2013 saw end of market s decline

SPECIAL REPORT, INFORMATION & ANALYSIS OF THE SECONDARY MARKET FOR LIFE INSURANCE 2013 saw end of market s decline Transactions grew to $2.57 billion by donna horowitz Transactions in the life settlement market stopped their precipitous decline last year as the face value of life insurance policies sold reached $2.57 billion, an increase from $2.13 billion the year before. The number of policy sales, at 1,356, represented 10 more deals than in 2011 when the total face value purchased was $5.07 billion and 160 more transactions than in 2012. In all, $406.2 million was paid to purchase policies last year compared to $319.4 million paid the year before, according to The Deal s annual market survey. The survey, compiled from information obtained through public records requests to state insurance departments, includes data from 36 life settlement providers, including seven that reported no transactions at all. That compares to data from 30 providers, including three that didn t buy any policies, for 2012. The survey also found Magna Life Settlements Inc. has overtaken long-time market leader Coventry First LLC in the amount paid and the face value of policies purchased in 2013. Magna paid $153 million, more than double the $71.8 million paid by Coventry. Policies purchased by Magna totaled $930 million in face value, almost triple Coventry s $340.1 million. Coventry still led the market in the total number of transactions, buying 637 policies to Magna s 168. In 2012, Coventry bought 597 policies while Magna bought 85. While Coventry s total face amount dropped further last year $340.1 million in 2013 from $393.8 million in 2012 the story was the opposite for Magna, which experienced a growth spurt. Magna s face amount shot up to $930 million in 2013 from $209.2 million in 2012. Alan Buerger, CEO of Fort Washington, Pa.- based Coventry, declined to discuss trends in his company s business. Market members speculated that Coventry paid less for policies and bought policies with smaller face amounts overall because the firm has been concentrating on small-face or retained death benefit transactions in which a provider buys only part of a policy and the seller keeps part. These deals, which market players say are becoming more popular, allow the provider to pay less or even nothing up front for policies, in return for relieving the seller of paying premiums. When the insured person dies, his or her beneficiary gets part of the payout. Retained death benefit transactions have come under scrutiny from state regulators, including those in California and New York. The California Department of Insurance has proposed rules meant to protect sellers from losing their share of death benefits if buyers lapse policies without notice. The proposed rules would require life settlement providers to pay lapsed portions of death benefits to sellers or allow sellers to take back their entire policies and resume paying premiums. Market players have said such a rule would kill the market in California for this type of transaction. Although retained death benefit transactions are becoming increasingly popular with providers, not all life settlement brokers will handle them. We re not comfortable that the client is protected because there s no regulation over that kind of transaction, Pam Bancsi, director of insurance services with ValMark Securities Inc. of Akron, Ohio, said. We just don t feel it s in the best interest of the client. The Deal s market survey also found that in the last two years, Coventry did the majority of its business in New Jersey. Last year, Coventry completed 460 transactions in New Jersey, paying out $19.5 million for $58.6 million in face value of insurance policies. In 2012, the company bought 464 policies from New Jersey, paying $26.6 million for $112.9 million in face value. It is unclear why New Jersey has been such a busy state for Coventry. However, New Jersey is one of 10 states that has a pre-2008 life settlement law. Unlike newer laws regulating the market, it does not prohibit stranger-originated life insurance. Buerger wouldn t say why Coventry buys most of its policies in New Jersey. He said in an e-mail, however, that speculation that it had anything to do with the state s older law would be incorrect. Proposals to update the New Jersey law have been introduced in the state Legislature during the last two years, but haven t passed. Although Magna s transaction level shot up last year, the top executive of its parent company Vida Capital Inc. has run into difficulties with the lender to one of his funds. Jeff Serra, CEO of Vida Capital and the majority owner of Life Assets Trust SA, is facing foreclosure of the Luxembourg-domiciled portfolio after its lender, Portigon AG, said it had defaulted on a $234 million loan at the end of last year. Dan Young, president of Magna, said the trust s financial problems will have no impact on the Austin, Texas-based provider s ability to buy policies. As far as transactions last year, he said Magna purchased more policies than it had the year before because it had obtained more capital and more funding sources. Young said the company also is getting more efficient at processing transactions. Magna paid $153 million for policies representing $930 million in face amount last year. This compares to spending $24 million for policies with $209.2 million in death benefits in 2012. continued >

2 the LIFE SETTLEMENTS REPORT T h u r s d ay J u n e 1 9 2 0 1 4 < previous Young said Magna also tends to buy mediumto large-size policies ranging from $1 million to $10 million in face amount. We re definitely seeing capital in the market, he said. We re definitely seeing good capital flow. The quality of policies is improving. I think a lot of the bad news is behind us and people see life settlements as a viable opportunity for investment. Settlement Group Inc. came in third place in the ranking, with 71 transactions last year, compared to 53 in 2012 and a fourth-place ranking. Joe Lucent, president of the St. Mary s, Ga.-based provider, said that about half of his purchases were for policies with short life expectancies ranging from two to four years. In addition, face amounts were smaller. Settlement Group paid $12.5 million for 71 policies with $107.2 million in face value last year. Although it did fewer deals in 2012 53 of them Settlement Group paid almost twice as much for them at $24.7 million. The face amount, at $149.7 million in 2012, also was higher than last year. Lucent said that in 2013 he purchased policies for 12 different buying groups, which was far different than the year before. I see a lot of small investment groups that band together, he said. There s a group of doctors out of one state, a group of businessmen out of another state. However, in 2012, he said he was buying almost exclusively for insurance company AmTrust Financial Services Inc. Lucent said fees for providers continue to remain low compared to previous years. Fees used to range from 2% to 4% of face amount, but now half a percent is the norm and some buyers only will pay a flat fee of $10,000, regardless of the face amount. While providers are seeing their fees drop, the costs of doing business have gone up as insurance regulators require the filing of various reports, including audited financial statements every year. In addition, some states require errors and omissions liability coverage while others require bonds. The regulation of providers has become really onerous, Lucent said. We re carrying the cost and liability and we continue to get squeezed. Legacy Benefits LLC, which came in third place in 2012 with the purchase of 54 policies, fell to sixth place last year with the purchase of 38 policies. The New York-based provider s face value, at $40.2 million in 2013, was similar to $41 million in 2012, however. Legacy paid $6.63 million last year compared to $10.2 million the year before. I m disappointed in the overall state of the secondary market, Zohar Elhanani, CEO of Legacy Benefits, said. The numbers do not reflect the recovery the industry was hoping for. I think the focus has been on distressed portfolios and investors looking to buy up distressed portfolios. Like other providers, however, he said he represents sellers and buyers in the tertiary market, where portfolios and individual tertiary policies are traded. At the same time, Elhanani said he believes the secondary market is more attractive than ever for investors due to improved methods for determining life expectancy estimates. There s more data about actual-to-expected performance of different underwriters, allowing investors to make better decisions. The STOLI headlines have been reduced, he said. In addition, yields from life settlement investments range from the mid- to high-teens, with greatly reduced volatility. And this is all in a low-interest environment, he added. The challenge has been the supply. I attribute that to the lack of capital flows to the market that results in reduced marketing to consumers and to consumers advisers, Elhanani said. The industry should focus on marketing and creating awareness. As an industry, we should market to consumers. It s been done in the reverse mortgage industry. It does take a budget, he said. Life Equity LLC had a better year last year, jumping to fourth place with 65 transactions from fifth place with 50 transactions in 2012. The Hudson, Ohio-based provider paid $10.2 million for policies with $121.9 million in face value last year compared to spending $12 million for $137.7 million in death benefits in 2012, reflecting a trend toward smaller policies. Cyndi Poveda, CEO of Life Equity, said she is seeing investor appetite for policies broadening. Buyers will consider viaticals, policies with longer life expectancies and retained death benefit transactions. We feel this trend is continuing. We feel the market is on a good trajectory, she said. There s definitely been a lot of inquiries and new capital coming to the market. In addition, Poveda said she s seeing activity by more brokers who are bringing more policies to the market. There s a better tone in the market, she said. Some of the headlines have gotten nicer. Berkshire Settlements Inc. fell to seventh place in the ranking last year from sixth place the year before, although its numbers are similar. The Atlanta-based provider completed 37 transactions in 2013, paying out $14.7 million for $50.9 million in face amount. This compares to 41 settlements purchased for $15.5 million with $47.9 million in face amount the year before. It s been steady for us. Not much has changed. We have had the same funders for the last five or six years, said John Dallas, CEO of Berkshire Settlements. He said his firm concentrates on small-face policies ranging from $25,000 to $500,000 in face amount. He forecast that the market s overall volume will remain about the same this year. I think it will be flat again this year, Dallas said. I think it will continue to grow in 2015 and 2016. I think consumers are looking for more options. continued >

3 the LIFE SETTLEMENTS REPORT T h u r s d ay J u n e 1 9 2 0 1 4 < previous He said the market may still be suffering from a lack of public awareness. I think we re going to have to widen our net. We can t just rely on life insurance agents to bring our product, Dallas said. He said he would like to see other professionals such as elder law attorneys, estate planners, certified public accountants and registered advisers get involved in bringing policies to the market. CMG Life Services Inc. moved up to eighth place in the ranking last year from 10th place the year before, although it bought the same number of settlements in the secondary market 30 of them. CMG spent $19.7 million for $162.9 million in face value last year compared to $29.2 million for $208.1 million in face value in 2012. Gary Brown, CEO of the Naples, Fla.-based provider, said his company continues to focus on large policies with face values averaging $5 million. About 75% of the policies it purchases are tertiary policies and 25% are secondary policies, he estimated. Most state insurance departments don t collect information on tertiary trades, which aren t regulated. He said CMG bought 126 policies in all last year, 96 of them tertiary policies and 30 secondary policies. Overall, the company spent $126 million to buy policies representing $585.7 million in death benefits, he said. He said he s seeing buyers returning to the market. We re bidding on some policies for one group literally as we speak. We put bids on a pretty substantial buy, Brown said. We ve been contacted by four different investor groups. There are very positive conversations. He said he expects this year to be about the same as last year in terms of volume. Investors are simply going to have to get more comfortable with the asset class and get away from their fear of headline risk, Brown said. Magna president Dan Young To give them an understanding of the asset, he said market members need to provide prospective investors with their track records. I give people a snapshot of every policy we ve ever bought and where it is on the LE spectrum, he said. For example, he said of the 540 policies CMG purchased before 2009, there have been 119 maturities, or 22% of the pool. The average internal rate of return after all fees is 18.2%, above the 11% targeted. Of the policies that have not yet matured, 65% still are within the life expectancy estimate, he added. So far, life settlement brokers say they re seeing an improving market for the first half of this year, continuing a trend they experienced last year. What we re seeing in 2014 is pretty consistent with what we saw in 2013. The market is active, Bancsi of ValMark said. What I m hearing is that there s plenty of capital out there. If it s a good policy, we re getting multiple bids, just like we did last year. But in talking to providers, she said they tell her the policy flow still is slow for them. Although she s seeing more competition for policies, providers aren t jumping at everything. If it didn t price for me, I don t get any bids. They re not bidding on junk, Bancsi said, referring to policies with life expectancy estimates that are too long. She said she expects the market to continue to grow during the next five to 10 years. Will it get back to the high point? I m not sure, she said. The high point for the life settlement market is generally considered to be the period from 2006 to 2008 when volume was inflated by STOLI policies. Numerous carriers sued to rescind those policies, which have since fallen out of favor with investors. Bancsi repeated the oft-quoted statistic that 10,000 people are turning 65 every day. She said it foretells a favorable outlook for the market. Robin Weinberger, director of national accounts in Boston for life settlement broker Life Insurance Settlements Inc., agreed with Bancsi s assessment. I think there s more confidence by investors on life expectancies because they re so much longer. They re more in line with life insurance life expectancies, she said. But she said it will still take more time for the impact of STOLI to recede. The false effect of STOLI business has taken time to wear off, she said. I think it will take another year or two. It s never going to be a huge market. It was falsely inflated. Weinberger said she s been able to help more people sell their policies than in past years. I m hoping 2014 and beyond will be better, she said. n

4 the LIFE SETTLEMENTS REPORT T h u r s d ay J u n e 1 9 2 0 1 4 2013 TOP 15 LIFE SETTLEMENT BUYERS Provider Settlements Total Paid Face Value Percent of Face Paid Total Considered Offered Coventry First 637 $71,842,820 $340,059,625 21.13 698 698 Magna Life Settlements Inc. 168 152,973,388 930,030,475 16.45 1,441 334 Settlement Group Inc. 71 12,477,122 107,249,459 11.63 334 100 Life Equity LLC 65 10,246,208 121,905,435 8.41 1,734 310 Abacus Settlements LLC 56 13,494,490 119,389,896 11.30 745 151 Legacy Benefits LLC 38 6,629,401 40,194,884 16.49 1,660 325 Berkshire Settlements Inc. 37 14,654,763 50,874,258 28.81 895 100 CMG Life Services 30 19,700,750 162,907,000 12.09 FairMarket Life Settlements Corp. 30 10,740,525 59,563,719 18.03 Institutional Life Services LLC 29 11,624,400 113,750,000 10.22 1,031 113 GWG Life Settlements 28 14,100,625 82,768,542 17.04 905 Habersham Funding LLC 27 8,569,848 27,208,212 31.50 1,298 80 Maple Life Financial Inc. 23 3,616,465 27,707,103 13.05 1,253 51 RiverRock Partners LLC 21 4,034,966 16,174,796 24.95 Montage Financial Group Inc. 21 7,464,199 32,150,000 23.22 1,281 362,169,970 2,231,933,404 11,994 2,262 2012 TOP 15 LIFE SETTLEMENT BUYERS Provider Settlements Total Paid Face Value Percent of Face Paid Total Considered Offered Coventry First 597 $72,350,438 $393,775,917 18.37 641 640 Magna Life Settlements Inc. 85 24,000,414 209,213,951 11.47 Legacy Benefits LLC 54 10,186,419 40,992,942 24.85 2,026 259 Settlement Group Inc. 53 24,672,176 149,659,468 16.49 Life Equity LLC 50 12,044,947 137,749,220 8.74 1,948 181 Berkshire Settlements Inc. 41 15,509,684 47,904,298 32.38 1,198 259 Abacus Settlements LLC 36 6,545,565 76,758,666 8.53 1,713 119 Credit Suisse Life Settlements 34 40,186,783 302,500,000 13.28 42 40 Maple Life Financial Inc. 30 8,152,680 49,882,062 16.34 1,430 60 CMG Life Services 30 29,199,712 208,133,307 14.03 Institutional Life Services LLC 25 10,782,929 85,452,927 12.62 1,449 120 Habersham Funding LLC 24 11,850,660 33,815,227 35.05 1,980 71 Lifeline Program 20 5,477,101 61,374,977 8.92 1,367 104 Institutional Life Services (Florida) LLC 15 6,796,995 44,900,000 15.14 Montage Financial Group Inc. 14 2,914,869 53,300,000 5.47 1,108 280,671,372 1,895,412,962 13,794 1,853

The Life Settlement Report s Webcast 2014 Market Outlook for Life Settlements Thursday, August 14, 2014 1 pm ET/10 am PT Moderated by The Life Settlement Report s Donna Horowitz on August 14th, listen to The Deal s live webcast where, we ll aim to answer questions about the latest developments in the market. After just 60 minutes, you ll leave with a refreshed perspective on the key factors that will make a difference in your firm s success for 2014 and beyond. For sponsorship opportunities please contact Emily Newman at enewman@thedeal.com To register for the Life Settlements webcast please contact Kaveh Mama at kmama@thedeal.com To view our other webcasts, go to www.thedeal.com/knowledge/webcasts.php