Structured Settlements 4Real™ Blog: Structured Settlements | Settlement Planning News and Commentary

Some Say Credit Default Swaps Should Be Regulated As Insurance

"Credit default swaps nearly brought down the world financial system last fall when it was discovered that AIG Financial Products had written hundreds of billions of dollars worth of credit protection without setting aside sufficient reserves. Yet since then, pathetically little has been done to get this corner of the derivatives market under control"  Today's Insurance Journal discusses credit default swaps and the notion of having them regulated as insurance that is currently being mooted.

Read the excellent Reuters' credit default swap commentary edited by Martin Langfield in the July 7, 2009 Insurance Journal

Looming Credit Pullback Puts Structured Settlement Recipients in Financial Crack Dealers' Sights. BEWARE!

According to Oppenheimer banking analyst Meredith Whitney cited through Reuters, the U.S. credit card industry could pull back well over $2 trillion of  credit lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending. Whitney believes that available consumer liquidity in the form or credit-card lines will decline by 45 percent.

All of the big names like Bank of America Corp, Citigroup Inc and JPMorgan Chase, which represent over half of the estimated credit card lines outstanding as of September 30, 2008 have discussed reducing card exposure or slowing growth. With the dominant players all pulling back their lines, reductions in consumer liquidity seem unavoidable.

Whitney warns of the danger of pulling credit when job losses are increasing by over 50 percent year-over-year in most key states.

Such credit pullbacks could make the most vulnerable of consumers, tort victims and the elderly more susceptible to unethical sales practices of certain factoring industry players that purchase structured settlement payment rights (a/k/a "financial crack dealers" or "cash now pushers". It should be "Giuliani Time" for the factoring industry.  Clear the worst of them "off the streets and air waves" and set standards for those that remain that include (1) professional licensure (2) rules concerning advertising and solicitation (3)full disclosure of all costs including who is getting paid from the deal up-front.

Hartford Has Worst Quarterly loss in 198 Years...But Don't Panic-CEO

Hartford Financial Services Group took a $2.6B hit in the 3rd quarter which was comprised of $2.2B in capital losses and $932 MM in deferred acquisition costs related to new and renewed policies

Today Hartford released the following statement from Ayer which said:

"I want to reassure you that the current stock price is not a direct reflection of the company’s ability to meet its obligations to our customers. The Hartford is financially strong and well capitalized, and our liquidity position is outstanding. Despite our recent challenges, I am very confident in our capital position and ability to meet all our policyholder obligations. The Hartford does not have a solvency issue".

• Capitalization at levels consistent with the standards rating agencies have historically required for
AA-level companies;
• About $10 billion of liquidity, including cash and short-term investments of $7.3 billion of cash
and short-term investments;
• Statutory surplus of $13.1 billion;
• Debt-to-capitalization ratio of 31 percent;
• $500 million of contingent capital in a facility available to Hartford today;
• A $90 billion general account portfolio; and
• Prefunded debt obligations through June of 2010.

Following is a link to Ayer's statement along with a helpful breakdown of holdings included in its 3rd quarter info sheet

Download 10-31-08_Hartford_Statement.pdf

Download 3Q_Info_Sheet_10-31-08.pdf

Treasury Expected To Take Stake In Insurance Companies

In a developing story the Wall Street Journal (WSJ) reports that the United States Treasury Department is contemplating taking equity stakes in insurance companies. The Treasury Department wants insurance companies to participate in its TARP Program, according to WSJ sources briefed by Treasury.

The TARP program is a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to American businesses and consumers and to support the U.S. economy.

According to the WSJ, Met Life Inc. and Prudential Financial Inc. two of the nation's largest publicly traded life insurers, and New York Life Insurance Co., one of the highest rated insurers in the United States, are interested in exploring a sale of equity stakes to the government, according to people familiar with the matter.

The former two are holding companies to structured settlement annuity issuers (Prudential Financial Inc. also guarantees periodic payment obligations transferred via non qualified assignment to Pruco Assignment Corporation) and the latter is a structured settlement annuity issuer.

The U.S. Treasury is considering taking stakes in 20 financial firms.

IRS Notice 2008-92 Provides Tax Certainty to Variable Annuity Holders During Period of Economic Stabilization

The United States Treasury recently instituted a Temporary Guarantee Program For Money Market Funds to provide cash from the Exchange Stabilization Funds to money markets that are regulated by the Securities Exchange Commission (SEC). In short, the temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995 (i.e. "breaking the buck")

There has been some concern that participation in the program might raise tax problems for money market funds that are within variable annuity or variable life insurance contracts. IRS Notice 2008-92 alleviates those concerns where issuers had investments that may have been at risk of default during the current credit crunch.

The concern centered on the provisions of IRC 817(h)  which provides that a variable life insurance or annuity contract that is based on a segregated asset account is not treated as a life insurance or annuity contract for any period (and any subsequent period) for which the investments of the account are not “adequately diversified.” Failure to meet the diversification requirements will result in the owners of the contracts being taxed directly on the inside build-up under the contract, which otherwise would be deferred or eliminated.

With respect to diversification, each agency or instrumentality is treated as a separate issuer. The test may be satisfied for variable life contracts by investing in a security issued by the United States Treasury. This does not however apply where variable annuities are concerned.

Notice 2008-92 informs practitioners that the Treasury Department and the IRS WILL NOT assert that participation in the Program by an Insurance-Dedicated Money Market Fund causes a violation of the diversification requirements in the case of a segregated asset account that invests in the Insurance-Dedicated Money Market Fund. In addition, the Treasury Department and the IRS WILL NOT assert that such a fund’s participation in the Program causes the holder of a variable contract supported by a segregated asset account that invests in the fund to be treated as an owner of the fund.

Click here for the full text of IRS Notice 2008-92

Jessica Johnson's "Ed-Abhorial"

Jessica Johnson is Head of Editorial and PR in London for Data Explorers, a firm that measures and tracks stock borrowing.  In an editorial on Seeking Alpha published on September 16, 2008 discussing the Market Capitalization on Loan (a/k/a "short interest" ) for both American International Group, Inc. (AIG) and Metropolitan Life Insurance Company (MET) Ms. Johnson actually wrote:

"In addition to insurance, MetLife also provides financial services with operations throughout the U.S. , including life insurance, annuities, car and home insurance and retail banking. It is therefore not surprising that short investors have noticed this company".

Yes, I'm afraid it's true, midgets have FINALLY noticed that large building at 200 Park Avenue, New York, NY that sits on top of Grand Central Terminal.

Oh dear Jessica! Where we both come from all of the words highlighted in blue ARE insurance!  Considering Ms. Johnson's London office is within "The Square Mile" and a stone's heave from Lloyds, what's the excuse here?

New York Times Article September 30, 1999 Says It All

About a decade ago I recall sitting around a table advocating my position against the principle and morality of a President of the United States lying under oath and the poor example it set for children. While we are on the subject of "lack of discipline" one now harkens back to the New York Times' reporting about another event from about a decade ago that has has proven to have more serious implications than parsing the definition of a blow job in front of Independent Counsel Ken Starr. The September 30, 1999 story entitled "Fannie Mae Eases Credit To Aid Mortgage Lending" will make you gag.

"By STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' 
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings."

Highlights were added for emphasis.

Nice Job Willie Jefferson Clinton! If only "we COULD party 0-0 like it WAS 1999", turn back the clock and undo this f-ing mess!

John Darer and Mark Wahlstrom Podcast On The Impact of The "Best Week" Mid-Year Report Insurance Industry Market Capitalization: A Discussion on Speaking of Settlements

In this 15 minute Speaking of Settlements podcast John Darer, Scott Drake and Mark Wahlstrom, Chairman of the Legal Broadcast Network (LBN) discuss the loss of market capitalization among insurers in the AM Best index of publicly traded insurance companies (reported in Best Week on June 30, 2008) and the impact of the losses on stakeholders to tort settlements.

Please note that the S&P loss since 2006 referred to in the podcast refers to the S&P index market gains since 2006. As an aside, the Sydney Morning Herald reported on June 27, 2008 that the Dow Jones "suffered its worst June since The Great Depression".

Read Structured Settlements Real's July 8, 2008 post Capital Losses by Publicly Traded Insurance Related Organizations Top $396B in 2008 Says Best Week 

When $100,000 Turns Into $1176 in 14 months!

The Wall Street Journal early edition is reporting that the once venerable Bear Stearns brokerage house has been sold to JP Morgan Chase for $2 a share. At its high in January 2007 the shares were priced at $170 per share.

Consider this:

• Had you invested $100,000 of settlement money in the stock of Bear Stearns at $170 per share in January 2007 and held it to today your investment would be worth approximately $1,176.  That's one

of an investment!

• Had you sold your structured settlement for a discounted amount of cash now in January 2007, because someone told you about "a great investment opportunity" (which happened to be Bear Stearns stock) and you sold your annuity payments, bought and held the investment in the stock through today, you would have been a two time loser. You would have effectively destroyed a safe secure program, taken the discounted amount of cash and it would now be worth less than 2% of the amount you subsequently invested!
• Had you taken the $100,000 and placed it in an annuity or US treasury based structured settlement in January 2007 you would still be receiving your payments without reduction.

Structured settlements provide income tax free, secure and guaranteed periodic payments.

Is It Time To Start Living Within Your Means?

The Times of London reports today that  nearly half of all shoppers seeking new credit cards are being refused, as a money squeeze begins to hit ordinary borrowers in the UK. Moreover "there have been 125 separate fee and rate increases over the past two months".

The Times cites Peter Brooker, a director at Experian, the credit reference agency, who is quoted: “Quite rightly, lenders are being more discerning about who they lend to and whether they can afford it. It was happening even before the credit crunch, as interest rate rises meant that people’s finances were tightening. We have noticed lenders keeping a closer eye on borrowers before it gets too late.”

The TImes also cites Shona Dobbie, head of Alliance Trust Research Centre, the investment group, who is quoted, “UK households have been too short-sighted and have lost track of financial reality . . . consumers remain reluctant, in the face of growing evidence, to pull back from their elongated spending binge.

Many debtors are turning to their families for loans. The amount owed by Britons to their families now stands at £25 billion – 82 per cent more than they owed in 1997, according to Skipton Building Society.

Chris Tapp, director of Credit Action, the debt charity, said: "We might need to see a move away from people bouncing between 0 per cent credit card deals and starting to try to live within their means without relying on cheap credit." 

For a link to the full article please click here

While the article is specific to UK consumers, the principles are the same in the United States which is facing its own crisis.