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AIG: The Short and "Winding Down" Road With Imperial Holdings, Inc.

‪by John Darer CLU ChFC CSSC RSP

Imperial Holdings has issued a revised registration statement, S1-A, with the Securities and Exchange Commission  ("SEC"), in conjunction with its Initial Public Offering (IPO). The statement was published on October 1, 2010

It includes the following:
 
"On September 30, 2010, we entered into a wind down agreement with Slate (A unit of AIG whereby
as of December 31, 2010, we will cease selling structured settlements to Slate.  Under the wind down agreement, which amends our existing arrangement with Slate,  we will continue submitting structured settlements to Slate through November 15, 2010 for purchase by December 31, 2010".  (see Imperial Holdings, Inc.  S1-A page F-37 in Notes to Consolidated and Combined Unaudited Financial Statements)

As an aside, this author has canvassed representatives of other current structured settlement annuity issuers to dislcose whether or not their firm makes investment in structured settlement securitizations and has received no disclosure at the time of this writing.

Both sides of house need to be aware of what each is doing to avoid conflicts and misperceptions

In my opinion It is important to assure that insurers who are writing structured settlements are not then purchasing secondary market deals or securitizations from "cash now pushers" who have charged excessive discount rates to tort victims whose circumstances have resulted in the need to liquidate some of their structured settlements down the road. In the opinion of this author the market place should be developing a solution which affords a fair price to sellers and affords reasonable opportunities to buyers as an asset class, including tort victims. 

 

AIG Unit to Buy Up To $250 Million In Structured Settlements From Factoring Company Annually Though 2013, Says Factoring Company, National Underwriter

National Underwriter reported that Slate Capital LLC, a unit of American International Group, Inc. ("AIG"), has agreed to buy up to $250,000,000 in structured settlements( payment rights) each year through May 2013, from Imperial Holdings, LLC***, a factoring company in Boca Raton, FL.  The information is disclosed on Imperial Holdings' registration statement (" S1 filing"- page 3) for its IPO, filed August 12, 2010, with the Securities Exchange Commission ("SEC") .

It is no secret. but has not been widely publicized, that insurance companies are buying structured settlement receivables via securitizations. In April 2010, JG Wentworth announced in its press release that insurance companies participated in its securitizations.  The notion that AIG and others are buying, or  appear to be buying, structured settlement settlement payment rights directly, or through securitizations, underscores why structured settlement payment rights are an excellent stable value option for both institutional  AND individual investors and possibly even for tort victims and their attorneys.

Due to unfortunate and/or changing circumstances, some annuitants sell their structured settlement payment rights to factoring companies (or in some cases to individual investors) in exchange for a cash lump sum. There are well established procedures under Federal and State law which govern structured settlement factoring transactions. The process was developed with input from the National Structured Settlement Trade Association as well as leaders in the factoring industry. At least 46 states have  structured settlement annuity transfer laws in place*.

As part of the research for this post, this author, John Darer, contacted AIG to learn more about its involvement with Imperial. A company spokesperson said that in addition to the (statutory) court approvals that need to be obtained in each case:

1. AIG’s arrangement with Imperial incorporates a number of carefully crafted eligibility criteria that in many cases go beyond Federal and state laws.
2. Although the arrangement provides that AIG may purchase up to $250 million of structured settlement rights annually during the program, AIG currently anticipates its near-term expenditures under the program to be significantly less than that amount.
3. Although AIG anticipates that its participation in the purchase of structured settlement rights will provide it with a fair return, AIG will not comment on any specific economic or purchase terms.
4. The structured settlement payment rights eligible for purchase must be supported by annuities issued by highly-rated annuity providers that are not affiliates of the Chartis companies*.

While some may feel it gratifying to take a swing at AIG, let us consider some of the history. In the 1990s, an era before structured settlement protection acts,  ING, parent of then structured annuity issuer, Security Life of Denver, purchased structured settlement payment rights. Today Clearscape Funding Corporation, a subsidiary of Symetra purchases structured settlement payment rights primarily from annuitants of its sister company and Allstate provides liquidity to its own annuitants directly as part of its Advanced Funding Exchange Notice (AFEN).  This author believes that there are a number of other insurance companies, perhaps even those issuing structured annuities, purchasing structured settlement payment rights through securitzation. 

The National Underwriter article also begs the obvious questions:

• What effective discount rate is Imperial charging to tort victims on its deals?   In an August 18, 2010 story in Westlaw Business' Jack Bunker reports that "Imperial notes that through the first quarter of 2010 and the year ended December 31, 2009, the company “purchased structured settlements at weighted average discount rates of 17.0% and 16.3%, respectively"  See EDGAR online and Personal Injury Hits the Big Board.
• What effective discount rate rate is Imperial giving the AIG unit?

This author believes that an efficient secondary market that provides access to all classes of investor including individual investors and other tort victims,  means that those annuitants faced with unfortunate circumstances will be able to get liquidity without having to obliterate as much of their long term financial security. The higher the discount rate the more that the unfortunate annuitant must sell.

This author understands that American General and American International Life Assurance Company of New York, AIG's life insurance companies operating in the structured settlement space,  (like a number of other structured annuity insurers) WILL NOT split payments to annuitants who only wish to sell part of their structured settlement (payment rights) thus effectively forcing the use of a servicing agreement. A servicing agreement means that the entire structured settlement payment, not just the amount being sold, gets paid to the servicing entity. Thus there is a potentially material shift of security for the original annuitant in such cases. In some cases (like the notorious 2008-2009 "CT woman case") the servicer is the factoring company or a subsidiary whose capital base pales in comparison to the insurance company issuing the annuity. Annuitants in such cases can longer receive service from the annuity carrier and must contact the factoring company for changing beneficiaries, bank accounts etc. I believe that the time is ripe to revisit the issue and determine if there is a more efficient and fair way to deal with it. In a previous posts I have discussed the concept. See "Exploring In Force Structured Settlements 3-Used Annuity Lots"

This purpose of this blog post is not to single out AIG. Indeed, the structured settlement watchdog asks the following important questions of every insurance company operating in the structured settlement space. This author encourages other insurers operating in the structured settlement space to reveal if the company invests in structured settlement securitizations and if so, from whom.

• Is any insurer operating in the structured settlement space buying from a factoring company charging an 18- 19% discount rate from tort victims, when the same victims can get deals that have discount rates 50% better?
• Is any insurer operating in the structured settlement space buying from a factoring company that uses fraudulent or misleading advertising to obtain business from desperate annuitants?
• If there are such insurers  are they doing a good enough job using their buying influence to exert moral leadership and effect changes in market practices? It appears that AIG has taken a step in the right direction. What can other companies tell us?

The National Underwriter article also puts a new patina on the market for "in force structured settlements" which this author, John Darer, has been covering in detail for almost 9 months and plans to cover in more blogs and podcasts leading up to the NSSTA Fall Meeting segment in November. This author would like to emphasize that settlement professionals can no longer afford to be ignorant about this subject.

Footnotes

*Best's Rating Methodology, August 4, 2008, Securitization of Period Certain and Life-Contingent Structured Settlements, page 3

** Upon information and belief the Chartis companies are responsible for the purchase of approximately $750,000,000 in structured settlement annuity premium annually as part of the resolution of claims and litigation.

***The registration statement notes that as part of the IPO, the name/entity Imperial Holdings, Inc. will be the result of a conversion from Imperial Holdings, LLC.