Where The Life Settlement Business Is Now--And Where It's Going

TED KILKUSKIE:There are a set of guidelines that a number of insurance companies ascribe to: the IMSA guidelines. I think a number of carriers have used this Good Housekeeping seal from the Insurance Marketplace Standards Association. You can see it on their websites.

I just want to quote from the 3 very quick points where carriers seem to be saying, “We believe in this,” but where their actions prove otherwise. Especially carriers that have their own agents where they’re directing the actions of the agent. The first point says, “To conduct business according to high standards of honesty and fairness and to render that service to its customers which in the same circumstances, it would apply to or demand for itself.” Point 2: “To provide competent and customer-focused sales and service.” And point 3: “To engage in active and fair competition.”

There are a number of other points but I think just those first 3 really hit the nail on the head. I mean, what senior executive at an insurance company, when looking to upgrade a policy for better features and benefits, if they had a million dollar policy that had $10,000 of cash in it and they could get $50,000 on the secondary market, would deprive themselves of doing that? They wouldn’t. As a matter of fact I know that a number have. They’ve kind of talked out of both sides of their mouth.

So I think on the broker-dealer side it’s more the fear there. I’ve spent a lot of time with those folks too. It’s compliance, it’s getting sued. So this is something new. So instead of taking the time and learning about it as I talked about ad nauseum, they’re just kind of ducking the issue. Feeling, well if we just put up the barricades, this is one more thing that won’t come in the door that we can potentially get sued for. So it’s something that quite a few firms–I think there are about 50 or so firms that we do business with–have done due diligence and have accepted the fact that this is good for clients. A number of them do it on an exception basis. Some still bar it. But I think, again, it gets down to education. Understanding what this is about and that bottom line and very quickly they can learn how good this is for the clients.

And don’t get the sale of a policy mixed up with the investment in policies which can be something quite different, and which is where most of them get turned around.

STEVE PIONTEK:It’s been said that many life insurance agents are not renowned for their servicing of clients. So when we talk about servicing clients it’s a little bit off the track, it seems to me, because what is going to make an agent have some stake in this is; in other words, how much is it worth to me? What am I going to get out of it? That’s why policies are not serviced. There are many, many orphan policy holders. How are you going to deal with that issue of how much is it worth to you to deal in life settlements without becoming like the annuity commission hucksters?

BRYAN FREEMAN:I think this gives agents an incentive to work with their clients and to keep in touch with them and service them. You know, frankly the life insurance industry and the way it’s structured allow us to exist. As a matter of fact I would say they foster our existence. A number of years ago most carriers made the decision to put their products into the commodity marketplace. In other words they said, ‘We don’t want you as an agent. You need to go be an independent agent. We will manufacture product and we’ll be a commodity and you need to sell it for us.’ And of course, quickly they found out that agents went to the cheapest company and the best underwriting. So they began to redesign their products so that they could beat their competitor. I think everybody knows that most new life insurance that’s written is written because one carrier takes it from another one. So you’ve got to have a better product–a new mouse trap all the time. And frankly, because consumers have the ability to go buy new life insurance that’s better, more modern, efficient, up-to-date life insurance with more bells and whistles and guarantees, they are able to trade in an old model for a new one. And the insurance companies have created that.

RAMIRO RENCURRELL:And the commission that the agent or the broker might make on the settlement is an incentive just for that broker or that agent to stay in contact and service the customer. Now he’s going to stay with them because he knows he can make another commission down the road, another sale. It’s another opportunity.

ROB HAYNIE: Not to mention the commission on the new product that he offers.

STEVE PIONTEK: I would like to segue to another point. What will be your reaction when more insurance companies start to co-opt you like Phoenix, which just had a policy approved where they say they’ve got to have the first right of refusal on a settlement offer?

TED KILKUSKIE:Actually what it says is that if you shop the market and get an offer for your policy, Phoenix has to have the right to come in and beat that offer at the end. And what that does is devalue the policy up front. If you know you are going to bid on that policy and at the end it’s going to be swiped away by the insurance company, why get involved? So all of a sudden they’ve added a language which destroys the fair market value to clients. That’s number 1. Number 2, that being said, I think it’s great that they’re doing something like that. If there really is an intention there to increase value to the consumer at the heart of it, it’s going to be a consumer benefit. As long as it’s legal and as long as it doesn’t involve restraint of trade.

LARRY SIMON:When we saw it come out, one of the questions we posed to our attorneys is, do they need to be a settlement company to re-purchase the policy? And the answer I got was, “Yes, they need to be a licensed provider to re-purchase policies.”

TED KILKUSKIE:This is the exact language. It says, “If, however, you are offered consideration to transfer ownership of your policy or any interest in your policy including a collateral or absolute assignment to a third party, no such transfer of ownership shall take effect unless we or one of our affiliated companies first have the right to purchase your policy. We require evidence satisfactory to us of any consideration offered by such third party.” So who knows what the affiliated company might end up…

BRYAN FREEMAN: I think we’re finding that state regulators are beginning to look at those approvals they gave, that this has caused quite an uproar. And you know, it’s really a complicated issue. And I think you may have some unfair trade practices here. But at the very bottom of the whole debate it’s a great promotion tool for us as an industry that they’ve done that. It’s the greatest thing that could ever happen. It legitimizes our business for a lot of people. Because all of a sudden an insurance company is not putting out propaganda against us, but they’re saying we’re going to join in.

NATE EVANS: And in the final analysis, whether it’s an insurance company coming in and trying to buy their own policies or it’s an aggressive hedge fund or a pension fund, the market is a very efficient place. And so to the extent that Phoenix or any other carrier wants to get in, that’s fabulous. We’ve got more institutional players in the marketplace. They’re still going to have to compete in the marketplace.

LARRY SIMON:As long as it’s done properly and there is competition where it’s not “we have the last look,” we don’t mind insurance companies being in that business. But…

ROB HAYNIE:So long as it doesn’t impede the transfer taking longer. That’s an issue that we’re coming across now. Just transferring the policies is taking longer. Getting information out of the carriers on policies.

DAN BOCKHORN:I think the key language in that document is Phoenix or their affiliated companies. And if Phoenix goes out and contracts with just one company and so they’re only getting an overview of one offer, then that’s not a consumer friendly product. And so what we have to look at with the carriers is to make sure that they don’t write this language into their contracts and then become affiliated with one company, because that doesn’t give the consumer the opportunity to shop the whole market. That’s the fear of the companies writing that into their language because the key is affiliating companies. Who would that affiliated company be?

STEVE PIONTEK:Well isn’t there at least one person in here who works with an insurance company or has an insurance company affiliate?

BRYAN FREEMAN:Look guys, in reality the matter is that all of us who are entrepreneurs will one day want to sell our companies. And who will buy them? Life insurance companies.

LARRY SIMON:You know, the other side of this market is that you will see in the next 3 to 4 months rated term securitizations come to the marketplace. You’ll see the big investment banks in this marketplace. Nate, I think it’s public knowledge that Morgan Stanley has an interest in Maple Life. You’re going to see other deals like that happening. And these companies are pretty happy with the market and where it’s going. And as you say, it’s becoming more efficient.

STEVE PIONTEK:I’d like to give people a chance to talk 2 points with a 2-year time frame: What do you see as the biggest obstacle to your business or the business in the next couple of years and what you see as the greatest opportunity?

ROB HAYNIE: The biggest obstacle is the delivery which we as an industry properly educate about the opportunities that exist. The producers are aware. At least the ones in the high net worth, senior market. But it’s the others–the wirehouses, orphan policy holders, philanthropic opportunities, charities and so on and so forth. And other things that we won’t even be able to think about as we go around this room. The positive is, I’ve watched this marketplace since ’93 go from where it was and have every possible imaginable event happen that was going to terminate the industry. You had the viatical industry, then AIDS drugs came around and basically virtually overnight changed the dynamic. Out of that came a new emergence of an asset class which is now the life settlement marketplace.

This marketplace is going to be a considerable multiple of what it is now. I’d say the death benefit that we’ll collectively give this industry this year in 5 years will be something you might do in 2 or 3 weeks. Life settlement is going to be one of those words you are going to see on television, I would say inside of a year. Because it’s something that they’ve got to get behind and they’ve got to let the consumer know or they’re going to get sued–it’s a pretty easy lawsuit if you are representing the consumer that was wronged because the advisor didn’t educate properly.

LARRY SIMON:I think education is real, real critical. We need to educate the broker-dealers if that’s where the market is going to be, and we need to educate the agents. I think that’s the biggest thing we have to do. You know, in the 6 years we’ve been in this business, we’ve never had anybody come back to us and say, “We’re unhappy that we did this settlement.” And we’ve had no threats of litigation. And I think it’s because part of the education is that the beneficiaries are signing off, spouses are signing off. We are getting signoffs from doctors, attorneys, whatever, as to competency. So we are in some ways educating the seller’s family and beneficiaries to it. But we’ve got to educate, continue to educate the people selling the sellers.

DAN BOCKHORN:I think that what life settlements can do, if we educate people properly, is get agents out to that dormant client that hasn’t been serviced as opposed to going out as an agent and asking that client for more capital to invest or buy new products. If a planner has done his job, people in their 70s traditionally don’t need new planning. They just need service. Since there is no new product sale, that client doesn’t get serviced. So with our product the insurance companies could seize an opportunity to go out and ask their field force to say, “Hey, now we have a product that you can go out and service your client, ask for new business, without asking for new capital.” Our industry will provide the capital for that agent to service that client again.

The carriers are so focused in on their reserves and what their potential losses are that they don’t recognize the opportunity that we give them for profit. And I think that’s the biggest thing we need to do, is to educate the insurance carrier to the profit potential as opposed to focusing in on the loss. And the profit in the benefits to their clients. And that’s what we have to do a better job of.

JIM CAVOLI: Part of what the obstacle is is the attitude that there has to be a lot in it for me, which keeps the market small and somewhat inefficient because people are trying to make sure there’s something in it for them. I think the way you fix that is to make things easy to sell and so create more demand. If it’s easy to sell and there’s high demand, you don’t worry as much about what’s in it for me. It’s then about how many are in there for me?

What we need to do is change because our industry right now is a low demand. We keep talking about how much is out there and how little penetration there is. We need to release that demand. The opportunity that I see is for the business to become somewhat more standardized, which it’s really not at all, and to become a more efficient or easier, smoother, simpler, faster transaction. If we can do that, it will generate lots more interest from the advisors themselves. Right now, you have to go get the big kahunas to make it worth your while. You’re going to spend a year going around with this thing, generally. By the time you start selling your client to when you get paid, it’s easily starting to run a year. And if you can streamline that process and make this something that can be done more standardized and more quickly and more efficiently, then the opportunities are all going to be there.

LARRY SIMON:Although it will never be an Internet buy.

JIM CAVOLI:No, it’s much more like selling a business, right? I mean everyone is kind of unique. They’ve got to be underwritten and reviewed. I’m not saying that buyers need to stop doing the work that they do. I think most of the stuff that hangs up these sells is on the seller’s side. There are 15,000 guys trying to horn in on the one good deal that’s out there. There is a lot of inefficiency in bringing product to market and in working with the providers. There is some inefficiency with providers with the multiple funding sources. We need to find some ways of streamlining checking with different funding sources. I wouldn’t say you shouldn’t underwrite product and just come up with a standard price. But until this gets more streamlined, I think that’s what’s holding the volume back. It’s just too hard to do transactions.

ROB HAYNIE:As far as the market being efficient, I think that will work it out on its own. All markets do that. They become more efficient as more sophisticated capital comes in. But having said that, I think that to touch on your point, that will happen. We’re going to go ahead and make life insurance more valuable and here is how we’re going to do it. We’re going to create another reason why you buy life insurance in the first place. Because now you have an opportunity if circumstances change. And none of us have even talked about what happens if tax laws change. There could be a whole lot of life insurance that is of no value anymore if they do some things in Washington. So there is a market increase right there.

JIM CAVOLI: It’s got to be a transparent, simple transaction. It can involve underwriting life insurance as everything else should. But it shouldn’t be as opaque as it is. The reason it’s hard to understand is because everybody is out telling the same advisors our angle or whatever it is on the marketplace. And I’m not sure–I don’t know if you get inundated with so much information that you can’t make sense of it and maybe that’s the problem. Because we’re all calling on the same guys and we’re all telling them what we tell them. And I’m trying to be different from you and you from me. And the problem is the transaction is not different.

BRYAN FREEMAN:The concept is simple. The execution, as in most things in life, is more complicated. It is much more complex than the underwriting for the issuance of a life insurance policy in the primary market. Why? Because you are not only underwriting health, you are underwriting the policy and its premiums. The ownership structure, whether it’s owned by a trust or a business, whether they have the right to sell it or not. Does it have a lien on it? Is there a lien by divorce on it? Then you are looking to make sure it’s a regulated transaction. What do we have to file with those states? And so it’s a lot more complex and has more pieces to it than the actual underwriting for the life insurance policy issuance in the first place. So you can’t sidestep that because if you do, you will have regulatory problems. Your funds will not do as they hoped to do. So it is complex. At least from the provider side in doing the underwriting for the transaction. And it’s labor intensive.

SCOTT PAGE: Within the next 2 years, life settlements will be a mainstream consumer product and a recognized profitable and viable financial planning option for the appropriate people.

Institutional funding will continue to dominate the industry, move it forward. More domestic fund sources, by way of hedge funds, etc. will enter the market at an increased rate.

We should also see increased uniformity across state-specific legislative and regulatory initiatives as various groups show a real interest in the life settlement industry, coordinate with each other to a greater extent and give birth to model legislation and other common regulatory points of interest.

BRENT BUSH: I think education is the major hurdle facing the industry. But I think overall we’re making little baby steps. And we’re going forward and we’re going to see some of the results of that over the next couple of years. I think we’re going to have more players in the industry. If you called the top 20% of the players next time around, you’ll probably have a table that’s twice or three times as big as this. And the reason for that is there is much more institutional money coming in, to legitimize the industry itself as well. It’s not me selling my policy to Ramiro. That’s not what’s happening. Those days are pretty well gone, it’s now institutional money that it’s coming from very, very legitimate sources. And I think that’s going to add credibility to the industry and make it much larger. And the insurance companies are going to have to pay attention to it.

CRAIG SEITEL:Yeah, I would agree to that. Our biggest challenge is creating awareness as quickly as we can. That’s going to help promote proper regulation. Our biggest positive in the future is going to be validating a liquid market for the consumer.

LARRY SIMON: Now the issues are more how do we educate the consumer, the agent? There was a recent study that basically said 13% of the agents have done a life settlement transaction. That’s a very, very low number. So either they don’t have the clients or they are not educated enough to feel comfortable doing the transaction. Again, that’s our problem.

STEVE WASHINGTON:We’re in the early stages of being a regulated industry. And there are probably opportunities that we haven’t yet even come across, new products that may become available for consumers. New products that ultimately as well will become available for institutional investors. We’ll get more institutional investors involved in the market. I think right now it’s still looked at by some institutional investors as a very exotic investment, a high risk investment. But I think as the market matures, it will become a very established, separate class of investment. Particularly as we develop a longer track record of life expectancies and it’s projected versus an actual result that will improve over time. That will bring more investors in. But I think we have to improve disclosures for consumers. Currently they get a lot of disclosure in connection with doing life settlements. But I think on the carrier side we can improve disclosures too.

Another aspect of that we have to deal with is carrier resistance. I mean if I were in the carriers’ shoes, I’d be trying to figure out a way to get into this market or somehow taking advantage of the opportunity. I think it’s really all those things combined and we’ll eventually get there. But we’re at the very early stages. And ultimately I think it will become a mature market just like mutual funds became. Just like other small regulated industries. They start out as little tiny niche and ultimately blossom.

TED KILKUSKIE:Over the next 2 years the biggest threat I see to the industry is ham-fisted legislation and regulation. And that would include whatever the carriers do. I think some of what they are doing is well-intentioned but misguided. I think some is not so well-intentioned. So that’s the biggest threat. I think the biggest opportunity is that it’s a severely underserved market. Especially when you look at the benefits to the consumers, to the trusted advisors. So I think education, but education with full disclosure. I think that a lot of times there hasn’t been enough light shed on disclosure especially as the market evolves in new products. I think there is going to be new applications of the secondary market that are going to benefit consumers that are being thought of right now but will be put into play over the next couple of years. And again, that’s going to require its own set of education.

BRYAN FREEMAN:I almost feel like I just want to say “Amen.” You know really what I think the obstacle is, is regulator and legislator education. Because in the next 2 years they are going to be bombarded by propaganda, and you can underline the word propaganda. That’s what it is. From the insurance companies that misstate our business, misstate the benefits of our business. And so I’m concerned that somebody somewhere might believe what they are hearing. So that’s an obstacle. Opportunities are that I think you are going to see the complexity of our business change because of purchases of companies and new entries into the business. There is at this point, quite a hurdle for new people to overcome because of licensure and because you need to be licensed in over half the states if you are going to do business there. So you’ve got a lot of opportunity, big growth ahead and furthermore, all of us baby boomers are about to get to the age where we need to sell our policies. So as that happens there is going to be a lot of policies for sell.

NATE EVANS: I agree with so many of the comments but I think the 2 biggest things as far as challenges from my perspective are regulation and legislation. And I think it’s going to be the challenge to make sure the proverbial baby doesn’t get tossed out with the bathwater. And the other challenge is going to be to clearly define for the regulators the difference between kind of mainstream life settlements and the fringe players that are doing things, kind of pushing beyond good sense to be kind. And then 2 years from now, I agree there will be more players and larger players. And when you look back a number of years, mutual funds and annuities were things that really had to be explained to people. And today they are just commonplace household terms. And I think 2 years from now, that will be how life settlements are viewed as well.