Kramer Case A Victory For Life Settlement Industry?

Today we had a newsletter forwarded to us from Fasano Associates. It examines the recent, high profile Kramer court decision about beneficial interest life settlements. The author did a good job of pointing out that while the decision was seen as a victory, it doesn't necessarily mean the industry should get excited. Below is the article from the newsletter.

The recent New York Court of Appeals decision on the Kramer case reminds me of another Kramer decision — that of Cosmo Kramer of Seinfeld fame.

In one of the funnier Seinfeld episodes I remember, Cosmo Kramer had been wrongly arrested on suspicion of being a serial killer of young women in the Hollywood area. He was released after another young woman was killed while he was in custody — proving that he could not have been the murderer. At the end of the episode, we see Jerry, Kramer and George jumping for joy at the news of the new murder that resulted in Kramer’s release — until they all realize at the very end that they were, after all, celebrating the death of an innocent woman.

The New York Court of Appeals clearly made the right decision in the Arthur Kramer case by affirming the right of an insured to designate his beneficiary and in being able to transfer his policy, any time after policy issue, to anyone he chooses — regardless of whether the subsequent policy owner should have or not have an insurable interest. Insurance companies have a duty to underwrite and it is their responsibility to establish the insurable interest of a life insurance application. Once a policy is issued it becomes an asset of the owner, like a stock or a bond, and should be transferable without an after-the fact requirement to devine the initial intent of the insured.

But let’s not lose sight of the reality of this case. Arthur Kramer was a rich attorney who got richer by abusing the system. He took out $56 million of life insurance, not to provide protection to his family, not to lessen the tax burden at the time of his death, not to arrange for key man insurance, but to profit by the immediate sale of his policies to investors in the secondary market. If the purpose of the life settlement industry is seen as helping the rich get richer — be they the Arthur Kramers of the world or the investors who benefit from an early death in a much publicized case like this one — and make no mistake about it, our gloating over the Kramer case outcome will be seen that way, then we may — like Jerry, Cosmo and George — be celebrating a death … ours.

The life settlement market has legitimacy because it gives an insured another option to surrendering or lapsing an unneeded life insurance policy. Let’s not lose sight of that and let’s not, in our jubilation over the Kramer case outcome, allow others to lose sight of it.

New NCOIL Model Act Requires Life Settlement Disclosure

On Nov. 19th, NCOIL (National Conference Of Insurance Legislators) approved landmark model language regarding life settlement disclosures. These aren't the disclosures you are thinking of. In fact, the model act requires life insurance carriers to notify clients that life settlements are an option when a policy is about lapse or be surrendered. Five states have similar requirements on the books already, but this new model act means the requirement probably coming to your state very shortly.

As you can imagine the carriers fought tooth and nail against this. However, the law is seen as very consumer friendly and passed easily. What is interesting is that a number of captive carriers, such as Farmers Insurance, prohibit their agents from participating in or even recommending a life settlement to clients. This new model act makes that type of policy an unfair trade practice.

We expect agents and producers to have many more life settlement discussions with clients as this model act takes hold around the country. Hopefully the insureds will benefit in the end from the additional awareness.

2009 Saw Decline In Life Settlement Market

The U.S. life-settlement market, in which investors buy life-insurance policies to collect benefits, declined last year as hedge funds and private equity firms had less capital to spend amid a recession, a research firm said.

Policies sold by insured individuals in 2009 had a face value of about $8 billion, a decrease of 36 percent from a year earlier, Conning & Co. said today in a statement.

“During 2009, a significant decrease in investor capital reduced the ability of life-settlement funds to purchase new policies,” Scott Hawkins, an analyst for Hartford, Connecticut- based Conning, said in the statement.

About $35 billion of U.S. life settlements were in force at the end of last year, up 16 percent from 2008, Conning said. Investors pay the premiums after buying the policies, and make money if the remaining costs are less than the final payout when the seller dies.

Conning said the industry was hampered also by new methods for calculating life expectancy. Underwriters made the changes in late 2008 and early 2009, extending average estimates for life expectancy and creating uncertainty about the accuracy of earlier contracts.

“First there was the economic turmoil that dried up some investor wealth,” Hawkins said in an interview. “That was compounded by concerns about the accuracy of life expectancies.

Apollo Global Management LLC, the private-equity firm founded by Leon Black, was bidding on $6 billion of life- insurance policies held by Belgian bank KBC Groep NV, two people with knowledge of the talks said this month.

Life settlements are being sold at “distressed pricing” on the secondary market, according to a document included in a presentation by the Oregon Investment Council, a state pension plan, on Sept. 29. Regulators in Europe are encouraging banks to divest their non-core assets, the pension fund said. To read the full article, please visit BusinessWeek

Fundamentals Of Life Settlement Valuation

Here at the Life Settlement Monitor, we frequently refer to policy value trends. We've received a number of emails asking about how life insurance policies are valued. What makes one more attractive than the other in a life settlement? We are republishing an article below that gives an excellent foundation.

As life settlements become a more popular tool for retirement income and financial planning, the question always boils down to how much is my life insurance policy worth? A life settlement appraisal is the first step in understanding if selling an existing life insurance policy makes sense. There are several factors that contribute to a life insurance policy's value as a life settlement.

A significant component to establishing the life settlement value of a policy is the insured's life expectancy. This is probably the most important factor aside from the policy's face value itself in determining a life settlement value. The insured's age, health, medical conditions, family history and gender are all evaluated to determine a life expectancy by buyers and outside medical appraisers. These third party vendors known as, Life Expectancy Providers, review medical records, personal information and proprietary actuarial tables to estimate an insured's life expectancy. The life expectancy reports, known as life expectancy certificates, project insured life expectancies down the number of months. As you can imagine, a policy insuring someone with a short life expectancy is more valuable than one insuring someone with a longer life expectancy.

The type of life insurance policy also plays into the valuation. While, non convertible term policies are not typically sold on the secondary market, Whole Life, Universal and convertible term policies are actively being purchased. Usually the Universal Life policies are the most sought after as they offer flexible payments and sometimes have accumulated cash value which can be used to pay premiums in the future.

Policy owners are also a component to the valuation of a life settlement. If a policy owner has previously declared bankruptcy or been divorced, buyers may devalue a policy. Some potential buyers are concerned that a former spouse or creditor will attempt to claim the life insurance policy. In addition, the value of a policy can be affected by the state of residence of the policy seller. Depending upon the type of life settlement transactional environment a state's laws create, a policy can be given a premium or receive a discount by buyers.

The life settlement market itself has an impact on the value of life insurance policies. The buyers of life insurance policies are typically large financial institutions such as retail banks, hedge funds and investment funds. When these institutions have capital to deploy the life settlement market becomes more competitive and policies carry a premium. However, the financial institutions don't have as much money to invest in policies, the life settlement market may see discounting of policies.

Policy owners that understand the factors contributing the value of their life insurance policy are more apt to maximize their asset's value. By recognizing what makes a policy attractive and valuable they can better plan if and when to sell their life insurance.

Green Shoots In The Life Settlement Industry

Some people inside and outside the industry were predicting the death of life settlements last year. Unattractive tax rulings, bad "headline risk", possible federal regulations, conflicting life expectancy reports and vanishing funding sources made life settlements on the whole look vulnerable for collapse. Brokers or providers listening to these talking heads would have thought it was time to close the doors and change industries.

As most know, the biggest challenge last year was a lack of capital. As new funding moves into the market the naysayers are having a harder time selling their doom and gloom story. New Asian and American pension funds are getting into the fold as funding sources. European hedge funds and retail investment funds are not only drawing new investors but deploying capital into the US secondary life insurance market. As a result, we've seen providers go from inactive in early 2010 to very active in just a few months.

Policy sellers are starting to come to the table as well. Some sellers were scared off by low valuations and stayed on the sidelines during the great recession. In some cases, these assets are now back in play with owners looking to do deals.

As with many of the other financial markets, life settlements are growing as confidence and capital return. The bond market, mortgages, commerical lending, life settlements and most other markets are making a come back.

By all signs, the life settlement industry has turned the corner. The recovery seems to be slow, but steady. It is happening in a measured pace, but perhaps that is the safest way for any recovery to happen.

Choosing Your Next Life Settlement Broker

Many people make a choice to sell their existing life insurance policy in a life settlement, but don't give much consideration about which life settlement broker to use. The choice of life settlement broker can make a big difference in not only the experience, but also the outcome. A great article was recently written about some of the important considerations to contemplate when choosing a life settlement broker. We paraphrased the article below, but always remind people to do their own due diligence.

A life settlement broker can be an extremely helpful advocate for policy sellers during a life settlement. Life settlement brokers can help sellers maximize the sales price of a life insurance policy. They have relationships with buyers that aren't available to the public and can expedite the settlement process which results in faster payments to sellers.

The life settlement industry is still in its infancy. As a result, new life settlement companies and life settlement brokers have emerged to fill the growing demand. Although, the quality of life settlement brokers across the industry is somewhat inconsistent. Some are extremely professional, while others are inexperienced and lack the expertise to maximize policy values in life settlements.

Life settlement brokers should concentrate on just life settlements and not sell other products or services. As a full time life settlement professional, brokers effectively remove possible conflicts of interest that make occur if they sell other services and products. Furthermore, dedicated life settlement brokers are free to focus on becoming masters of their craft and industry best practices.

Life settlement brokers should have a robust network of potential buyers. By leveraging a competitive marketplace of multiple buyers, a broker can be assured that the seller is capturing the full market value of their asset. Some claim to be life settlement brokers but unfortunately only work with one or two potential buyers.

Life settlement brokers are now licensed in approximately 80% of the states. Selecting a Life Settlement Broker that is properly licensed and held to the highest standards by law is of the utmost importance. Licensure ensures a minimum level of proficiency and establishes a regulatory framework for broker operations.

The decision to sell a life insurance policy as a life settlement is as important one. Choosing which person is best suited to represent you during that transaction should be weighed just as carefully. As a fiduciary, a life settlement broker is obligated to work in a policy seller's best interest. It is up to the policy seller to decide who is best able to fulfill that obligation.

Life Settlement Market Still Weak

Like real estate, the life settlement industry has squarely been a buyers’ market thus far in 2010. Many of the same reasons real estate remains weak are also impeding the life settlement industry from emerging from its own slump. Demand for policies on the secondary market has been dampened by persistently tight credit facilities, difficult liquidity conditions and a lethargic investment climate.

The weak demand from buyers continues to affect pricing at the life settlement origination level. This often makes the market dysfunctional as the large disparity between buyers and sellers’ expectations can sometimes not be bridged. Unfortunately, many sellers have expectations of a policy’s value, based on the boom time life settlement market of 2008 and earlier. Many life settlement brokers are reporting an increasing amount of policy sellers looking for second opinions, because they are in disbelief when they are told their policy has no offers, or the offers that have been received are for “pennies on the dollars”.

A disparity in buyer and seller expectations can create a costly environment for life settlement originations. Life settlement brokers often outlay close to $1,000 just to obtain the documentation required to present a policy to life settlement providers. While the administrative process of pricing a policy and presenting an offer within a provider organization is relatively expensive as well. This is compounded by the long sales cycle associated with life settlement transactions. While optimistic sellers may list a policy with a broker, the 3 months of document collection and interaction with prospective buyers means a lot of resources were expended just to get to the point of an offer (or declination). Then if buyers expectations are not in line with current market realities, the entire process has been in vain.

A life settlement broker recently reported receiving an email from a life settlement provider soliciting policies. The email was enthusiastic about their ability to purchase, but at the same time cautioned brokers not to present any cases in which the policy seller expected to receive offers based on IRR’s of less than 16%, meaning life settlement buyers are looking for an at least 16% return on their money. It truly has become a buyers’ market.