JGWPT Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: The J.G. (JGWE)

JGWPT Holdings Inc. (JGW) Q4 2013 Earnings Conference Call April 1, 2014 10:00 AM ET

Executives

John Schwab - EVP and CFO

David Miller - Chairman and CEO

Analysts

Mark DeVries - Barclays Capital

Stephen Schulz - KBW

Moshe Orenbuch - Credit Suisse

David Scharf - JMP Securities

John Hecht - Stephens

Marcelo Lima - Heller House

Operator

Good morning. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome everyone to the JGWPT Holdings Inc. Fourth Quarter and Full Year End 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. John Schwab, Chief Financial Officer, you may begin your conference.

John Schwab

Thank you, operator; and thank you everyone for joining JGWPT's conference call for the fourth quarter and full year of 2013.

Statements in this conference call and in our earnings press release issued last night, other than historical facts, are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. Factors that might cause the actual results to differ materially are discussed in our earnings press release. The company disclaims any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur, or otherwise.

I will now turn the call over to David Miller, our Chief Executive Officer.

David Miller

Thank you, John, and good morning everyone. We appreciate you joining our equity investor conference call today. Today, I will give you an overview of our fourth quarter and annual performance and discuss some more recent developments. I will then ask John Schwab, our CFO, to provide a detailed overview of the financial results. We will then open up the call for questions.

One of the key metrics that we use to evaluate our performance is total receivable balance, or TRB. TRB is the total of the undiscounted payments purchased from customers during the period. In 2013, the company purchased $1.125 billion of TRB as compared with $1.0697 billion in 2012. During the fourth quarter, as we expected, total TRB purchases were $260.5 million, down from $278.9 million in the fourth quarter of 2012.

Revenue for the fourth quarter was $106.6 million as compared to $126.2 million for the fourth quarter of 2012. The decrease in revenue from prior year was driven primarily by lower TRB purchases and increased interest rates. For the full year, revenues were $459.6 million, slightly down from revenues of $467.4 million in 2012, and down from the prior year due to interest rates really. For reference, the 10-year swap increased from 1.84 on December 31, 2012, to 3.09 at December 31, 2013, that's over one point increase throughout the year.

As anticipated, the company reported adjusted net income of $111.12 million compared to $23.8 million in the fourth quarter of 2012. The largest drivers of the decrease in adjusted net income were $10.1 million impact of the additional interest expense arising from the term loan we entered into in February 2013. An increase of $1.6 million of advertising expense, and as I mentioned earlier, the impact of increasing interest rates on our spread revenue and lowered share repurchases.

For the full year, the company reported adjusted net income of $46.6 million as compared to $76.4 million in 2012, which was primarily driven by a $33.5 million of additional interest expense on the term loan, as well as increased interest rate environment, and the increases in other expenses.

In a few minutes, John will discuss in more detail, certain of the revenue and expense items in his review of the financial statements. But on an overall basis, the expenses we incurred during the fourth quarter, were consistent with our expectations.

The key to work -- on executing our M&A strategy, and while we had hoped to announce a deal, we are not ready to do so at this time. We are however continuing to evaluate acquisition candidates and are into due diligence with another party. You should expect us to continue to be disciplined in our approach to M&A, and holding steadfast in our reserve to pursue the right acquisition at the right price.

Our lead brokering strategy is beginning to take shape, and we have an agreement in place with the partner to deliver the products that our customers require. Although it would be premature to announce a name at this time, we are looking forward to a strong business partnership, and hope to be able to share that with you soon. At this time, we currently anticipate that we will be referring [ph] to the new partner at the end of the second quarter.

As we disclosed in our Form 10-K, in March 2014, the company and certain of its affiliates were served with Civil Investigative Demand, CIDs, from the U.S. Consumer Financial Protection Bureau, the CFPB. The CFPB requested various information and documents for the purpose of determining the company's compliance with certain sections of the Consumer Financial Protection Act of 2010, the Truth in Lending Act or its implementing regulations and other Federal Consumer Financial laws. The CIDs appear to be designed to broadly solicit general information about the company and its businesses. We believe that the company's practices are fully compliant with the applicable law, and we intend to cooperate fully with the CFPB.

Overall, we are pleased with our fourth quarter and full year results for 2013. As we mentioned previously, we do not provide future guidance. However, Q1 ended yesterday, and I know you want some indication of the business results for the quarter. We expect TRB for the first quarter of 2014 to be in the range of $255 million to $265 million. Now, I am only providing this information, because the quarter's closed. In the future, we expect that these calls will be earlier in the subsequent quarter, so I need to caution you that we will not release estimates of TRB or any other metric mid quarter.

I will now turn the call over to John Schwab, our CFO, for a review of the fourth quarter financial results.

John Schwab

Thanks David.

Now for the fourth quarter, revenue in the quarter was $106.6 million, this represents a decrease of $19.6 million or 15.5% from the fourth quarter of last year. The decrease in revenue was driven by decreases in our unrealized gains, primarily, due to increasing interest rate, as well as the reduction in TRB by 6.6%. Interest income in the fourth quarter was higher than 2012, due also to the higher interest rates, as well as securitizations that were completed in 2013. This is somewhat offset by lower interest income on our pre-settlement and other portfolios. The company's servicing, broker and other revenues decreased to $1.6 million for the fourth quarter of 2013, from $1.7 million in the prior period, due to the transition of certain life settlement servicing activities, as well as our lottery revenue, which is now included in unrealized gain.

As you recall, the company deploys a number of financing vehicles for its purchased receivables, including securitizations, private placements and term facilities. During the fourth quarter, the company securitized certain receivables that had been part of the term financing facility. The company regularly looks to the capital markets to finance or refinance portions of the existing asset pools, to take advantage of favorable financing rates. The company recorded a net gain on the refinancing of $14.2 million. Additionally, the company also recorded securitization expenses of $1.9 million related to this transaction, which is recorded in debt securitization expense on the company's P&L.

Moving on to expenses, advertising expense increased in the fourth quarter to $18.6 million from $17.1 million in the fourth quarter of 2012. As the company continues to shift its marketing dollars to the highest performing media and develop TV production, you will see quarter-to-quarter variances in advertising expenses.

Interest expense during the fourth quarter increased to $53.1 million from $39.7 million in the fourth quarter of 2012, primarily due to the $575 million term loan the company entered into in 2013, which was discussed in detail during the third quarter call. The net increase in interest expense attributable to the term loan was $10.1 million in the quarter. As we previously discussed, we used our IPO proceeds to repay $123 million of the term loan and repriced the debt to [indiscernible].

In addition to the effect of the term loan, interest expense also grew by $1.2 million, due to the securitizations that were completed in 2013 and the full year impact of the securitizations completed in 2012.

Compensation and benefits expense for the fourth quarter was $10.1 million as compared to $10.9 million in the fourth quarter of 2012. This decrease was primarily driven by the savings associated with the downsizing of the company's Boynton Beach office, which was completed in 2013.

General and administrative expenses increased slightly during the fourth quarter, driven by additional promotional expenses and costs associated with the expansion and transition of our office space. Professional consulting fees were essentially flat on a quarter-over-quarter period.

Provisions for losses on financed receivables were $1.3 million for the fourth quarter as compared to $1.9 million in 2012. This decrease was due to our reduction in reserve needs for a non-performing pre-settlement receivables. We used adjusted net income, which is a non-GAAP financial measure, as a measure of our performance. We define adjusted net income as our net income under U.S. generally accepted accounting principles, but for certain non-cash compensation expenses, other expenses, provision of benefits from income taxes and amounts related to the consolidation of securitization and permanent financing trust that we use to finance our business.

We use adjusted net income to measure our performance, because we believe it represents the best measure of our operating results, and the impact of the variable interest entities do not influence our operations. Please refer to our earnings release issued last night for a reconciliation of GAAP net income to adjusted net income.

So our adjusted net income for the fourth quarter was $11.2 million as compared to $23.8 million for the fourth quarter of 2012. The decrease in ANI between the periods was driven by the additional interest on our term loan of $10.1 million, a reduction of the unrealized gain driven by the TRB decreases and increased general and administrative expenses, partially reduced by the gains in the portfolio of refinancing that I previously discussed.

On a full year basis now, revenue for 2013 was $459.6 million, slightly down from revenues of $467.4 million in 2012. This represents a decrease of $7.8 million or $1.7 million from last year. The decrease in revenue was driven by decreases in unrealized gains, primarily due to increasing interest rates, offset by the refinancing of our term facility as discussed and the increase in TRB during the year at 5.2%.

Interest income in 2013 was $172.4 million as compared to $177.7 million in 2012, which is a decrease of $5.3 million. This decrease is due to lower interest recorded on finance receivables and pre-settlement financing transactions.

The company's servicing, broker and other revenues decreased to $5.3 million for 2013 from $9.3 million in 2012, again, due to the transition of certain life settlement, servicing activities, as well as our lottery revenue, which is now included in unrealized gains.

Advertising expense was down to $70.3 million from $73.3 million in 2012, due to the timing of some of our advertising initiatives. Interest expense increased to $193 million for the full year from $158.6 million in 2012, due primarily to the term loan interest as previously discussed.

Compensation and benefits expenses for 2013 were down slightly to $42.6 million as compared to $43.6 million in 2012. This was due to the Boynton Beach consolidation, but please keep in mind that such amount also includes severance costs of $2.9 million.

General and administrative expenses increased $5.6 million to $20.2 million in 2013 from $14.6 million in 2012, and professional and consulting costs increased $2.9 million to $18.8 million from $15.9 million in the same period of the prior year. These increases are primarily due to additional promotional expenses, a 2013 consulting project, and outside legal expenses associated with our term loan modification in December of 2013.

Provision for losses on finance receivables on 2013 was $5.7 million, an increase of $1.9 million from $3.8 million in 2012. Relating to increases in provisions for losses on pre-settlement funding transactions.

Adjusted net income for 2013 was $46.6 million, as compared to $76.4 million in 2012. The decrease in ANI between the periods was primarily driven by $33.5 million of interest expense on our term loan, increasing interest rates during the year, partially reduced by the gain on the portfolio of refinancing previously discussed.

Lastly, some notes on our financial condition; at December 31, 2013, we had $39.1 million of cash and equivalent on hand. In February 2014, the company completed its 2014 loan securitization, which resulted in an additional $46.8 million of cash to the company. The fair value of the company's retained interest and finance receivables was $239.6 million as of December 31, 2013, as compared to $184.1 million at December 31, 2012.

Now, some notes on the warehousing; from a warehousing standpoint, we regularly looked to refine and optimize our warehouses and other financing arrangements. As such, we made some changes to a number of our facilities in the fourth quarter. Those changes included amending the terms of one of our $300 million structured settlement credit facilities, entering into a new $300 million credit facility, and reducing the size of the other $200 million structured settlement credit facility for $50 million.

Currently, we have a total of $750 million of structured settlement, annuity and moderate warehouse capacity. In addition, last month, we increased the life contingent structured settlement and annuity capacity to $100 million from $50 million. In the aggregate, we currently have $885 million of structured settlement, annuity lottery and pre-settlement warehouse capacity.

On February 10th, 2014, we priced our 2014 loan securitization. The total amount of the issuance, including the residual was $248.8 million, at a discount rate of 4.24%. The 2014 loan securitization closed on February 18 of 2014. We were pleased with the execution of the securitization, and we are able to bring spread-in, on both the A and B tranches of the bonds form our last securitization.

Now, I will turn things back to David.

David Miller

Thank you, John. Operator, can we now open the line for questions?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And your first question comes from the line of Mark DeVries from Barclays Capital. Your line is open.

Mark DeVries - Barclays Capital

Yeah. Thanks for the commentary on the M&A front. Just a follow-up on that, I think you mentioned, you're still in talks. I know, when we talked during the IPO phase, you were looking at one deal that was I think meaningfully bigger than the others, and you thought it might the first to close. Is that still a possibility that it's a larger percentile acquisition?

John Schwab

We don't really comment on specific acquisitions. I can tell you that we are very active, and when we have something specific to announce, we will announce it.

Mark DeVries - Barclays Capital

Okay. Got it. Could you talk a little bit more about your ability to price higher in pass-through rate, as interest rates increase here? It seems like rates also certainly more subdued this quarter compared to the last two, but spread was a little bit lower than we expected?

John Schwab

Sure. I mean, we have talked about increasing rates a couple of times at this point. So first of all, I don't have an exact answer, but we have noted in our filings and previous discussions, we are a interest rate sensitive business, and as interest rates change, [indiscernible] pricing equivalents. These changes, they are not instantaneous. They take some time to pull through our pipeline of transactions. But it is our expectation or our expectations are, that the numbers -- when the numbers for Q1 are filed, the revenue for TRB margin would be better than it has been in recent months. So you should see some expansion for margin coming up in Q1 this year.

Mark DeVries - Barclays Capital

Okay. And then just finally on the 1Q numbers you gave us for TRB, sounds like they are a little bit light of our expectations and kind of flattish on a year-over-year basis, at the high end. Is there any color you can give us, in light that might have been [indiscernible] in the quarter?

John Schwab

The quarter just wrapped up last night. I can tell you that we have -- we certainly were impacted by -- whether any of you know this, whether this quarter, we were impacted by some insurance companies and some judges taking a little tighter view of what -- we are trying to get deals approved. So those would be, some of the reasons we saw.

Mark DeVries - Barclays Capital

Okay, got it. Thanks.

Operator

Your next question comes from the line of Sanjay Sakhrani from KBW. Your line is open.

Stephen Schulz - KBW

Hi, thanks. This is actually Stephen Schulz filling in for Sanjay. I guess the first question I had was around the just -- can you quantify what the interest rate movement impact was in the fourth quarter?

John Schwab

The movement from what, in particular?

Stephen Schulz - KBW

The movement in your swap -- yeah, the movement around the 10-year swap played in -- what the effects it had on the P&L? And then, just looking forward in the first quarter, if we just look at the 10-year swap, that has also come down from the fourth quarter levels at the end of the first quarter. So just trying to gauge around, what the impact was in the fourth quarter, and what potentially could it mean in the first quarter? Thanks.

John Schwab

So as I am sitting here, I don't have what the 10-year swap was, yeah, the change quarter-over-quarter. What I can tell you though, there was an increase that occurred in the quarter, as it wrapped up at 3.09, as David had talked about. The impact to rising rates in the quarter had an impact on our results, certainly, we estimate those about $2 million and again a lot of it was dampened, because of the fact that we had a pre-funding that closed in the November-December timeframe. And so because of that, we had a minimal amount of inventory on hand, but we were impacted by a couple of million dollars anyway by those rising rates.

Stephen Schulz - KBW

Got it. Then just moving back on CID funds. Is the expectation that, given you don't believe there is anything meaningful. Do you think the CID could be resolved relatively shortly, or just wanted to get some more clarity around the CID?

John Schwab

Yeah. I mean, we just received it last week. We are in the process of evaluating. We have been cooperating fully in providing all the information that they require. I think that all financial and our business is run pretty tightly, but I really can't tell you what else would happen. I mean, as we disclosed in our Form 10-K. in March, the company and some of its affiliates were served with a CID from the U.S. CFPB. This requires various information, documents for the purpose of determining the company's compliance for certain sections of the Consumer Financial Protection Act of 2010, Truth in Lending and is implementing regulations and other federal concern finance [indiscernible]. The CID appears to be designed to broadly solicit general information about the company's business.

We believe, and we really believe the company's practices are fully compliant with applicable law, and we intend to cooperate with the CFPB fully. We are proud of our efforts in this regard and intend to continue to establish industry leading practices, to ensure continued compliance and transparency within the business. But I really can't comment how quickly this can be resolved at this point.

Stephen Schulz - KBW

Got it. Great. Thanks and I will hop off. Thanks.

Operator

Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

Moshe Orenbuch - Credit Suisse

Great. John, I think that you can kind of do prospectively in terms of the structure, either of your securitizations or debt that could perhaps dampen that interest rate volatility. I mean, anything you can do from a pre-funding standpoint is there?

John Schwab

I think, as we look at it Moshe, on a go forward basis, certainly the pre-funding is something that helps us out; because when we do the financing and have a pre-funding open, it does limit certainly the volatility of interest rate swings, because the rate is fixed at the time that we do the initial close. So for example, on the first quarter, when we closed that deal in February, that pre-funding that's opened, we are accumulating product to put into that close that's going to occur. So that does take in some of the risk out. However, keep in mind, that the transactions are fairly long in nature, and so it takes a long time from the time we commit the pricing, to the time that it finally gets in there, and that depends on the quarter.

So we do look at that. And in addition, one thing to note when you look a the 2014 loan securitization, as that securitization, the pre-funding component there; we have raised that up to about 45% from the previous 40% to where it had been. So we do look at that and flex that at times, depending on sort of need demand and sort of use on interest rates.

Moshe Orenbuch - Credit Suisse

Okay. And not to beat the CFPB thing to death here, but this was not the CFPB coming in and writing new rules about your business. They are just coming in, as someone who believes they are looking at compliance with existing law, correct?

David Miller

That's our understanding. I mean, basically, what we have today, is we have a list of -- for documented information request that we have been complying with.

Moshe Orenbuch - Credit Suisse

Got it. Okay. And then just -- I am sorry, just a little housekeeping. Could you just run through -- you had mentioned $2.9 million of severance that was in the numbers and then $2 million of securitization, interest costs. What were the other things that you had mentioned, I kind of just got lost a little?

John Schwab

Well, the $2.9 million was in severance costs for the full year.

Moshe Orenbuch - Credit Suisse

That was in the quarter?

John Schwab

Very limited amount.

Moshe Orenbuch - Credit Suisse

Okay. Got it.

John Schwab

Let me just double check on that. Yeah, the severance fees of it was very small.

Moshe Orenbuch - Credit Suisse

Got it. Okay. And the other costs that you had called out?

David Miller

We talked about the impact in Q4 for the interest rate changes, it was about $2 million on our Q4.

John Schwab

And then the securitization costs at $1.9 million.

David Miller

I am sorry. And the securitization costs were $1.9 million, again, relating to the refinancing of the portfolio.

John Schwab

That was all Q4.

David Miller

Right, and that happened all in Q4. Correct.

Moshe Orenbuch - Credit Suisse

Great. Thank you.

David Miller

You bet.

Operator

Your next question comes from the line of David Scharf from JMP Securities. Your line is open.

David Scharf - JMP Securities

Good morning. Thank you. Dave, wanted to follow-up on a comment you made, I believe regarding being impacted by potentially judges taking a little longer to approve some settlement purchases. Is this some thing that was confined to any particular region? Is it something you see ebb and flow usually throughout the years or is there anything just fundamentally changing, in terms of how may be the industry is being approached these days?

John Schwab

Yeah, I think it's too early to say there's something fundamentally changing gin the industry. We have seen isolated cases around the country. Potentially just because there's some publicity around the business, as a result of the IPO, and we will see how it progresses across the year.

David Scharf - JMP Securities

Got it. Okay. So we shouldn't read anything to --

John Schwab

Not at this point. We are not reading much into it. I mean, in the future, it could become an issue. But at this point, its early days.

David Scharf - JMP Securities

Got it. And just as it relates to some of these anecdotal delays, can you give us a little context for -- from soup to nuts, how many weeks the process has been delayed in some cases?

John Schwab

I think we should be careful; because one example would be, we had significant number of court dates delayed in the first quarter, because of the weather, and the courts were simply closed. But most of those have cleared up at this point. I think, we probably still have a handful that have not cleared up, but most of those have resolved themselves inside the quarter. So I wouldn't say that delay is a big deal. I mean, we are seeing some judges have increased scrutiny of potentially denials that we need to go back and restructure.

David Scharf - JMP Securities

Got it. Is the approval rate still holding, and roughly that's kind of mid-90% range, has there been a material change in that?

John Schwab

I don't know if I have the numbers for the quarter in my hand, and the quarter really closed last night. But I would think it’s a little below the 90. It's probably mid-90, so below 95 at this point. I don't have the real number.

David Scharf - JMP Securities

Got it.

John Schwab

It's safe to assume it's down a little bit. I mean, I would assume that.

David Scharf - JMP Securities

Okay. On the pricing front, I believe on the Q3 call, you mentioned a little more, may be heightened degree of competition a little more aggressive discounting. Has there been any material change over the last few months to how you have been dealing most of it -- discount rates that you have been purchasing -- I mean, aside from adjusting for interest rate fluctuations?

David Miller

I would say the level of competition is continuing to be aggressive, but I wouldn't say it has changed significantly from our prior discussions.

David Scharf - JMP Securities

Okay. So consistent with last quarter. Lastly, I just wanted to revisit there or may be just clarify -- some of the initially inquired about the M&A transaction it would be -- in your prepared remarks, that hasn't closed. Just wanted to make sure, was this a discreet transaction that was supposed to have closed in the first quarter, that I think was kind of discussed may be late last year, of a particular size. Just trying to get a sense for materiality, how we ought to beat that TRB number in Q1?

John Schwab

Could you repeat the question, I am trying to -- the TRB number I gave you, does not include an acquisition at all for Q1.

David Scharf - JMP Securities

Does not include any, okay. And I guess, the specific reference to an acquisition that you were hoping to, has closed or announced by now. Is that something that we should think of as being delayed or probably off the radar for a while?

David Miller

The way I would think of it is, we are continuing to look at acquisitions both in our current and adjacent spaces, and we are evaluating several different businesses at a time, and when we have our real announcement to make, we will make it. But until then, I really can't tell you anything.

David Scharf - JMP Securities

Got it. Okay, very helpful. Thanks guys.

David Miller

Thanks David.

Operator

Your next question comes from the line of John Hecht from Stephens. Your line is open.

John Hecht - Stephens

Morning. Thanks for taking my questions. Real quick on the quarter, when you make adjustments from the GAAP to the adjusted net income, you had the gain on extinguishment of debt in the 4Q results. Is there any offsets to that to get you to adjust net income, or is that fully included in the adjusted net income figure?

John Schwab

That is included in the adjusted net income. Again, we look at that, John, primarily, because that's just the piece of that regular operating -- the way that business operates. We make money by buying something discounting it, and then discounting it and then financing it at lower rates. So that's how we view that. So that's why it's included in there. Again, we do have the extra $1.9 million which is not adjusted out, it is included in adjusted net income, as far as that calculation goes. That's why I called that out specifically.

John Hecht - Stephens

Got you. And then periodically, you are going to engage in that type of process, of buying something and then refinancing at a lower cost. How often would that occur on a recurring basis? In other words, what -- quarterly you are able to do this, or is it just infrequent?

David Miller

Yes, I would say it’s a little more infrequent than quarterly. But we look at things -- one-off type things come rolling down the road. We evaluate to determine whether we want to do something or not. But we expect that, by the end of the year, into early part of next year, there will be another transaction that may be out there, that we will look at. Again, I can't say the size and a lot of things depend on timing, interest rates, and sort of penalties to the extent that there are any for these kind of transactions. But it's kind of -- on our list of things that we evaluate regularly, and just to make sure, we know where we stand.

John Schwab

And just so you guys know, we buy small portfolios regularly and put them through the warehouse. So you don't really see them, call that on the interest rate balance sheet as extinguishment of debt, but we are -- part of our business is buying smaller portfolios and warehouse financing them and then securitizing them.

John Hecht - Stephens

And that will be accounted, when you do that type of operation, it would be accounted under the gain of extinguishment of debt as well?

John Schwab

No. Those are just the regular. They were just passed through the warehouses and be financed. So that they would not be counted as extinguishment of debt at that point. They are just purchases and then we securitize them.

John Hecht - Stephens

Okay. You mentioned ANI as a percentage of TRB, you expect some recovery in Q1. I am wondering, is that scaling the business, is that better spreads, you are pricing up less competition, what is going to drive that, and is there anything -- any color you can give us, kind of the remainder, what you might expect to kind of -- for the duration of the year?

John Schwab

The only color I can give you is for Q1, and in that case, we have talked a couple of times about the fact that we are reacting to the increased interest rate environment we are operating in. I mean, you saw, we went from 1.84 to 3.09 across the year. I mean, obviously, we are adjusting our pricing accordingly and those pricing adjustments are going to see -- start passing through the income statement in Q1.

John Hecht - Stephens

Okay. That's helpful. Then final question, more thematically, our research and long term discussions in this -- observations of this market suggested that over the last few years, kind of end market structured settlements has been growing. Low single digit type of rates, and based on the expectations for Q1, it looks like its going to be down year-over-year. Is the market contracting for a period of time here, or is there a market share shift here, how should we think about kind of the near term volume?

John Schwab

Yes, I can tell you that the primary structured settlement market, which is obviously -- [indiscernible] are 90% of our revenue and profitability, has been flat for several years now. We don't see that changing until the interest rate environment changes. So rising rates, we think will help the primary structured business, but certainly rates are not going up enough to impact that significantly yet.

John Hecht - Stephens

So your overall thought, is that it's just a flat market?

John Schwab

That's the primary market. We don't think it's growing at all at this point now.

John Hecht - Stephens

Okay. All right. Thanks very much.

Operator

(Operator Instructions). Your next question comes from the line of Marcelo Lima from Heller House. Your line is open.

Marcelo Lima - Heller House

Hi good morning. Thanks for taking the call. Could you spend a little bit more on why would our judges be denying certain deals? Is this primarily because the view, the interest rate is -- serious, too high, and it went to -- just go back and restructure the deal as far as pricing?

David Miller

Yes. It's hard to characterize specifically what any specific judge, how they decide. The judges are trying to determine, if the transaction is in the best interest of the customer, taking into account, the welfare of their dependents, and confirm that we comply with state and federal regulation and law. Some judges take a paternalistic view and they ask lots of questions. Some judges want to make sure, the customer understands the transaction they are entering into, and then that's okay, because they understand it. So commenting on one judge is really -- is hard to do.

Marcelo Lima - Heller House

But these are judges that you're in front of often, or are these -- are you in front of new judges all the time?

David Miller

We are in county court around the country, so we are in front of new judges all the time.

Marcelo Lima - Heller House

Got it. As far as your comment on the market not growing, how does the sustained increase in interest rates help the market grow?

David Miller

So obstruction settlement is really just an annuity that's used to settle property, casualty and insurance claim. And so, the idea is, that as rates go up, annuities become more valuable, right? If you think about it, the injured plaintiff or the injured claimant is given a choice of payments over time, or a lump sum today, and as interest rates go up, the lump sum today will buy a bigger payment over time, so the trade off looks better to them. Does that make sense?

Marcelo Lima - Heller House

And so, the market, you think the primary market is not growing today, because interest rates are so low that, it's just not that attractive to do it versus settlement?

David Miller

Yes, I mean you think about it, like -- if you think about it -- if I were to buy an annuity. Let's say I am going to buy $500 a month for 20 years, what is that, $120,000 something like that? The lump sum today is pretty close to the nominal value over 20 years. So it's just a trade-off, its better to take the lump sum than to take the payment over time. As rates go up, you get more over time for the same lump sum today, and we think the value of the structured settlement for settled claims would be more valuable, and more people will take them.

Marcelo Lima - Heller House

Even taking into account, the tax benefit of doing it over time?

David Miller

Yes. But if rates were zero, the tax benefit, those all you would get, right? Does that make sense? We are just at the lower end of the curve. I do think, and the business has done – it’s very different even from primary market information, but we know that in the past, the primary market has sold more structured settlements than they are selling today. You know, kind of pre-2008, when the rates were higher. So I think its -- we are assuming, or estimating that it would go back to those kind of levels if rates go back, and go up another point or two.

John Schwab

And the thing there, to keep in mind, obviously with all these changes in the primary market, but the primary market itself is shifting. Some of the players are moving around. Different people are coming in, some are exiting. Causes a little disruption there, as we sort things out. But we are always mindful of who those people are, and how that's changing.

David Miller

That's a good point. We are definitely seeing new players enter and others exit as rates change .

Marcelo Lima - Heller House

All right. Thank you.

David Miller

Yup.

Operator

(Operator Instructions). We appear to have no further questions at this time. I will turn the call back over to the presenters.

David Miller

Thank you very much Kirk. I would like to thank everyone for joining our call today. As always, if you have additional questions please feel free to call me or John Schwab, and we will attempt to answer your questions. Thanks everybody and we appreciate your interest.

Operator

This concludes today's conference call. You may now disconnect.

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