Everything is getting better—part III
This is Part III of the 4th Life Settlement Roundtable sponsored by National Underwriter Life & Health, the parent publication of Settlement Watch. Held in Washington, D.C. on May 14, 2008, the session featured life settlement company executives discussing the nuts and bolts of settlement business operations. They identified various process challenges but expressed tremendous confidence in the value of what their firms provide to consumers. Upcoming issues of Settlement Watch will carry more segments of this intriguing roundtable. The moderator is NU Editor-In-Chief Steve Piontek.
What companies are doing
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.
(General laughter.)
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.
Choice of product
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.
Small-face 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 smaller face 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.
(General laughter.)
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."
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 a 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.
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.
Lumpy process
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.
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.
(General laughter.)
Reminder: You will be able to read more segments from the 4th roundtable in upcoming issues of Settlement Watch.
Following is a list of participants in the Settlement Roundtable:
Bryan Freeman
President and Managing member
Habersham funding, LLC
Atlanta, Ga.
www.habershamfunding.com
President and Managing member
Habersham funding, LLC
Atlanta, Ga.
www.habershamfunding.com
Steven Piontek
Editor-in-chief
National Underwriter Life & Health
Hoboken, N.J.
www.lifeandhealthinsurancenews.com
Editor-in-chief
National Underwriter Life & Health
Hoboken, N.J.
www.lifeandhealthinsurancenews.com