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Credit Crunch Puts The Squeeze On Premium Finance Market

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Credit market turmoil is having a substantial effect on the life insurance premium finance market, but quality deals continue to get done and the turmoil should be seen merely as a “pause” for a growing industry.

That is the view of Ronnie Katz, president of Finance for Life, a premium finance company based in Memphis.

Specifically, Katz said that as many as six lenders have lost their funding sources or run into delays in receiving funding.

Scott Cipinko, the executive director of the Life Insurance Finance Association, an industry trade group, said one reason for the turmoil is that potential lenders want to see how the market is going to be regulated in the future before they make any investment in funding new policies.

Besides the general credit market turmoil that reached its peak with the need to bail out Bear Stearns by JP Morgan Chase and the Federal Reserve Board last month, Katz said the declining dollar is causing foreign investors to rethink their commitment to U.S. markets.

The growing caution of hedge funds, a primary source of funding, to commit funds to the market, is also a primary source of the funding problem, Katz added.

The turmoil is also creating greater emphasis on due diligence on deals as well as the agent bringing the deal to the broker, he said.

“We are doing greater due diligence of the agents and advisors who bring deals to us,” he said. “We are now checking criminal histories and reviewing insurance licensing records for the agents who bring us the business to ensure we are dealing with credible people.”

This is becoming an industry-wide trend, he said.

Cipinko said another of the problems the premium finance industry is running into is what he calls the “stigma” attached to efforts by life insurance companies to lobby state legislatures to outlaw stranger-originated life insurance (STOLI).

“The campaign against STOLI is painting any premium finance program as a potential STOLI deal,” Cipinko said. “This has had a chilling effect on the market–to the detriment of the consumer.”

Specifically, he said, “Legislators and regulators have been told that life insurance premium finance can lead to STOLI, but life insurance premium finance has been around a lot longer than STOLI, and even the secondary market.”

As a result, Cipinko said, “some of this [financing] money has been running scared.”

But Katz is optimistic. “We have relationships with lenders who have continued to fund through this ‘pause,’ because it has not been a cessation of funding.”

It is just that, while funding continues, “there is more due diligence, more safeguards as to the information they are receiving and more verification as to the accuracy of financial data.”

Katz also said he is optimistic about the future of this business. “The business provides an absolutely necessary vehicle for those who need this type of coverage; it has not been available previously,” he said.

He says the business is doing “very well,” especially for an industry that is so young.

Katz provides premium financing for life insurance and primarily serves a market for people 70 and over who started estate planning late in life, and who are wealthy in terms of hard assets, “but cash poor.”

He said he started Finance for Life in late 2004 after 24 years in public accounting. His first foray was into a life settlements business, Settlements for Life, which he started in 2003 and sold in 2006.

In the beginning, he said, these were life settlements and premium finance deals.

“Now it has morphed into a more sophisticated estate planning provider for seniors, for those over 65,” he said. “Seniors with assets over $5 million but who have little cash need life insurance to protect their estates and they are also at a point where health can change very quickly.”

The premium finance business “provides insureds the opportunity to get the coverage they need with little or no out-of-pocket cost.” Katz said he is involved only in deals valued at $5 million or more, and capped at $100 million.

He said that while these seniors have ‘skin in the game,’ in other words, some risk, “this industry provides an opportunity for a period of time that will be terminated through some sort of exit strategy with which they are comfortable and which they work though with their advisors.”