Secondary market annuity is a where an owner of an annuity sells it to a third party in exchange for a lump sum. The effect is that the seller swaps a stream of periodic payments for a immediate lump sum payment. The initial holder of the annuity may have received a structured settlement through a court settlement, insurance claim, or other means but wants or needs immediate liquidity.
The annuity is typically sold at a discount, meaning the buyer pays less than the total value of the future payments. This discount reflects the time value of money and provides a potential yield advantage for the buyer. There may also be tax advantages for the buyer who is typically in investor.
Some salespeople call the investment in an annuity based on a structured settlement a secondary market annuity. This is a misnomer as it may not meet the definition of annuity under the insurance law for many states and therefore does not enjoy the statutory protections, which is a risk for the buyer.for example Connecticut Gen. Stat §38a 860(f)(2)(O) excludes "structured settlement annuity benefits to which a payee or beneficiary has transferred the payee’s or beneficiary’s rights in a structured settlement factoring transaction as defined in 26 USC 5891(c)(3)(A), regardless of whether the transaction occurred before or after said section became effective" In the United States, The National Association of Insurance Commissioners states that when the ownership of structured settlement payment rights is transferred by a Qualified Order, the ownership of the actual insurance product, the structured settlement annuity, does not change hands.
The US association of state regulators of insurance (including annuities) issued its Statutory Issue Paper No. 160 in 2019 which makes clear that the acquisition of structured settlement payment rights is a not an annuity or an insurance product.National Association of Insurance Commissioners (NAIC) Statutory Issue Paper 160, finalized April 6, 2019, that introduced substantive revisions to SSAP No. 21—Other Admitted Assets
History Initially structured settlement payments rights were primarily packaged up by large buyers such as JG Wentworth, securitized and sold to institutional investors. During a period where institutional capital became less available in the immediate aftermath of the 2008 financial crisis, a number of intermediaries began marketing structured settlement payment rights to investors. Some began to use labels that included the term "annuity", such as in force annuities, secondary market annuity, secondary market annuities, secondary market income annuity and/or the acronyms SMA or SMIA, despite the fact that these were not annuities and that many of the people marketing these instruments did not even hold insurance licenses. Some make reference to State Insurance Guarantee Funds of which the mere mention in connection with the sale or solicitation of a legitimate regulated annuity would be unlawful.
Most states in the US have, as part of their insurance laws, an advertising prohibition which specifies that insurance companies and insurance agents may not use the existence of the guaranty association for the purpose of sales, solicitation, or inducement to purchase insurance, including annuity contracts Some states such as Connecticut and Tennessee have or have pending legislation to specifically exclude investors in structured settlement payment rights from guaranty fund protection.see C.G.S. 38a-860 (O)
As of March 11, 2022, 34 states in the US had adopted the 2017 Revisions to the Life and Health Guaranty Association Model Act #520) which expressly exclude factored structured settlement payment streams from their state guaranty association insolvency schemes. On November 30, 2021, the NAIC Receivership and Insolvency (E) Task Force adopted a draft memorandum that encourages state insurance departments to review their receivership and guaranty fund laws to ensure they address: (i) conflicts of law between the guaranty fund law or the provisions of any other law; (ii) continuation of coverage; (iii) priority of distribution of estate assets; (iv) full faith and credit stays and injunctions; (v) the 2021 revisions to the Holding Company Models; (vi) treatment of workers’ compensation large deductible policies; and (vii) the 2017 revisions to the Life and Health Insurance Guaranty Association Model Act (#520).According to the Task Force, the above have been identified as critical for states’ laws with respect to multi-jurisdictional receivership Wilkie Farrand Gallagher LLP report "NAIC Report Fall National Meeting 2021" p 20 Section G (vii)
Structured settlement annuity When structured settlements are established, there is none of the transactional risk of investing in factored structured settlement payments. A stark example of transactional risk is the Wall case. On April 30, 2019, a judge in the matter of Robert Wall and Linda Wall vs Corona Capital, LLC and Altium Group, LLC,Robert Wall and Linda Wall vs Corona Capital, LLC and Altium Group, LLC WD Pennsylvania Case No. 2:16-CV-01044-MRH, filed July 15, 2016 granted summary judgment in favor of Altium Group.
Altium Group LLC was an intermediary that had a relationship with the originating company Corona Capital and made the deal originated by Corona Capital available to its network of agents and advisors. The Walls were retirees, who invested $152,833.37 in a deal that was approved by a Florida state court March 28, 2012. The original annuitant Kenneth Stevens subsequently discovered a fraud in the origination. Stevens had filed papers seeking to overturn the order and, "after extensive discovery", the court concluded that Stevens "did not sign any of the documents submitted to this Court in support of the Corona petition. In other words, his signature had been forged. Stevens successfully sued to vacate the Order approving the transfer of payment rights.
The Walls subsequently sued Corona Capital, LLC and Altium Group, LLC. The Court ruled that the Walls could not sue the finance company for breach of transfer warranties under the Uniform Commercial Code but may sue the intermediary seller (Altium Group LLC) receiving her investment for breach of contract". While initially successful on the breach of contract claim, the ruling was overturned in favor of Altium on appeal, leaving only an unjust enrichment claim to be contested. As things stood on April 30, 2019, the Walls invested $152,833.37 in 2012 and have lost their entire investment and incurred substantial legal fees. Altium Group's website continued to tout "Unparalleled Safety of Principal" in solicitation to investors for a considerable time after the Wall transaction. Other examples of matters related to transactional risk appear in Unsettling Events Section below.
Primary market structured settlement payees may have statutory protections in the event of carrier insolvencies, however that may not be case with investments in factored structured settlement payment streams. In January 2019, the Tennessee legislature introduced House and Senate bills excluding from coverage under the Tennessee Life and Health Insurance Guaranty Association Act a person who acquires rights to receive payments through a structured settlement factoring transaction, as defined in federal law, regardless of whether the transaction occurred before or after the federal law took effect.
Primary structured settlements are shielded from creditors in accordance with their statutory protections. An investment in factored structured settlement payment streams does not have this protection. It then becomes like any other investment and is open to the rights and claims of creditors, bankruptcy trustees and other claimants.
Lack of regulation of sales practices Originators of structured settlement derivatives that end up being labeled "secondary market annuities" are currently not subject to any uniform federal licensing standard. With few exceptions—such as Maryland, which requires registration and bonding—many of the salespeople and companies that originate the derivative cash flows being sold to investors are not licensed or registered in the states where they solicit customers.
A number of sellers of structured settlement derivatives who do hold active insurance licenses have nevertheless continued to mislabel them as "secondary market annuities." Some have even implied coverage by state guaranty funds—despite explicit prohibitions in state insurance laws. For example, New York's Insurance Law Section 7718 prohibits such misrepresentations.
Potential risks to investors Absent most of the sales pitches for "secondary market "annuities" is mention of transactional risk, the possibility that a structured settlement transfer order can be later vacated and result in suspension of payments and possibly the loss of the entire investment. Following the Maryland Attorney General's lawsuit against Access Funding and several associated defendants, servicers of structured settlement payment rights notified certain investors with Somerset Wealth Strategies that their payments were being suspended pending the outcome of the litigation. This does not happen when one buys a legitimate annuity. In April 2010, Somerset Consulting established and continues to operate a website called Secondary Market Annuities that since December 2016web.archive.org underscores that factored structured settlements are not annuities. On August 19, 2017, Somerset CEO Thomas Burgess Hamlin issued an update to investors' Maryland Attorney General lawsuit against Access Funding, et al. ("the Lawsuit") in which he stated "An important difference is that the plaintiffs in the class action are trying to recover damages from Access Funding, but not to void the orders approving transfers of payments. The class actionCrystal LINTON, and Dimeca D. JOHNSON, On Behalf of Themselves and Others Similarly Situated, Plaintiffs, v. ACCESS FUNDING, LLC, RELIANCE FUNDING, LLC, ACCESS HOLDING, LLC, ASSOC, LLC Serve on: Lee Jundanian, EN COR, LLC Serve on: Lee Jundanian, Charles E. SMITH, CES LAW GROUP, LLC, Anuj SUD, and SUDLAW, LLC, Defendants. 2016 WL 3627316 (Md.Cir.Ct.) July 6, 2016. (another action against Access Funding) therefore would not affect the payments to which you are entitled". Oral arguments were heard in the appeal of the Attorney General's case, in March 2019. In the meantime buyers of structured settlement derivatives that were marketed as "secondary market annuities" by Somerset have not been receiving the income payments that they paid for. The Maryland Court of Special Appeals overturned the lower court decision in April 2019, leaving investors to remain in limbo with no payments. In September 2019 Thomas Burgess Hamlin settled a FINRA complaint against him for $50,000 from an investor who was sold a factored structured settlement payment stream that was mislabeled "secondary market annuity". In December 2019 a FINRA complaint against Brian Thomas Horn, a former employee of Somerset, allegedly involved in the same transaction settled the FINRA complaint against him for $55,000.