Published: August 6 2010 18:56

By Matthew Vincent, Financial Times

Trading in second-hand life insurance policies is expanding rapidly due to increased interest from banks and institutional investors, according to specialist brokers and fund managers. But independent financial advisers warn that this is still too risky an asset class for private investors to buy into.

Earlier this week, research commissioned by fund manager Managing Partners revealed that banks including HSBC, Credit Suisse, Citibank, and Allied Irish were now investing in traded life policy funds, or “life settlements“. These funds aim to generate returns by buying life insurance policies from older US citizens, maintaining the premiums on them, and receiving the proceeds when the policyholders die.

Seven out of 10 life settlement brokers in the US expect to see more policies being traded over the next five years, the research found – suggesting further growth in funds. Managing Partners said that five of the world’s top 20 banks were now investors in its own fund, which has seen assets under management rise from $176m in June 2009 to $190m in June 2010.

Later in the week, SL Investment Management, one of the biggest life settlement providers outside the US, announced it was acquiring two other firms to create a traded life policy “super-power”. Patrick McAdams, investment director at SL Investment Management and chairman of the European Life Settlement Association forecast further growth in trading. “It is a growing market – demographics will support the supply of policies.”

However, the author of the research, professor Merlin Stone, also warned that “this relatively new asset class is creating several dangers for unwitting investors”. Similarly, four of largest independent financial adviser (IFA) groups in the UK cite risk factors as the reason they still refuse to recommend traded life policy funds.

Longevity risk – miscalculating when a traded life policy pays out – can dramatically affect a fund’s performance. “For this type of investment to work, they must be valued accurately, and this entails the difficult job of getting mortality assumptions correct,” says Darius McDermott of Chelsea Financial Services. “Should subjects live longer, it will reduce the return on the investment.” Adrian Lowcock of Bestinvest says: “With valuations based on actuarial calculations on life expectancy, if these are wrong then they could be revalued very quickly.”

Liquidity risk – not being able to sell fund holdings to return cash to investors – can also mean that investors lose money. “If there were a run on these types of fund, assets cannot be sold to meet redemptions,” says Danny Cox of Hargreaves Lansdown. “While the fund has positive cash flows everything in the garden is rosy; however if this were to reverse, there is the potential for values to collapse.”

Charges levied on traded life policy funds have been called into question, too. “The FSA has raised concerns that the commission is too high . . . if the products are as good as the sales literature, suggests then the commissions being paid wouldn’t need to be so high to incentivise people to sell,” argues Lowcock.

Managing Partners has proposed a six-point check list – covering risk, charges, fees and regulation – to help private investors avoid unsuitable products. But Hargreaves Lansdown, Bestinvest, Chelsea Financial Services and Towry say they will not recommend funds to clients. “We are extremely uncomfortable with these investments, and would not wish to be involved,” says Andrew Wilson of Towry.

http://www.ft.com/cms/s/2/ff89b8e0-a182-11df-9656-00144feabdc0.html

! ]]> http://www.lifepolicygroup.com/press/second-hand-but-first-risk/feed 0 http://www.lifepolicygroup.com/press/washington-state-life-settlement-investments-may-be-securities http://www.lifepolicygroup.com/press/washington-state-life-settlement-investments-may-be-securities#comments Wed, 17 Nov 2010 08:25:06 +0000 jwoodroffe http://www.lifepolicygroup.com/press/?p=794  

By Trevor Thomas, Life and health insurance

The Washington State Securities Division has issued an alert emphasizing that only licensed securities salespeople or broker-dealers can sell investments in life settlements.

Selling securities without a license is subject to criminal prosecution, division officials say.

Insured individuals use life settlement contracts to sell their policies.

In Washington, a security exists when an arrangement represents an investment of money in a common enterprise with the expectation of profits resulting primarily from the efforts of others. A life settlement investment often fits that definition, according to the division, which is part of the state’s Department of Financial Institutions.

Even if a salesperson is licensed to sell securities in Washington, the salesperson needs to check to make sure that the life settlement investments in question have been approved for sale by the broker-dealer the salesperson represents, officials say.

“Selling away,” or selling securities off the books of the broker-dealer, could result in disciplinary action by the broker-dealer and suspension or revocation of the salesperson’s license, officials warn.

The Washington State Securities Division has issued an alert emphasizing that only licensed securities salespeople or broker-dealers can sell investments in life settlements.

Selling securities without a license is subject to criminal prosecution, division officials say.

Insured individuals use life settlement contracts to sell their policies.

In Washington, a security exists when an arrangement represents an investment of money in a common enterprise with the expectation of profits resulting primarily from the efforts of others. A life settlement investment often fits that definition, according to the division, which is part of the state’s Department of Financial Institutions.

Even if a salesperson is licensed to sell securities in Washington, the salesperson needs to check to make sure that the life settlement investments in question have been approved for sale by the broker-dealer the salesperson represents, officials say.

“Selling away,” or selling securities off the books of the broker-dealer, could result in disciplinary action by the broker-dealer and suspension or revocation of the salesperson’s license, officials warn.

Life Policy Group comments:

Personally I think life settlements should be sold as securities not because they need to be but because we need some clarity!

http://www.lifeandhealthinsurancenews.com/News/2010/8/Pages/Washington-State-Life-Settlements-May-Be-Securities.aspx

17/08/10

In a generalized sense, insurers use life expectancies to price life policy products when they use mortality tables to provide a guideline of the life expectancies of each cohort market group. Mortality tables and ratings allow them to project future premium revenues vs. expected death benefit payments (including lapses), thereby knowing the potential profit potential for each line of insurance product. Based on the estimate of the insured’s life expectancy, insurers will assign the insured into one of several typical risk classifications. (These classifications may differ among insurance companies.)
The assigned risk category will determine the policy premium cost and/or whether or not a life insurance policy will be issued.

Commentary by Life Policy Group:
This is an excellent study worthy of reading and debate. However, investors should note that with more lives in your investment the greater the chance of good, consistent returns. Investors should also note the emphasis on medical underwriting.
http://www.insurancestudies.org/wp-content/uploads/2010/08/ISI_Evolution-of-Life-Expectancies-Aug-4-2010.pdf

By Robert Powell
BOSTON (MarketWatch) — Life settlements are not wildly popular investments. But they are wild investments. And to that end, federal regulators and lawmakers are fast at work trying to tame these slippery products, which promise a much higher return over more traditional conservative offerings.

A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums.

Last week, the Government Accountability Office (GAO) warned consumers about participating in life-settlement transactions “due to a lack of clear, consistent state oversight.” The Securities and Exchange Commission recommended that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws. Read the SEC report at this website.

Commentary by Life Policy Group:
A well balanced and reasoned article.
http://www.marketwatch.com/story/life-settlements-are-doa-as-an-investment-2010-07-29

By Trevor Thomas

The California Department of Insurance (CDI) has revised its proposed emergency regulations regulating life settlement providers in the state to make them less onerous to life settlement industry.

Among other changes, the revised rules state that audited financial statements submitted by life settlement providers to the CDI shall be held in confidence. The earlier version of the rules would have opened that information to scrutiny by the public, a fact that members of the settlement industry objected to.

Read original article here

Lifemark, one of the life settlements groups behind Keydata, could be facing liquidation after US hedge fund CarVal pulled a $60m rescue offer.

CarVal entered a six-week exclusivity period with Luxembourg-based Lifemark last month to try and thrash out a deal but this has failed, according to the Life Settlements Wire.

It had already stumped up £3.5m in short-term loans to Lifemark, which ran bonds backing Keydata plans owned by 23,000 customers who invested £350m.

Read original article here

Commentary by Life Policy Group:
The media and political coverage of the industry and its predilection with ‘bad’ news has created an impression of an industry filled with fraudulent practice and consequently confidence is low. Perhaps these changes will help to raise the industry profile and give investors and regulators more comfort.
Read original article here

By Darla Mercado

On Thursday, a government task force recommended treating life settlements as securities, thus bringing the instruments under tighter regulatory scrutiny.

On Friday, some market participants backed the idea. But others bashed the plan, claiming that such a proposal would place sizable burdens on providers — and offer little added protection for institutional investors.

Commentary by Life Policy Group:
At this stage unfortunately regulation is needed which may ‘kill off’ some of the smaller players in the market, but it may well produce a more settled and professional industry. These developments are all part of the industry growing up and very much echo the experience of the UK secondary market which began its development perhaps ten tears earlier than the US life settlement market.
Read original article here

“Investors remain hungry for effective strategies that enable them to access the life settlements market. Providing full transparency through an educated and unbiased view of the investment opportunities, weighed with the risks, is key to allow investors to feel comfortable when they invest in this non-correlated asset class.” said Mark Engelhardt, CEO of Life Policy Group. “In providing a forum for investors and industry veterans to come together to share knowledge and opportunities, LPG’s inaugural life settlement seminar underscores our commitment to helping institutional investors, family offices, and broker-dealers tap the benefits of this attractive asset class.”

Participants were treated to three presentations and lively discussion which explored past negative perceptions of this maturing industry, its continued evolution and a range of investment challenges and opportunities. Keynote presentations included:

• Mark Engelhardt, CEO of Life Policy Group, provided a detailed overview of the growth of the life settlement market, addressed misconceptions about the industry and presented the investment options available to investors seeking to enhance their portfolios;
• Brian Casey, Partner at Locke Lord Bissell & Liddell LLP and one of Life Settlement Review’s “Top 10 Most Influential People in the Life Settlement Industry,” reviewed due diligence in life settlement investing and the impact of increased regulation; and
• Bill Potoczak, Joint Owner of Mills, Potoczak & Company, a full service public accounting firm, offered his insights into the role of life settlement servicing.

Brian Casey, Partner at Locke Lord Bissell & Liddell, added, “Bans on stranger originated life insurance or STOLI, an advance in regulations nationwide and the arrival of meaningful transparency within transactions are all examples of how the asset class has matured. However, for investors to take full advantage of the asset class, thorough due diligence and the selection of experienced service providers throughout the investment process remain critical to mitigating risks and achieving the expected returns.”

Steve Oliver, President of ManhattanRidge Advisors, a delegate at the seminar commented, “Combining life settlement industry veterans Mark Engelhardt’s, Brian Casey’s and Bill Potoczak’s insights with a detailed explanation of current investment strategies, LPG provided investors with a thorough exploration of the opportunities and challenges of life settlement investing at every part of the process from policy sourcing and valuation to structuring investment portfolios. I look forward to their next event.”

The LPG seminar series for investors continues this summer. For more details click here.

About Life Policy Group
Founded in 2007, Life Policy Group (LPG) is a specialist in life settlements investment and policy acquisition. Directly and through its subsidiaries, which include Life Settlement Leads and LifeBack, LPG participates in all aspects of life settlement investing providing investment advice and solutions to institutional investors, family offices, broker-dealers, high net worth investors, consumers and other life settlement service providers. LPG applies extensive life settlement expertise and proprietary technology to policy acquisition and valuation, policy and portfolio servicing, and fund management to provide clients with comprehensive life settlement solutions designed to enhance their investment returns.

Over the past few years we have witnessed a big growth in the popularity of life settlements as an alternative investment opportunity. In comparison to other, more traditional asset classes, life settlements offer a non-correlated, market neutral investment opportunity that is independent of the volatility associated with interest rates, the equity markets, global events and property.

According to an October 2008 report, Conning Research estimated that approximately $12 billion in face amount of Life Settlements changed hands in 2007, up from $6.1 billion in 2006. By 2012, Conning estimated that figure will approach $21 billion.

As the market continues to expand, an increasing number of companies are making investment in life settlements funds available to both retail and institutional clients. The list below, which is not exhaustive, includes a number of funds and their managers, some of which Life Policy Group has or is supplying policies to:

Aurora Defined Benefits Funds
The Aurora Defined Benefits Funds

Catalyst Investment Group
The ARM Assured Income Plan

Centurion Managers
Defined Return Fund
Accelerated Life Settlement Growth Fund

EEA Investment Partners (Guernsey)
EEA Life Settlement Fund

Lansdown Atlantic
The Lansdown Atlantic Life Settlement Fund

Life Contracts International Ltd
Senior Life Settlements Asset-backed Securitization Bond

Life Settlements Funds Limited
The Life Settlements Wholesale Fund

Managing Partners Limited – MPL
Traded Policies Fund

Policy Selection
Assured Fund
Select High Security Fund, plc