The deal flow in structured settlements is expected to maintain a steady pace, and the market could see another public term transaction before year end, sources said.
"[The rating agency] believes the number, frequency and size of issuance will all continue to increase as securitization remains a cost effective method of financing these assets," said Kristal Jones, an analyst at Standard & Poor's, during a recent teleconference dedicated to structured settlements.
S&P has rated between two and four public transactions of this type annually for the past several years. Structured settlement securitizations are backed by periodic payments derived from the settlement of legal claims, such as personal injury suits. There are currently four active public issuers in the term market. The most recent transaction rated by S&P - a $71 million MBIA-wrapped offering from Settlement Capital Corp. - closed last month. The offering represented the first term lead mandate for DZ Financial Markets, the U.S. subsidiary of DZ Bank (see ASR, 10/11/04).
In the early days of structured settlement payment securitizations, legal hurdles posed a challenge in the form of express prohibitions of assignments built into the settlement agreements. These anti-assignment clauses were intended to preserve a tax exemption on the compensation received by assignees of the payment liabilities. Insurance companies sought to oppose any assignment by the claimant in order to receive the immediate income
tax deduction reflecting the cost of the liability.
However, in 2002, legislation was passed by Congress that allowed the tax exemption to remain even if the claimant chose to assign the right under the agreement. Additionally, assignments are now essentially required to be preapproved by qualified court orders.
Meanwhile, various state statutes governing the transfer of structured settlements have lately been enacted, dovetailing with the federal legislation. Taken together, the state and federal rulings have gone a long way toward untangling the thorny issue of assignment and cleared the path for future securitizations.
"The legal changes have been positive for securitization," said Sabine Zeraka, a member of S&P's legal department. "Securitization portfolios will include fewer structured settlements that have not been court approved."
While there have been some delays in payment by insurance companies in connection with an assignment, Zeraka added, these were primarily administrative in nature and should become increasingly rare as insurance companies become more familiar with the court ordered process.
Legal questions remain with respect to those structured settlements assigned by claimants before federal legislation took effect in 2002. These assignments have not necessarily received a judicial imprimatur, and are, therefore, vulnerable to insurers' claims that they have violated the assignment prohibition.
There are currently more than 500,000 contracts outstanding in the U.S., according to S&P analysts. As of Dec. 2003, the total cost of structured settlements was estimated at $55 billion, and was on track to grow $3 billion to $4 billion annually. Due to settlement purchase limitations, roughly one-quarter of aggregate settlements are currently available for purchase, analysts said.
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