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Distressed Portfolios Of Policies Present Unique Set Of Challenges

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As the life settlement industry has matured, companies are beginning to see the need to keep their eyes open for problems stemming from the earlier days of the industry to the potential challenges lying in the road ahead.

One of the challenges discussed at the Life Insurance Settlement Association’s spring conference here was the issue of distressed portfolios that have come into the market as those investors holding them have been unable to bear the financial burden of doing so.

Speaking at the conference, a panel of experts discussed the unique challenges that are involved with the purchase of a distressed portfolio, and what companies can do to minimize their risk when acquiring them.

Of course, part of addressing the problems of buying distressed portfolios is recognizing that those problems are different for each transaction, noted Sheri Townsend, a managing member at Asset Servicing Group.

“When you go in the door, every one is unique,” she said, adding that each transaction is a “whole different situation, with a whole different set of problems.”

Some problems, however, are more common than others, and Townsend noted that in many instances, the buyer of a distressed portfolio often faces a problem with policy data, or the lack thereof.

“When you go in, there should an existing database” of the policies included in a portfolio such as when premiums are due and how much is owed, she said. However, she added, in many cases no database exists. She said she has at times found herself among “literally conference rooms full of documents” sorting through files.

“It’s really difficult to go to the hard files” for information, she said. Hard files, she added, may also differ from one another or be incomplete. “You may not have all the data you are used to” when evaluating a portfolio.

However, noted Scott Gibson, senior vice president and principal with the actuarial and consulting firm of Lewis & Ellis, those selling portfolios with incomplete files will also be forced to sell those portfolios for less than they would otherwise fetch.

“The better the data a seller gets and gives to you,” he said, “the better the price” they can expect to sell for. “You’re going to err on the side of caution.”

Adding to the complexity, said Jason Jacobs of Silver Point Capital, is that many sellers of distressed portfolios are looking only to get away from the portfolio, and can’t be counted on to help out later. “Once they sell it, they just want to be done with it,” he said, and in some cases aren’t available to help even if they wanted to.

Many distressed portfolios in the market today, he said, “were basically developed from fraud” and the principals involved are serving prison sentences.

Such circumstances only serve to compound the data problem that Townsend mentioned, he added, as those involved in a fraudulent scheme “become incentivised” to delete important files in an attempt to avoid being caught or convicted.

Alexi Poretz, an attorney with the firm of Sidley Austin, LLP, said that the sale of a distressed portfolio is “very, very different” from a non-distressed portfolio transfer, which, he noted, is much more likely to involve complete files and, therefore, bring a higher price.

Poretz disputed that argument somewhat, countering that the issues in a distressed portfolio sale “are probably not that distinct” from one involving a non-distressed portfolio, but are rather just “heightened” by the circumstances. In terms of the process and evaluation, the two are largely the same in that they are simply based on the portfolio being sold.

“Your asset is only as good as it is,” Poretz concluded.


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