Life Settlements

The Death of the Life Settlement Market Has Been Greatly Exaggerated
by Doug Himmel

As 2008 fades into history, we can slook back upon what was truly a vvvery interesting year for our business. It changed business as we know it. Call it the year of the perfect storm.
In the first half of the year, it was business as usual with many strong, active buyers. However, things changed markedly as the third quarter, and even more significantly the third quarter, rolled around. Buyers were affected on several different fronts, including the following:
• The credit crisis hampered their ability to raise new capital and their use of existing funds, allocated to life settlements, to cover other investments.
• The necessity to de-leverage their holdings impeded their ability to buy new policies. In some cases, it brought distressed pools of policies into the market.
• The existing portfolio of policies was hurt when life expectancy underwriting was turned on its head. It stopped some buyers as they assessed their current portfolios.
Also, sellers needed to monetize their policies more than ever to keep their homes out of foreclosure or keep their businesses open. Thus the laws of supply and demand got off kilter and we saw the marketplace freeze.
Buyers have now changed what they are looking for in terms of the following:
• Return on investment – We hear that 15% to 18%+ is the new hurdle for many buyers compared to the previous hurdle of 12% to 14%. Buyers are demanding higher returns.
• Face amounts – More buyers are looking at smaller face policies (the $250,000 to $2 million range) and there are fewer buyers for the $5 million to $10 million+ range. This change has occurred because they can get the same desired portfolio diversification with a smaller net investment. Buyers are buying smaller policies overall.
• Life expectancy reports – After the dramatic changes in underwriting (specifically at AVS and 21st), many buyers are including ISC, EMSI, Fasano, and even Mid-West life expectancies in their buy boxes. They are also buying policies on insureds with life expectancies of 12- to 14 years or less. Most buyers are actually looking for eight- to 12 year life expectancies. Buyers are looking at alternative life expectancy reports and shorter life expectancies.
All that being said, the fundamental underpinnings of the market remain comp-letely intact and as strong as ever. The secondary market for life insurance is based on a seismic shift of population and institutional cash flows. These factors can be looked at more closely to see why there is such momentum in the market:
• A huge demographic shift is underway. More than 30,000 people turn 65 every day in the United States.
• Since the life settlements is a non-correlated asset class, buyers can hedge their other investments in stocks, currencies, commodities, CMOs, CDOs etc. by buying pools of policies that are based purely on mortality -- a factor that is not related at all to any market forces.
• Most policies never pay out the death benefit and are allowed to lapse or are surrendered, which gives the life settlement marketplace the opportunity to bring additional money back to policyowners. In fact, it’s believed that over the past few years, more than $1 billion in excess of the CSV of policies has been paid to policy owners who have sold their policies.

Now more than ever, this business is centered on the strategy of submitting files and the relationship that the brokers have with providers. The days of easy pickings are over, such as sending a 21st + AVS life expectancy to every known buyer and getting aggressive bids.

Originations are at all time highs and providers are more cautious and selective about whom they allow on their A-list. The level of service and the strength of the bids will be less than desirable if your closing ratio is poor or you don’t have the volume to get their attention. We work on an exclusive basis on nearly every deal since there are far too many twists and turns, hard and soft costs, and damage that can occur on a case. This enables us to maintain control over the case and remain highly credible at the provider level.

Over the past month, we added eight new funding entities or providers to our list of potential buyers. This brings our aggregate list of potential buyers to nearly 50.
Here are a few cases that we are closing to illustrate the industry’s return to health:
• A case in which we had a huge divergence in life expectancies – life expectancy #1 and life expectancy #2 averaged 65 months to equal 22% of face offer for the policy
• Life expectancy #3 and life expectancy #4 averaged 115 months to equal 6% of face offer on the policy. (We have seen a nearly 00-month variance on other reports.)
• We just got an offer on a $10 million SUL (with both insureds alive) in Georgia (a hard state) and life expectancies at 153 months, 162 months, 163 months, and 179 months.
• We just got an offer on a $1.4 million UL in which life expectancies are 171 months and 182 months.

For the first time in months, we are seeing robust activity, solid offers, and legitimate competition between buyers on policies ranging from $250,000 to $10 million. In addition, we have received bids from more than15 providers, which speaks to the return of the health of the marketplace. Change is never easy and we have taken the steps to get acclimated to this new norm.
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Doug Himmel is the managing director and a founder of Melville Capital, a life settlement brokerage that focuses on monetizing life insurance policies. He has more than 15 years of experience in the financial services industry, and brings a unique approach to analyzing and approaching complex situations. He is a sought after speaker on issues surrounding distressed companies and has also been featured in such publications as The Daily Bankruptcy Review, The life settlements Report and The Los Angeles Daily Journal.