Legislators quiz regulators on deterring abuse in life settlements securitization

Regulators and legislators clashed with members of the life settlements industry at a congressional hearing today that focused on the risks and merits of life settlements securitization.
Legislators, though intrigued by the concept of the pooled life settlements, were also interested in having regulation to deter abuse.

“The improper securitization of life settlements could ultimately leave countless seniors penniless and innumerable investors broke,” Rep. Paul E. Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, said at the hearing.

Regulators and legislators appeared most sensitive to the possibility of a securitization market for packages of life settlements — bundles of life insurance policies that have been sold over the secondary market.

The Securities and Exchange Commission has already taken a step forward by creating a life settlements task force that will not only consider how federal securities laws apply to life settlements, but also the emerging role of securitization, concentrating on investors, intermediaries and sales practices. That task force will work with the Financial Industry Regulatory Authority Inc., Paula Dubberly, associate director of the SEC’s division of corporation finance said in her testimony.

The SEC has already brought enforcement cases against life settlement sales as investment opportunities, including cases in which the settlement providers made misrepresentations of the underlying policies, she said.

“In the event that possible securities law violations are present in sales of securities through life settlement securitizations, we stand ready to pursue those cases vigorously,” Ms. Dubberly said.

However, members of the life settlements industry raised concerns that regulators were tilting at windmills.

For one thing, these financial products are nothing new, and the market that exists for them is limited, said Jack Kelly, director of government affairs for the Institutional Life Markets Association. Only two rated securitization transactions have occurred: a 2009 life settlements securitization that involved American International Group Inc. — the only pure life settlements transaction to date—and a 2004 securitization by Legacy Benefits Corp. that included life settlements and annuities.

“Since these are the only known transactions, it brings to question why suddenly there is such increased attention to the securitization of life settlements,” Mr. Kelly said.

Furthermore, representatives from Credit Suisse Group AG and The Goldman Sachs Group Inc. indicated that they have never securitized life settlements. However, while Credit Suisse wouldn’t rule out participating in a “properly structured life settlement securitization,” Goldman Sachs has no client mandates or plans to execute these transactions, according to testimony.

Still, both participate in life settlements, and Goldman owns a longevity index.

“We do not see the life settlement securitization market as a cause for concern for the financial system as a whole,” Goldman managing director Steven T. Strongin said in his testimony. “However, there does appear to be special issues in terms of consumer protection in life settlements in general that may be appropriate for Congress or a regulator appointed by Congress to address.”


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SEC creates life settlements task force

SEC creates life settlements task force Specifically, the SEC is concerned with the securitization of life insurance policies that have been sold on the secondary market, as well as whether insured individuals and investors know what they are getting into, insiders told the newspaper.

Last month, Mary Schapiro, chairman of the SEC, asked her staff to create a task force that combines employees from the agency's enforcement, corporate-finance and trading-and-markets divisions, an insider told the Journal.

Reports of the SEC's interest in the packages of life settlements arrived on the heels of legislators' increased interest in the products. Rep. Paul E. Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, yesterday announced a Sept. 24 hearing to discuss the securitization of life settlements.

Ms. Schapiro's interest in the world of life settlements goes back as far as April, when she submitted a comment letter on the topic to Sen. Herb Kohl, D-Wis., chairman of the Senate Subcommittee on Aging. She noted that the SEC has jurisdiction over a transaction in which a senior sells a variable-life-insurance policy on the secondary market, as well as a case in which the senior uses the policy sale's proceeds to buy securities.

However, Ms. Schapiro noted that the investment side of a transaction can also be subject to SEC oversight.

“The second part of the transaction — the purchase of an interest in the life insurance policy or a pool of policies — can be structured in a variety of ways. But in many cases, this transaction will involve the sale of a security and thus be subject to the commission's jurisdiction,” Ms. Schapiro wrote in her April 28 letter to Mr. Kohl.

“Typically, the management activities and services provided by the party who arranges the life settlement and sells the interest to an investor will bring the transaction within the definition of an ‘investment contract,'” she wrote.

A call to the SEC seeking further comment wasn't immediately returned.


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GHF GROUP LIFE SETTLEMENT FUND SURPASSES TARGETS

“This is a result of offering a protected investment with guaranteed returns in an environment of devastated equity markets. Sophisticated investors are rapidly realizing the benefits of the life settlement industry and are quickly trying to secure their own piece of the pie.” said senior trader Nelson Garber.

A life settlement is a financial transaction in which an existing life insurance policy owner sells their policy to a third party. The purchaser then becomes the beneficiary of the policy in addition to assuming responsibility for all subsequent premium payments.

In general, life settlements are an option for high-net-worth policy owners aged 65 or older who want or need access to cash. Independent estimates report that 20% of policies have a market value that well exceeds the cash value offered by the carrier. The majority settled policies are Universal Life (UL) policies which provide coverage for the entire life of the insured. Policies typically have a face value of between $100,000 and $10,000,000 and have been in-force for over two years so as to be outside of the insurance company’s contestability period.

Global Hedge Fund Group Ltd. (GHF Group) has been developing customized alternative investment solutions and providing corresponding advisory services since 2000. Our priority lies with hedge funds and private equity. GHF Group has also become a leader in providing funds in the life settlement industry. All products are designed to provide sustainable and above-average rates of return. Instability and risk are reduced by well-structured investment strategies whose clarity and success are established. Our team of competent professionals has the distinction of reliability, effectiveness and promptness. GHF Group's expertise in hedge funds is enhanced by a close association with leading research firms, successful hedge fund managers, and brokerage houses whose macro research gives its research team an edge in understanding world market trends, enabling them to make better hedge-fund allocation decisions. For more information, visit Global Hedge Fund Group’s website at ghfgroup.net.

This news release may contain forward-looking statements, as defined by securities laws, including statements about the financial outlook and business environment. Any such statements are based on current expectations and involve a number of risks and uncertainties. Important factors, including those mentioned in this news release, that could cause actual results to differ materially are set forth in the company’s current annual report and subsequent filings. They include risks and uncertainties relating to the pace at which GHF Group adds new clients or at which existing clients use additional services, the value of global and regional financial markets, and the dynamics of the markets GHF Group serves. GHF Group encourages investors to review filings in conjunction with this announcement and prior to making any investment decision. The forward-looking statements contained in this news release speak only as of the date of release, and the company does not undertake to revise those forward-looking statements to reflect events after the date of this release.

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Ratings affirmed for New York arm of Symetra Life Insurance

Symetra Life Insurance Co. and its New York subsidiary had their ratings from A.M. Best Co. affirmed because of their growth in a difficult economy.
The ratings service affirmed the financial strength rating of “A” (Excellent) and issuer credit ratings (ICR) of “a+” of Symetra, based in Belllevue, Wash., and First Symetra National Life Insurance Co. of New York.
The ratings reflect the organization’s solid liquidity and risk-adjusted capital position, the consistent operating profitability of its four business segments and its continued progress in delivering strong top-line growth despite the difficult economic climate, the ratings service said. The affirmation also reflects that Symetra’s balance sheet carries somewhat less asset risk than many of its similarly rated peers, with limited exposure to the subprime and Alt-A residential mortgage markets.
A.M. Best notes that the investment portfolio’s overall unrealized loss position has narrowed significantly since its peak in the first quarter of this year. The ratings service noted that Symetra maintains a modest level of intangible assets on its GAAP balance sheet relative to its peers.
A.M. Best indicated that offsetting these strengths is the potential for additional asset impairments given the current economic conditions, the company’s increasingly heavy concentration in spread-based and other commoditized product lines, and its exposure to reinvestment risk within its large block of immediate annuities and structured settlements, which accounts for slightly less than one-half of its statutory general account reserves.
Symetra, according to A.M. Best, will continue to be challenged to maintain profitable spreads as the long-term nature of its structured settlement liabilities makes finding suitable investments difficult. The company’s spread-based product concentration is further exacerbated by its recent strong growth in fixed annuity sales, which accounted for nearly 90% of the company’s total product sales during the first half of 2009.
But A.M. Best noted that Symetra continues to execute on its strategies to closely manage its asset/liability duration matching (ALM), which have led to improved cash flow testing results. Additional offsetting factors include concerns over the near-term profitability of the group medical stop loss business, although A.M. Best noted that Symetra has a history of profitability in this product line.


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Alternative Investments, Illiquidity, And Endowment Management

I am a risk manager first, and a profit maker second.  I tend not to trust solutions that are "magic bullets" unless there is some barrier to entry — why can you do it, and few others can?  Knowledge travels.

So, regarding the "endowment model" of investing, I have been partly a believer, and partly a skeptic.  A believer, because endowments do have the ability to invest for the long-term, and not everyone else does.  A skeptic, because many endowments were taking on too much illiquidity.

Liquidity is an underrated factor for investors who have charge over portfolios that have a long-term stable funding base.  I had that advantage once, as the main investment manager for an insurer the had a large portfolio of structured settlements.  In insurance liabilities, nothing is longer than a portfolio of structured settlements.

Buy long-dated debt?  Illiquid debt?  If the pricing is right, sure; you should have to pay to rent the strength of a strong balance sheet, where the funding is intact.  WHen managing that company's portfolio I didn't have to worry about a run on the portfolio, because I kept more than enough liquid assets to satisfy the demands of policyholders should they decide to surrender.


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Gold ETF backed Gold Participating Bond scheme for resource finance

In the opening presentation on Mining Journal's Gold Day, sponsor Steve Sharpe of investment banker Canaccord Adams' London office unveiled an innovative financing scheme which can be used to help raise finance for a gold related resource project .  The idea behind what it calls a Gold Participating Bond, is a proprietary mechanism developed by Canaccord Adams that affords the investor full gold price exposure, whilst achieving a running yield, by circumventing conventional financial markets and pre-purchasing gold direct from the mining company, with settlement by way of a gold ETF (currently the Zurich Kantonal Bank's gold ETF).

The idea is that in effect the mining company issues the bond which is based on a maximum of 20% of the mine's annual gold production giving a strong degree of commercial safety.  The bond is set on a fixed term and carries a set coupon - in the case of the example put forward by Sharpe at 8% per annum - and is repayable by the issuer (the mining company) in equal quarterly payments in the form of the gold ETF.  Thus, in effect, the bond becomes a securitised gold loan repayable out of future production.

Sharpe told Mineweb that this is the kind of deal he used to structure when he worked for Rothschilds in London, although in those days the ETF element was not available.

He reckons the Gold Participating Bond will be of particular interest to funds looking for pure gold exposure, those already holding gold ETFs or those wishing to undertake a phased purchase of gold ETFs at a predetermined price, while carrying a good interest rate and with very limited risk.


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Corporate Powers Should be Limited to Services, Short Term Investments, Task Force Urged

CUNA and NAFCU's Corporate Credit Union Restructure Policy Task Force recommended that corporate credit unions should restrict the products and services they offer to short term investment products and payment processing and settlement services.
The task force said it found “considerable value” in the corporate credit union's payment and settlement services and urged that they keep offering them, even as it acknowledged the same services are available though the Federal Reserve banks.
“Although there are alternatives to some of these services from the Federal Reserve, Federal Home Loan Banks, and commercial banks, the task force believes there is significant value to credit unions in having these services provided by not-for-profit organizations controlled by credit unions,” the task force said.
Since short term credit and deposit accounts are tied to payments and settlement services, the task force recommended that corporate credit unions continue to offer these. But the task force urged that corporate credit unions not be allowed to offer longer term investment products going forward.
“This is the area that has historically and recently created the greatest risk in corporate credit unions. Purely for settlement purposes, a maximum maturity of three months would be sufficient,” the task force said.  “However, the task force believes that on-balance sheet deposit taking and investing in instruments of up to one year could be consistent with an acceptable level of risk. Even within this short maturity limit, care should be taken that interest rate risk is appropriately managed.”
In order to help meet, in a limited way, the needs of natural person credit unions for investment products, the task force urged that corporate credit unions be allowed to own investment CUSOs that would “provide investment advisory and broker/dealer services” to natural person credit unions, but would act in a more advisory role rather than holding long term investments themselves the task force recommended.


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Scoring investment risk

The Bank for International Settlements is thinking the right way in calling for a global standard of ranking financial instruments based on their risk and suitability for different kinds of investors.

The BIS Annual Report argues that financial instruments, markets and institutions all require reform if a truly robust system is to emerge. For instruments, it means a mechanism that rates their safety, limits their availability and provides warnings about their suitability and risks.

One way to do that would be to require investment houses to slap a Surgeon General cigarette-style warning on every exotic security that gets peddled to retail investors.  This warning would be attached to every piece of marketing material for a financial product, disclosed by brokers everytime they pitched the security and prominently displayed on every investor account statement.
For instance, the warning on a structured note could read something like this: “Even though this security is marketed as principal protected, you could still lose everything if the bank that issued it goes bust. Additionally, structured notes generate fat fees for the both the issuing bank and the bank that sells them. In many cases, an investor could achive the same asset exposure by buying a basket of stocks, commodities etc. on his or her own.”
Let’s hope this idea from BIS is adopted by the SEC and the new consumer financial protection agency the Obama administration wants to create.


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Structured notes investors hope MAS report will boost claims

INVESTORS caught out by the structured notes fiasco hope the official report slamming the sale processes used by financial institutions might bolster their legal claims for compensation.
But lawyers maintained yesterday that an investor's chances of success will improve if individual sales staff are found to have mis-sold the Lehman-linked structured notes.They also expressed hope that the findings on this point from the Monetary Authority of Singapore (MAS) will be released soon.
The MAS said on Monday that it is still investigating complaints of mis-selling against individuals - sales representatives, relationship managers or financial advisers - and may take action.
Its comments came as it released its report documenting how the 10 financial institutions that sold complex structured notes had failed to ensure a robust sales and advisory process.
About 9,900 retail investors lost around $520 million invested in structured notes such as Lehman Minibonds and DBS High Notes 5.
The institutions have since been banned from selling similar products. The bans range from six months to two years.
Investors hope that the bans have strengthened their case that the sellers were at fault.
However, the MAS had made it clear that the institutions' failings and the penalties handed out do not automatically mean they will be liable to investors.
Some investors say the report will not help them, but one lawyer said the report offers 'one more piece of evidence in the investor's favour but that alone may not win the case, though it does help bring the investor closer to the finishing line, or help him cross it'.
Another lawyer in corporate litigation said: 'The report generally helps the investors prove that there was really a systemic problem, especially in how the relationship managers were trained.
'If the relationship managers were untrained, then it is unlikely they can fulfil their duties under the Financial Advisers Act.'
The role which sales staff played remains crucial for investors in trying to prove that they were mis-sold, said lawyers.
Investors will typically need to relate what exactly they were told and what information they relied on from the staff before they decided to invest in the notes.
The challenge investors face with such cases of mis-selling or misrepresentation is one of proof, but most information related by sales staff is done verbally so there would not be any records.
'This is where the credibility of the staff is crucial and if it is known that he has already been singled out by the authorities for inappropriate behaviour during the sale process, then that may tip the scales in favour of the investor,' said another lawyer.
That is why if details of the investigation into individuals are released, they may help the legal proceedings.
Meanwhile debate continues on whether investors have received fair compensation as the settlement amounts released by the MAS appear surprisingly low.
For example, brokerages DMG & Partners and UOB Kay Hian were out of pocket by only $20,000 and $90,000 respectively, a small fraction of the total sums their clients invested in the notes.
DBS Bank paid out $7.6 million, about a tenth of the $70 milion to $80 million it had set aside to compensate investors in Singapore and Hong Kong.
The MAS said the different compensation sums were determined by each institution's customer profile and business model. Brokerages, for example, mostly perform transactions instructed by clients without necessarily giving advice, so the cases of mis-selling may have been fewer.
DBS said that most of its customers were relatively sophisticated - two out of three DBS High Notes 5 clients were priority banking customers, while 80 per cent of the customers were below the age of 60.
MAS had noted earlier that most of the 'vulnerable' investors - the elderly or those with little income, low levels of formal education or little investment experience - had been offered 'full or partial settlement'. For the 'few cases' among this group who did not receive any settlement offer, the financial institutions had provided 'good grounds' for their decisions.

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Alternative Investments Under Scrutiny

Scrutiny of the due diligence performed by independent financial advisors and broker-dealers on alternative investments has increased dramatically, according to experts.

Regulators and arbitration panels expect member firms and their registered representatives to conduct significant due diligence and to communicate their findings to investors, said Derek C. Anderson, Esq., an attorney with the law firm Michaels, Ward & Rabinovitz LLP, a securities litigation and regulation law firm with offices in Boston, Boulder, Colo., and West Palm Beach, Fla.

“More alternative investments are being sold and FINRA is focusing its examination efforts on the sales practices surrounding alternative investments” because of the scandals that have hit Wall Street, said Anderson, who spoke on the topic during a recent webinar sponsored by the Financial Services Institute, an advocacy organization for independent financial advisors and broker-dealers.

Regulators are looking closely at how advisors are handling investments in hedge funds, asset-backed securities, derivative products, structured products, bonds and bond funds and life settlements, he noted.

“Due diligence now means more than just accepting the disclosures in the offering documents. It means advisors and firms need to investigate the sponsors and the documents and see if the quoted projections add up,” Anderson says. “Advisors will be required to dig deeper for information than they may have in the past.”

One of the reasons for the heightened scrutiny is the large number of baby boomers who are seeking higher yields on their investments because of the losses they have sustained in the bear market, according to Anderson.

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