Non-qualified structures. What would John Chambers of Cisco do?

As you know, this is an industry that thrives on talk about who has the biggest case. Irecently wrapped up one of the largest 468B settlement trusts of my career, with a potential recovery in excess of $100 million. Given the type and nature of the claim, it was a combination of qualified and non-qualified structures.

Of course, as part of some great cosmic joke, this coincided with the decision by Prudential to close their non-qualified annuity division, while Allstate simultaneously announced they were restricting the amount of premiums they would take per case due to capacity restrictions.  Fortunately for me, it is clear that much of this case will end up qualifying as section 104 damages, thus initially reducing the need for non-qualified premiums. However, it drove home the point how amazingly shortsighted our business is when looking at the non-qualified structured annuity market.

John Chambers, Cisco

I'm involved in a joint effort to start pushing the timid life markets to look hard at non-qualified structured annuities. I recently saw the historic production numbers for non-qualified structures written since 2003.  The lowest year was 2003, which makes sense because it was a new concept and was only $100 million.  The peak year was $300 million when Prudential, Liberty and Allstate were busy promoting their markets. Even that peak year represented only a modest percentage of what the potential could truly become.

In fact, only Allstate made a serious commitment to the market through training, advocacy of the concept, tax research and expanding the application to a wider range of areas.  That progress was halted due to a substantial loss of talent and staff from Allstate. Since then, the remaining staff has worked hard to maintain the growth, but it's tough to replace an experienced team overnight.  As it currently stands, most of the efforts in the non-qualified structured annuity market has resulted from brokers pursuing 1031 exchange business, structured sales, large 468B cases on environmental or disaster cases, as well as structured legal fees.

What is astonishing is that the seed work of brokers in this area continues to produce great potential, even with lack of support or commitment from life markets. I’m not the only one working hard to develop innovative applications of these products. Plenty of others are, too. However, just at a time when cases like mine are beginning to bear fruit, I am encountering the most pusillanimous behavior from life markets you can possibly imagine!

Listen. I know capacity is tight. Companies are fixated on maintaining credit ratings and most major life markets want to concentrate on their "core products." In other words, they got scared! People don't want to get fired, so they send out smoke signals to curtail all risk and just do what builds cash and doesn't rock the boat. However, I'd like some of these scared rabbits at the life markets to go check out the interview in the Wall Street Journal with Cisco CEO John Chambers. I highly recommend it because it gives the 30-year career perspective of a man who has battled business cycles and come out convinced that the time to expand is in the midst of adversity. The Chinese character for “crisis” also means “opportunity.”

The bottom line is that the seed work of pioneers in non-qualified structures has largely been accomplished. Right now, with improved marketing, communication and education, we can finally start seeing substantial, high profit growth in this area. The life markets and structured settlement departments need to shake off their malaise and cowardly behavior and look to grow this highly diversified, profitable and long-range market. If, in the first full calendar year of a market they really went after being a player, then I predict they could expect at least $250 million, with potential annual sales of $400 million per year going forward.

In what world and what economy isn't THAT a good thing?

Come on, guys, and girls! Let’s take a real look at this and stop being so scared! The time to take over and control this market is NOW when everyone else is on the sidelines. The question is: what company has the vision to make it happen?

Posted on July 26, 2009 .