A recent bankruptcy protection filing by a provider of life settlements raises concerns that consumers in the midst of selling a policy, as well as investors, may get a raw deal in this and similar situations.
Last Monday, a Delaware bankruptcy court allowed JGW Holdco LLC and two other non-operating holding company affiliates, J.G. Wentworth LLC and J.G. Wentworth Inc., to emerge from Chapter 11 bankruptcy protection after the company encountered liquidity problems amid a tightening credit market.
J.G. Wentworth operating affiliates that were not involved in the filing historically have purchased structured settlement and annuity payments, as well as life insurance policies. J.G. Wentworth has securitized structured settlement and annuity payments, but not life settlements.
As funding dried up during the credit crunch, J.G. Wentworth had difficulties buying up these assets. The company is now reorganizing its business per the bankruptcy arrangement.
Similar woes may be around the corner for other players in the settlements market, raising questions as to where insured individuals stand when a buyer's credit dries up, forcing it to undergo restructuring or liquidation, observers said.
Life settlements involve the sale of an insurance policy on a person's life to a third-party investor. The settlements and their securitization have fallen prey to the same capital drought that has hit other firms' ability to borrow funds.
“You have to have the money to buy assets to securitize if you're in that business,” said Elmo Chin, assistant vice president of the insurance-linked securities group at A.M. Best Co. Inc. in Oldwick, N.J.
“If you don't have the ability to borrow the money, it's going to affect your business,” he said. “Anyone in asset-backed securities without financing to buy assets going forward will be impacted.”
Larry Rybka, president and chief executive of ValMark Securities Inc. in Akron, Ohio, agrees, saying that he expects more bankruptcies for the policy buyers.
“The lines of credit to help pay future premiums have been cut back, especially for life settlements, because the results have been bad,” he said. “I think we're just seeing the leading edge of it.”
When a life settlement buyer files for bankruptcy, insured individuals who have already sold off their policies are often the ones who end up least injured, as they have already collected their lump sum. However, insurance policies and annuities in the process of being sold may be up in the air.
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“In the middle of the transaction, all bets are off,” said Stephan R. Leimberg, chief executive of Leimberg Information Services Inc., a financial-legislation and financial-regulation analysis service in Havertown, Pa. “If you already have the check, you're home free, but it's those policies that are in the middle that are in no man's land.”
Generally, a policy that the firm hasn't placed into escrow can still be pulled back by the policy seller. Once a policy is in escrow, the transaction will go through following a 15-day rescission period.
After that, if the seller wants to undo the sale because the company buying the policy goes bankrupt, he or she can sue under contract law, but bankruptcy typically protects such companies from litigation.
Policy buyers have imploded in the past, having their assets — including books of life insurance policies — sold off to others in a bankruptcy arrangement.
Such an event took place in 2007 when Ritchie Capital Management Ltd. in Lisle, Ill., sought bankruptcy protection for a pair of hedge funds that held life settlement investments it had purchased via The Coventry Group of Fort Washington, Pa. During the bankruptcy proceeding, the funds sold off the portfolios of life settlements to others.
Insured individuals who had already received their money were notified that their policies had come under new ownership. However, those whose policies were in mid-transaction were still in limbo, Mr. Rybka said.
Twenty of his clients were insured individuals whose policies were in the settlements, having sold the policies to Coventry.
“To an extent, the identity of the purchasers isn't clear,” he said.
“Until closing, we wouldn't know if it was Ritchie Capital. If they went out of business, then there is no money, and the deal is pending,” Mr. Rybka said.
The settlements provider — Coventry, in this case — could try to find an investment pool in which to place the policy, but the deal fizzles if no other investors want to buy the policy, he added. Clients could sell elsewhere, though the offer price may not be as good.
In a bankruptcy proceeding, particularly if a trustee has oversight of the bankrupt policy buyer, paying insured individuals top dollar for their policies is probably not the first priority, said Michael D. Myers, a partner at McClanahan Myers Espey LLP in Houston. Rather, conserving assets to pay off creditors is the first order of business.
“Those transactions would have to be subject to the approval of the bankruptcy court, and if the trustee of the bankrupt estate didn't approve, they could be cut off,” he said.
The court would have to be mindful that the consumer won't have any advocates, Mr. Myers said.
“You're stuck unless you get the permission of the court to modify the contract, but it won't do so if the creditors would be put at a disadvantage,” he added.
Anticipating more difficulties in the life settlements market, financial advisers said that they are paying closer attention to the companies that are acquiring their clients' policies.
“You need to make sure that they have the funding to do the deal,” said Adam Sherman, president of Firs-trust Financial Resources LLC in Philadelphia. “If it's a bona fide life settlement — the company pays, and I cash the check — then I'm not too concerned with its health afterward. It's just the end user I'm worried about,” Mr. Sherman said.
He thinks that the companies buying the policies greatly underestimate how long insured individuals live. That helps sink the buyers because they end up paying more money in premiums, and over a longer period of time, than expected.
Policy sellers are feeling the sting too, in the form of poor offers or no buyers, Mr. Rybka said.
One of his clients received a $5 million quote in 2007 for a policy sale and decided to wait. Upon revisiting the offer last year, the offer was down to $2.6 million.
“Either the price is down significantly or there is no demand for the policies at all,” Mr. Rybka said.
“It's like dealing with a teetering mortgage company,” Mr. Sherman said of the life insurance buyers. “Until they show up with the check, the deal isn't done, and you need them to honor the offer.”
E-mail Darla Mercado at firstname.lastname@example.org.