Mr. Piontek: Starting off today’s roundtable, I think it would be helpful if we could have a definition of what each link in the life settlement chain is and what it does. Bryan, would you start off defining a “provider”?
Mr. Freeman: Yes, a “provider” is the entity that is regulated as a purchaser of policies, and that is, in regulated states. They buy policies direct from the public.
What I mean by that is they contract with the seller of the policy to purchase them. Typically, there is a broker in between the provider and the seller, but the seller contracts with the provider to sell the policy.
They are also the party that has to report transactions; has to keep data on the life expectancies (LE) they used and how they priced and report all this to the states; and, frankly, they keep the records in most states until 5 years after death and report all that every year. It is laborious.
The provider is the buyer that is regulated, that the regulator has the opportunity, if they so desire, to reach out and grab them and say, “You know, you’ve got to do what we want you to do because you’re the buyer that we regulate.”
Mr. Piontek: Can somebody speak to the sources of funding for the business?
Ms. Balsam: Sure, I can speak to that. We are seeing a lot more private equity and hedge funds and institutions that are entering the market, that are purchasing policies.
Mr. Piontek: And brokers?
Mr. Finfer: Absolutely. We work with the agents. It seems that policy owners still go back to their traditional life insurance agents for advice, and we are the back office for life agents who want to help their clients settle policies.
We do soup to nuts, whether it be ordering the APSs, getting the medical records in, or getting the LE reports. We then go to the various capital sources that are the providers, who Jordana was talking about, or the hedge funds, whoever it happens to be. We have the fiduciary responsibility to obtain the best offer for that individual client.
Mr. Wright: A good explanation. I would just like to that in the insurance world we are the “general agent,” for lack of a better term, to the life settlement market.
The broker has relationships with most of those in the institutional funding marketplace and is able to best identify and connect the right provider with the owner of the policy.
Mr. Haynie: To add to that we are probably responsible for the education process that takes place. Still to this day, you will have conversations with insurance professionals where you’re starting out with a discussion of the elementary.
Really, half the time I can’t even figure out how some of these policies were even issued when you ask them for simple things like a clear copy of the driver’s license. It’s holding their hand and teaching them how to do the business and how to do it efficiently.
Mr. Piontek: This is the role of all of these links in the chain today. Has this changed, say, in the last couple of years? Where do you see it going in the next couple of years in terms of the roles and the business shifting? Does everybody agree that that is probably going to happen to a greater or lesser degree?
Mr. Freeman: Yes, I think everything is getting better. There are better quality players in the market today than there were 5, 6 or 7 years ago. With that, there is still a tremendous potential that we will have individuals who do not know what this business is, are afraid to do it, are misled and uneducated.
You’re seeing different models come out, such as, for example, online training, which may or may not work for one broker, but may work for another.
Mr. Piontek: Do you see changes around the fringes of these links in the chain; people migrating, going a little bit here, a little bit there?
Mr. Wright: Steve, there still is some jockeying for position that is going on. My background is from the BGA world. I worked with a general agency that started in 1979. That was about the time BGAs were really coming to the forefront. There have been various iterations of how carriers wanted to deal through brokerage general agencies.
There were different models where some carriers decided to try to go around them. Some carriers tried to go directly to clients, directly to agents. It took a long time for that to be really fleshed out.
I think the same thing is going on in the life settlement marketplace. There is a channel distribution disconnect between some of the funders and some of the actual agents. Over the next few years, it’s going to play out.
I think what Rob is saying is it is going to be more of the same. Everyone sees that we provide a value at different points in the process. Sure, there are going to be some mavericks that try to work around this model, but it does seem to be working, for the most part, the way it is.
Mr. Freeman: I think that things are definitely changing. I think eventually it is going to settle down, and it’s going to look very much like it does today, but a lot of things are going on that will probably cause some fundamental shifts in the business.
I started thinking about the change that has occurred in the last 20 years. I mean, it is significant.
As a matter of fact, we’ve seen microchanges where you would see things change every 2 or 3 or 4 weeks where it really fundamentally affected the business. And then you saw a wholesale macro-change where the business went in a totally different direction never to return to where it was before.
One of those things that changed a few years back was the introduction of life insurance agents to have the potential, because of their life insurance license, to be in the business of brokering policies.
That was a fundamental shift away from the old model that had been set up in the original National Association of Insurance Commissioners Model Act where you had to go get a specialty license, and they thought that you had to be sprinkled with holy water to be able to be a settlement broker.
That changed fundamentally forever the role of the broker and, frankly, allowed these guys who are here at the table who run brokerage shops to be able to build this sort of MGA model or GA model that you have now. That was a fundamental change.
I think there is going to be a fundamental change around how financing is done in the business going forward. When the business first started 20 years ago, you saw people, providers, who went out and borrowed money from banks and built their own “block,” if you will, of policies.
They started selling to individual investors and then there was a big ruckus about whether you should be able to sell to individual investors, and that continued for about the first 12 to 13 years of the business.
Now you are seeing people begin to shift back to the platform of where they should have their own capital and actually come into the marketplace and buy for their own book.
I think you’re going to see more of that. What I believe is going to happen is large financial institutions will either create their own provider, or they will buy a provider with all of their intellectual capital of course going with it to be able to make this happen.
Then, I think you will also see that there will be fewer and fewer providers and probably more and more brokers.
I think there are going to be some fundamental shifts. How they actually pan out is going to be interesting to see. I think there will be some technology models that bring different ways of approaching the business than we have had in the past.
Mr. Piontek: What kind of time frame do you see for this happening?
Mr. Freeman: Three years maximum. We are in a very fast-paced sprint to see who is going to gain market share. I think a lot of the people who have been the big players may not be, the people who have been medium size may end up being bigger or non-existent, and then maybe some new startups will end up to be very large, and some folks will just go away because they won’t be able to compete. They don’t have the capital and the know-how to make it work.
Ms. Balsam: I agree with everything you’ve said. There are a lot of fringe players out there. I think the market needs and will come to consolidation.
I think a lot of intermediaries will consolidate, whether it is what you just said, as far as the financing entities becoming their own providers or brokerage firms merging. Whatever the word is I think consolidation probably will happen.
Mr. Haynie: Going back to what Bryan said earlier, from the broker’s perspective, we are making far less money than we ever did before. I think everybody at the table would agree that with full transparency and disclosure to the client our shops have to be far more efficient than they have ever been before.
We have to really understand the marketplace, understand how to bring it to market, and understand how to get it through as quickly as possible. As a broker, I’m working on very thin margins today as opposed to what we were doing a couple of years ago when that wasn’t the case.
Mr. Piontek: Well, wouldn’t that in and of itself cause changes in the way the players act and who is really going to survive?
Mr. Haynie: Well, you just have to carve your niche. Everybody is going to be different. There are going to be very, very small boutique brokers who will come in and market, some who are already here and are going to continue to thrive and others who are going to build their shops bigger.
I remember when I first got in the business we were big. I remember one time we were excited to be number one, and now we’re number 57, to be honest with you.
It’s one of those things where more quality players come into the market. I would like 500 companies per day to come in, because all they are doing is educating everybody and it will eventually trickle down and find us. That is where the efficiencies come in.
The bottom line is they may like me, or they may like Dave, but it’s going to come down to individual differences. I may do something where I pick a phone up and talk to you. Other people like to see things electronically.
Ms. Balsam: I was going to say that as much as the financing entities have shifted and the bigger players that we might have been closing business with for years and years may have changed so that now we have to find other sources of capital, we’re seeing a tremendous volume of policies come our way, and they are being sold. We are finding homes for them. It’s out there.
I agree with everyone who is saying this. Whether it’s a broker or someone you rely on to create that value, you look to them as an advisor. If they are finding a place for your client’s policies, then they are going to work with you.
Like Rob said, some people prefer the electronic. I don’t see it. I think that they prefer the in-person, the relationship. I think that word is definitely overused in this industry, “relationship,” and people kind of think of it as fluff, but it’s a reality.
Mr. Piontek: Right now, in May 2008 with the credit crunch affecting so much, what have you noticed in terms of sources of funding changing or tightening up or new people making capital available?
Mr. Finfer: Last year, we saw a huge push by U.S. institutional capital, specifically investment banks; since then they have been hit. What I’ve seen in the last 6 months has been a quick and dramatic change in European money back into the market, because they have it, the proposition value is better on this side.
Most of the CEOs that I try to get in touch with, these providers, they are not on vacation, but they are out there actively pursuing capital so they can continue to be competitive in today’s marketplace.
Ms. Balsam: Regarding the entrance of the private equity and the hedge funds and the institutions there is less risk for them as far as entering the settlement market. That is the feedback we’re hearing. Because life settlement is not connected to the overall economy, it is a little bit less of a risk for them to enter this market space. I think that we are going to see a lot more of it.
Mr. Freeman: This asset being non-correlated, that’s a big deal right now. It should have been a bigger deal two years ago, three years ago.
All you’ve got to do is ask Wall Street, the guys who lost their jobs, what they would think if they had all that money that they tied up in mortgages, if they had it in a non-correlated asset like life settlements. They wouldn’t be in the same spot they are in today had they actually decided to invest more money in our space than in the space they chose.
Mr. Wright: I would like to comment on the credit crunch for a minute. I hate to bring up STOLI because I don’t think STOLI is uniquely the life settlement industry’s problem. It is the whole industry’s problem. However, the STOLI problem has been helped by the credit crunch.
From the agents I’ve talked to it is more difficult right now with the credit situation the way it is to get a life insurance policy financed than it has ever been before.
We have a situation where all this legislation came in to try to put the kibosh on STOLI, and what has happened is the credit crunch has made it virtually impossible anyway.
Mr. Finfer: Most people, high net-worth people today, are really not borrowing money. I mean, they are just paying the premium themselves. You are seeing a lot of “write your own checks.”
The business is going to continue to grow as long as it is done properly. I mean, people may laugh at the credit crunch, but the money is out there. If all of a sudden it dries up today, Rob will find it. We will all go find money in 10 seconds.
That is what we do, entrepreneur-wise, as a brokerage, just like Bryan does when he goes out to find the money. I mean, everybody seems to go to Europe to find money. Well, you will go to Mars if you have to, to fund these providers, get the capital.
I think things are going to settle down. Once everything settles, again it’s an uncorrelated asset, a great buy, if run properly. There are a lot of good bargains. For people who sell their policies today versus what they sold it for 4 or 5 years ago, it might be far less, but it is still a great situation for them to sell.
Mr. Piontek: As far as I know there has not been a securitization of the business at this point.
Ms. Balsam: No, not yet. Though, we are leading up to it.
Mr. Piontek: That is going to be a fairly sizeable change I would imagine when and if that happens.
Ms. Balsam: Tremendous.
Mr. Freeman: As we begin to know more and more about life expectancies, and we thought we knew about this a few years ago, what we found out is not only did we not know, but we had a lot to learn. Over the past few years, prices have dropped, and they should have dropped.
Mr. Haynie: They should drop.
Mr. Freeman: We’re beginning to learn a lot about life expectancies. I think for the first time in the history of this business we know about life expectancies. What is interesting is the life insurers are now buying our data about life expectancies because they have now figured out we know more about it than they do, which is an interesting turnabout.
But when the rating agencies begin to realize and really have a belief that we understand life expectancies and that these policies are being originated not only with direct life expectancies, but with institutional due diligence into the purchase of the policy so that it is packaged in a way so that you take as much of the risk that could potentially be in a transaction out of it, you will then see a securitization.
Ms. Balsam: On that point, I think a lot of the changes are in seeing the discrepancies in the life expectancy reports in this market. It used to be, and we can all attest to this, that one life expectancy report was sufficient to evaluate a policy, definitely two reports at best
Now we’re often ordering 3 or 4 reports just to determine the value of that policy because of a large discrepancy. You can have one with 76 months and then come back with another at 148. There is just such a discrepancy that there are 8 different rules for doing the underwriting.
To your point, Bryan, about the due diligence factor, I was thinking as a broker we’re the intermediary who is handling that due diligence and getting the clean up lists.
The cleanup lists are getting longer. The funders are demanding more. It is just ridiculous sometimes. The other day we had to get a divorce decree that was issued 30 years ago. An insured was divorced 30 years ago, and we had to provide the divorce decree. You try to find that. That is our role. We are seeing that more and more.
I understand that funders have to be more thorough and provide due diligence. I’m hoping that eventually this asset will be rated with good ratings for securitization.
Mr. Freeman: The reason you are having to find those 30-year-old divorce decrees is because people like us who buy those policies where people have been divorced are finding out that some of the policies people are trying to sell, even though they are newer policies that they’ve purchased, they were policies that were purchased to replace the ones that were specified in the divorce decree. They actually can’t sell them unless the ex-spouse signs off. That is the reason you’re finding that, because we are actually seeing that a lot.
Mr. Haynie: That comes from experience. I mean, they weren’t asking for that divorce decree until someone got burned.
Mr. Freeman: Right.
Mr. Haynie: You almost have to begin a conversation to explain to them it is not 70 pieces of toilet paper to get an offer. This is real business that requires real information done properly and correctly and efficiently and quickly.
Mr. Finfer: Rob mentioned a driver’s license and he says that facetiously. I would be happy if the client and insured actually knew where the life insurance policy was.
Mr. Finfer: It is amazing how someone could lose a multimillion-dollar life insurance policy and how many times we have to order a duplicate as part of our due diligence. They sign the forms and they say, “Where is the money?”
And I say, “Well, you’ve got to have a policy to get the money.”
We are seeing many of these high networth individuals sitting in front of their CNBC, Fox Television, MSNBC, and their computer watching their life savings get depleted. Now more than ever they want to know what the value of that policy is.
They are actually listening to what they were told and what they have read in The Wall Street Journal and what they read in the “Death Bond” article in Business Week and so forth and they are saying, “Maybe I should evaluate this policy. Maybe it’s money I could use today.”
Mr. Piontek: Well, I want to go back to one thing about the life expectancies because Bryan is saying the life business is looking now to you because of the expertise that has been developed in the settlement business with life expectancies. You say you get 4 life expectancy reports, and they are all over the place. It seems like a little bit of a contradiction to me. I’m just wondering whether at some point there is going to be a push for standardization?
Mr. Freeman: No.
Mr. Haynie: No, it’s opinions.
Mr. Freeman: There has been no place in the life industry in 100 years for standardization. You can literally take one client and shop it to 10 companies and get very different responses.
Mr. Haynie: If one carrier won’t issue a policy, someone else will. It depends on the month.
Mr. Wright: They are still required to work off of certain mortality tables. They have to by law, so there is some standardization. However, yes, when they want to get the business, they bend the rules.
Mr. Haynie: Well, one thing I will speak to is that at least some life expectancy companies are realizing there are other services they provide than life expectancy and how the life expectancy is viewed.
One of them has gone so far as to trade almost a certificate for financial planners/advisors to take when a 55- or 60-yearold individual comes to them and forecast what their life expectancy is, how long they will be alive, what assets they currently have, what they will look like in the future.
“When should I retire? How much money will I need?” This is based on a number provided by a life expectancy company not for the issuance of life insurance, not to sell a policy, but to know where they should put their money, what’s safe, what’s risky.
It is going to create a whole other market for the life expectancy company, and in turn they will probably come back to the life settlement business at some point.
When you say, Is it going to be consistent? Obviously, if you take 100 life expectancies, 80 of them probably are in that zone, but every once in a while you have no rhyme or reason. Someone is high and somebody is low. It is actually an opinion.
We’re proving that each and every day when you get an 86-month LE and the gentleman passes away in 3 months; so, obviously everybody got that one wrong. But that’s just life.
I don’t think you are going to see a standardization, but I think you are going to see them come more in line to most likely create their own table. There are lots of other purposes for life expectancy.
Mr. Finfer: We’re seeing more and more successful agents who have high networth clients who absolutely, positively must have a life expectancy so they can properly present the products, an asset to their client. It is very helpful in presenting the value of that asset by providing those life expectancies to demonstrate the value of the policy.
Mr. Freeman: Well, I’ll tell you all this has been really a big topic at NAIC and at NCOIL. The reality of the matter is that if you are a purchaser of a $20 million piece of real estate, you wouldn’t dare purchase that real estate without an appraisal.
It is just absolute nonsense to think that people wouldn’t do an appraisal. So why shouldn’t you, if you are about to send a large check every year to an insurance company to purchase a $20 million policy, why wouldn’t you do an appraisal to know where you are? Absolutely, certainly, you should do an appraisal.
Ms. Balsam: Well, that’s interesting that you compare it with real estate. In the real estate market, how do they value what the market value is for that house as to the asking price? They do comps.
“What did the house down the street go for?”
“It went for $1.2 million.”
“Well, then I should sell my house, because I’ve got a bigger back yard, for $1.5 million. Well, my kitchen is not redone and my bathroom.” I mean, I can go on and on.
Everyone is different. I agree that there probably won’t be any standardization as far as life expectancy reports are concerned, but there has to be a middle ground as far as the funders that are willing to buy off of each expectancy report.
Mr. Freeman: In fact, sort of a hot topic is that if you are a life agent and you are not doing this or if you are a financial planner and you are not considering the option of a life settlement, are you really a professional in your business, or are you just somebody who carries certain opinions to your clients and are not really looking at it in a comprehensive way so as to best serve the interest of your clients?
I would say if you are not dealing with life settlements and you are not trying to educate yourself about life settlements and you are carrying some old outdated, outmoded philosophy that somebody in the life insurance industry has force fed you, that you are living in a world that is not 2008 and not a world where you are looking out for the best interest of your client and fulfilling the fiduciary duty that you should have to that client. I know that sounds harsh, but I believe that’s accurate.
Mr. Wright: I agree. I don’t think that you see many agents do that. The efficient way once you purchase a policy to fund that policy out to maturity is to have it extremely thinly funded so that the client doesn’t die with cash value in the product.
There is not a life insurance agent out there that sells life insurance under that same model, and they should. Armed with a life expectancy report, they could do that and bring a service to these clients that is not being brought right now.
Mr. Finfer: Bryan, you bring up an important point. I actually sold myself a life insurance policy two weeks ago and I got the interview call. They asked me what the intended purpose of insurance was and if I intended to sell it at some future point in time. I’m turning 43 on Friday.
Mr. Finfer: I understand the question, but I was quite shocked that I received it. As a life insurance agent myself, and I’m also an MDRT member, selling life insurance has always been it’s for life.
They try to give you the warm fuzzies, “This isn’t being done for the intended purpose.” Well, what is the intended purpose? When we are young, the intended purpose is to protect our children. When we get a little bit older, it is to pay for college expenses, if we should pass. We keep that policy for estate planning. Now, those are intended purposes.
They change over time, and we take that policy with us throughout our life. But if we utilize that policy through its intended purpose and then we sell it in the secondary market, why isn’t that an intended purpose?
Mr. Piontek: Let’s talk a little bit about what some of the companies are doing in terms of co-opting what you do or trying to co-opt what you do. We have life insurers actually getting into the settlement business, Transamerica and Phoenix.