The View from  The Top – Part II:
The Life Settlement    Market Begins to Pick Up
by Leila Morris

The View from The Top – Part II: The Life Settlement Market Begins to Pick Up
by Leila Morris

What once was a frenzied buyers market for life settlements has cooled off as capital sources froze and increased life expectancies made policies less valuable. But, experts in the life settlement industry say that tough financial conditions make life settlements more useful than ever – for clients who need fast cash to meet financial obligations to investors looking for a safer place to put their dollars. Capital markets have picked up significantly since the fourth quarter of 2008 and the consensus among our experts is that capital flowing into the market should really pick up this summer. But, we are not likely to see a return to the frenzied buying environment that drove discount rates down to the high single digits.

Expect to see increased regulatory focus from the states. Many settlement entities created during the frenzied sellers market, serving as a non-value added intermediary, will fold or retool. Experts note that new programs offering alternatives to settlements, such as period certain premium finance lending for in-force polices are beginning to appear. Direct fractional ownership of life settlement policies by individual investors will become more mainstream and demand for policies and offers for policies could rise. Large investors will seek portfolios of policies, non-value added life settlement intermediaries will fold, and there will be a new push for life settlements for term policy, which do not have to be convertible term, say the experts.

Our experts are predicting more state regulation, consolidation of life settlement brokers, portfolio aggregation, and most importantly, a recovering market for life settlements. In Part II of our survey, our experts answer the most anticipated question:

What trends in the life settlement industry can we expect over the next year?
Greg Albers CEO of Life Insurance Buyers Inc.: Larger funders, with better access to capital, will have larger portfolios. Nate Evans, president of Maple Life Financial: In the short term, I think you will see fewer players in all aspects of the business. Many market participants depended on revenue generated from premium finance and STOLI programs. These programs are struggling since the life expectancy adjustments have drastically reduced the volume of cases that make economic sense. Given the renewed capital interest in the asset class, I think the mid- to long-term prospects for the industry remain very strong.

Craig Seitel CEO Abacus: I believe that financial planners and wealth managers will become directly and more actively involved in this industry as they become increasingly aware of this product as a great potential liquidity solution for aging Baby Boomers.

Alex Sirotkin, JD, CEO, and Erez Rotem, LUTCF, president of Integrity Life Settlements, LLC: State adoption of vertical settlement laws will continue with increased requirements for disclosure. This is, no doubt, necessary to preserve the market and to allow for further growth. In any event, it is inevitable now with the public’s demand for greater vigilance on the part of government. As certain issues are adjudicated in the courts, the law will also become clearer in this area and that of premium finance. We may even see class action suits against carriers that are alleged to have inhibited the life settlement market – specifically by refusing certain types of illustrations or stalling the change of ownership process.

Scott Kirby Co-President, Advanced Settlements Inc.: I would like to see more consolidation of settlement brokers. There are too many people who don’t truly understand the business or don’t have the scale to take care of the seller. I predict that we will see more money, better pricing, and higher offers.

Curtis M. Cole President of New Asset Alternatives, LLC: Due to the economic downturn, we should see more policies come available and this could possibly drive down the offers on policies. Direct fractional ownership of life settlement policies by individual investors will become more mainstream and demand for policies and offers for policies could rise. Life settlements, sold in a fund and made available to individual investors, will become widely available through registered reps. A life settlement fund is currently available for private investors.

David J. Wright, J.D. Vice President - Marketing for Rumso Capital LP: I think we will see increased due diligence for policies that have just come out of contestability. Capital sources want to be sure that the policy was not subject to some type of premium-finance arrangement, whatever that deal might have been. Due diligence could include requesting copies of premium payment checks and affidavits from the client’s trustee or attorney. We may also see hedge funds develop creative ways to purchase policies. Policies could be purchased by swapping shares of the fund for the policy. These shares are likely to have restrictions on redemption for a period of time. This is an interesting way for a fund to remain competitive in the life settlement arena, while not burdening the fund with a current cash outlay.

Brian Smith, CEO of Life Equity LLC: More states will pass regulation of life settlements. More due diligence will be completed on all policies during the life settlement process. Less variance in underwriting for life expectancies should yield more consistent pricing.

Robert Taurosa, managing member of Ideal Life Settlements, LLC: Well, we know that most markets are affected by fluctuations and economic factors that can cause a lack of stability and volatility and no one knows exactly when a trend is going to change. I do believe that we will see that things have started to pick up in the life settlement market by the summer. Hopefully, the federal government’s actions in attempting to free up the credit markets will have positive results in all markets. However, for the housing and financial markets, this may take significantly longer as the plans are implemented. It may be years before the housing and financial markets are healthy again. With that in mind and in these uncertain times, I do believe the life settlement market will show signs of increasing in the shorter term as investors and fund managers seek out a stable asset class that has a fixed amount of payment, a clear expectation of its maturity date, and a healthy profit. The life settlement market provides them with a way to reduce the volatility of a portfolio while maintaining a healthy rate of return and provides an asset that is completely uncorrelated to either interest rates or the stock market. Let’s hope my reflections on our market come true!

Stephen Terrell, executive vice president of The Lifeline Program: We are seeing increasing interest from large institutions seeking portfolio aggregation to sell these portfolios at a later date. This trend to sell accompanies a trend to purchase complete portfolios of policies. We believe this is the most significant trend affecting our industry this year. Many companies entered the life settlement industry with the idea of competing against providers. Today, however, more institutions are seeing the value of providers and are looking instead to purchase complete portfolios as performing assets. We are creating transparent portfolios that only contain policies that meet the qualifications and specifications of individual institutions. The aggregation of policies to build custom portfolios is a commanding trend in today’s market.

Mark B. Leeds, who has been participating in the life settlement industry since 1992 and was a chairperson of the original trade group, The National Viatical Association: Probable near-term trends include fewer players, increased competition, and somewhat reduced compensation for brokers.

Cynthia Poveda, executive vice president of Life Settlement Insights LLC: Through the year, we will see continued regulatory focus by states, both those with existing regulation and states considering the addition of settlement regulation. While additional capital is moving into the space, buyers will continue to be selective and a brokers’ knowledge of the market will be valuable to sellers. Many settlement entities created during the frenzied sellers market, serving as a non-value added intermediary, will fold or retool. New programs offering alternatives to settlements, such as period certain premium finance lending for in-force polices are beginning to appear. The perspective that a life insurance policy is a financial asset to the owner has been established. A settlement is simply one option for that asset when needs change, and this fact will remain.

Rob Haynie Managing Director of Life Insurance Settlements: You will see different players enter the market with a different focus on what they want to purchase. There is a new push for term policies that don’t have to be convertible term. We have been one of the first companies dealing with this segment. Since there is no cash value, any offer is better than nothing. People will start to specialize in different areas such as jumbo policies. I am interested with a death benefit of $10 million or greater. Not a lot of investors want to buy policies over $10 million.