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Phoenix's Life Settlement Subsidiary Will Be Debuting Soon

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Phoenix Life Insurance Company is planning to formally open its own life settlement business in the next 2-3 weeks, said a Phoenix executive who spoke during the Society of Actuaries’ Investment Symposium here.

The new business will be called Phoenix Life Solutions and will be offered through a group of 4 brokerage general agencies with which Phoenix is in final negotiations, said Christopher Macklem, second vice president and actuary with Phoenix, Hartford, Conn. The BGA agreements are expected to be in place in the next few weeks, he said.

Currently, the new subsidiary has not settled any policies, Macklem said, adding that when it does start operations, it will begin working with “very large face amount policies.”

The new unit will settle both Phoenix policies as well as contracts from other insurers, Macklem said.

An initial announcement was made by The Phoenix Companies, parent of the new subsidiary, in September 2007.

Macklem described parameters that are going to be put in place to make sure transactions are legitimate. Among the guidelines contemplated are: elevated market conduct efforts and refusal to purchase ‘wet paper’ life insurance contracts, pricing that will be very transparent, and documentation of compensation.

The maximum commission that will be paid on a contract is 20% of the value created in the settlement of the policy which, on average, is about half of what the industry has charged, he said. The provider fee will be 5% of the value created, also half of what the industry currently offers, he added.

Both regulators and rating agencies have been told about Phoenix’s plans and the reaction is positive, he continued.

Phoenix looked into the possibility of a joint venture with a life expectancy provider that is a medical underwriting company, a life settlement distributor, investment banks and investors, and decided it had the capability to build its own business, he said.

Building its own subsidiary will allow Phoenix to leverage its name, he said, noting that Phoenix policy holders are high net worth clients with an average face amount of $2 million, a demographic that makes it a fit for the life settlement business.

Macklem said that as the securitization market grows, he believes Phoenix will be able to provide guarantees to make life settlement securitizations more palatable to the rating agencies.

The details of the new life settlement unit prompted a number of questions from attendees at the session, “Darling or Deadly? Life Settlements and the Secondary Insurance Market.”

Moderator Nicola Barrett, vice president-traded markets with ABN AMRO’s New York office, asked whether buying Phoenix contracts presented a conflict of interest. Macklem responded that it will not be a conflict since the contract holder will receive more than the cash surrender value.

Barrett then asked if it raises a situation in which Phoenix policyholders could ask for a greater cash surrender value, which Macklem acknowledged could happen.

Another question raised by the audience was whether the new unit will get much business if it is offering half of the commission rate the life settlement industry is now offering. But Macklem said conversations with the BGAs suggested that Phoenix would get business, although he did say Phoenix would be competing with other life settlement companies for BGA business.

In developing the subsidiary, Macklem said the company worked out a number of challenges including reputational risk, which he said it solved by establishing guidelines for transparency.

Pricing was a “big challenge,” he said, because Phoenix views mortality differently than life settlement companies, which makes it a “little less competitive.”

However, he continued, the lower commissions and a lower internal rate of return expectation will help make Phoenix Life Solutions competitive, he added.

When asked whether the settlement market could be extended to other products such as variable annuities, Macklem responded that “in the long term there are possibilities there as well as with IAs [immediate annuities.]” In fact, he said, the new entity will probably allocate some capital in the near-term to level-premium term policies. He also noted that universal life policies, which are not yielding what they were originally illustrated to earn, are also fueling the life settlement market.

There are possibilities across every product in every insurer where there are pricing inefficiencies, said panelist Hasham Malik, a senior vice president and chief capital markets officer with Peachtree Settlement Funding, Boynton Beach, Fla.

Peachtree is also in the process of several new projects including an open-ended pass-through hedge fund that will be based in the United Kingdom, Malik said. In addition, a structured note program should be launched in the next 45-60 days which will make various tranches available to investors, he said.

The structured program will be offered in conjunction with a European ‘Aa2′ rated bank, will offer up to 80% capital protection and the possibility of regular income, he said. There are a lot of institutional investors who are interested in life settlements but do not want to spend hundreds of millions of dollars to enter the business, he noted. Rather, Malik continued, they would rather put $20 million-$30 million into an investment vehicle they know.

Referring to industry data available culled by the Life Insurance Settlement Association and Conning Research, Hartford, Conn., Malik said the life settlement market has grown from approximately $200 million in 1998 to $14 billion in 2006 and an estimated $15 billion-$17 billion in 2007. Some estimates, he continued, place the market at $50 billion in the next few years and up to $160 billion in the next decade or two.


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