Michael Abraham

Posted October 22, 2010 2:50PM PST

Fortress Investment Group has reached an exclusive agreement to buy the $6.2 billion KBC Financial Products distressed life settlements portfolio, beating out Apollo Global Management and provider Coventry First, according to a person associated with Apollo.

The deal was signed yesterday with the global investment management firm based in New York, according to another person familiar with the situation.

The sales price was not immediately known.

“Apollo was informed last night or this morning. KBC called and basically said that they’ve entered an exclusive intent to move to purchase and sale,” a person said.

“It now gives Fortress two weeks to come to an agreement with KBC. Exactly what will be in the purchase and sales agreement has to be negotiated in two weeks. If it doesn’t get an agreement, then there’s a breakup fee,” the person added.

“That tells me KBC feels it will come to an agreement,” the person said, adding KBC is working with “a formidable law firm.” The law firm is said to be O’Melveny & Myers.

Apollo is said to be eligible for a significant breakup fee.

“Apollo is very disappointed, especially our team. Apollo is prepared to raise our bid substantially if [the deal] comes back,” the person added. “There is a slim chance it could come back.”

However, the person said that Apollo is likely to remain in the market and look for other opportunities.

The person speculated that perhaps Fortress offered a cleaner deal. The deal with Apollo required KBC to work with it on a liquidity facility. The Oregon Investment Council, which committed $100 million to invest in the deal with Apollo, said in a staff report that the portfolio expected a 15% to 22% internal rate of return with a leveraged 5x multiple of investment capital.

Apollo planned to raise $525 million and its partners expected to invest $37 million in the portfolio of just less than 1,000 policies.

Fortress in New York did not return emails or phone calls from The Life Settlements Wire.

David Taieb, executive vice president of insurance derivatives for KBC in New York, declined to comment, saying the firm’s spokesperson in Brussels could be reached on Monday.

Alan Buerger, chief executive of Coventry First, a Fort Washington, Pa.-based provider, declined to comment.

Commentary by Michael Abraham:

As we do not know what they paid it is difficult to comment, other than I am pleased that this portfolio is out of the market.  In this writer’s opinion it is the apparent availability of portfolios that is depressing the new purchase market.  Why apparent? The portfolios out there are being promoted by many different advisers and the impression given is that there are many to buy.  This is not the case and of the ones that are out there many have little, or no, value!  They do however look good to people who are new to the industry.  It is after all much easier to have a credit committee understand the value of a portfolio that they can see, rather than one that has yet to be obtained!  And therein lies the rub.

http://lifesettlements.dealflowmedia.com/wires/article.cfm?title=Fortress-Winner-KBC-62B-Portfolio-Auction&id=xrtrsyngapzdxoy

Submitted by Steven Meyerowitz on Fri, 10/22/2010 – 11:13am

A life settlement is an investment in which a person sells his or her life insurance policy for a cash payment, which is a percentage of the policy’s face value or death benefit. When they work properly, these transactions can provide needed cash to the insured, and a profit to an investor. They don’t always work properly. Consider the case of Eric M. Kurz.

Kurz has just pleaded guilty to conspiracy to commit mail fraud and money laundering in conjunction with his actions as a wholesaler of investment products for A&O, a group of businesses that acquired and marketed life settlements to investors.
 
Three principals of A&O were charged last month in an 18 count indictment for their alleged roles in the scheme. They are awaiting trial.
 
According to the government, A&O was founded in November 2004, and obtained life settlements from a wholesale life settlement company, then marketed and sold whole and partial interests in those life settlements to investors. In the statement of facts filed with his plea agreement, Kurz admitted that from September 2005 to November 2007, he was affiliated with A&O, creating marketing materials for A&O’s sales agents to distribute to potential investors. He also admitted that with his co-conspirators, he published information on an A&O website. Kurz knew that the website and marketing materials contained specific misrepresentations about A&O’s management and past success. According to the statement of facts, A&O obtained approximately $100 million from investors in 38 states and in Canada from 2005 to January 2008, based on the material misrepresentations and omission by Kurz and his co-conspirators.
 
Kurz pleaded guilty before U.S. Magistrate Judge M. Hannah Lauck to a one count criminal information alleging conspiracy to commit mail fraud and money laundering. At sentencing, he faces a maximum penalty of five years in prison and a $250,000 fine.

Commentary by Michael Abraham:

Fraud is an unacceptable aspect of most, if not all, emerging businesses.  The unscrupulous will take advantage of the lack of knowledge of the public and the regulators. How bad was this misrepresentation, did it actually affect the purchaser? Without reviewing the case papers it is difficult to say.  But what will be interesting to see will be the severity of the sentence, this will surely indicate the seriousness of the transgressions.  I await the release of that information with interest.

http://www.financialfraudlaw.com/lawblog/guilty-plea-100-million-financial-fraud-involving-life-settlements/1614

By ARTHUR D. POSTAL

Published 10/20/2010 

WASHINGTON BUREAU — A top life settlement industry official this week said that despite current opposition from some underwriters, he believes the life settlement business will soon become an integral part of the life insurance industry.

Calling integration of the life settlement business  into the life industry “Act III,” Alan Buerger, co-founder and chief executive officer of Coventry First L.L.C., Fort Washington, Pa., said, “We are about there; that is self-evident.

“Carriers will invest in the business,” Buerger said. “Carriers will learn about our industry; we are already working with carriers who are investing in one way or another or participating in the industry.”

Buerger said the life insurance industry will see longevity insurance “where people in our industry will participate in, along with the carriers, and help the carriers design the new products.”

The shift is being generated, he said, by the fact that people are living longer. “There is a real concern about people living too long and outliving their ability to maintain their needs in their retirement,” he said. “So Act III will be very vibrant; we will see the industry coming alive. We have a great, great, future.”

Buerger made his comments at a life settlement conference sponsored by Fasano Associates, Washington.

He said he believes life settlements will become an integral part of the life insurance industry even though some carriers engage in

“numerous tactics to delay, interfere, and suppress the competition created by life settlement transactions.”

He said this interference “includes, but is not limited to,” delaying or failing to provide illustrations, policy validations, verifications in coverage, and changes of ownership documents involved in life settlement transactions.

Buerger also talked about what he says are cases of some carriers delaying paying claims for life settlement transactions, refusing to reinstate or reissue policies, “engaging in scare tactics by sending alarming letters to policyholders loaded with warnings about life settlements in general,” and suing matured policy owners and agents.

Buerger said some carriers have added language to their agreements with agents and brokers to try to keep producers from discussing life settlements with policyowners or helping policyowners with life settlements.

But “I do not want to fight the life insurance industry,” Buerger said. “I don’t believe anyone in this [industry] wants to have such a fight.”

Calling the current battles with certain carriers “Act II” of the effort by the life settlement industry to become accepted by carriers, Buerger said, “We want Act II to end. We want to get on to Act III. As I said before, the purpose is not to fight for the sake of fighting but to protect consumers, investors and our right to compete.”

Buerger added, “I believe without any hesitation or reservation that by fighting back we will accelerate the beginning of Act III, and we are already seeing signs of that.”

Buerger said a truce between carriers and the life settlement industry will generate new products that will benefit carriers, and that the current situation is similar to the battle over borrowing from life policies that took place 100 years ago.

Buerger said he believes the life settlement industry “will just become another part of the life insurance industry.”

In the future, Buerger said, “[we] will increasingly see programs where instead of a cash benefit, there will there a sharing of the death benefit, with the investor taking over premiums.”

WASHINGTON BUREAU — A top life settlement industry official this week said that despite current opposition from some underwriters, he believes the life settlement business will soon become an integral part of the life insurance industry.

Calling integration of the life settlement business  into the life industry “Act III,” Alan Buerger, co-founder and chief executive officer of Coventry First L.L.C., Fort Washington, Pa., said, “We are about there; that is self-evident.

“Carriers will invest in the business,” Buerger said. “Carriers will learn about our industry; we are already working with carriers who are investing in one way or another or participating in the industry.”

Buerger said the life insurance industry will see longevity insurance “where people in our industry will participate in, along with the carriers, and help the carriers design the new products.”

The shift is being generated, he said, by the fact that people are living longer. “There is a real concern about people living too long and outliving their ability to maintain their needs in their retirement,” he said. “So Act III will be very vibrant; we will see the industry coming alive. We have a great, great, future.”

Buerger made his comments at a life settlement conference sponsored by Fasano Associates, Washington.

He said he believes life settlements will become an integral part of the life insurance industry even though some carriers engage in

He said this interference “includes, but is not limited to,” delaying or failing to provide illustrations, policy validations, verifications in coverage, and changes of ownership documents involved in life settlement transactions.

Buerger also talked about what he says are cases of some carriers delaying paying claims for life settlement transactions, refusing to reinstate or reissue policies, “engaging in scare tactics by sending alarming letters to policyholders loaded with warnings about life settlements in general,” and suing matured policy owners and agents.

Buerger said some carriers have added language to their agreements with agents and brokers to try to keep producers from discussing life settlements with policyowners or helping policyowners with life settlements.

But “I do not want to fight the life insurance industry,” Buerger said. “I don’t believe anyone in this [industry] wants to have such a fight.”

Calling the current battles with certain carriers “Act II” of the effort by the life settlement industry to become accepted by carriers, Buerger said, “We want Act II to end. We want to get on to Act III. As I said before, the purpose is not to fight for the sake of fighting but to protect consumers, investors and our right to compete.”

Buerger added, “I believe without any hesitation or reservation that by fighting back we will accelerate the beginning of Act III, and we are already seeing signs of that.”

Buerger said a truce between carriers and the life settlement industry will generate new products that will benefit carriers, and that the current situation is similar to the battle over borrowing from life policies that took place 100 years ago.

Buerger said he believes the life settlement industry “will just become another part of the life insurance industry.”

In the future, Buerger said, “[we] will increasingly see programs where instead of a cash benefit, there will there a sharing of the death benefit, with the investor taking over premiums.”

Page 2 of 2

Commentary by Michael Abraham:

While I applaud the message provided by Alan Buerger, and hope that he is correct,,I do have difficulty understanding how companies deal with paying more than the surrender value that they would normally offer; and in fact how  they can justify paying more than the market.  I suppose one way would be that they offered the buy backs as a life settlement fund investment, the profit from which would offset the book loss created by paying more than surrender value.  Interesting!

http://www.lifeandhealthinsurancenews.com/News/2010/10/Pages/Life-Settlements-Buerger-Eager-to-See-Next-Act.aspx

by Iain Martin on Oct 20, 2010 at 08:30

IFAs have criticised the new voluntary code of conduct for life settlement funds for failing to address crucial issues, against the backdrop of another fund in trouble.

Advisers say a new code of conduct for life settlement funds fails to address the main problems with the asset class, as a fresh fund in the sector hits liquidity issues.

The European Life Settlement Association (Elsa) has created a 68-point code of conduct for the sector, which follows strong criticism of the sector from the Financial Services Authority (FSA).

The code sets out a minimum standard of conduct for life settlement funds and providers, and rules for the management and promotion of the asset class, but it is only voluntary.

Crucial issues ignored

Jason Butler, partner at London-based Bloomsbury Financial Planning, said he was not convinced the code of conduct would provide more protection for investors. He said it did not address the crucial issues affecting the sector, such as how life expectancy is estimated, how transparent the funds are for investors and how many charges are levied on them.

‘Estimating life expectancy is something that major insurance companies try to do and get wrong. So why should you trust someone sitting in the Cayman Islands who says they know better?’ said Butler (pictured). ‘There are so many hands in the till and there is nothing left for the client.’

Addressing ‘Keydata’ problem

Elsa chairman Patrick McAdams said the code had been launched to prevent the recurrence of problems like the collapse of Keydata Investment Services, which had heavy exposure to life settlements.

‘As is often the case with new asset classes, teething problems, some of them serious, have occurred within life settlements,’ he said. ‘Sadly the better known of these problems have wrought painful damage on both investors’ pockets and the reputation of the asset class. They have also taught us some important lessons, however, and these lessons form the foundations of this code,’ said McAdams, who is investment director of life settlement fund group SL Investment Management.

The code includes a requirement to inform investors whether companies connected to funds are rewarded through commission or performance fees. Keydata founder and director Stewart Ford’s arrangement to receive 10% of all assets invested in life settlement vehicle Lifemark would have had to be disclosed under the rule.

Commentary by Michael Abraham:

How interesting that Patrick McAdams would comment on this when he, as a Director of SL, is himself supplier and investment manager to a fund that has just stated:  (the fund) “has experienced a surprisingly low rate of maturities’’. SL also advises the doomed Avon Fund.  Investors have every right to ask ‘do these guys really know what they are doing?!’  As a voluble critic of mine I might ask him to consider that while my own troubles resulted from the fraud of others his could appear to be rank stupidity

http://citywire.co.uk/new-model-adviser/life-settlement-code-falls-short-of-expectations/a441091 

October 19, 2010 10:00 AM Eastern Daylight Time 

WASHINGTON–(BUSINESS WIRE)–In his opening remarks to over 200 industry participants attending Fasano’s 7^th Annual Life Settlement Conference, Michael Fasano, President of Fasano Associates, called for more transparency from life settlement intermediaries.

“We should not minimize the real differences that continue to exist among Life Expectancy underwriters and we should be willing to present Actual to Expected experience based on the actual life expectancy estimates given to our clients, and not limit our disclosures to hypothetical results based on adjusted estimates.”

Fasano described the industry as being at a crossroads as new sources of capital evaluate historically high rates of return. Said Fasano: “We should not minimize the real differences that continue to exist among Life Expectancy underwriters and we should be willing to present Actual to Expected experience based on the actual life expectancy estimates given to our clients, and not limit our disclosures to hypothetical results based on adjusted estimates.”

Fasano added: “Most importantly, intermediaries must stop the practice of only sharing shorter LEs with their clients or, as bad, only ordering LEs from those underwriters who are known to produce shorter LEs. LEs should be ordered and disclosed based on who is believed to be most accurate, not who is the shortest.”

Fasano was followed by Coventry CEO, Alan Buerger, who predicted that, ultimately, life settlements would be accepted by the life insurance industry, but that in the meantime, the industry needs to fight back against those in the life insurance industry who have tried to thwart legitimate secondary market transactions.

Tim Roberts, CEO of Catalyst Investments, talked about the need for transparency, accountability and good regulations for life settlements and argued that life settlements were no more complex than equity investments and, if done properly, appropriate for retail investors.

Cormac Treanor of Wilton Re explained the reasons for the Absence of a Developed Market in Extension Risk Protection, while Pricewaterhouse Coopers’ partner, Larry Rubin, covered the elements of valuing life settlements in portfolio audits.

Additional presentations were made by Tom Weinberger, Partner of Strook & Strook & Lavan, Franz Schmidpeter, Managing Director of Augur Capital, Hasham Malik, Chief Capital Markets Officer of Peachtree Settlement Funding, and Dr. David Vaughan, Chief Medical Director of Fasano Associates.

Fox News Analyst, Michael Barone, ended the Conference with his views on the likely impact on financial markets of the upcoming mid-term elections.

About Fasano Associates:

Fasano Associates is a leading underwriting consulting firm serving the life, health and life settlement industries

Commentary by Michael Abraham:

Mike Fasano makes a fair point, but, who is more accurate? When the bulk of the policies have been bought since 2005 and with LEs out as long as 15 years, how can anyone swear to the efficacy of their evaluations?  Numbers, spread and dynamic valuation is what is needed!

http://www.businesswire.com/news/home/20101019006472/en/Fasano-Calls-Transparency-7th-Annual-Life-Settlement

by Iain Martin on Oct 15, 2010 at 14:36

Investors in the Jersey-based life settlement fund Preferred Asset Allocator have been warned they have been hit by liquidity issues as one of holdings is wound up.

Preferred has asked investors to defer settlement of liabilities due to the ‘significant difficulties’ caused by the winding up of Avon Fund PCC, in which it has a stake.

Preferred, which started a merger with the Jersey-based Avon Fund PCC in February 2009, told investors it had been able to recover sufficient funds from Avon to settle with creditors.

Hong Kong-based Avon Capital began winding up the fund, which stood at $64.2 million in December 2008, in April after experiencing serious liquidity issues, according to Preferred. The official accounts for the Avon Fund up to December 2008 show the life expectancy of the portfolio jumped 12%, causing a 4.2% drop in the internal rate of return.

Avon has already sold 107 of its policies and has now entered an agreement to sell a further 48 for $7 million to an unnamed purchaser, which has lowered its bid from $8.5 million. Avon Fund investors faced at least a 30% discount to their investment following the restructuring, claimed a senior life settlement fund provider, who did not want to be named.

‘Since Preferred merged with Avon things have gone wrong,’ said an adviser with clients invested in Preferred, who did not want to be named. ‘There is no clear information about what is going on and I’m not sure how much they will be able to recover.’

The directors of Preferred have informed investors they had sought advice over possible legal action against SL Investment Management, investment adviser to both Preferred and Avon.

Avon Capital chief executive Stephen McIsaac and Preferred director Mike Rumbold both declined to comment.

Commentary by Michael Abraham:

It wouldappear that we have another fund with Patrick McAdams as the investment adviser/manager where there have not been enough maturities to pay premiums and expenses.  This is a major issue for all portfolios, they have been predicated on the purchase of large ‘healthy wealthy’ policies with a mortality curve that was too aggressive.  Buy small, be conservative!

http://www.citywire.co.uk/new-model-adviser/preferred-life-settlement-fund-hits-liquidity-issues/a439557?ref=iain-martin 

Cara Waters

Magazine: FTAdviser

Published Thursday , October 14, 2010

Life settlement funds are not a suitable investment for retail investors and most financial advisers should steer clear of them, SL Investment Managment has warned.

The specialist asset manager said the asset class was appealing because of its low correlation, low volatility and returns of nine to ten per cent, however it required sophisticated investors.

Life Settlements funds operate by buying the legal rights to multiple US life policies, paying policy premiums and generating a return by collecting the entire death benefit of the policy upon the death of the insured.

SL Investment said the lack of a standard valuation base meant it was very difficult to compare one fund with another.

To address this problem, SL Investment has helped to establish European Life Settlements Association which is aimed at creating common standards between providers.

Jeremy Brettell, the chief executive of SL Investment, said SL Investment did not accept any investors with less than £120,000 and imposed gateways on any investments less than £1m, effectively excluding the majority of retail investors.

He said: “At the moment I do not believe retail investors understand how life settlement funds are structured.

“If they do not understand then they should not invest.

“I know that the Financial Services Authority is opposed to life settlements for retail investors the way they are currently structured.

“We don’t have products suitable for most financial advisers at the moment.

“Until their clients have £100,000 in cash or £500,000 in investable assets then life settlements are not an appropriate investment for them.”

Mr Brettell said the life settlement industry had been hit hard by the failure of Keydata.

He said the average size of investments made by adviser’s clients into Keydata was not appropriate.

Mr Brettell said: “What happened with Keydata was because of fraud not because of the investment vehicle but if it was not fraud it would have happened eventually.

“I think there are other blow ups to come.

“For the long term health of the asset class it concerns me that too many people are investing in life settlements and they do not understand them.”

Darius McDermott, managing director of Chelsea Financial Services said he also thought life settlements were not suitable for retail investment.

He said: “I think they are a bit opaque, untransparent and calculating the downside risk is impossible.

“We don’t touch them.”

Commentary by Michael Abraham:

Following on from my previous comments how rich is the statement from Patrick McAdams that ‘Life settlement funds are not a suitable investment for retail investors’? Could this be anything to do with his close involvement with the failing retail Alternative Asset Opportunities Fund or the failed Avon Fund? The article goes on to suggest ‘it concerns me that too many people are investing in life settlements and they do not understand them.” Clearly this could also apply to the investment manager.

http://www.ftadviser.com/FTAdviser/Investments/News/article/20101014/54276220-d61d-11df-9af8-00144f2af8e8/Life-settlements-not-suitable-investment-for-most.jsp

Posted October 14, 2010 3:00PM PST

Four life expectancy firms in the life settlement market formed a focus group to further refine best practices to guide their profession, although one major life expectancy firm, Fasano Associates, is not participating.

A statement issued by the group today said founding members of Major Life Expectancy Providers (LEPr) are Advanced Underwriting Solutions, AVS Underwriting, Examination Management Services (EMSI), ISC Services and 21st Services. Advanced Underwriting merged last week with EMSI.

The life expectancy firms were members of a previous Life Insurance Settlement Association (LISA) Best Practices Committee, which was headed by Mike Fasano, president of Fasano Associates, based in Washington, D.C.

The new group said it “recognized the need to further expand the scope and definition of ‘best practices’ by continuing this effort as an independent group.” It said all life expectancy providers in the market were invited to join.

“The goal of the LEPr focus group is to provide a comprehensive and consistent set of best practices and performance standards to all longevity markets that may benefit from life expectancy and mortality information,” the group said in a statement. “It is also the intent that all major life expectancy providers participate and adhere to our best practices and professional standards.”

It was not clear specifically what areas of best practices that the group wants to expand. Kevin Malone, president of underwriting services for EMSI, who sent the group’s statement to The Life Settlements Wire, said he could not elaborate at this time.

Fasano said as an officer and board member of LISA, he didn’t believe it was appropriate to participate. He said LISA’s previous effort, which began two years ago, was “responsive to everyone’s concerns.”

His committee put out best practices guidelines a year ago and then published a common mortality table of actual-to-expected results of life expectancy providers at LISA’s spring conference earlier this year. The table was intended to help investors compare life expectancy estimates among various underwriters. He said four of six life expectancy underwriters supported the table at the time, adding that 21st Services dissented while ISC Services abstained originally but then changed its vote and dissented.

In July, LISA board member Nate Evans, chief executive of provider Maple Life Financial, headed another effort to refine the best practices.

Correction: In a previous version of this article Fasano misstated ISC’s final vote.

Commentary by Michael Abraham:

Though I am sure Mike has his reasons this sort of conflict does not reflect well on us.

http://lifesettlements.dealflowmedia.com/wires/article.cfm?title=Life-Expectancy-Providers-Form-Group-Fasano-Declines-Participate&id=hfffksszdlhhgap

Author: Christian Evulich
Published: October 14, 2010 at 6:54 pm

An article by Lance Wallach appeared on the Gerson Lehrman Group website claiming the life settlement industry would die within two years. His comments set the life settlement forums, blogging community and pundits into a frenzy. While Wallach made a number of accurate observations, the pessimistic conclusion drawn for the life settlement industry is built on faulty logic at best.

Wallach reasoned that because the past couple of years had seen low offers and lack of bids for policies in the secondary life insurance market that “the future of the life settlement market is dim”. However, the conditions that dragged on the life settlement market during the past two years are not likely to persist into the future. A lack of liquidity from institutional investors that feed capital into the life settlement market was the number one drag on valuations and offers. Quite simply the money used to buy policies was limited because investors had few credit facilities and limited capital available to deploy. This was not something inherently wrong with the life settlement market, rather it was an inevitable reality of the broader capital markets.

Wallach added “I think that the life settlement market will not have any future source of funds within two years.” This is clearly not the case. As financial institutions resume more normal liquidity levels and credit facilities again become available the demand in the life settlement market will consequently increase. The life settlement recovery is already underway in 2010 with more providers regaining funding and become active in the marketplace. At the end of the day, the hedge fund managers, private equity executives and investment bank traders must deploy their capital where they get the best returns. Many life settlement investors are now buying with 19% target IRR’s. Those kinds of returns are hard to ignore as an investment manager
Another pillar of Wallach’s argument against the continued health of the life settlement industry is the proliferation of life settlement legislation. While life settlements are now regulated in 40 states and consequently the cost of doing business has increased for life settlement brokers and providers, the net effect isn’t all bad. In fact, a handful of states, and new NCOIL model act language now being considered, require life insurance carriers to notify policy owners that life settlements are an option when they are going to surrender or allow a policy to lapse. That can only be viewed as a positive signal for the longevity of the life settlement market.
The life settlement industry certainly has suffered along with the rest of the world over the past two years. But those difficulties should not be perceived as an indication of the long term strength of the secondary life insurance market. As a consumer friendly transaction, life settlements are enjoying continued protection by legislators and increased attention by investors seeking healthy returns. Those two things alone should ensure life settlements have a place for years to come.

Commentary by Michael Abraham:

This is a well balanced response to a rather ill informed article By Lance Wallach

http://technorati.com/business/article/the-life-settlement-industry-will-be/

By Josephine Cumbo

Published: October 8 2010 17:23 | Last updated: October 8 2010 17:23

Fund managers are moving back into the scandal-hit UK life settlement market by offering a new generation of products said to “reduce+++++++++ or even eliminate” investor risk.

This week saw the launch of SL Investment’s LifePlus Series 2 – the first life settlement fund fully compliant with a new industry code of practice aimed at raising standards and improving transparency for those investing in the alternative asset class. It comes less than a week after 19,000 UK investors who invested in so called “death bonds” through Keydata learned that they could be eligible for compensation after Lifemark, the Luxembourg-based issuer, went into administration.

Life settlement funds aim to generate a high income by buying life insurance policies from older US citizens, maintaining the premiums on them, and receiving the proceeds when the policyholders die. But because their valuation – and income – depends on longevity assumptions, they have been criticised for being risky and opaque.

“As is the case with any asset classes, teething problems – some of them serious – have occurred within life settlements,” said Patrick McAdams, chairman of the European Life Settlements Association (ELSA) and investment director with SL Investments. “Compliance with the code’s principles should significantly reduce and in some instances remove the risk of these failures occurring.”

The products have been marketed to UK investors as “exciting and potentially high yielding” investments, often offering 9-10 per cent returns per year.

But the Financial Services Authority (FSA) has described the products as “complex with a number of inherent risks” and believes them suitable only for “sophisticated investors”.

ELSA has since consulted the FSA on its code of practice, which states:

? All fees and commissions must be fully disclosed

? Illiquidity of life settlements (difficulty in selling) must not be underplayed in marketing literature

? Life settlements must not comprise a significant percentage of an individual investor’s portfolio

? Risks of life insurance policies not paying out when expected, due to increasing longevity, must be prominently explained

?Product providers must deal only with trusted partners when sourcing life insurance policies.

ELSA members who do not comply with this code will face expulsion.

Independent financial advisers (IFAs) have described the code as a welcome development, but some said the life-settlement industry “had a long way to go to regain the trust of advisers and clients”.

According to Danny Cox, certified and chartered financial planner with Hargreaves Lansdown: “The real test of the code is how many providers conform and how quickly. If we assume all the providers agree the code and move toward it, ultimately the IFAs will follow. However, this will take time.”

Patrick Connolly, certified financial planner with AWD Chase de Vere, said that until the code was widely adopted, investors were still at risk of being sold products which understated longevity risk.

“Life settlement funds are based on actuarial models trying to predict when ­people are likely to die,” he explained.

“The projected returns are still going to be subject to actuarial assumptions, which may or may not be correct, and there will remain issues with transparency and layers of charges.”

Another key issue that the code has not addressed is the potential for the mis­selling of products, which the FSA expects should be marketed to “sophisticated investors”.

“The problems of bad advice by intermediaries who have neither the desire nor skill to provide objective advice to investors will not be solved by this or any other code of ethics,” said Jason Butler, certified and chartered financial planner with Bloomsbury Financial Planning. “I’m still not ­convinced that this investment makes sense for most investors.”

Commentary by Michael Abraham:

Readers of this blog know my thoughts in regard to the issue of actuarial models but to repeat they need to be dynamic and based on many varied lives.  Then people who know what they are doing must present them.  Challenging requirements!

http://www.ft.com/cms/s/2/64f1f99e-d2f8-11df-9ae9-00144feabdc0.html