Michael Abraham

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

By Dave Lieber, Star Telegram

Sharon Brady realizes that she will never see the 16 percent annual return she was promised on her $50,000 investment. Worse, she realizes she may have lost most of her money.

“This actually makes you physically ill,” she says.

The retired Tarrant County sheriff’s deputy invested in what regulators describe as an alternative investment: life settlements. Her money was used to buy insurance policies of older adults who want to cash out and sell their benefits to investors. When the original policyholder dies, investors, who pay the premiums, reap the death benefits. The quicker the person dies, the greater the payoff.

As I reported in the spring, the company she invested with, Retirement Value Llc. of New Braunfels, has been shut down by the state. Now comes word from the court-appointed receiver that commissions paid to financial advisers and company officials were 30 percent.

Of $77 million raised in a year from 900 investors like Brady, about $10 million went to Retirement Value and $13 million went to sellers of the program. Brady says nobody told her commissions would be that high.

Fraud happens in all businesses at one time or another as do the incidence of high commissions.  The question of what is a high commission is open to debate but 30%+ is certainly way over the top, but it is the norm!  The real issue is that the regulations are not in place in all states but even where they are this level of cost /commission prevails and in most cases mistaken regulation actually legitimises it!  What do I mean? Well there are so many regulated levels, a referral agent, a life settlement agent, a broker and a provider and each of these requires to be paid and because of this chain of individuals the process is slowed  giving  more people more work to do and they therefore convince themselves they deserve the cash!

Commentary by Michael Abraham:

This is a case where the UK regulation of the secondary policy business really scores.  It´s a simple model and it creates transparency and competition and the broker/adviser earns 3 to 4% of invested dollars with the provider earning an average gross of circa 15% also of invested dollars a figure that creates a net profit of circa 5 – 7%. Still 20% but if you are not prepared to pay such amounts the market will not exist and then everybody loses – except of course the life insurance companies!

http://www.star-telegram.com/2010/08/26/2428028/grim-news-for-investors-in-some.html

Washington State: Life Settlement Investments May Be Securities

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.

Commentary by Michael Abraham:

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

Second-hand but first risk.

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.

Commentary by Michael Abraham:

Some interesting comments in this article not least those of Adrian Lowcock´s – ‘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.   He is surely well aware that the smaller funds have always needed to deliver better value than their established larger cousins but are unable to do so until they have a track record, and they can´t get this until someone sells the product.  The large fund creates impetus by massive marketing spend, these costs all come from the fund.  The smaller fund pays that same marketing money directly to the broker and allows that broker to determine whether he keeps it or credits it to the investor  – some do, some don´t!

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

Critics say plan to treat all life settlements as securities will shrink the industry – or worse; others say it’s not so

Investment News

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 Michael Abraham:

At this stage unfortunately regulation is needed and if it ‘kills off’ some smaller players it will be no loss and 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.

http://www.investmentnews.com/article/20100723/FREE/100729946

Investment News

By Darla Mercado

A recommendation by an SEC task force that life settlements be treated and regulated as securities has raised concerns that another turf battle may be brewing between state insurance regulators and federal securities cops.

 “We generally have concerns when the federal government pre-empts state authority, and this would be no exception to that, but we’ll reserve judgment until we see what action the federal government will take,” said Connecticut’s insurance commissioner, Thomas R. Sullivan, who is also chairman of the National Association of Insurance Commissioners’ Life Insurance and Annuities Committee.

Commentary by Michael Abraham:

While I applaud the statements made in the above article I think 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 – for instance the FSA in the UK rate life settlements as high risk and have spoken out against them.  Perhaps these changes will raise the profile and give investors and regulators more comfort.

 http://www.investmentnews.com/article/20100726/FREE/100729928

Betting on someone’s life could put your portfolio six feet under

MarketWatch

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.

Commentary by Michael Abraham:

At last a well balanced and reasoned article!

http://www.marketwatch.com/story/life-settlements-are-doa-as-an-investment-2010-07-29