As one of the earliest advocates of structured sales I have watched with almost a sense of disbelief as the life insurance and annuity companies which stand to benefit the most from the growth of this concept, sit on their hands and discuss the problem of "finding new money business" for their annuity departments. As I have written in past columns, the retreat from the advocacy of actively promoting structured sales back in 2008-2011 fiscal years made a some sense. As the real estate market had collapsed, interest rates plunged to 50 year lows and tax rates for capital gains stayed at historically low levels. The market for these transactions had shrunk dramatically, so a retreat by Allstate and Prudential was understandable given the market issues and life company concerns about their post TARP balance sheets, but the question now is are those concerns still valid?
We and an industry are now looking at conditions which pretty much scream out for a life insurance or annuity company to jump into the structured sale market, but as of March 2014, all those of us in the profession hear from life markets is crickets chirping. While I understand the thinking of life company home office types, I was one of them way, way back, the fact is I receive almost daily calls and emails from clients looking to structure their real asset gains, so the consumer interest is there and growing, all with out any promotion or marketing by the life and annuity industry that would stand to benefit most by offering this option to their clients.
In part one of this analysis, I'd like to provide a couple of compelling arguments as to the opportunity and why life and annuity companies are missing a huge market by not adding a structured sale division:
- The real estate market, particularly commercial real estate sale, dwarf's the personal injury structured settlement market. Hard numbers are difficult to obtain but it is generally recognized that the commercial real estate transaction market is in excess of $200 billion per year, many multiples larger than the $5 billion structured settlement market. In short, the gross total of potential clients is huge and easily reached using modern marketing and advertising programs.
- Unlike the early years of structured sales, roughly 2006-2009, we are looking at the reality of higher capital gains tax rates at both the State and Federal level. One of the previous objections to deferring gains was "what if capital gains tax rates increase", something the last tax bill made a reality. High rates now mean's a diminished potential of deferring gains to future years with even higher rates.
- The aging of the American property owner. Most structured sales of real estate are initiated by clients over the age of 60, who by nature are more inclined to want a fixed, period certain income over time vs simply rolling a property into another investment after a few years. Longer term income horizons fit the needs of many older property owners looking to cash out and not purchase any more real estate.
- Life and Annuity companies have constant angst over the "new money" issue and structured sales of real estate are true "new money" assets. In short, many feel the annuity market has grown by the recycling of existing cash or annuity assets from one company to another. Structured sales by contrast convert real estate equity into an annuity asset for the funding life or annuity market, creating a true new money business model with out issues of churning current annuity accounts.
- The biggest reason life companies should be in this market is that most of the sellers have substantial assets, need estate planning and wealth management. Why in the world would life companies not want to speak to and work with this major market?
In short, there a at least five major reasons life and annuity companies need to be back in the structured sale market, however, all indications are they will continue to wait for another major player to jump in before we see a substantial growth of underwriting markets. That said it is clear that sellers and structured sale experts will not sit still for much longer waiting for the life companies to add this to their portfolio of products, but instead are crafting alternative assignment company and funding programs to meet the growing demand. More on that topic in Part II of this analysis.