For the first time they can recall, several independent broker-dealers have been solicited by life settlement companies to sell private placements of securities based on life insurance policies.
“We're being approached on a regular basis to do these deals; we don't believe they're appropriate for consumers,” said Michael Leibowitz, president and chief executive of Invescor Ltd., which provides life-settlement-processing services to broker-dealers and insurance companies.
“The people shopping them around don't know the risks in-volved,” he added.
In this latest twist, life settlement providers are offering a fixed-in-come security collateralized by a life settlement or an investment in a fund or limited partnership that owns settlements. Providers are looking for broker-dealers that can provide access to accredited in-vestors with at least $1 million in net worth.
Senior Settlements LLC recently shopped a deal that would allow investors to participate in a life settlement involving a single, non-variable insurance policy. Participants would be able to invest in three tranches, paying annual returns of 6%, 8% and 10%, respectively, depending on the settlement's maturity date — when the insured person dies.
The deal offers broker-dealers a fee of up to 9%, according to its private-placement memo, higher than the 3% to 4% range typical in recent deals, according to Brian T. Casey, a partner at the law firm Locke Lord Bissell & Liddell LLP. Mr. Casey is co-leader of his firm's insurance practice group, which has structured life settlement private placements.
“If the investor is looking for a 10-year instrument and they have the confidence that the life settlement policy has a life expectancy of seven years — and they have confidence in whoever is doing the underwriting — it's likely to produce some maturity within the 10 years, so it's not too bad,” Mr. Casey said.
Life settlement providers point to a strong potential for yield as an inducement for retail investors.
“A lot of people in the life settlements market are saying that they have this portfolio of settlements, and they can create something that can give a higher return than a fixed annuity,” said an executive at a life settlements firm, who asked not to be identified because his firm is considering such an offering through broker-dealers. “Since they need the distribution, they go to broker--dealers.”
But broker-dealers — even those who are open-minded about recommending life settlements as a way to cash out of insurance policies — aren't jumping at the chance to get into these deals
“It's a mixed bag — it's tepid out there in terms of interest,” said Mr. Casey, who says he thinks a combination of negative press and regulatory scrutiny has dampened the reception of the products.
Among the criticisms is that the investments can be highly illiquid and hard for an investor to sell.
In addition, broker-dealers question the settlement providers' methodologies, saying that the deals don't encompass a sufficient number of policies to provide a statistically valid prediction of mortality. According to a report from A.M. Best Co. Inc. on life settlement securitization, a portfolio of settlements should contain at least 300 lives to reduce volatility within the pool.
“People are living longer, and sometimes [providers] use old tables,” said Carrie Wisniewski, president of B-D Compliance Associates Inc., which provides consulting services to broker-dealers. “You don't even know who came up with the table for the offering unless it's a rare deal where they had an actuary do it.”
While some private placements provide a liquidity backstop if the insured person lives longer than expected, such allotments are rare, settlement providers say.
Finally, life settlements in private-placement offerings are unrated.
“It's hard to build one of these [pools] with enough quality policies to meet a rating company's criteria,” Mr. Leibowitz added. “I would want something rated by an agency. To me, people don't know what they're buying with these private placements.”
Since the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc. take a dim view of private placements and life settlements, broker-dealers are being extraordinarily wary of a product that combines the two lightning rods in one package.
If a broker-dealer sold the private placements, Finra suitability and best execution rules would apply, according to James W. Maxson, who is of counsel at the insurance and reinsurance practice of Morris Manning and Martin LLP. Further, a broker-dealer that gets into the business of dealing with life settlements must notify Finra of a material change in business operations, he added.
“A broker-dealer needs to be smart enough to understand what they're being told,” said Mr. Maxson, referring to the actuarial data behind an offering and the expected rates of return.
“If there's a black-box element — if the issuer can't set out the assumptions and explain by way of example how to achieve their returns — then don't get involved,” he said.
E-mail Darla Mercado at [email protected].
