarkable speech that Chartis’ (now AIG) President of Claims Rick Woollams delivered at NSSTA’s 2012 fall convention.  A self-described supporter of structures, Woollams nevertheless predicted that by 2017, “The entity count represented by [NSSTA’s members] will probably be two-thirds of what it is now.”

By 2022, Woollams predicted that the number would be half of 2017’s figure.

Today, with industry production down almost 20% from 2008, the consolidation that Woollams predicted is underway. During the past year, Brant Hickey merged with Pension, Integrated Financial snapped up JMW Settlements and the James Street Group disappeared (Rest in peace, James).

Meanwhile, only eight life insurance companies (exactly half the 2004 figure) are issuing structured annuities.

Given this consolidation, no one should be surprised that the primary market (yes, individuals AND companies) is angling for new revenue and efficiencies from the factoring industry. Structure consultants who work with accident victims are building professional arrangements with secondary companies, referring accident victims wishing to sell payment rights in exchange for finder’s fees.

At last month’s Capital Hill session on structured settlements, Mark Perriello, president of the American Association of People with Disabilities, spoke passionately about his support of the primary market and objections to the secondary market. Shelly Buxenbaum from the office of Rep. Matt Cartwright, sponsor of legislation to change Section 5891, also spoke of the two as separate industries.

But Congress and AAPD (among others) must accept that this distinction is increasingly outdated and doesn’t reflect the growing business links between the consultants who work with accident survivors and the secondary market.

Coming after Labor Day: How primary and secondary market companies can integrate operations under a single streamlined management.  And the truth is that, if done correctly, this will benefit structured settlement beneficiaries as they will gain all its advantages while also having ready access to liquidate some or all of their payments when necessary.

July 24, 2014

Will push on purchasing regulations backfire on structured settlements?

Filed under: Structured settlements — Peter Arnold

Yesterday morning, the American Association of People with Disabilities and the National Consumer League held a panel discussion on Capitol Hill about problems that structured settlement beneficiaries can encounter when selling future payment rights.  It was an interesting discussion and may presage heightened federal attention to the structured settlement industry in general and settlement purchasing specifically.

As usual when discussing structures, context is important: In recent years, the structured settlement marketplace has seen a drop in production.  This has created an economic dynamic that’s pushing broker companies and purchasing companies toward a single merged industry.

Industry watchdog John Darer recently reported that a structured settlement provider company has purportedly entered into a formal arrangement with a settlement purchasing company to sell “contacts and/or other nonpublic information.”

NSSTA Board member Randy Dyer of Ringler Associates told me last November that he’d picked up a heightened amount of industry chatter about settlement purchasing companies angling to purchase broker operations.

Yesterday’s panelists were AAPD President Mark Perriello, Shelly Buxenbaum, legislative assistant to Rep. Matt Cartwright and NSSTA member Marty Jacobson.  Perriello began by noting that on average, about 5,000-6,000 people each year sell their rights to future payments and therefore settlement purchasing “is critical for us to look at.”

Both he and Ms. Buxenbaum indicated upfront that settlement purchasing had value for accident victims in certain circumstances.  “It probably needs to remain a perfectly legal practice,” said Perriello.

Ms. Buxenbaum went further, saying, “We want factoring to remain legal.”  She later added that an example of a legitimate reason for a beneficiary to sell future payment rights might be to pay down a student loan.

Still, both Perriello and Ms. Buxenbaum spent most of their time urging Congress to strengthen federal oversight of settlement transfers. Perriello added that AAPD had expressed concerns about settlement purchasing to the Consumer Financial Protection Bureau.

Marty Jacobson, for whom I have tremendous respect, echoed the other speakers’ comments by cautioning against “too much regulation” on settlement purchasing, even as he encouraged passage of Rep. Cartwright’s bill.

Much more went on, including Marty describing why a New York judge describes the current regulatory framework for payment rights transfers provided by Section 5891 of the federal tax code as a “rubber stamp.”

I plan to write more about the event but for now, a few thoughts:

  • If NSSTA and the primary market push for new federal regulations on settlement purchasing, they could be in for a rude awakening.   Capitol Hill history is littered with examples of companies that start a lobbying effort to put competitors under a regulatory yoke only to see themselves put in regulators’ crosshairs.

Look at Google, which tried to saddle Internet service providers with online “neutrality” regulations and quickly found itself in trouble at the FTC for its privacy policies.

  • Regulators looking at structured settlements are unlikely to respect arbitrary lines between “primary” and “secondary” market activities – especially as the two markets merge.  Some in the primary market may believe that a “bright line” exists between the primary and secondary markets but don’t expect Federal regulators to believe it. Also, it’s just not true. Pat Hindert has been exceptionally keen on documenting this point.  If Congress starts probing transfer fees, it’s likely also to focus on the primary market’s standard 4% annuity commission.
  • Boon for plaintiff brokers?  If Congress believes that annuitants don’t have structures designed to meet their needs, it’s likely to focus on efforts to facilitate plaintiffs’ access to structure consultants. There was a brief discussion yesterday morning of Rep. Brian Higgins’ bill to encourage exactly that.
  • Trouble for Liberty, AIG & life insurance companies? In 2010, Hartford paid $74 million to settle claims that it defrauded thousands of structured settlement annuitants who did not have the benefit of a plaintiff broker.  Other life insurance companies (Liberty, AIG and others) may have had internal policies similar to those of Hartford. It’s a near-certainty that if Congress probes settlement transfers, it will also look at how life insurance companies have conducted themselves in disclosing fees.

There’s a lot more to write but this is a blog, not War & and Peace.  More to come in due course.  If anyone wants the recording of yesterday’s session, let me know.

UPDATE: The esteemed structured settlement consultant Dan Finn of Finn Financial Group informs me that there is no ampersand in the title of Tolstoy’s epic. Apologies to Dan and to Leo.

January 4, 2014

An aging Apple?

Filed under: Apple,Uncategorized,Wireless Industry — Peter Arnold

According to a new report from Nielsen SoundScan, for the first time since 2003, when the iTunes store opened, annual U.S. digital music sales have declined. Digital track sales fell from 1.34 billion units in 2012 to 1.26 billion in 2013, a decline of about six percent.  Digital album sales fell 0.1% while CD sales went into free fall – down nearly 15% last year.

The driving force behind these numbers appears to be the growth of streaming music sites which suggests that creative destruction in the music industry is alive and well.

But that aside, the more interesting tech parlor game is how this change will affect Apple.  After all, no other company has used the music industry’s current business model more effectively and more profitably.  Apple has married innovative hardware and elegant software into first-class (read: expensive, high-margin) products.

This strategy worked because everyone needed personal hardware (iPods, iPhones, Macs) to access entertainment.  The “cloud” was not a viable mass-market option for most of the past decade and Steve Jobs many times dismissed the concept of streaming music services.

But with Spotify, Pandora, Vevo (the web’s #3 video publisher behind YouTube and Facebook) and others offering attractive services to fit changing demands, the concept of buying single songs no longer has the same allure.  Yes, Apple Radio is a good entrant but it was woefully late.

In the past, Apple cannibalized sales in order to create new products.  The iPhone did that with the iPod.  But Apple back then was a different company.  Its near-death experience in 1997 was still recent history when the company began work on the iPhone in 2004, despite protests from the iPod division.

With the music industry seeing the impact of cloud-based services, Apple’s model no longer looks as imposing.  Moreover, a $487 billion company (Apple today) doesn’t necessarily act with the quickness of a $2.3 billion company (Apple in 1997).

The song will not remain the same.  Stay tuned.

November 27, 2013

The cutest commercial you’ll see this weekend

Filed under: Uncategorized — Peter Arnold

Question: How does a Fortune 15 telecommunications company differentiate itself from the competition?

Answer: By creating a really well-done TV commercial that can’t help but create smiles.  Here you go:

Disclosure: Yes, the company has been a client since 1998.

August 7, 2013

In the beginning…

Filed under: Structured settlements,Uncategorized — Peter Arnold

claims-journal-spring-2013It’s always a pleasure and usually a bit humbling to be cited favorably in a news article.  Claims Journal just posted a long article about the legal and insurance dynamics during the 1970s and early 1980s that resulted in Congress passing legislation to recognize and encourage the use of structured settlements.  Titled “The Beginnings of Structured Settlements,” the article’s author is Claims Journal editor Denise Johnson, an attorney and respected commentator on insurance.  I am cited twice, in my capacity as a consultant to the National Structured Settlements Trade Association (NSSTA).

For anyone who has been physically injured in an accident, the structured settlement offers unmatched advantages including the opportunity to design a stream of guaranteed payments to meet future medical and living needs.  Moreover, per the federal tax code, all income is completely exempt from federal and state taxes.

As U.S. Rep. Jim Langevin (RI), the only quadriplegic ever to serve in Congress, states in the article:

I always take the opportunity to educate my colleagues on the benefits of structured settlements to injured victims. These settlements ensure that victims have enough funds not only to pay their bills today, but also in the future. They provide economic security not found in a normal legal settlement.

More information about structured settlements is available at the NSSTA website or by clicking here.

June 3, 2013

“Get in. I’ll give you a ride.”

Filed under: Frank Lautenberg — Peter Arnold

LAUTENBERGWith the passing of Senator Frank Lautenberg, the U.S. Senate is a poorer place and not in the financial sense.  In a city where ego is rarely in short supply, Mr. Lautenberg stood out as truly gracious and a real gentlemen.  He was also the last member of the “Greatest Generation” to walk the halls as a Member of the Senate.

If you spend enough time in Washington, you typically have some good stories about well-known people.  Senator Lautenberg’s passing brings back a memorable anecdote from the winter of 1987-88.  It was early evening — probably around 7 or 7:30 pm — when a young speechwriter to George H.W. Bush walked out of the Old Executive Office Building and began the walk up 17th Street to the Farragut North metro station.  It was raining and the hapless speechwriter had naturally forgotten his umbrella.

As he was walking past the front door of the New Executive Office Building, a car pulled alongside.  The front, passenger side window went down and the 60-something driver inside called out, “Is this how you get to The Mayflower?”  It was and a short back-and-forth ensued about the best way to the hotel since road construction had made 17th Street a nightmare.

Finally, the driver asked, “Are you going that way?”  Yes, sir, replied the twentysomething government worker in the dark (and increasingly wet) wool suit who still didn’t have any idea to whom he was talking.  “Get in.  I’ll give you a ride,” the driver snapped.

When we got to the hotel, I hopped out and thanked the driver for the lift.  His reply: “You can tell your friends you got a ride from the Senator from New Jersey.”

In different circumstances, the logical rejoinder would involve a Soprano-esque snark about New Jersey and “going for a ride.”  But not today. R.I.P., Mr. Lautenberg.

January 20, 2013

Recalling “Dictatorships & Double Standards”

Filed under: Jeane Kirkpatrick,Ronald Reagan,White House — Peter Arnold

Jeane KirkpatrickSorry for the long drought in blogs.  Chalk it up to global warming.

Former Slate and New Republic editor Michael Kinsley has this delightful review of Lawrence Wright’s new book on Scientology in Sunday’s New York Times.  Describing Scientology, Kinsley writes:

The closest institutional parallel would be the Communist Party in its heyday [including] the determination to control its members’ lives completely (the key difference, you will recall, between authoritarian and totalitarian regimes, according to the onetime American ambassador to the United Nations Jeane Kirkpatrick)….

As the Scientologists have a legal budget on par with the GDP of a developing country, they can respond to Kinsley and The Times.  But Kinsley’s remark about Kirkpatrick deserves a comment since the sway of history during the past few decades puts her once-derided thesis in an increasingly vindicated light.

First a disclosure: During much of 1985, I worked with Amb. Kirkpatrick, helping her prepare her UN speeches and papers into a book, Legitimacy & Force.

Kirkpatrick’s distinction about authoritarian and communist dictatorships came to public attention in a November 1979 Commentary article, “Dictatorships & Double Standards.”  It was a critique of American policies that sought to undercut authoritarian pro-Western regimes (Somoza, the Shah, Lon Nol) while minimizing the destruction of human freedom in totalitarian regimes and movements (Soviet satellites and funded insurgencies).

Her article was often called a criticism of a “human rights” foreign policy – ironic because the phrase “human rights” never appears in the text.

What she did posit was that America’s foreign policy would be better focused on undercutting through trade, food aid, and yes, even foreign aid those governments that were trying to shut down all aspects of unsanctioned behavior (read: Jaruzelski’s Poland, other Soviet satellites).

With 30 years of hindsight, the insight of Amb. Kirkpatrick’s distinction has become blindingly obvious. Precisely as she and like-minded Reagan Administration colleagues (especially CIA director William Casey) predicted, once the aura of “invincibility” came off the Soviet Union in the mid-1980s due in no small part to aggressive American efforts, its empire crumbled with stunning swiftness.  In turn, once the Kremlin was no longer able to maintain an empire, those “wars of liberation” in El Salvador, Colombia, and Africa suddenly came to ignominious (for the rebels) conclusions.

A blog is not nearly long enough for a full discussion of issues that could easily consume tomes.  But suffice it to say from this member of a group occasionally labeled “the Kirkpatrick Mafia,” it is pleasing beyond belief to know that Amb. Kirkpatrick was able to see her views vindicated prior to her passing in 2006.

Incidentally, for the trivia minded, Prof. Kirkpatrick also holds the distinction of being the first Cabinet-level female appointee whose duties focused on international policy.

May 28, 2012

Microsoft: “with hollow eye and wrinkled brow”

Filed under: Microsoft,Randall Stross — Peter Arnold

The slow erosion of Microsoft’s brand continues.  New York Times columnist Randall Stross has a wonderful essay this morning on how the salons in Redmond are using Microsoft 8 as an excuse to phase out the eye-rolling “Live” appendage to  its desktop software:

After so many years of pushing the Windows Live brand in so many products, the company couldn’t easily drop the branding, even if executives had come around to the idea that it was misbegotten. But the imminent arrival of a new version of its flagship PC operating system, Windows 8, seems to provide cover for the change.

While schadenfreude at Microsoft’s expense is a frequent occurrence these days, the import of this is larger than a misbegotten marketing strategy.  Stross covers one key point and passes over another.  First, as Stross rightly notes, the emphasis on “Live” was Microsoft’s attempt to capitalize on real-time integration of software programs and users across the web.  This worked fine for Xbox where the addition of real-time gaming actually lent itself to the “Live” moniker.  But as PC users gravitated toward the web, particularly on mobile phones when 3G became ubiquitous, something else happened: The central focus on the PC and all its attendant software began to fragment. Microsoft couldn’t respond as Apple and Google effectively grabbed the smartphone OS market.

The second point, which derives from this, is that the web (especially the mobile web) put the public’s focus on third-party software developers. This is another big Microsoft weak point since the company has spent nearly 20 years expanding its bundled software in an effort to stamp out third-party competition.  This strategy worked fine when dial-up ruled but as mobile broadband expanded, this was doomed.

Memo to former AG Reno: You could’ve saved a lot of time and trouble.  The marketplace worked.

May 12, 2012

Action is eloquence

Filed under: Landon School — Peter Arnold

Rather than an urgent public policy debate, today’s missive covers something of far greater importance, namely Landon’s 7-4 victory over Bullis today for the IAC lacrosse crown.  Coming on the heels of a sweep of Georgetown Prep — the first since 2004 — the dispassionate onlooker can only respond by quoting American philosopher Jackie Gleason: “How sweet it is!”

 
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