Current Factors Weighing on Life Settlement Offers

After a bleak 2009 in the financial services industry many are looking to the dawn of 2010 filled with renewed optimism. This certainly holds true for the life settlement industry as well. While we’ve seen a number of indicators that buying activity is poised to strengthen in the life settlement industry this year, it looks to be a measured and incremental return of activity rather than an exuberant return. As one industry insider put it, “the buying freeze affecting the life settlement industry is definitely thawing, but is far from melting due to an overheated frenzy.”

As many are well aware the liquidity crunch of 2008-2009 affected the life settlement industry negatively. Many life settlement providers are reporting that their funding sources have returned and they now have money to buy policies. However, the lack of capital was only one of the contributing factors in the life settlement slow down last year. Other issues that affected the industry may not change with an improving economy and continue to weigh on the marketplace.

Life expectancies still trend upward which makes insureds with ages once deemed attractive to buyers much less so now. A couple of years ago a person in their mid 70’s was a decent candidate for a life settlement. Today, insureds in their early 80’s are far from a sure thing. Life settlement providers as a matter of rule are now requiring at least two LE certificates as a prerequisite to submitting a policy for pricing. Life expectancies and insureds’ health are being scrutinized and analyzed now more than ever before.

Regulation and compliance are also heavily influencing the buying activity in the marketplace. This is particularly apparent in cases that fit the buying parameters of only a small number of providers. Thus the marketplace demand in these situations is recognized as smaller and settlement offers are heavily discounted.

For example, life insurance policies originating in Florida are discounted due to the lack of life settlement providers competing there. Typically the presiding jurisdiction of a life insurance policy is based on the state in which the owner is domiciled. Broad regulatory interpretation has begun to dissuade providers from working with policies listing insureds in some states such as Florida, even if their owners’ domiciliary state is elsewhere. The regulatory and compliance environment there has caused a number of life settlement providers to pull out of the state altogether. So the remaining providers can obtain policies at a relative discount compared with other states.

Regulatory and statutory treatment of premium financed policies has also severely affected the market appeal of policies purchased using those programs. For example, the Office of General Counsel of the New York Insurance Department stated that many non recourse premium financed policies are not permissible under New York law because they violate New York’s insurable interest regulations. The number of life settlement providers buying premium financed policies has dwindled tremendously. Of the providers that still buy these policies, they are highly selective about what programs they will even entertain for pricing. Since premium financing is a tool of STOLI’s providers are quite cautious about becoming entangled with a policy that has the potential to be problematic post purchase. As a result premium financed policies, even those that have had the note paid off for a few years, are receiving heavily discounted offers in today’s marketplace.

Further complicating matters is the number of life settlement providers which have ceased operations or become relatively inactive in the past year. Consequently, the remaining providers have become overwhelmed with life settlement cases. In the past, life settlement brokers could get away with selectively shopping life settlement cases to a limited number of life settlement providers. Now with the aforementioned factors limiting market activity, life settlement brokers are feverishly shopping policies to anyone that can review policies. In fact, Amrita Financial which is no way a life settlement provider, receives a number of inquiries from brokers each month who erroneously hope to find a yet undiscovered new buying source. The lack of buying activity has created a tremendous back log for life settlement providers. Currently providers are taking up to 5 weeks to return declinations or offers on policies. In some cases, they are so inundated they don’t even respond to inquiries unless they plan to make an offer on a policy. This massive oversupply of policies means providers and the buyers they serve can be very selective about the offers they make and are applying heavy discounts to settlement offers accordingly. We are seeing offers come in well above 20% IRR’s for policies that would have priced in the 13% range two years ago.

As 2010 begins the life settlement industry is clearly awakening, but the environment still does not favor policy sellers. It is squarely an advantaged position for the buyers as the supply far outstrips the demand. Although we look forward to the marketplace reaching a greater state of equilibrium this year, significant changes are not expected until the end of Q1 or beyond.

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