Last week J.G. Wentworth released a press release stating that only 6.6% of structured settlement recipients sell their future payments and that those who do sell commonly cite getting out of debt, purchasing a home or vehicle, unexpected medical bills or continuing their education as reasons for selling. [i]
The press release stated that the study was based upon data collected by J.G. Wentworth over the past 20 years but it did not provide any further details regarding the data collection. For instance, how did they obtain the data; how many people were included in the study and did it include data from other factoring companies besides J.G. Wentworth/PeachTree? In addition, there was no mention as to whether discount rate played a considerable role in the annuitants’ decision to sell.
Back in 2008, J.G. Wentworth published an email survey of 115 respondents who previously sold some or all of the payments to J.G. Wentworth in exchange for a lump sum payment. In this survey, only 18% said they were completely satisfied with their structured settlement. 31% said they didn’t wish that there attorney negotiated a single lump sum payment which means that many of them would have liked a lump sum payment. 60% of the respondents sold their payments to pay bills while less than 5% did so in order to buy a house. 30% stated that they would not sell their payments again. J.G. Wentworth only released 9 questions to an industry blogger and did not reveal the remaining questions, the number of individuals the survey was sent to or any other circumstances that could have skewed the results of the survey.[ii]
In the 2006 The National Structured Settlement Trade Association (NSSTA) survey of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys) 75% of annuitants were happy with their structured settlement and would recommend one. [iii]
In an AIG survey of 1,000 participants, 65% of respondents said they would elect a lump sum payment, while 26% stated that a lump sum was more appropriate to pay bills.[iv]
So if that many people wanted a lump sum payment then why aren’t they selling? In a review of 100 recent factoring transactions it was revealed that the average discount rate was 13.75% with 7.5% being the lowest and 20% being the highest. So you have to question whether the 93.4% of individuals that chose not to sell would have changed their mind IF the discount rate was closer to the 7.5% rate.
As structured settlement annuity premiums continue to decline (10% from 2010 and 20% from 2008)[v], there will be fewer annuitants available to market. While it seems perfectly logical that this would in fact lower the discount rate, if one looks at current trends it mostly will not occur.
For example, the top three companies spend millions of dollars a year in order to entice annuitants to sell. They’re all well established and are household names. Smaller, lesser known companies cannot afford to go head to head in advertising spends with these industry giants so they tend to focus on non-traditional marketings. While some sellers will seek out these smaller players in order to obtain better rates more often than not a first time seller will call one or two companies they see on TV. Which basically means they are going to receive rates of 13% or higher.
While the decline in annuities does not currently seem to be an issue for J.G. Worthworth/Peachtree who already completed a $244 Million Securitization this year[vi], one has to wonder whether primary market decline and increased competition combined with well informed, tech savvy consumers could adversely affect their business in years to come.
J.G. Wentworth had securitizations worth $469,000,000 in 2011 and $579,000,000 in 2010.[vii] This represents 9.4% and 10% of the annual premiums for those years.