mckinsey's mio new stream investment story 4.21.11

8/15/2019 McKinsey's MIO New Stream Investment story 4.21.11

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http://lifesettlements.dealflow.com

NEW YORK TERM CONVERSIONOPINION CREATES STABILITY

by Daniel C. Smith

An opinion by New York insurance regulators directing John Han-cock to convert an $11 million term policy to permanent coverage will

likely set a precedent for other states and could impact a California lawsuitagainst the life insurance company.“I think it’s probably the [market’s] most significant regulatory opinion,”

said Nat Shapo, an attorney with Katten Muchin Rosenman in Chicago who represented the policyholder in the case. Shapo grouped the decision with First Penn v. Evans in 2009 and Kramer v. Lockwood Pension Services last year as the three “leading indicators of the strength of the market.”

“It certainly tilts the table toward the life settlement industry,” saidNick Williams, a New York-based insurance attorney with the law firm ofClifford Chance. “Put together with the Kramer case and other favorable

Continued on page 13

Continued on page 11

FORTRESS MAY SNAG TWOMORE DISTRESSED PORTFOLIOSby Donna Horowitz

Fortress Investment Group shockedthe life settlement market when it snatchedthe $6.2 billion KBC Financial Products portfolio out from under Apollo GlobalManagement last October for just morethan $330 million, making what is con-sidered the single biggest purchase of a

distressed portfolio so far.Now, it looks as if the New York-based

global investment manager with $44.6 bil-lion in assets under management could snagthe $1.36 billion HM Ruby Fund portfolioand the $500 million SageCrest portfolio.

Fortress, which is said to be flush with$700 million in cash that it raised in Novem-ber, is under a deadline to spend the moneyand thus has put out the word that it’s look-ing for more life settlement portfolios, aperson with knowledge of the matter said.

“Fortress has a ton of money. Theymay be forced to return it to investors,” aperson who asked not to be named said. “I

think it’s [the deadline to spend the money]coming up pretty quickly. I know a lot ofpeople are trying to show them portfolios.”

But another person close to the situa-tion disagreed.

“The company is absolutely under nopressure to rapidly deploy investment

capital and is always a disciplined, oppor-tunistic investor,” the person said.

Gordon Runté, a spokesman for For-tress, and Doug Cardoni, managing direc-tor at the firm, declined to comment.

Even if the HM Ruby portfolio ends up with Fortress, it wouldn’t be put in the ex-isting Fortress life settlement fund due topotential conflicts of interest, a person said.

As of Dec. 31, the firm had invested $230million in capital in its life settlements fund,according to a filing with the Securities andExchange Commission. The firm also haslife settlement investments in other funds.

Market players say purchases of

IN THIS ISSUE

THE LIFE SETTLEMENTS R EPORTNEWS, INFORMATION, & ANALYSIS OF THE SECONDARY MARKET FOR LIFE INSURANCE

Volume V, No. 7 lifesettlements.dealflow.com April 21, 2011

TOP STORIES• Fortress may snag two more dis-

tressed portfolios.

• New York’s term conversion opinioncreates stability for the industry.

• Interest rates may have doomed the AIG securitization ..........................2

• New Stream may be forced to re-runits auction ......................... ..............3

NEWS IN BRIEF A study found life settlement funds out-

perform other investments; FSA finedN&P $2.3M over its Keydata advice; aDelaware court will address the insur-able-interest issue; Life Partners is fac-ing new class action lawsuits; a Mas-sachusetts committee took no actionon a bill; a judge recused himself fromthe Life Partners case; the EEA Fund isavailable in South Africa; Vespera andEagil got Florida provider licenses; VidaCapital and Silver Point joined ILMA;the SEC suspended trading of MaxLife;13 candidates are vying for the LISAboard; Aspinwall is heading an indexcommittee; and hirings & firings ......... 4

LEGISLATIVE UPDATEThe Life Settlements Report tracks pro-posals to regulate life settlements throughstate legislatures across the country ... 10

Source: AA-Partners; Indexes at 100 in December 2006.

LIFE SETTLEMENTS

VS. HEDGE FUNDS

2010 2011

70

80

90

100

110

120

FJDNOS AJJM AM

Through February 2011

AAP Li fe

Settlement Index

CSFB Tremont

Investable Index

CODE: LSRFFT3-042111


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The Life Settlements Report © 2011 DealFlow Media 2 April 21, 2011

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AIG SECURITIZATION FAILING

BEFORE S&P PULLED PLUG?The Standard & Poor’s securitiza-tion of the American InternationalGroup life settlements portfolio thatfell apart at the end of last month mayhave encountered difficulties a few

weeks before over investor unhap-piness with the 6.5% interest rate onthe offering, a source familiar with thetransaction said.

Market players previously told The Life Settlements Report that the deal to

securitize the AIG pool with $4.5 bil-lion in death benefits fell through at thelast minute because the rating agency’spresident, Deven Sharma, did not wantto be associated with the asset class.

But a prominent market playerheard from four investors, three ofthem sizeable, that “the thing was on itslast legs because the interest rate wastoo low for the risk” even before S&Pbacked out of the deal.

The investors believed the interestrate should have been more like 8% to

10%, the market player said.“Trouble was afoot for a few weeks

[prior to the pullout by S&P. BarclaysCapital ] started sending signals they

would delay. They couldn’t find sub-scribers,” the person said.

The Limestone Securitization offeredby Chartis, the property and casualtyarm of AIG, was seeking investors for$250 million in asset-backed seniornotes. The pool contained 1,157 poli-cies on 929 insureds.

Chartis expected to get an S&P

rating of A- on $750 million of seniornotes in one tranche and a BBB- ratingon $150 million in junior notes on thesecond tranche, according to Barclays’March presentation of the deal obtainedby The Life Settlements Report .

Brandon Ashcraft, a spokesmanfor Barclays in New York, declined tocomment.

A person close to the deal disagreed

that investors were dissatisfied with the6.5% interest rate on the notes and thatthe deal was going nowhere becauseof that.

The person said “there were strongindications of interest and a sense ofconfidence that the deal would havepriced at or near the 6.5% level.

“The deal was proceeding as origi-nally envisioned,” the person said. “Thedeal was to be announced and priced

the last week of March.” A previous AIG securitization on aportfolio with $8.4 billion in death ben-efits, known as Fieldstone SecuritizationI, offered interest rates of 8.5% on juniornotes and 5.85% on senior notes, accord-ing to a filing with the Securities and Ex-change Commission by National UnionFire Insurance Co. of Pittsburgh, whichbought the notes from AIU Holdings, asthe property and casualty affiliate of AIG

was previously called.The AIG unit acquired junior and

senior notes of $235,000 and $1.56 mil-lion, respectively, on Jan. 30, 2009, thefiling said. A.M. Best gave the top tworatings of the National Association of In-surance Commissioners (NAIC) Securities

Valuation Office: SVO1 went to the seniornotes and SVO2 to the junior notes.

In what it described as a self-ratedtransaction, National Union Fire onFeb. 12, 2010, also acquired junior andsenior notes of $210,000 and $474,000,respectively, from Fieldstone Securiti-zation II. The interest rates were 11%

and 7.75%, respectively, according toan SEC filing.

Meanwhile, a copy of the Char-tis Limestone Securitization packet byBarclays shed new details on the failedtransaction and Chartis itself.

In addition to senior notes yieldinga 6.5% interest rate, the junior notes

would have yielded 10.4% in interest,the report said.



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NEW STREAM MAY BE FORCEDTO RE-RUN AUCTION

by Teri BuhlBankrupt New Stream Capital

could be forced to place its life settle-ments portfolio up for auction for asecond time.

The Ridgefield, Conn.-based firmis battling with some of its investors,in U.S. Bankruptcy Court in Wilming-ton, Del., over how its assets should bedisposed.

Investors objecting to New Stream’spre-packaged Chapter 11 filing nowhave support from a court-appointedcommittee of unsecured creditors. Ittold the court earlier this month thata competitive auction for the portfolioshould take place before the court ap-proves a sale that New Stream had pre-

viously agreed to with MIO Partners,the investment arm of consulting firmMcKinsey & Co. In July, New Streamagreed to sell the assets to MIO, an in-

vestor in the fund, for $127.5 million

and secured bridge financing from MIOto cover the premiums until the sale

was approved.The unsecured creditors commit-

tee questioned if New Stream hadbreached its fiduciary duties to all cred-itors by only allowing an eight-day auc-tion before agreeing to the sale to MIO.

Sale documents filed with the courtshow that MIO stands to receive a 3%break-up fee if the sale isn’t completed.

The sale was brokered by Guggen-heim Securities.

The unsecured creditors committee voiced concern about the price NewStream’s estate will receive for the port-folio, and also about the structure andamount of the debtor-in-possession fi-nancing MIO is providing. The commit-tee asked the court to deny approval ofthe financing until it can seek alterna-tive financing.

Court documents show that $40million in debt from before the bank-ruptcy filing is included in the structur-ing of the DIP loan. Some of this debtincludes premium payments MIO wasmaking for New Stream after agreeingto buy its life settlement portfolio lastsummer.

“Permitting this roll-up for which theDebtors have offered no valid justifica-tion will do nothing to benefit the Debt-ors’ estates and will have a significantchilling effect on any effort to refinancethe DIP,” the unsecured creditors com-mittee said in a court filing. “The issueof repaying the MIO entities on accountof their pre-petition claims should beseparated from the sale process.”

Judge Mary Walrath ruled last weekthat New Stream could use only $7.6million of the DIP financing until sherules on its validity.

The portfolio offered diversifiedexposure by insurance company, age,medical diagnosis and net death ex-posure of the underlying insured, thedocument said. It included pie chartsbreaking out percentage of exposure ineach category.

In addition to offering “structuralenhancements” to protect against legalrisks such as insurable interest, AIGalso would have advanced the deathbenefit to the issuer if it wasn’t receivedfrom the carrier within 180 days of noti-fication of death of the insured.

The presentation document said

Chartis is one of the largest, long-terminvestors in the market with more thannine years of continuous experience. Inthat time, it had accumulated more than$18 billion in death benefits throughDecember.

Since it began buying policies inOctober 2001, Chartis’s risk financegroup had acquired about 6,600 poli-cies on about 5,400 insureds.

The document further said that therisk finance group has about 33 full-time professionals working on life set-tlements, including senior managers,life actuaries, systems and informationmanagement employees, pricing un-derwriters, medical underwriters, ac-countants and legal professionals.

Of this total, the unit has 15 medicalunderwriters who analyze each policypurchase. In addition, the risk finance

group obtains a life expectancy esti-mate from a third-party underwriter.The group has had a relationship

with provider Coventry First since2001, the sole originator and servicer ofits policies, the presentation said. If the

securitization had gone through, Cov-entry would have acted as the servicerand backup collateral manager.

Of a total of 6,600 policies on 5,400insureds Chartis had obtained, therehave been maturities on 698 policies in-

volving 621 lives. Chartis has collected$1 billion in death benefits.

Of the $18.4 billion in net benefitsacquired, Chartis only has faced dis-putes on 22 policies involving 16 livesand $129 million in net death benefits,the document said. Of the 22 disputes,12 remain unresolved. None of thedisputed policies were included in

the Limestone portfolio, the documentsaid.Chartis has had an actual-to-

expected accuracy ratio for its policiesof 80.6% for men and 91.6% for women,according to the presentation. — DH



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The unsecured creditors committeeis also challenging a proposal that NewStream has made to provide a prior-ity lien on the DIP financing to claimsfrom investors in New Stream’s Bermu-da-domiciled feeder fund.

Last summer, Swiss-based fundmanager Gottex won receivership ofthe Bermuda feeder fund in a Bermudacourt. Court filings show that Gottexhas more than $200 million invested inthe feeder fund.

Since then, New Stream has offeredthe court-appointed Bermuda receiv-ers all available cash in the fund and

agreed to pay around $3 million in re-ceiver fees.The unsecured creditors committee

filed a motion to stop fees from beingpaid to the Bermuda receivers fromcash of the bankruptcy estate. The un-secured creditors claim that the fees arenot secured and were not approved bya majority of New Stream’s creditors.

New Stream’s pre-packaged bank-ruptcy plan had stated that a majorityof investors had approved the DIP fi-nancing and the fees.

The firm has delayed its request tothe court to approve the pre-packagedplan. Lawyers for investors in NewStream’s U.S. and Cayman Islands-do-miciled feeder funds say they expectthe plan to be withdrawn.

Meanwhile, a separate involuntaryChapter 11 bankruptcy petition againstNew Stream that was brought by theU.S. and Cayman investors is movingforward.

The disgruntled investors, witharound $90 million in the hedge fund,

were granted access to documentsshowing how the funds were used tobuy life settlement assets and deposi-tions of New Stream managers thatmarketed the fund to investors.

The U.S. and Cayman investorsargue in court documents that thesemanagers solicited millions in addi-tional funds in 2007 by promising a re-structuring of the fund that would have

given all investors equal claims to thefunds.

Testimony in the Bermuda courtcase showed that Gottex, the largest in-

vestor in the fund, never approved therestructuring.

U.S. investors have filed claims ofunjust enrichment and inequitablesubordination by the Bermuda inves-tors and asked the court to determineif their actions to secure senior claims

were legal.Bermuda-based receivers John McK-

enna, Michael Morrison and CharlesThresh of KPMG filed motions with the

court arguing that the Bermuda receiv-ers hold the true economic interest inNew Stream’s bankruptcy estates. Thereceivers state that Bermuda investorsare entitled to be paid in full before anydistributions are made to the U.S. andCayman feeder fund.

The receivers also warned the courtlast Friday that the value of the remain-ing assets in the funds won’t evencover the full claims of the Bermudainvestors, potentially leaving the U.S.,and Cayman investors with nothing.

A court filing shows that the Bermudasenior secured creditors in New StreamSecured Capital Fund Limited are oweda total of $369 million. After the life set-tlement assets are sold for $125 million,the Bermuda investors would still beowed $141 million.

Study Finds Life SettlementFunds Outperform Other Assets

Open-end life settlement funds inrecent years have on average delivered

investors higher returns than a rangeof more traditional investments, accord-ing to a study by the University of St.Gallen in Switzerland.

The March 2011 study, “Perfor-mance and Risks of Open-End LifeSettlement Funds,” is the first analysisof such investment vehicles, accordingto its authors. In the past, the “over-the-counter” nature of the investments

was a barrier to gathering enough datato draw reliable conclusions, they said.

However, the researchers saidthe number of open-end life settle-ment funds has grown in recent years,making it possible to analyze “returndistributions, a general performancemeasurement, and a comparison to es-tablished asset classes.”

The paper said that there are abouta half dozen new open-end funds cur-rently being prepared to launch as well.

Between December 2003 and June2010, the study said life settlementfunds produced a 37.3% return, only

coming in behind hedge funds trackedby the HFRI Fund Weighted Compos-ite Index, which generated 45.9%, andgovernment bonds as measured by theFTSE U.S. Government Bond Index,

which returned 37.38%.Over that period, life settlement

funds beat the Dow Jones CorporateBond Index, which generated a 2%return, Standard & Poor’s Case-ShillerHome Price Index, which lost 0.84%,the S&P Listed Private Equity Index,

which lost 1.9%, the S&P 500, which

lost 2.6%, and the commodity indexS&P GSCI, which lost 4.97%.

The study obtained performancedata from advisory firm AA-Partners of Zurich, Switzerland, which compilesthe AAP Life Settlement Index. The uni-

versity assigned code numbers to the17 individual funds to keep their identi-ties confidential in the research paper.

Beat Hess, managing partner of AA-Partners, said his firm provided all ofthe data it had available to the research-ers, but the fear of lawsuits from life

settlement funds that didn’t want atten-tion called to their performance createdproblems.

“One-third of the funds were nothappy to be in the index,” he said. “Therest of the funds were quite happy tobe in the index.”

The performance data on the fundsin the index is calculated by an inde-pendent company, Structured Solutions



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AG of Frankfurt, Germany, Hess said.Of the 17 funds analyzed in the

study, the oldest fund was launched inDecember 2003 and the newest fundcame to the market in 2008.

The fee structures vary, but on av-erage these funds charged a manage-ment fee of 2% and a performance feeof about 20%. Most accept subscriptionsand redemptions on a monthly basis.Several of the funds impose redemptiongates and lock-up periods of six monthsto three years on their investors.

The funds held between eight and567 policies. The sum of face value

ranged from $20 million to $2.37billion.The authors of the study are Alexan-

der Braun, a researcher at the Univer-sity of St. Gallen Institute of InsuranceEconomics, and Nadine Gatzert, chairfor insurance economics at the Univer-sity of Erlangen-Nurnberg, Germany.Hato Schmeiser, chair for risk manage-ment and insurance at the University ofSt. Gallen, edited the paper.

The report cautioned that investorsshould engage in extensive due dili-

gence before investing in any specificfund. It suggested a close look at valu-ation methodology, cash management,asset pipelines and the identities andtrack records of the business partnersinvolved in the fund.

“Nonetheless, our results also illus-trated that – within reasonable limits

– life settlements certainly provide asuitable means for diversification asthey seem to be genuinely uncorrelated

with the broader capital markets,” thepaper said.

“It is a useful contribution to the lit-erature,” said Dr. David Blake, direc-tor of the pensions institute at the CityUniversity London and co-founder ofthe J.P. Morgan LifeMetrix Index, whichprovides mortality rates and life expec-tancies for populations in the U.S. andseveral European countries.

However, he questioned what por-tion of the market the 17 funds actually

account for. “The original data set rep-resents a very small segment of thetotal market,” Blake said. “We do notknow how representative it is.”

Hess said the data largely covers themarket.

Schmeiser, who edited the paper,said that although the approach toinvesting followed by open-end lifesettlement funds is quite sound, the in-dividual funds are highly vulnerable toliquidity issues.

“Life settlements are an inherentlyilliquid asset,” he said.

Investors should make their own as-

sessment of whether a fund has madeadequate provision for accessing capi-tal if confronted with unusual liquiditystress, said Schmeiser.

The March paper is the university’ssecond attempt at coming up with ananalysis that satisfied academic expertsin the field, he said. A 2009 paper onthe subject was met with reservationsabout the data and methodology by thereferees who evaluated it for publica-tion in an academic journal, accordingto Schmeiser. The authors accepted

those criticisms and went back to work,he said.

The latest paper has been acceptedfor publication by The Journal of Riskand Insurance , a publication of the

American Risk and Insurance Associa-tion. It is expected to be published inseveral weeks.

FSA Fines N&P $2.3MOver Keydata Advice

The Financial Services Authority inthe U.K. imposed a £1.4 million ($2.27

million) fine on the Norwich & Pe-terborough Building Society forgiving its customers bad advice whenit sold them life settlement investmentsmarketed by Keydata InvestmentServices.

Two Luxembourg-domiciled specialpurposes vehicles, Lifemark SA andSLS Capital , backed the investmentproducts.

The Building Society will be re-quired to pay the fine in addition tothe voluntary payments it has alreadyagreed to make to customers who lostmoney in the collapse of the Keydatainvestments and to reimburse the Fi-nancial Services Compensation Scheme(FSCS) for payments it has made toKeydata victims.

The FSA said N&P is obligated topay £51 million to compensate Keydata

victims. The Building Society had previously set aside £57 million to coverits obligations in connection with theKeydata sales.

Over a period of three years, N&Precommended Keydata’s life settlementproducts to 3,200 of its customers who

went on to invest in them, the FSA saidin a statement. The Building Societydesignated these customers as “havinga higher tolerance of risk than was ap-propriate,” the FSA said.

The FSA said the fact that the Key-data products were unsuited to manyof the Building Society’s clients wasdiscovered by N&P itself in June 2007.“Their compliance team produced a

report setting out concerns about thesuitability of advice given to custom-ers,” the FSA said. “No effective action

was taken and Keydata sales remainedconsistently high.”

In the first three months of 2007,Keydata products accounted for 30%of all investment products sold by theBuilding Society, the FSA said.

“N&P failed in its basic duty to provide suitable advice to its customers,despite an internal compliance reportpointing out that there were problems

as early as 2007,” said Tracy McDer-mott, the FSA’s acting director of en-forcement and financial crime. “Firmscannot treat customers fairly unlessthey pay attention to their financial cir-cumstances and attitude to risk whenthey make recommendations. This isthe only way to prevent widespreadmis-selling like this.”

N&P said in a statement that it has



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been open and cooperative with theFSA and “maintained a full dialogue

with the Financial Ombudsman Ser- vice” which is handling some com-plaints relating to the Keydata collapse.

The Building Society has agreed with the FSA to commission an inde-pendent review of non-Keydata invest-ments previously sold by its Financial

Advice Services. The authority saidN&P has agreed that if other casesof customers being given unsuitableadvice are discovered, the society “willpay redress where appropriate.”

Delaware Court to Address

Insurable Interest Issue

The Delaware Supreme Courtagreed last Thursday to answer severalquestions, including whether a policy’sinsurable interest can be challengedafter the two-year contestability periodexpires.

The issues were brought to the Su-preme Court by the U.S. District Courtin Wilmington, Del. The lawsuit wasfiled by PHL Variable Insurance Co.against the Price Dawe 2006 Insurance

Trust, its trustee, Christiana Bank and Trust Co. and the Price Dawe Irrevo-cable Insurance Trust and its trustee,Christopher Hammatt.

One question, similar to that ad-dressed in New York in the ArthurKramer case, asks whether the state’slaw prohibits an insured from immedi-ately transferring a policy on his or herown life to someone without insurableinterest.

Steven Sklaver, an attorney withthe Susman Godfrey law firm in Los

Angeles, said this case is broader than what was addressed in Kramer becausethe federal court also asked Delaware’shighest court whether a life insurancecompany can contest a policy lack-ing insurable interest two years afterissuance.

The Caruso case in New Yorkprohibits such challenges aftercontestability.

Jule Rousseau, an attorney withthe law firm Arent Fox in New York,said this will be an important decision.He said in an email that providers andtertiary market participants will havegreater confidence in the value of apolicy if it can’t be challenged after itis settled.

New Class Action LawsuitsFiled Against Life Partners

The latest class action lawsuit filedin federal court against Life Partners and its top executives claims that twoinvestors who purchased portfolios of

life settlements from the Waco, Texas,provider were damaged by “false andmisleading statements.”

Bryan Springston and James Connellsued April 14 in U.S. District Court inDel Rio, Texas.

They claimed that projections by theprovider’s life expectancy physician-underwriter, Dr. Donald Cassidy ofReno, Nev., were inaccurate. Citing sto-ries in The Life Settlements Report andThe Wall Street Journal , the suit said “asinvestors now know, Cassidy’s analyses

were severely flawed and completelyunreliable.”

The lawsuit said Life Partners de-rives its operating revenues from fees.

The “company is able to chargehigher fees for life settlements withshorter durations. Thus, the companyhas an interest in increasing the volumeof life settlement investments andshortening the expected duration of apolicy,” the suit said.

The suit said common issues formembers of the class include wheth-

er Life Partners defendants breachedtheir fiduciary duties, misrepresentedor omitted material facts, whether thedefendants were unjustly enriched,

whether the defendants violated Texassecurities law, as well as the damagesustained by class members.

The law firms handling the case areBarroway Topaz Kessler Meltzer & Check in Radnor, Pa., and Nelson,

Roselius, Terry & Morton of Okla-homa City.

In another class action lawsuitagainst Life Partners, the provider is ac-cused of paying excessive premiums toinsurers to keep policies in force.

The suit, filed April 8 in district courtin Ellis County, Texas, said the inves-tor, John Willingham, “never agreed tosimply give extra money to the insurerthat would provide no added benefit”to him.

Will ingham, a resident of EllisCounty, purchased fractional interestsin several policies between 2006 and

2008 ranging from a 0.33% interest inone policy to 23.33% interest in anotherpolicy, the suit said.

Willingham said that Life Partnersfailed to take steps to ensure that he

was only paying the amount necessaryto maintain the policies.

Participants in the life settlement in-dustry normally optimize premiums orpay the least amount possible to keeppolicies in force.

After news reports surfaced of a Se-curities and Exchange Commission in-

vestigation of the firm and alleged shortlife expectancies provided by Cassidy,the provider changed its business prac-tices in January and began optimizingpremiums.

Under its new “7 X 7” program,investors won’t be responsible forpremium calls on a policy with a five-

year life expectancy until after seven years.

The suit accuses Life Partners ofbreaching its fiduciary duty and breach-ing its contract by allowing the exces-

sive premium payments.The Heygood, Orr & Pearson law

firm of Dallas seeks class action statusfor Texas residents who bought inter-ests in the policies from Life Partners.

Yet another class action lawsuit wasfiled April 4 on behalf of investors inLife Partners’ policies. The federal courtcase in California alleges breach of fi-duciary duty and breach of contract, as



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well as violation of the state’s businessand professions code.

Most cases against the provider havebeen filed on behalf of the firm’s share-holders, but the plaintiffs in this caseand several others are investors whobought fractional interests in policiessold by the provider. This case, like theothers, cites the allegedly inaccurate lifeexpectancies by the provider’s physi-cian-underwriter that were the basis forpricing the policies.

The case was filed in U.S. DistrictCourt in San Jose, Calif. The plaintiffsare Frederick Vieira of Watsonville,

Calif., who purchased $99,625 in frac-tional interests in policies and AnthonyTaylor of Aptos, Calif., who invested$82,878 in policies, the lawsuit said.

Steven Sklaver, an attorney with theSusman Godfrey law firm in Los An-geles who is representing the plaintiffs,said Life Partners had a duty not to be“self-dealing, be truthful” to investorsby putting their interests first.

Mass. Committee Takes No Action on Settlement Bil l

Massachusetts legislators held ahearing April 13 to consider life settle-ment legislation, which allows policiesto be sold two years after issuance.

The Joint Committee on FinancialServices took no action yet on HO2069, sponsored by former House Rep.Peter Koutoujian who accepted a job asa Massachusetts county sheriff in Janu-ary. The bill had carried over from last

year. A similar bill, HO 1203, sponsored

by House Rep. Ron Mariano, also was

carried over from last session. Butit hasn’t been revised after movingthrough the legislative process.

Coleen Elstermeyer, chief of stafffor Mariano, said her office supportsthe Koutoujian version. Koutoujian hadbeen chairman of the Joint Committeeon Financial Services and had orches-trated agreement on the bill by urgingmembers of the life settlement and life

insurance industries to work togetheron it.

“We strongly support the bill andhope it will get moved as soon as pos-sible,” said Elstermeyer.

The next step is for the committeeto report the legislation out favorably,she said in an email. She expects thatto happen soon, but the House is inthe middle of a budget debate, which

will occur the last week of April. Oncethat’s concluded, she said she expectsthe settlement legislation to be takenup.

The Koutoujian bill is based on the

model act developed by the NationalConference of Insurance Legislators,but with a revised definition of strang-er-originated life insurance favored bythe settlement industry.

If it passes, the bill will replace thestate’s viatical law. Massachusetts doesnot regulate life settlements.

Judge Recused OverFriendship with Pardo

Judge Walter Smith of the U.S. Dis-trict Court in Waco, Texas, has recused

himself from five lawsuits naming BrianPardo, chief executive of Life PartnersHoldings, citing his friendship withPardo.

“Brian Pardo, individual defendantand a major stockholder in Life PartnersCompanies, has been a close personalfriend of the undersigned for several

years. The nature of that friendshipmandates recusal,” Smith said in a filinglast month.

The Life Settlements Report raised thepossible conflict of interest in a Feb. 17

story after a person familiar with the sit-uation said Pardo had a close relation-ship with the judge and had entertainedhim on his yacht in Fort Lauderdale,Fla. Smith had declined to return a callat the time on whether he planned torecuse himself from the Life Partners’cases.

The cases have been assigned to thecourt’s Del Rio division.

Numerous class action lawsuitshave been filed against Life Partners on behalf of shareholders and investorsfollowing revelations that the Waco,Texas, provider relied on life expectan-cies from a single source, physician-un-derwriter Dr. Donald Cassidy of Reno,Nev. His estimates are consideredmarkedly shorter than other underwrit-ers in the market.

Life Partners also has been underinvestigation by the Securities and Ex-change Commission.

EEA Fund Availablein South Africa

The Guernsey-domiciled EEA LifeSettlements Fund has a new salesoutlet in South Africa. The fund willbe available to South African inves-tors through Momentum Group andSygnia Life Ltd .

Industry analysts said the main ob-stacle to winning over South Africa’sretail investors is likely to be explain-ing that EEA’s policies are completelydifferent from the poorly performingendowment policies that were popular

in the U.K., but are out of favor now.Mark Alexander, a director of Riv-

erstone Distribution Services, whichhandles the EEA fund’s distributionin South Africa, said EEA has neverbought U.K. endowment policies.

EEA Life Settlements Funds has hadannualized returns of 9.7% in its Britishpound share class since the fund waslaunched in December 2005, Alexandersaid. The share classes in other curren-cies have been quite similar, with the

variations attributable to shifting values

in the international foreign exchangemarket.

“Only policies from the U.S. aresuitable for life settlement funds,” hesaid. “We are provided with certaintythrough the non-contestability rule.

After two years of payments, life as-surors are not allowed to refuse thepayout.”

South Africa has quickly recovered



8/16



LSR News

from the global recession due to itssurging agriculture and mining sectors.South Africa’s central bank is forecast-ing 3.7% economic growth this yearand 3.9% in 2012.

Two New ProvidersLicensed in Florida

Florida insurance regulators recentlyissued licenses to two new providers,allowing them to conduct life settle-ment business in the state.

The licenses, which the industrycontends are tough to get, were grant-ed in February to Vespera Life and

Eagil Life Settlements.There are now 16 providers that arelicensed in the state.

Jan-Eric Samuel, chairman of Ves-pera, based in Luxembourg, said thefirm essentially is dormant.

He said he obtained the license be-cause a customer was potentially inter-ested in buying policies, saying “we’llsee in six months or a year if we haveuse for it.”

Vespera has no staff and he doesnot contemplate applying to any other

states for licenses.Samuel also is chairman of Litai

Assets, a servicing firm in PompanoBeach, Fla.

Eagil, a Woodcliff Lake, N.J.-basedfirm, is licensed in other states as a pro-

vider as well.

Vida Capital, SilverPoint Join ILMA

Vida Capital , an Austin, Texas-based asset manager, and Silver PointCapital , a Greenwich, Conn.-based in-

vestment firm, have joined the Institu-tional Life Markets Association (ILMA)as allied members, ILMA said in an

April 11 statement.Both are active in the life settlement

market.The trade group said allied mem-

bers agree to comply with the tradegroup’s guiding principles focusingon transparency, consumer choice,

fiduciary duty, insurable interest, policyorigination, protection of the insured’sidentity, competition and marketplaceeducation.

SEC Suspends Tradingof MaxLife Fund

The Securities and Exchange Com-mission temporarily suspended tradingof securities in MaxLife Fund .

The SEC said it halted the tradingof securities in the firm because of alack of current and accurate informa-tion about the company concerning thecontrol of its stock, its market price and

trading. The suspension began April 8and was to end today.MaxLife, a Toronto-based firm, most

recently tried but failed to raise moneyto purchase early life settlements from

Trinity Life Settlements of DownersGrove, Ill.

Bennett Kurtz, chief executiveof MaxLife, was not available forcomment.

Thirteen Candidates Vyingfor Five LISA Board Seats

Thirteen candidates, including fourof the five incumbents, are seekingelection to fill five, two-year seats onthe board of the Life Insurance Settle-ment Association (LISA).

The group will hold its election May5, according to an April 4 memo sentto LISA members from Darwin Bayston,the group’s executive director.

Incumbents seeking to hold on totheir seats are Rob Haynie, managingdirector of Life Insurance Settle-ments, a Fort Lauderdale, Fla.-based

broker; Russel Dorsett, director of Veris Settlement Partners, a brokerin Houston; Brian Casey, an attorney

with Locke, Lord Bissell & Liddell , alaw firm in Atlanta; and Ramiro Ren-currell, president of Magna Life Set-tlements, a Coral Gables, Fla.-basedprovider. The fifth incumbent whoseterm is up, Brad Thompson, presidentof Fidelity Assurance Associates,

a financing entity, is not seekingre-election.

Other candidates are: Adam Balinsky,president of Caldwell Life Strategies,a Stamford, Conn., portfolio manager;Terry Barr of Parcside Equity , a New

York-based provider; Robert Finfer,president of Integrity Capital Part-ners, a Bethesda, Md.-based broker;

Vince Granieri, chief underwriter at21st Services, a Minneapolis-based life expectancy provider; David Hartman, amanagement team member with MMS

Advisors in Baltimore, a former LISAboard president; Jim Maxson, an attor-

ney with Morris, Manning & Martinin Atlanta; Jon Mendelsohn, president of Ashar Group, an Orlando, Fla.-basedbroker; Cynthia Poveda, vice presidentfor secondary markets with Crump LifeInsurance Services, a Roseland, N.J.-based broker; and John Welcom, presi-dent of Welcome Funds, a Boca Raton,Fla.-based broker.

Aspinwall HeadsIndex Committee

Dr. Jim Aspinwall, an adjunct pro-

fessor at Florida Southern College inLakeland, Fla., has been named aschair of a committee planning a newlife settlement index, the InternationalSociety of Life Settlement Professionals(ISLSP) said.

At Chase Manhattan Bank, Aspin- wall helped develop the bank’s REALMrisk management and derivatives pric-ing system. He is a co-author of thebook, “Life Settlements and LongevityStructures.”

Aspinwall is currently working on a

new publication tentatively titled, “Mor-tality Synthetics and Derivatives.”

George Polzer, president of ISLSP,said the committee headed by Aspin-

wall will develop a life settlement indexto be made available to financial infor-mation publishers, including Reuters .

One of the committee’s first proj-ects will be to develop “best practices”guidelines for indexation, Polzer said.



9/16



LSR News

Polzer said the other committeemembers are Dr. Geoff Chaplin, anactuary and head of CDAnalytics;Edward Jones, an acquisition and fund-ing agent for The Dominion Fund ;and Dr. Wai Tang, president of KappaLife, a consulting firm that specializesin mortality arbitrage trading.

Veris Settlement OffersLife Settlement Class

Veris Settlement Partners, a New York-based life settlement broker, plansto offer a life settlement master class forfinancial advisers, life insurance agents,

wealth managers, certified public ac-countants and estate planning attorneysMay 3 in New York.

Topics will include the life settle-ment landscape, evaluating and pricing

policies, the regulatory and complianceenvironment, taxation and the inves-tor’s point of view.

To register in advance for free ad-mission, contact Randy Vogt of Veris at631-239-6655 or [email protected].

Hirings & Firings

Ken Ross, commissioner of theMichigan Office of Financial and Insur-ance Regulation, resigned his job effec-tive last Friday.

He was appointed to the job inFebruary 2008 by then-Gov. JenniferGranholm and continued on in the

job during Gov. Rick Snyder’s term,according to a statement from thestate.

Absolute Life Solutions chief ex-ecutive Moshe Oratz has resigned and

his position has been taken over by hisbrother, Avrohom Oratz, the firm’s chieffinancial officer, according to the firm’slatest filing with the Securities and Ex-change Commission.

In addition, Joshua Yifat has beenappointed as the new chief financialofficer.

Moshe Oratz will continue to helpduring the transition, a statement fromthe firm said.

Kevin Malone, president ofunderwriting for ExaminationManagement Services Inc. (EMSI),recently told market players he was

leaving his position to return toconsulting. He had rejoined EMSI a year ago after stepping down from theposition once before in July 2008 to actas a consultant.

Please take notice that pursuant to (a) Section 9-610 of the Uniform Commercial Code as adopted in the State of New York (the “UCC” ) and otherwise applicable state law and (b) that certain credit and security agreement,dated as of February 12, 2010 and amended by the fi rst amendment to t he credit and security agreement dated as of June 3, 2010 (collectively, the “ Credit Facility Agreement” ) in each case among Brentwood Holdings,LLC (the “Borrow er”), the financial institutions parties thereto from time to time as lenders (the “Lenders” ) and Fortress Credit Corp., as program agent (the “Program Agent” ), the Program Agent will offer for sale to thepublic (the “A uction” ) certain collateral (the “Collateral” ) for the Borrower’s obligations under the Credit Facility Agreement, including the Borrower’s interests in a portfolio of 195 life settlement policies with an aggregate

face value of $1.36 billion. The Collateral is being sold on an “ AS IS WHERE IS” basis pursuant to the following terms and condi tions.

TIMING/LOCATION OF INDICATIONS OF INTEREST AND INITIAL BIDS: Indications of interest are due by 5:00pm EDT on April 21, 2011. Initial bids are due by 5:00pm EDT on May 2, 2011. All indications of interest and initial bidsmay be made by hand, certified mail, email or fax to Houlihan Lokey Capital, Inc., as marketing agent to the Program Agent (“Houlihan”) at the address below.

TIMING/LOCATION OF THE AUCTION: Date and Time of Sale: May 11, 2011 at 11:00am EDT. Location of Sale: Sidley Austin LLP, 787 Seventh Avenue, New York, New York 10019. Bidding may take place in person or via telephone.

TERMS AND CONDITIONS OF THE AUCTION. 1. The Collateral will be offered for sale as described above and pursuant to the following terms and conditions. The successful bidder on the Collateral at the Auction must be prepared topurchase all of the Collateral. The Collateral will be sold to the qualified bidder that makes the highest and best bid at the Auction. The Program Agent reserves the right to reject any bid which it deems to have been made by a bidder thatis unable to satisfy the requirements imposed by the Program Agent on prospective bidders in connection with the auction or to whom, in the Program Agent’s sole judgment, a sale may not lawfully be made. The Program Agent reservesthe right to reallocate the Collateral. 2. Subject to executing such confidentiality agreements as the Program Agent, in its sole discretion, deems appropriate, parties interested in bidding at the Auction may obtain additional information anddetail concerning the Collateral and the indication of interest, bid and Auction procedures by contacting Houlihan at the address provided below. 3. To participate in the Auction, the Program Agent requests that interested parties submitan indication of interest by hand, certified mail, email or fax to Houlihan (at the address below) by 5:00pm EDT on April 21, 2011. After the Program Agent evaluates the indications of interest, qualified bidders will be contacted by Houlihan.Qualified bidders must submit an initial bid by hand, certified mail, email or fax to Houlihan (at the address below) by 5:00pm EDT on May 2, 2011, together with an initial deposit equal to 10%of the purchase price indicated in its initialbid (the “Initial Deposit”) which will be held in escrow with a third-party nationally recognized escrow agent. If a bidder withdraws prior to the Auction or does not submit the Winning Bid or is not the Back-up Bidder (as described below),its Initial Deposit will be returned. If a bidder submits a Winning Bid, but does not provide the required Deposit or the Balance (as described below) its Initial Deposit will be forfeited. 4. The Collateral is being sold on an “AS IS WHEREIS” basis, without recourse, warranty or guaranty, whether express or implied. Neither the Program Agent nor any Lender makes or will make any representations or warranties with respect to the Collateral, and the sale of the Collateralis specifically subject to all taxes, liens (other than those of the Program Agent and the Lenders), claims, assessments, liabilities and encumbrances, if any, that may exist against the Collateral under the UCC or other applicable law.Without limiting the generality of the foregoing, the Program Agent and each Lender expressly disclaims all representations and warranties relating to the origination of any policy, the presence of insurable interest under any policy, thedeath benefits under any policy, the condition of title to, the completeness or accuracy of any description of, or any other rights, liabilities or obligations that may accompany any of the Collateral. 5. The Program Agent may require certainrepresentations from bidders to ensure the bidders are qualified and the sale complies with applicable law. 6. In order to participate in the Auction, each potential bidder must either join the Auction via telephone or be physically present atthe Auction, and demonstrate to the satisfaction of the Program Agent, in its sole discretion, that each such bidder has the financial means and is otherwise qualified to close on any bids made at the Auction. The Program Agent reserves

the right to reject any bid or all bids at the Auction, to announce such other terms at the Auction as may be commercially reasonable in the Program Agent’s sole discretion, or to accept non-conforming bids. Further, the Program Agentreserves the right to cancel, postpone or adjourn the Auction by announcement made at the Auction, either before or after the commencement of bidding without written notice or further publication. The Program Agent reserves the rightto credit bid at the Auction on behalf of the Lenders, either directly or through one or more designees or assignees, all or any portion of the then outstanding secured indebtedness of such Lenders. The Program Agent reserves the right toimplement such other terms or conditions prior to or at the Auction regarding the Auction procedures as the Program Agent, in its sole discretion, determines to be commercially reasonable under the circumstances. 7. The Program Agentwill determine the highest and best bid, based on all relevant considerations including, without limitation, price, financial means to consummate a sale and mechanics and timeliness of closing, for the Collateral made by a qualified bidderat the Auction (the “Winning Bid”). The Program Agent reserves the right to select the second highest and best bid for the Collateral by a qualified bidder at the Auction (“Back-up Bidder”) as a back-up bid (the “Back-up Bid”). Unless theWinning Bid is made by the Program Agent on behalf of the Lenders or their designees or assignees via credit bid, the party submitting such Winning Bid (the “Successful Bidder”) must provide, at the Auction, a cashier’s, bank or certifiedcheck made payable to the Program Agent in the amount of not less than 10% of the Winning Bid less the amount of its Initial Deposit (the “Deposit”). The Successful Bidder shall deliver the Balance of the Winning Bid (the “Balance”)by wire transfer or certified funds within twenty-four hours of the conclusion of the Auction (the “Payment Deadline”). If the Successful Bidder fails to pay the Balance by the Payment Deadline, its Deposit will be forfeited to the Program

Agent as liquidated damages. Following such default, the Program Agent may sell the Collateral to the Back-up Bidder, if any, without further notice. 8. Upon indefeasible payment in full of the Winning Bid by the Successful Bidder or theBack-up Bidder, as applicable, the Program Agent will cause to be delivered to such Successful Bidder or its qualified designee a bill of sale covering the Collateral.

REQUEST FOR FURTHER INFORMATION All inquires concerning this Notice of Public Auction and the terms and conditions of the Auction should be made to: Jeff Bollerman, Houlihan Lokey Capital, Inc., 245 Park Avenue, 20th floor, New York, NY, 10167, telephone:(212) 497-7968, facsimile: (212) 661-3070, email: [email protected]. The Program Agent reserves the right to require any person making such request to: (i) disclose the person or entity on whose behalf such information is beingsought and (ii) maintain the confidentiality of the information provided to it.

NOTICE OF PUBLIC AUCTION



10/16



LSR Legislation Update

Previous 12 Months Legislative Activity

State Bill Bill Source Last Action Date

Arizona SB 1461 NCOIL Passed Senate April 19, sent to governor. April 20, 2011

Connecticut SB 172 NCOIL Public hearing on consumer-disclosure bill. Feb. 22, 2011

Delaware HB 88 Adds viatical settlement contract to Delaware securities law; assigned to House Judiciary Committee. April 13, 2011

Indiana SB 400 NCOIL First reading of a consumer-disclosure bill, referred to Committee on Insurance and Financial Institutions. Jan. 11, 2011

Indiana SB 415 NCOIL First reading of a consumer-disclosure bill, referred to Committee on Insurance and Financial Institutions. Jan. 11, 2011

Massachusetts HO 2069 NCOIL Regulates market, includes anti-STOLI provision; hearing in Joint Committee on Financial Services. April 13, 2011

Massachusetts HO 1203 NCOIL Regulates market, includes anti-STOLI provision; hearing in Joint Committee on Financial Services. April 13, 2011

Michigan HB 4230 Printed bill filed, anti-STOLI provisions. Feb. 15, 2011

Michigan SB 0129 Anti-STOLI provisions; referred to Committee on Insurance. Feb. 10, 2011

New Hampshire SB 74-FN NCOIL Makes changes to STOLI definition. Re-referred to committee. Feb. 22, 2011

New Mexico SB 410 NCOIL Action postponed indefinitely. Feb. 4, 2011

New York S0 4427 Revises law on licensure, reporting and disclosure requirements; sent to Senate insurance committee. April 5, 2011

New York A 7143 Revises law on licensure, reporting and disclosure requirements; sent to Assembly insurance committee. April 13, 2011Virginia HB 2529 NCOIL Consumer-disclosure bill tabled by voice vote in Committee on Commerce and Labor. Feb. 1, 2011

1 NCOIL: National Conference of Insurance Legislators 2NAIC: National Association of Insurance Commissioners

Items updated this issue appear in blue.

2-year Waiting Period

Life Settlement Laws

P

P

P

PP

P

P

P

P

P

UnregulatedPre-2008 Laws

5-year Waiting Period

Other Source

Pending

Pending D

D

D

D

D

D

D

D

D

D

D

Settlement Disclosure Required

LD

LD

Limited Disclosure Required

Washington

Oregon

ArizonaNew Mexico

Texas

Oklahoma

Kansas

Colorado

Utah

NevadaCalifornia

Idaho

MontanaNorth Dakota

South Dakota

Nebraska

Minnesota

Iowa

Missouri

Arkansas

Miss.Alabama

Louisiana Florida

Georgia

Tennessee

Wisconsin

IllinoisIndiana

Ohio

Michigan

Kentucky

NewJersey

New York

Conn.R.I.Mass.

New Hampshire Maine

Wyoming

Pennsylvania

VirginiaWest Virginia

Delaware

Maryland

Vermont

North Carolina

SouthCarolina

Alaska

Hawaii

4-yr. waitingperiod



11/16



Continued from front page

rulings in and outside New York, itfurther legitimizes the life settlementindustry.”

John Hancock denied a request inDecember 2009 by a wealthy, 76-year-old woman to convert her convertibleterm policy, alleging that the conversionconstituted a new policy. The case waspresented to the depart-ment July 17 and the opin-ion was issued in a Feb.25 letter. Gary Edelston, alife settlement broker withGE Insurance Services of

Minneapolis, representedin the case by Shapo, saidthe letter formalized a de-cision expressed verballyby the department’s officeof general counsel last fall.

The New York insurance department,in the Feb. 25 letter by Assistant DeputySuperintendent and Counsel Paul Zuck-erman, said that John Hancock could notdeny the insured’s request to convert herterm policy because she planned to sellit. The department said a conversion of a

policy without an increase in the deathbenefit is merely the continuation of thesame policy, state law doesn’t preventsuch a conversion, and the state Legisla-ture did not intend its insurance laws tolimit such conversions.

Zuckerman said that John Hancockhad never before asserted the need torevisit the insurable-interest issue inother policies it has converted to per-manent coverage. “Surely, JHNY is notasserting that its past conversions wereinvalid,” the decision said.

Williams said that John Hancock’sposition was contrary to New York in-surance law. “I think the departmentgot it right,” he said.

“Industry practice doesn’t considerthe converted policy to be a new policy,”said Chiahua Pan, an attorney in New

York with the law firm Virtual Law Part-ners. “There’s no application, there’s nounderwriting, there’s no nothing.”

Larry Simon, chief executive of SanDiego-based provider Life SettlementSolutions, said in an email that the de-cision reaffirms the rights of policyhold-ers. “A life insurance policy is a contract,and the insurer should not be able tounilaterally change the terms of the con-tract to suit its own interests,” he said.

Industry insiders estimate that about15% of the policies headed for settle-ment are term-limited and require con-

version to permanent status to attractinvestors.

However, Stephen Stanton, chair-man of Downers Grove, Ill.-based pro-

vider Trinity Life Settlements, whichspecializes in term conversions, said he

wondered how much impact the opinion would have on the life settlement marketbecause it’s a reflection of what is alreadycommon insurance industry practice.

Katie Redle, a manager of life settle-ments marketing with Akron, Ohio-based broker ValMark Securities, saidthat this was the first scenario of a car-rier not allowing conversion. “Had theybeen able to limit it, it obviously wouldhave limited the number of policies

available for settlement,” she said.Pan said that John Hancock has

been a problem in the life settlementbusiness. “I think John Hancock’s effort

was yet another desperate attempt tostem the tide,” she said.

Williams said he believes that it is very important that New York took thisposition about converting term policiesbecause it is a “bellwether state” for

insurance regulation. “Other states willtake notice,” he said.

Stanton said he doubts other states will even take up consideration of suchcases. “They’d rather just yield to aprecedent in another state,” he said.

The opinion could impact a caseagainst John Hancock in U.S. District

Court in Los Angeles. JohnHancock has been ac-cused of undermining alife settlement in Californiaby paying the policyholderthe same $45,000 that Cov-

entry First had offered tobuy the policy, a movethat prompted Coventryto file suit in March for in-terference with an existingcontract.

“You wonder if the New York case will play into that at all,” said Redle.

Shapo, who is also representingCoventry in the case, said that the New

York opinion could impact the Califor-nia case. “If and when the question ofinsurable interest on a term conversion

is addressed in that case, we wouldhope that the court would take thesame position,” said Shapo. “We thinkthe New York opinion reached the rightresult with sound reasoning behind it.”

Robin Weinberger, director of na-tional accounts for the Fort Lauderdale,Fla.-based broker Life Insurance Set-tlements, said some companies will doanything they can to stop a settlement.

“Insurance companies have a badtaste in their mouth with life settle-ments because of the negative experi-

ence they had with” stranger-originatedlife insurance (STOLI), she said. “I thinkthat life settlements got a lot of badpress because of STOLI. Now thatSTOLI is pretty much over, it’s stillhaving a negative residual impact.”

Industry observers were skepticalabout John Hancock’s fear that the New

York case was a STOLI. Every state thathas a life settlements law, such as New

LSR Term Conversion

“Industry practice doesn’t consider the

converted policy to be a new policy.

There’s no application, there’s no

underwriting, there’s no nothing.” — Chiahua Pan

Virtual Law Partners



12/16



LSR Term Conversion

York, also has a waiting period to settlea policy, said Pan. “The whole point ofthe waiting period is to prevent STOLIproviders.”

The opinion pointed out that STOLIonly arises at the time the policy isoriginally procured, and in this case, nonew insurance was being purchased.

“STOLI claims are to some extentthe stalking horse for the life insuranceindustry’s general attack on the life set-tlement industry,” said Williams.

Redle said she believes that the New York opinion will be good for both thelife settlement market and the policy-

holders because it “keeps the optionopen to settle.”“The department is essentially

saying, ‘we understand you, the [insur-ance] industry, don’t like life settlements,but you can only go so far in stoppingthem,’” said Williams. “At some point,

the life insurance industry will recognizethat the life settlement industry is hereto stay and stop spending a significantamount of resources trying to put it outof business. They’re pushing a very largerock up a pretty steep hill.”

Simon said in an email that theopinion “adds another element of sta-bility” for consumers and institutionalinvestors. Consumers will know thattheir right to transact a settlement willbe upheld and investors will have con-fidence that carriers can’t interfere withunilateral actions.

“It’s good because investors will ac-

knowledge that they can monetize oth-erwise latent assets,” Stanton said. Weinberger said the opinion could

even be turned into a selling point forcarriers, comparing it to the secondaryhousing market.

“If people know there’s a secondary

market … more people might buyinsurance,” she said. “Not because they’replanning on selling it, but because theyknow there’s that option.”

Unless your company holds amulti-user license, it is a viola-tion of U.S. copyright law tophotocopy or reproduce anypart of this publication, or forward it electronically, without

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Two years after the worldwide recession hit, recovery is on the way as investors andprivate equity firms begin to enter the Life Settlements market. Large institutionalinvestors with European connections are setting up for the long term by takingadvantage of the many distressed portfolios available. At , you’ll learn about what types of assets these new marketparticipants are interested in and what their plans are for the long term.

THE INTERNATIONAL

LIFESETTLEMENTSCONFERENCE2011



13/16



Continued from front page

distressed portfolios by Fortress, Apolloand others are necessary before money

will return in a sizeable way to thesecondary market. Whether these bigfirms will remain in the market for thelong term is unclear. Some say theyare merely looking to buy cheap assetsgenerating returns as high as 30% and

will be gone once the market normal-izes. Others believe they’ll turn their at-tention to the secondary market whenthe distressed assets are cleared outbecause of the steep learning curve tounderstand life settlements and the in-

frastructure put in place to buy them.Robin Willi, principal and chief investment officer of fund manager RigiCapital Partners in Cham, Switzer-land, believes that those looking tobuy troubled assets are only here forthe short haul.

“All the guys you’re talking about

tend to be opportunistic players. Theyhave to put money to work institution-ally. They can’t afford to engage withevery provider individually on poli-cies,” Willi said. “I can’t see these guysbothering with the secondary market.”

Scott Rose, principal of Barrett Ad- visors, a Tarrytown, N.Y.-based assetmanagement and advisory firm, said,however, the new players are preparedto remain in the market for the long term.

“No one who is smart is getting intothe business today with a short-term

view,” Rose said. “They’re much more

sophisticated than the ones that got hurt.”Part of that is because they have ahealthy suspicion of the accuracy ofthe mortality estimates and realize thatthis could be a long-term investment,he said.

Although “the big boys” are buying atdeep discounts, they expect the market to

improve in the nexttwo to three years,Rose said. Thismeans if they’rebuying paper today

at a 25% yield,they’re expect-ing to sell it downthe road at a 15%return, he added.

He forecast thatthere will be con-tinued contractionand consolidationin the market. Ul-timately, he saidhe believes pri-

vate equity players

will try to turn thesecondary marketinto a more ef-ficient business

without al l thefragmentation.

“The th ingabout buying adistressed portfoliois it’s a good way

to get into this asset class quickly and ina significant way,” said Nick Williams,an attorney with the Clifford Chancelaw firm in New York. “Overnight youcan own 200, 300, 400 or 500 policies bypurchasing several portfolios.”

He said he believes that some of theinvestors of distressed assets will thenbecome engaged in the market and seeit as “a long time play.”

Some market players forecast thattrading of distressed portfolios willrun through the end of the year whileothers believe it will last for another

year or year and a half. At the same time, market partici-pants say money has started tricklingback into the secondary market. NateEvans, chief executive of Maple LifeFinancial , a Bethesda, Md.-based pro-

vider, said he secured two new fundersin the first quarter and has several morenew entrants who will deploy moneyin the next six to eight weeks.

Meanwhile, the latest public auc-tion for one-half of the HM Ruby Fundportfolio, which holds 195 policies with

$1.36 billion in face value, is expectedto conclude shortly.

A person said there was an agree-ment that if the HM Ruby fund everbreached its loan contract the portfolio

would go up for auction.Indications of interest must be ex-

pressed by today, initial bids are dueby May 2 and the auction itself will beheld May 11, according to a public auc-tion notice published in The Life Settle-ments Report . Houlihan Lokey , aninvestment bank in New York, is han-

dling the auction.The auction is being held because

Brentwood Holdings, a special pur-pose vehicle set up by HM Ruby, wasunable to make payments on a $65 mil-lion loan to Fortress.

Fortress had extended a $65 mil-lion line of credit to HM Ruby to paypremiums in 2010, but the firm neededanother $35 million to pay premiums

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LSR Fortress

is interested in the settlement market.“I know Fortress has looked at this

area for a number of years,” Kroll said.“They’re very smart people. I think it’sa very good indication for the marketin general. If all the big funds wantednothing to do with the life settlementfield, what would that say? The fact thatthey’re interested is a good indication.”

Fortress also is said to be the winnerof the $500 million SageCrest portfolio,but the deal still must be approved bythe judge in U.S. Bankruptcy Court inBridgeport, Conn., before the end of themonth. There were four bidders in the

recent auction for the portfolio contain-ing 123 policies, which include a mix ofpremium-financed and traditional poli-cies. The minimum bid was $35 million.

The winning bid made by Fortress was not immediately available.

The other half of the HM Ruby Fundportfolio, which has been marketedby fund manager Himelsein MandelFund Management , may have founda buyer. The original deal for purchaseof 180 policies with a face value of $1.2billion with Gerova Financial Group fell apart after the Bermuda-based firmfailed to make its initial $1 million cashpayment, a person familiar with thematter previously said. Gerova had in-tended to obtain the policies and loansfrom the fund for $105 million, includ-ing $11 million in cash and $94 mil-lion in Gerova shares. Gerova has been

facing an implosion in its business anda steep decline in its share price.Serious discussions are under way

with a private asset management firm tobuy the portfolio, a person familiar withthe matter said. The terms of the deal

would include an upfront payment andmortality participation, meaning pro-ceeds of every insured’s death would beshared by the new owner and investorsin the fund, the person said.

Rose of Barrett Advisors believesthat the distressed activity is almost atan end.

“I think it has a limited life span left,the end of the year,” Rose said. “All ofthe large portfolios are trading.”

He said he’s worked with portfolioscontaining 1,000 policies, those with400 policies, and currently he’s seeingsmaller portfolios with about 50 policies.

“By the end of the calendar year,anything worth trading I think will havetraded,” Rose said.

Senior Editor Donna Horowitz may be

reached at [email protected].



16/16

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