Mike Fasano, Founder at Fasano Associates;
Fred Love, President and General Counsel, SuttonPark Capital;
Jason Sutherland, CEO at DRB Capital
The life contingent structured settlement (LCSS) market in the United States began in the early 1980s with the enactment of the Periodic Payment Act of 1982 but it remains a niche investment opportunity, despite the potential size of the market. Greg Winterton spoke with Mike Fasano, Founder, Fasano & Associates; Fred Love, President and General Counsel at Sutton Park Capital; and Jason Sutherland, CEO at DRB Capital, to get their views on the current state of the LCSS market.
GW: Let’s begin with the size of the market, and market penetration in terms of existing deal flow compared to potential deal flow. Where are we at in 2023?
JS: I remember a memo from Willis Towers Watson more than a decade ago that said that at any given time, there is around $250bn outstanding in structured settlements and our industry factors approximately around $1bn each year. Market penetration is quite low in our space, despite some firms spending enormous amounts on TV advertising.
FL: We talk to people all the time and they still have no idea that this market exists. Overall, this is a very niche industry and advertising, especially on TV, can be very expensive and only the largest companies can afford that expenditure. Smaller companies are forced to advertise on Google searches or through direct mail campaigns. So, unless you have a structured settlement and are in need of immediate cash, it’s not something that people are generally searching for.
MF: It’s important to note the motivation factor here when analysing the market size. The percentage of the market that sells their structured settlement is small; the people who tend to take this option often can’t get a credit card, so the settlement option that provides them with cash now is an attractive one to this group. The potential size of the secondary market in this space is not the same as the overall size of the market. Those that don’t need the cash quickly won’t sell their policy.
GW: What about the outlook for growth in your space in the coming 12-24 months? Are there any structural changes coming that might contribute to an increase in sales of consumer policies? Any technology-related developments that might impact your market?
JS: The space has had only minimal growth in the past two decades. As we’ve discussed, our market sees activity when there is some sort of need – that could be anything from buying a car, to college tuition, even child support payments. If someone doesn’t need to access a cash lump sum, they’ll keep their policy and continue to receive the payments themselves because they will receive their undiscounted payments over the long term.
MF: In terms of technology, one thing I’d mention is that an area where there is significant potential – but will take years to play out – is in the spinal cord injuries arena. Progress is being made in reversing spinal cord injuries in laboratory mice. If that gets traction in people, that could significantly affect mortality in the structured settlement space. We’re talking years here, but the potential is substantial.
GW: Following on from Mike’s earlier point, another consumer life-linked secondary market, the life settlement market, consistently claims that it’s an ESG-friendly space – certainly, in terms of the ‘S’ leg of the stool. Your space can also make that claim, right?
FL: That’s right. We provide a service that benefits those who can’t access money. Many of the consumers we work with are lower income consumers with poor credit scores, so they can’t get credit cards to help them manage their spending and cash flows, or they ae stuck with 30% interest credit cards which makes it more difficult to pay off. Our market gives them access to cash, with no obligation to repay it.
GW: Mike – the profile of the consumer selling their structured settlement, when compared to the consumer selling their universal life policy, is very different, as has been noted. How does that impact underwriting in the LCSS space?
MF: There’s a huge difference in the profile. The life settlement space tends to be populated by above average income consumers whereas the structured settlement demographic, with a few exceptions, is the lower end of the socio-economic spectrum as we’ve already discussed. The life settlement types, partly because they’re older, go to the doctors much more frequently, and consequently have more medical records. Whereas you have a large percentage of the structured settlement market who don’t go to the doctors because they can’t afford it – sometimes they might not have health insurance, for example. The life expectancies tend to be much shorter in the LCSS space, and they’re harder to underwrite because of a wider range of ages and lack of medical records.
We did a study where we compared anti-selection in structured settlements vs life settlements. We found a strong anti-selection bias in life settlements, as people who sold their life insurance policies knew more about themselves and lived longer than the underwriting suggested. People in the secondary structured settlement market selling their settlement annuities, on the other hand, died as predicted and didn’t live shorter lives, as you would expect if they were gaming the system. That’s a function of the relative lack of financial and medical sophistication of the structured settlement seller vs the life settlement seller. The former cohort don’t have financial planners, for example.
GW: Finishing up with the bigger picture in terms of the current macroeconomic environment. The LCSS space is a fixed income product, with the vehicles created by the intermediary firms rated by the agencies. What’s been the impact of the recent slew of interest rate rises by the Fed and the higher inflationary environment on your space and what are the medium-term consequences here?
JS: In terms of the impact on the firms that structure these deals, it’s obviously not helpful. We have consumers asking us ‘why is it that my payments I sold a year and a half ago were discounted at 4.5% and 10% now? We’re trying to re-educate the consumer because when rates jumped up, we had to honor the existing contracts, but many don’t understand the mechanics of the impact of rate rises on the market.
FL: I agree with Jason. In the short term, it’s about re-educating sellers and judges. However, we have been through this type of interest environment before, and the market will adjust. When rates are low, people want money to take vacations, purchase homes, etc. When rates are high, people need money just to survive. At the end of the day, people are always going to need money and historically, the demand has been very consistent.
Mike Fasano is Founder at Fasano Associates;
Fred Love is President and General Counsel at SuttonPark Capital;
Jason Sutherland is CEO at DRB Capital