by John Darer® CLU ChFC MSSC RSP
in 2009, Burt Kroner, CEO of Client First Funding published Benefits of Purchasing Structured Settlement Annuities Directly from The Annuitant in NuWire Investor.
It was generally a well written article at the time, except for the title and, as it turns out, a few other things.
Here are just a few excerpts with my comments:
Kroner: "Purchaser has control throughout the process; Purchaser receives assignment of the Structured Settlement payment rights directly from the seller through an approved court approval process, and the Purchaser receives the future cash flows directly from the rated insurance company that is obligated to make the payments. At no time during the lifecycle of the asset should the broker have possession, or control, of the Purchaser’s money
The security of the annuity is directly related to the claims paying ability of the insurance entity. The designation of an annuity as a “claims paying” obligation means that these obligations supersede obligations to bond holders, stockholders and other debtors. The insurance entities are required to hold capital to support these obligations as required by the applicable state insurance regulator. To date, a situation has not been reported where an insurance company rated A, or better, by Standard & Poors has defaulted on an annuity obligation that supported a structured settlement, and a concomitant loss has resulted to the payee. However, as the current financial markets illustrate, past history is not a guarantee of future results, and there could be future issues that arise relating to Structured Settlements that have not existed in the past".
Comment: Kroner has not accounted for Executive Life of CA shortfalls resulting from that company's 1991 financial problems, the impairment of Executive Life of New York and regulatory action in 1991, the deteriorating financial condition widely know in 2007, which preceded his article and the further deterioration of ELNY Executive Life of New York and the shortfalls to both annuitants and investors that followed, leading to ELNY's liquidation in 2013 (updated)
Kroner: "Annuities, depending on the amounts owed, are partially or fully guaranteed by state insurance funds, and are designed to protect annuity holders from loss. This and may provide an additional level of security to the potential Purchaser".
Comment: Licensed insurance agents are forbidden by state law from discussing the existence of state guaranty funds in sales presentations. Yet in an article that holds the product out as an annuity when it isn't, in the title of the article) it's a virtual free for all. For some reason regulators have ignored a requirement to have a licensing requirement for factors, factoring brokers and the like, even though they refer to these purchases as annuities. State restrictions on guaranty fund solicitation are being made mockery of as a result. Why is there no symmetry for the protection of insurers AND investors?
Kroner: "Because most state guaranty funds have dollar limits on the amount that they can be obligated to pay in respect to annuities and life insurance policies issued by insolvent insurance companies, Purchasers should be cognizant of the size of the underlying annuity that supports the Structured Settlement relative to those limits".
Comment: Ditto to the immediately previous comment. Furthermore, the 2017 revisions to the Life & Health Guaranty Associations Model Act (#520) expressly exclude the type of investments that Kroner sold, and others still sell. The 2017 revisions have been adopted in 40 states as of August 2023. The alarming part for investors is that the Model Act applies the revisions retroactively. So, if you bought factored structured settlement payments rights (possibly marketed to you as a "secondary market annuity" you could be in for a world of hurt in the event there is an insolvency. Eventually all 50 states will adopt the provisions. (updated)
Message to Structured Settlement industry from Burt Kroner?
"These structured settlements normally earn more than two times the yearly rates of Municipal or Corporate Bonds, Bank Issued Certificates of Deposit (CD’s), or Government Issued Treasury Securities . Investors can certainly purchase an annuity directly from an insurance company, but these Direct Annuity Investments are backed by the same insurance companies as the Structured Settlements arranged by a broker, and THEY are typically originated with large sales charges or commissions, and offer substantially lower yields".
Wasn't the title to Kroner's article "Benefits of Purchasing Structured Settlement Annuities Directly from The Annuitant"?
Postscript
Anyone studying this industry, may find the contemporaneous and updated commentary to be a helpful reference point among others about just how brazen Kroner (among others) were about discussing guarantee funds while selling structured settlement receivables, which are not annuities, to investors, to compete with other annuity investments.
Last updated November 12, 2023
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