We've all been talking about private equity investing in life settlements for a while. The rumors have persisted for the past year and the whispers have grown louder throughout 2010. Finally, a report of movement about private equity in the life settlement world has come out naming Cerebus Capital as the funding source for Proverian Capital. Cerebrus is one of the largest PE firms in the United States.
While I am sure Proverian wouldn't admit if Cerebrus is their funding source, this is a huge win for Proverian. You know anyone that can buy Chrysler and live to tell about it is well capitalized.
I for one applaud Cerebrus for jumping into the longevity market. I have a feeling this will pave the way for other PE firms to jump in as well.
www.cerberuscapital.com
Life Settlements
Tuesday, December 21, 2010
Monday, December 13, 2010
Life Settlement Brokers And Best Practices?
The Institutional Life Markets Association, ILMA for short, came out with its list of best practices for life settlement providers. Keep in mind, the ILMA is slanted from an investor's persepective. This is a not-for-profit trade association focused on the longevity market as an investment class. In essence, this is the investor's wish list of what a life settlment transaction should have to make them, the investor, feel more comfortable.
It is hard to argue against most of their best practices. Some of the suggested items are:
1) Providers certifying the intermediary (i.e. a life settlement broker, insurance agent, financial advisor or attorney). Life settlement providers already do this to some extent, but the degree to which it is done varies dramatically.
2) Guidance to providers on transferred policies; whether policy premiums have been financed; anti-fraud plans including retention of a medical professional or underwriter capable of comparing policy applications to medical records for material discrepancies; and privacy policies; and direction on state and federal laws and regulations compliance.
3) Policy owners should only work through certified intermediaries unless the policy owner has a net worth of at least 1,000,000. Essentially, if you aren't an accredited investor type, don't think about calling Coventry yourself. This is moronic to me. Is the ILMA suggesting that those with a lower net worth aren't sufficiently sophisticated enough to handle a direct to consumer life settlement provider? Why not? Perhaps the policy owner wants to save the brokerage commission? If they are of a lower net worth, the brokerage commission is probably more important anyway. Perhaps the policy owner has excellent counsel and advice, but their advisor (whatever type they might be...estate, law, insurance, financial, etc.) isn't participating in the transaction, but merely advising on the impetus for selling the policy? We can not continue to attempt to save people from themselves or assume people are not capable of things they may very well be capable of. Trying to treat selling one's personal asset, their life insurance policy, as analogous to investing in hedge funds doesn't make sense.
While the best practices didn't explicitly call for the use of a life settlement broker, it seems implicitly communicated that the best intermediaries are life settlement brokers. No insurance producer, attorney or financial planner could realistically execute the intermediary best practices called out by the ILMA if they only attempt life settlements intermittently. Only dedicated life settlement brokers are capable of effectively establishing the market price of a policy since they are most likely to have the most well developed networks of funding sources and consistent implementation of best practices described by the ILMA. I for one agree with this assertion.
To implement the best practices across the industry in a uniform fashion will require time and financial resources. I don't know how interested providers, in a time when funding isn't pervasive, are in adopting the ILMA guidelines. Then again, if this is what investors want, perhaps the providers won't have a choice.
To read the ILMA's best practices in their entirety, please visit the ILMA's website at www.lifemarketsassociation.org
It is hard to argue against most of their best practices. Some of the suggested items are:
1) Providers certifying the intermediary (i.e. a life settlement broker, insurance agent, financial advisor or attorney). Life settlement providers already do this to some extent, but the degree to which it is done varies dramatically.
2) Guidance to providers on transferred policies; whether policy premiums have been financed; anti-fraud plans including retention of a medical professional or underwriter capable of comparing policy applications to medical records for material discrepancies; and privacy policies; and direction on state and federal laws and regulations compliance.
3) Policy owners should only work through certified intermediaries unless the policy owner has a net worth of at least 1,000,000. Essentially, if you aren't an accredited investor type, don't think about calling Coventry yourself. This is moronic to me. Is the ILMA suggesting that those with a lower net worth aren't sufficiently sophisticated enough to handle a direct to consumer life settlement provider? Why not? Perhaps the policy owner wants to save the brokerage commission? If they are of a lower net worth, the brokerage commission is probably more important anyway. Perhaps the policy owner has excellent counsel and advice, but their advisor (whatever type they might be...estate, law, insurance, financial, etc.) isn't participating in the transaction, but merely advising on the impetus for selling the policy? We can not continue to attempt to save people from themselves or assume people are not capable of things they may very well be capable of. Trying to treat selling one's personal asset, their life insurance policy, as analogous to investing in hedge funds doesn't make sense.
While the best practices didn't explicitly call for the use of a life settlement broker, it seems implicitly communicated that the best intermediaries are life settlement brokers. No insurance producer, attorney or financial planner could realistically execute the intermediary best practices called out by the ILMA if they only attempt life settlements intermittently. Only dedicated life settlement brokers are capable of effectively establishing the market price of a policy since they are most likely to have the most well developed networks of funding sources and consistent implementation of best practices described by the ILMA. I for one agree with this assertion.
To implement the best practices across the industry in a uniform fashion will require time and financial resources. I don't know how interested providers, in a time when funding isn't pervasive, are in adopting the ILMA guidelines. Then again, if this is what investors want, perhaps the providers won't have a choice.
To read the ILMA's best practices in their entirety, please visit the ILMA's website at www.lifemarketsassociation.org
Saturday, November 27, 2010
Fed Action Related To Life Settlements?
This is an interesting piece about the signifigance of the Federal Reserve to life settlements. It is part of an obvious PR blitz by LPI, but food for thought nonetheless.
WACO, Texas, Nov 16, 2010 (BUSINESS WIRE) -- The Federal Reserve recently announced that it would move ahead with its plan to buy an additional $600 billion of U.S. Treasurys, an act widely viewed as an effort to spark the nation's economy. With short term interest rates at nearly zero -- and few other available tools at its disposal -- the Fed decided to effectively "flood" money into our economy. Whether the move will achieve its intended objective remains to be seen. What is apparent is that the financial markets offer no clear paths. To combat this, many investors are adopting multi-faceted strategies to hedge against risk, volatility, or meager returns and are seeking alternative, non-correlated investments like life settlements.
A life settlement is the purchase of an existing life insurance policy from an elderly policy holder at a discount to its face value. The transaction is used by wealthy seniors, who have large and expensive policies they no longer need, to extract value from an otherwise illiquid asset. Investors are attracted to life settlements because returns are not based on unknown future market performance (as with the stock, bond or real-estate markets), but on a known discount to a stated face value, which is quantifiable over a variety of time periods.
Life settlements are priced to yield around a 3% compounded return over a ten-year period, but can yield around 10-12% if the policy matures in five years. Yields increase even more if the policy matures earlier than five years. Because of this superior return potential and lack of correlation to financial markets, life settlements are becoming increasingly attractive to qualified purchasers.
Read rest of article at Marketwatch
WACO, Texas, Nov 16, 2010 (BUSINESS WIRE) -- The Federal Reserve recently announced that it would move ahead with its plan to buy an additional $600 billion of U.S. Treasurys, an act widely viewed as an effort to spark the nation's economy. With short term interest rates at nearly zero -- and few other available tools at its disposal -- the Fed decided to effectively "flood" money into our economy. Whether the move will achieve its intended objective remains to be seen. What is apparent is that the financial markets offer no clear paths. To combat this, many investors are adopting multi-faceted strategies to hedge against risk, volatility, or meager returns and are seeking alternative, non-correlated investments like life settlements.
A life settlement is the purchase of an existing life insurance policy from an elderly policy holder at a discount to its face value. The transaction is used by wealthy seniors, who have large and expensive policies they no longer need, to extract value from an otherwise illiquid asset. Investors are attracted to life settlements because returns are not based on unknown future market performance (as with the stock, bond or real-estate markets), but on a known discount to a stated face value, which is quantifiable over a variety of time periods.
Life settlements are priced to yield around a 3% compounded return over a ten-year period, but can yield around 10-12% if the policy matures in five years. Yields increase even more if the policy matures earlier than five years. Because of this superior return potential and lack of correlation to financial markets, life settlements are becoming increasingly attractive to qualified purchasers.
Read rest of article at Marketwatch
Wednesday, November 10, 2010
NY Times Doesn't Understand Life Settlements
A recent article in the NY Times, titled Raising Cash From the Less Usual Places, seemingly tries to do a fair and balanced look at ways to pay for elder related expenses. They of course touch on life settlements. However, my gripe is this, to the uneducated life settlements are portrayed and understood to be a tool for desperate seniors who have nothing else to sell.
Life settlements have helped numerous seniors out of tough spots, prevented foreclosures and wiped out crippling debt. But for every down on their luck senior who sold a policy, there are 10 others who were affluent or even down right wealthy when they sold their life insurance policy.
As much as life settlements are depicted as a strategy for the needy, they are really a wealth or estate strategy. Consider this, the average life settlement is for a life insurance policy with a $1.7million face, while the average in force policy is less than $350k. There are some ancillary considerations for this discrepancy, but at the end of the day, rich people are selling policies not poor people.
So while reporters and misinformed politicians are reminding everyone that your food stamp eligibility might be affected if you sell your policy, the rich keep selling their policies like just another asset. So please save us the sob story about poor grandma who was broke and someone took advantage of her to buy a life insurance policy on the cheap. If Grandma was really broke, chances are she stopped paying her premiums long ago.
Life settlements have helped numerous seniors out of tough spots, prevented foreclosures and wiped out crippling debt. But for every down on their luck senior who sold a policy, there are 10 others who were affluent or even down right wealthy when they sold their life insurance policy.
As much as life settlements are depicted as a strategy for the needy, they are really a wealth or estate strategy. Consider this, the average life settlement is for a life insurance policy with a $1.7million face, while the average in force policy is less than $350k. There are some ancillary considerations for this discrepancy, but at the end of the day, rich people are selling policies not poor people.
So while reporters and misinformed politicians are reminding everyone that your food stamp eligibility might be affected if you sell your policy, the rich keep selling their policies like just another asset. So please save us the sob story about poor grandma who was broke and someone took advantage of her to buy a life insurance policy on the cheap. If Grandma was really broke, chances are she stopped paying her premiums long ago.
Wednesday, July 28, 2010
GAO Study Finds that Life Settlements Deliver Almost 8 Times Surrender Value to Seniors
When evaluating a life settlement, the first question is always how much will a policy sell for? The better question is, how much more will a life settlement net than surrendering it to the life insurance carrier. Financial decisions are never made in a vaccum and the relative value of an insurance asset on the scondary market is best compared with the perceived value of a surrender. The GAO has finally given some fantastic context to this discussion with a recent report.
HUDSON, Ohio--(BUSINESS WIRE)-- The U.S. Government Accountability Office recently issued a long anticipated report on the state of the emerging Life Settlement market. One of the key findings, based on analysis of over 1,000 life settlement transactions, was that seniors selling their policies in a life settlement transaction received almost 8 times as much money as they would have had they surrendered the policy to the insurance company. “This confirms what we have been saying all along, life settlements are good for consumers and result in maximizing policy value for seniors who no longer want or need their life insurance policy,” said Brian Smith, President of the Life Settlement Institute. For example, proceeds of a life settlement may help a senior pay for long term care.
Using just the 1020 policies relied upon in the study means that life settlements delivered $232 million more value to seniors than they would have received from the issuing insurance company. The study shows that seniors would have received $37.4 million if they surrendered their policy but instead received over $269 million from the life settlement transactions.
The study also found that although the vast majority of states have adopted pervasive regulation of the life settlement market, some have yet to do so and differences among state laws can be significant. Smith added: “This finding also comes as no surprise to us. We have been working with state legislators and state insurance regulators to adopt consistent model legislation across the country and eliminate such discrepancies. Last year we helped get legislation enacted in several states including New York and California. However, there are 50 states and it takes time to get these initiatives passed. The National Conference of Insurance Legislators (NCOIL) Model Life Settlement Act is a very good bill and we will continue to support its adoption around the country.”
HUDSON, Ohio--(BUSINESS WIRE)-- The U.S. Government Accountability Office recently issued a long anticipated report on the state of the emerging Life Settlement market. One of the key findings, based on analysis of over 1,000 life settlement transactions, was that seniors selling their policies in a life settlement transaction received almost 8 times as much money as they would have had they surrendered the policy to the insurance company. “This confirms what we have been saying all along, life settlements are good for consumers and result in maximizing policy value for seniors who no longer want or need their life insurance policy,” said Brian Smith, President of the Life Settlement Institute. For example, proceeds of a life settlement may help a senior pay for long term care.
Using just the 1020 policies relied upon in the study means that life settlements delivered $232 million more value to seniors than they would have received from the issuing insurance company. The study shows that seniors would have received $37.4 million if they surrendered their policy but instead received over $269 million from the life settlement transactions.
The study also found that although the vast majority of states have adopted pervasive regulation of the life settlement market, some have yet to do so and differences among state laws can be significant. Smith added: “This finding also comes as no surprise to us. We have been working with state legislators and state insurance regulators to adopt consistent model legislation across the country and eliminate such discrepancies. Last year we helped get legislation enacted in several states including New York and California. However, there are 50 states and it takes time to get these initiatives passed. The National Conference of Insurance Legislators (NCOIL) Model Life Settlement Act is a very good bill and we will continue to support its adoption around the country.”
NCOIL Drafts New Life Settlement Disclosure Model
The Life Insurance and Financial Planning Committee the National Conference of Insurance Legislators (NCOIL), Troy, N.Y., is drafting model state legislation that would require life insurers to tell policyholders that life settlements are among the alternatives to letting policies lapse, according to Georgia state Sen. Ralph Hudgens, R-Hull, Ga., the committee chair.
Hudgens says he has asked another committee member, Kentucky state Rep. Ronald Crimm, R-Louisville, Ky., to draft the model bill.
The model bill would require life insurers to advise insureds about all of the alternatives that would be available if the insureds ever decided to give up their policies.
Kentucky, Maine and Washington have enacted similar notice laws, Hudgens says.
Hudgens says he expects the model law to be introduced during the NCOIL annual meeting in Austin, Texas, in November.
Source: www.LifeandHealthInsuranceNews.com July 28, 2010
Hudgens says he has asked another committee member, Kentucky state Rep. Ronald Crimm, R-Louisville, Ky., to draft the model bill.
The model bill would require life insurers to advise insureds about all of the alternatives that would be available if the insureds ever decided to give up their policies.
Kentucky, Maine and Washington have enacted similar notice laws, Hudgens says.
Hudgens says he expects the model law to be introduced during the NCOIL annual meeting in Austin, Texas, in November.
Source: www.LifeandHealthInsuranceNews.com July 28, 2010
Tuesday, July 27, 2010
Life Settlement Industry Poised for Growth
We've been seeing evidence of a recovery in the life settlement market for the past couple of months. Providers are buying for new funding sources, brokers are closing more deals and an index that tracks the industry has been pointing to a more positive market. Scott Page, the president and CEO of the Lifeline Program, wrote a great article which provides some background information on the current life settlement market and reasons to be optimistic moving forward. As the head of an Atlanta, Ga based life settlement provider he is indeed on the front lines and has a great vantage point. The following is an excerpt from the National Underwriter, which was published on 7/26/10.
For the first time in 24 months, the forecast for the life settlement industry is bright, particularly after surviving a perfect storm situation in 2008. The life settlement market was whipsawed two years ago when a dramatic change in life expectancy tables combined with the collapse of the credit markets to nearly cripple the industry.
The fallout was significant: Credit disappeared, hedge funds fled, offers were pulled, some companies folded and consumers ultimately suffered. However, the life settlement business has once again proven to be resilient as funding sources have returned, and the industry has another opportunity to flourish—as long as it is done the right way this time. The companies in our industry need to focus primarily on the long haul, while the goals of the capital sources need to align with the goals of the providers and the rest of the industry.
At the moment, there are a number of large players poised to help bring the industry back to prior glory. But there are challenges ahead. The industry is facing what can be best described as a crisis of confidence, which can be seen at both ends of the business.
At one end, capital sources, including hedge funds and private equity groups, remain wary. Some got burned badly from polluted portfolios containing policies with insurable-interest question marks and origination concerns. Fortunately, regulators have finally cracked-down on stranger-owned policies.
At the other end, there are skeptical agents and brokers who were let down when policy offers were pulled—sometimes inexplicably, often unprofessionally and usually with little or no notice. In between, providers had little control of the situation and were forced to make excuses that left agents and brokers scrambling for answers. It was a difficult time, and the industry as a whole has the scars to prove it.
Looking back, perhaps the industry needed the shake-up, painful as it was. The life settlement industry is unique and challenging. Too many new companies jumped into the business with little experience but a lot of attitude. They quickly secured a bunch of state licenses and started vacuuming up policies without understanding the intricacies of the business. We saw ignorance of origination and insurable interest risks; poor medical underwriting; disregard for transparency and standardization; and a complete lack of understanding of how to track the insured and manage the asset class.
As previously mentioned, the future for the industry is, indeed, bright. Moving forward, the industry needs to address the confidence issues head-on and ensure that these situations never happen again. Foremost, the goals of the providers must be better aligned with the capital. Ideally, the provider companies should have their own capital or a least direct control of the capital. Transparency also emerges again as a key factor. Full disclosure of fees and commissions adds to the industry’s legitimacy, but we need to go even further and begin to present unimpeachable proof of funds when offers are made. This is of tremendous value to brokers, agents and consumers.
In the short term, a key factor is pent-up demand. Only a select few policies have been purchased during the past year, and there are thousands of seniors who are interested in selling their policies as soon as possible.
For institutions, this means that portfolios can be aggregated to specific goals very quickly and at reasonable costs. Providers who have aligned with the new capital sources have an opportunity to grow quickly but with more control over their business.
For agents and brokers, new funding sources are emerging. This will help revive a practice area and profit center that had been dormant. As the industry embraces transparency and new best practices, such as requiring proof-of-funds letters, confidence will begin to rise and the industry will once again flourish.
For consumers, there is great promise. While offers might not be at the levels of a few years ago, the market is coming back. The option to sell an insurance policy for a profit is now available again for seniors. This in itself is an encouraging development.
Improved underwriting and more sophisticated medical exams also work in the consumer’s favor. Some providers are performing in-person paramedical examinations, just like insurance companies at policy origination, to secure the most up-to-date medical picture of policyholders. This improves underwriting and in some cases will help raise offers.
After weathering the perfect storm, the industry is poised for growth. As long as the lessons learned remain at the top of the mind, and the industry is responsible with its capital while always focusing on seniors as the primary client, then the players and the pieces are in place for the life settlement industry to once again flourish.
For the first time in 24 months, the forecast for the life settlement industry is bright, particularly after surviving a perfect storm situation in 2008. The life settlement market was whipsawed two years ago when a dramatic change in life expectancy tables combined with the collapse of the credit markets to nearly cripple the industry.
The fallout was significant: Credit disappeared, hedge funds fled, offers were pulled, some companies folded and consumers ultimately suffered. However, the life settlement business has once again proven to be resilient as funding sources have returned, and the industry has another opportunity to flourish—as long as it is done the right way this time. The companies in our industry need to focus primarily on the long haul, while the goals of the capital sources need to align with the goals of the providers and the rest of the industry.
At the moment, there are a number of large players poised to help bring the industry back to prior glory. But there are challenges ahead. The industry is facing what can be best described as a crisis of confidence, which can be seen at both ends of the business.
At one end, capital sources, including hedge funds and private equity groups, remain wary. Some got burned badly from polluted portfolios containing policies with insurable-interest question marks and origination concerns. Fortunately, regulators have finally cracked-down on stranger-owned policies.
At the other end, there are skeptical agents and brokers who were let down when policy offers were pulled—sometimes inexplicably, often unprofessionally and usually with little or no notice. In between, providers had little control of the situation and were forced to make excuses that left agents and brokers scrambling for answers. It was a difficult time, and the industry as a whole has the scars to prove it.
Looking back, perhaps the industry needed the shake-up, painful as it was. The life settlement industry is unique and challenging. Too many new companies jumped into the business with little experience but a lot of attitude. They quickly secured a bunch of state licenses and started vacuuming up policies without understanding the intricacies of the business. We saw ignorance of origination and insurable interest risks; poor medical underwriting; disregard for transparency and standardization; and a complete lack of understanding of how to track the insured and manage the asset class.
As previously mentioned, the future for the industry is, indeed, bright. Moving forward, the industry needs to address the confidence issues head-on and ensure that these situations never happen again. Foremost, the goals of the providers must be better aligned with the capital. Ideally, the provider companies should have their own capital or a least direct control of the capital. Transparency also emerges again as a key factor. Full disclosure of fees and commissions adds to the industry’s legitimacy, but we need to go even further and begin to present unimpeachable proof of funds when offers are made. This is of tremendous value to brokers, agents and consumers.
In the short term, a key factor is pent-up demand. Only a select few policies have been purchased during the past year, and there are thousands of seniors who are interested in selling their policies as soon as possible.
For institutions, this means that portfolios can be aggregated to specific goals very quickly and at reasonable costs. Providers who have aligned with the new capital sources have an opportunity to grow quickly but with more control over their business.
For agents and brokers, new funding sources are emerging. This will help revive a practice area and profit center that had been dormant. As the industry embraces transparency and new best practices, such as requiring proof-of-funds letters, confidence will begin to rise and the industry will once again flourish.
For consumers, there is great promise. While offers might not be at the levels of a few years ago, the market is coming back. The option to sell an insurance policy for a profit is now available again for seniors. This in itself is an encouraging development.
Improved underwriting and more sophisticated medical exams also work in the consumer’s favor. Some providers are performing in-person paramedical examinations, just like insurance companies at policy origination, to secure the most up-to-date medical picture of policyholders. This improves underwriting and in some cases will help raise offers.
After weathering the perfect storm, the industry is poised for growth. As long as the lessons learned remain at the top of the mind, and the industry is responsible with its capital while always focusing on seniors as the primary client, then the players and the pieces are in place for the life settlement industry to once again flourish.
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