“What can we do to improve profitability and grow our business?” is a question that often comes up in conversations with life industry colleagues. Very often, I tell them, the potential answer is to intensify your focus on asset/liability management. In this task, structured settlements frequently play an important role.
One person who has figured out the benefits of structured settlements is Warren Buffett. In recent years, Berkshire Hathaway has moved aggressively into structured annuities, capturing about 15% of the total market in 2012. A quick scan of life insurance members of the National Structured Settlements Trade Association shows about a dozen other companies: Amica, Liberty Mutual, American General, New York Life, MetLife, Pacific Life, Prudential, Mutual of Omaha, and USAA.
In our experience, there’s a striking similarity between the structured annuity business and the institutional pension annuity market. Both involve insurers’ use of annuities to manage long-term liabilities and reduce required assets or, in the case of casualty companies, effectively manage reserves.
For the claimant, income from a structured annuity is completely exempt from all federal and state taxes. It is also exempt from taxes on capital gains, interest, dividends and the AMT. For claimants in high-tax states, this offers a significant financial advantage. This, in combination with the financial strength of the insurance industry, aligns the needs of the claimant with the casualty company offering the annuity.