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.
We have companies that are tailoring policies so that settling them will become less advantageous. New York Life just came out, I think, with a policy where if you want to sell the policy, they will give you more than the cash value. I think that this will be a major change as more and more companies get on board with this kind of activity. Any comments about that?
Ms. Balsam: It is wonderful. I think that products that are competing with life settlements are not only coming from insurance companies; they are coming from Wall Street too. It is giving us, the brokers, the opportunity to add more value to our clients by giving them more options.
There are innovative new products that are coming onto the marketplace for seniors that are giving them options, and we are advisors of them. As a result of the marketplace, there are more outlets for us.
Mr. Piontek: I have to say, this is kind of a unique attribute of the settlement business, at least as it is articulated, “We love competition. Bring them in. We don’t care how many more players enter the business” is something that has been said over and over and over again.
Mr. Haynie: I can’t do it all, and he can’t do it all.
Mr. Finfer: It is consumer-friendly, too. It only drives up the price.
Mr. Haynie: It legitimizes what we do.
Mr. Finfer: It is free advertising. I think we’ve got them–if you can’t beat them, join them. I think the companies have finally realized that we are here to stay for the long term. They have to understand our market placement and adapt to it.
Mr. Freeman: Well, when they all get in, they will all go change the STOLI laws.
Mr. Haynie: I think Transamerica is going to be surprised trying to do business on the Exchange the way they are. It’s easy to hold an auction and get items to auction off, but having the actual money show up in the room to buy the items is a much different story. That is what we are seeing on the exchanges right now is it’s not the real money that is coming to buy product on the exchange.
Mr. Finfer: For the exchange to be successful, for anybody that has ever used an exchange, you cannot take out the human element of explaining to a high net-worth senior exactly what it is that they are doing along with their two kids and the attorney. An exchange doesn’t provide that value.
It also doesn’t put in the necessary piece until Rob calls seven different funders to try to get the best possible price. An exchange can’t add that personal touch and then come back to the client and explain to them why this is the best possible offer and what can be done.
Ms. Balsam: An exchange can’t offer the expertise that we do. With all these new products that are entering the marketplace, they are multifaceted; they are very complicated. You can’t get that from an exchange.
Mr. Haynie: We don’t want to beat the exchange. We all hold auctions. I mean, that’s just what we do, whether it looks fancy or on a computer with deadlines, drop-dead dates, timeouts, or whatever you want to call it.
The one thing that is important about all auctions is you have to make them available to everybody that can potentially buy, or you’re not doing your job. You can’t just go, “Well, I don’t like that company, so I’m not going to send it to them.”
A lot of the exchanges and a lot of the program platforms don’t go to everybody. Unfortunately, you’re leaving money on the table for your client.
Mr. Freeman: Not only that, but people have licensing problems. Not everybody can buy everything everywhere.
Mr. Haynie: It is kind of like a very complicated board game you play every day. We talked a little bit about, where is the trust? Where is the beneficiary? Where do they pay their taxes? These are things you’ve got to know.
Mr. Piontek: I’m just thinking about agents who might not know too much about this and wondering, “Well, are any products better for settlements, any type of life insurance better than others? Is universal life better than whole life? Do they have pluses and minuses? What do you look for?”
Mr. Freeman: Very little whole life is purchased. The old kind of fixed-premium whole life, there is not much of that purchased.
Now, universal life, as you know, is a whole life product. It is just a flexible or adjustable face amount product. Frankly, those products are the most sold now, and they allow us to optimize premiums so that we can optimize the returns in the investment.
Frankly, whole life products don’t allow us to do that.
Mr. Piontek: What about variable life? Are there particular problems with that product?
Mr. Freeman: It presents some problems that are unique to it, especially if you’ve got the subaccounts funded. If you find the cash value in a subaccount or put the cash value in a subaccount, it is a security.
Then, you’ve got issues around its being sold to you as a buyer. If you are a buyer, how do you sell it, if you wish to do that? There are a couple of different issues.
I think a lot of people have looked at that and made their own decision about whether they will buy variable life policies or not. Maybe the brokers actually know more about how many people are buying those than I do.
Mr. Wright: We see very few variable policies. They are sold under a different selling process when the agent goes to the client. Some of them aren’t even intended for the death benefit to be the real benefit of the product.
Mr. Finfer: I think what we are seeing are predominantly the cases that are best to bring to the market are universal life policies. You are seeing face changes and other changes here.
What you are seeing is UL policies in excess of $500,000 or more, and you are seeing a convertible term converted to a universal life product as being the easiest to bring to market.
You are seeing people walking away from smaller faces because of the amount of time and energy and dollars that are having to be put into life expectancies is too expensive a process for everybody involved in smaller policies.
Mr. Piontek: Well, let me ask you this. If life settlements are so pro-consumer, don’t you think it is incumbent on the business to find a way to have smallerface policy owners have access to the settlement?
Ms. Balsam: Sure. It’s happening now.
Mr. Haynie: Well, there is definitely a home for that, and the cost remains the same. To service it from the buyer’s perspective the way they do, I have been listed as an individual that they need to keep in touch with on a regular basis.
I get letters almost daily and telephone calls to service that small policy. Just like any business, you know the bigger the service, the more money you can make. In some cases, it is just not profitable. Especially if you have a $50,000 or a $100,000 face amount, it is just not profitable.
Mr. Freeman: I know that a lot of people have come out with pronouncements in the last few years to buy small policies. For the record, I would like to let you know Habersham Funding would always buy small policies and still does; so for us, it is not a new thing. I didn’t mean to give an advertisement.
Mr. Piontek: The rap on insurance companies is they just want to sell big policies to wealthy people, and the middle market is being ignored. I think statistics would bear that out.
It seems to me you guys run into a contradiction if you say, “This is a great consumer benefit, but you really need a half a million dollar policy to avail yourself of it. Because otherwise, it just doesn’t make sense for us.”
Mr. Freeman: Well, one of the problems that the insurance companies have, in their defense, is when they face trying to price policies that are smaller at a different price point than they do policies that are larger, they then have regulators put together panels.
They had one called the Small-Face Committee where they want to tell them to charge the same thing that they are charging for a $1 million or $2 million or $10 million policy.
Well, they can’t do it. They would go broke. These people are not charitable institutions that have contributions to keep them afloat. They actually have to make money.
This is one of the problems in the real world is you actually do, if you have overhead and employees who expect to eat, have to make money. Whether you are a life insurance company issuing small policies or whether you are life settlement company buying small policies, you have to make money.
Mr. Haynie: I think the same thing could be said for money managers today. If you talk to any money manager, they have a limit of how low an amount of net worth you can have in order to manage your money.
The amount of time you’re going to put into managing your money is the same amount of time they are going to put into managing somebody’s with a higher net worth. There is again a time limit involved and the value of their time doing that.
Mr. Piontek: By the same token, though, if you look at 10 years ago what money managers would take and what some of them will take now in terms of managing an account, that amount has gone way down. It has gone down to the point that 10 years ago it may not have been profitable, but somebody has found a way to make it profitable.
I guess what I’m asking is do you think somebody is going to find a way to make settling smaller face profitable? By smaller I’m talking maybe $100,000.
Mr. Haynie: Absolutely, because it’s already happened.
Mr. Freeman: It’s happening, but it’s not happening as fast as you might think.
Mr. Haynie: The elephant guns are out because the guys are all looking for the big cases. When we first were in the business, the average was $60,000, and it worked, but it was a different class of capital, too.
They were individual investors, and they were those who could buy those types of deals. Now you’re going to see they are going to try to streamline underwriting to make the process go quicker, but the LE is still $250 whether it is a $25,000 policy or $1 million.
Ms. Balsam: There was talk, I didn’t see it come to fruition, about new LEs needed for these smaller faces.
Mr. Haynie: Oh, absolutely, no question.
Ms. Balsam: If that still is effective, and again it hasn’t really taken effect, if that actually comes to fruition, then that could work even more so. That would add to an influx of these smaller face policies.
Mr. Wright: Well, there are more of them than any other policy. Your clients would be getting more money than the cash value of the policy. However, would they really be getting fair market value, if we’re not spending the same amount of resources analyzing those policies as we are analyzing the million-dollar policies?
Mr. Freeman: Well, no, they do because the fair market value as a percentage is not the same. Well, you take the same LE and you look at a $1 million policy and if it is worth 40%, then you take a $50,000 policy and it’s worth 18%, I mean, it is just economics. It’s pretty black and white. You can spreadsheet that.
We have our own underwriting team in our office and have had for the last 5 years, so we do LEs. I think that some companies are doing that now. We have been doing it because we thought that this was a trend a long time ago to have a vertically integrated business that looks similar to an insurance company.
It’s taken 5 years to actually have people in the financial community look at that and say, “Oh, yeah, you know that’s forward thinking.” But that is beginning to happen.
Mr. Haynie: Baby steps. It’s happening. Somebody is already here. Will there be more people? Now we’ve got to let the education process catch up. Again, there are people out there that have $2 million policies that don’t know they can sell.
Mr. Wright: The small-face policies were purchased for different reasons than the larger-face policies. So many more of the large-face policies have outlived their usefulness because of the state tax law changes and because of the decline in wealth in some of our wealthiest people in America. Most of these $300,000 and $400,000 death-benefit policies were truly purchased for the death benefit.
Mr. Piontek: One of the things we touched on before and at previous roundtables was how kind of lumpy the settling process is. It is not smooth like a mousse.
I am just wondering, say, in the last 6 months have you seen streamlining in any particular facet of the business, any facet of the business where it has gotten easier to do business or is there not much progress on that front?
Ms. Balsam: Let’s go back to the discussion we just had about the role of the intermediary, the role of the broker. I think we can all attest to our war stories of how complicated this process is, how unstreamlined.
Yes, if it was that easy, 3 steps and you’re done, everyone would be doing it and you wouldn’t necessarily have to offer expertise or offer the advisory role we do.
It is so complicated due to the fact that we talked about an hour and a half ago–the due diligence funders are requiring now with the credit crunch.
The credit crunch happened, the biggest credit crunch in United States’ history. Bear Stearns was a major player in the life settlements industry, and we all know the story there. A lot of due diligence is going on because of the credit crunch. Due diligence leads to complication, a paper-intensive complicated process.
Mr. Haynie: I would say it is worse than it has ever been before. As a broker, you have to utilize outside resources in order to present it to a provider.
We have absolutely no control, never had control of the life-expectancy underwriting team. I’m running 20 days, I’m running 25 days, I’m running 30 days while you have a client screaming at you, “How come you can’t get a price to me?”
At the same time we have really in some cases non-responsive carriers not willing to run the illustration that we need or the verification of coverage that we need.
A lot of people have an expectation that this is going to be a 30- day process. They are unrealistic because in this business time is what gives you the biggest price. If it is done right, it is more of a 4-month process.
Mr. Freeman: Well, unfortunately, in the law in many states if you send for a certain form, they have 30 days. If you send for a change of ownership, that gives them another 30 days.
Just within the insurance carriers themselves, getting the information and getting the changes, it is 60 days. There are 60 days that go by, forget everything else.
It is going to be longer even in small policies, and this is one of the problems with small policies, you have to look at the ownership of a small policy the same way you do a large policy.
In either one of those size policies, that person could be divorced. He could be encumbered. You have to look. That makes it very lumpy, it makes it slow, and it draws the process out.
Mr. Piontek: It makes life interesting.
Mr. Freeman: I guess we could do subprime settlements so that we didn’t look at all that, but then we would probably have the same problems that they already have.
Mr. Piontek: I am curious about your perception of agents over the last 6 months to a year and whether you think they have actually gotten more plugged into this process, whether there is a growing sophistication among agents.
Ms. Balsam: Yes. Yes, we are seeing a growing level. I will say that the process that we started so many years ago with educating. I am also proud to say I started this business educating people kind of by myself on the telephone, educating agents as to the difference between a life settlement and a viatical settlement.
“What’s that? A viatical?”
“No, it’s a life settlement.”
That being said, those agents who are already participating apparently are actively participating, and they have grown their business. However, there are so many other agents who have kind of an advisory role who have the senior clients who are not in this market space. I know that I see these guys all the time. We are all out there educating people as to the benefits.
Mr. Piontek: That education, is there a movement afoot in LISA to institutionalize education?
Mr. Freeman: Yes. Within LISA, there are regional agent seminars and conferences that are going on now. Regional broker seminars. I think you will also find, if you even look beyond LISA that a number of us in our own businesses have educational efforts that we put forth to educate the financial representatives, whoever they may be, whether they are insurance agents, CPAs.
Mr. Finfer: We have already gone so far as to get the classes approved for CE credits. That is a big upside for agents to come and listen to you talk about a product that they should know about and get CE credits for it.
But as you can see, this industry is constantly evolving. What I told you six months ago might be a little bit different today. You constantly have to educate.
The nice thing I think is that when you get somebody hooked on this–one agent to get one case done–they will immediately say, “I’ve got to go back to my book because I’ve never made more money and worked less with the outcome in this situation.” They become a life-long agent and understand life settlements even more.
Mr. Freeman: If you focus on the consumer, the person they helped, too, they have never had a more unique solution to a financial problem that they never had a solution for before.
I think that is really the biggest selling point of the whole life settlement option is that it is an option that solves problems that couldn’t be solved any other way until life settlements came into being.
Mr. Piontek: From the agent point of view, don’t many agents once they have a client settle a policy, they sell new insurance, don’t they?
Mr. Finfer: In some cases, it could be the impetus to review the valuation of the policy, to review that policy as opposed to a 1035 and see if they could increase or provide them with a new product that does the job better. In my business, I’m seeing that 30% of the time.
Mr. Piontek: We’re getting close to the end of this. If you had a mini wish list of one or maybe two things that you could change to make either the process better for you or better for the business, what would you change?
Mr. Haynie: Life expectancy reports have slowed down so much, and that’s a problem. That is a big problem right now. I think that is a good problem for the life expectancy companies.
Mr. Finfer: I sit on the advisory board of an LE company. You wouldn’t even believe this organization today and where it was 6,7,8 years ago. It is amazing.
Again, they are just going to have to hire more people, but that’s a great problem to have. However, you’re right, you can’t even get a true number for 20 days. It is 20 business days; it’s a month.
Mr. Freeman: One month.
Mr. Haynie: God forbid if something happens during that month where a new medical report now comes in and they have already issued a date and then there is a whole other level of problems.
Mr. Finfer: It puts us back in the queue.
Mr. Freeman: Another 30 days, so 60 days just for an LE.
Mr. Piontek: Anything else?
Ms. Balsam: Securitization, a uniform process.
Mr. Finfer: I think from a broker’s perspective, there seems to be a disconnect between the date that you provide a full and complete file and the date that you actually receive a price. As a broker, I spend more time on the phone calling up providers saying, “At least call me back.” I don’t understand it.
Mr. Freeman: It’s the mechanics of the funding of the business, which is why providers need their own funds. Most providers really don’t have their own funds, so they have to depend on somebody else to agree to a price. That is one of the problems.
Mr. Haynie: Well, the funding is kind of lumpy. I mean, it’s there sometimes, and it’s not there at other times.
Ms. Balsam: It’s piecemeal.
Mr. Haynie: Right. That might be difficult to take advantage of.
Mr. Finfer: The problem is an agent will call you a hundred times, “I need a price, I need a price, I need a price.” When you finally give them the final price, it’s like, “I’m on a vacation in Europe.” Nobody can sign anything. They don’t know how to make a decision.
That is also very frustrating, very frustrating for us because now we are in the middle of managing the provider’s expectation, and before we were providing the insurance agent the insured’s expectation and we have to flip to the other side.
Now we’ve got to explain to them that we are not trying to BS them. We’re not giving it to somebody else. We just really can’t get this guy to make a decision, and all of a sudden he has brought his daughter into the picture.
Mr. Freeman: The problem then is when you’ve got money and you’re ready to spend, you’ve got to spend it. Basically, if they wait too long, the offer disappears.
Ms. Balsam: The offer is gone, yes.
Mr. Haynie: One of the things I would probably say that I would change is when a deal actually goes to paper, an offer, a formal offer, and then that offer goes away, which happens a lot. Really, they kind of pass that down to you and give no real explanation as to why. I’m sure it is a valid reason.
We are seeing a lot of that. I would like to see less of that. In other words, you make a firm commitment, you make the offer. There is really no recourse for you as the broker or for your client to really come back at them. They just pull the offer. Believe me, I’ve been the beneficiary and been the victim.
Mr. Piontek: Well, I think we have come to the end of the time. I have to say I have really enjoyed this conversation. It has been very stimulating and I think it will really give people, when they read the supplement, an absolutely terrific idea of where the business is now. I thank you all for your contribution.