A major initiative to create a dialogue between American and European investors launched today with the start of the Life Settlement Trade Mission here.
At the start of the weeklong Mission which will reach out to investors in London, Luxembourg and Zurich, 150 attendees listened to experts in the industry address some major issues that ranging from the growth of the industry to tax issues. The Trade Mission which runs from Feb. 23-26 is being jointly organized by the Life Insurance Settlement Association, Orlando, Fla., and the European Life Settlement Association, London.
Doug Head, LISA’s executive director, greeted well over 100 European investors and 38 attendees of the mission by noting how far the life settlement industry has come. LISA’s Head kicked off the first day of dialogue by noting that the life settlement market is much better regulated today with 34 states including large states such as California, Illinois and New York regulating the market. There are greater stability, regulation and transparency of the life settlement market today than previously, he noted. And, he noted that in the proposed U.S. budget of President Barack Obama, it was estimated that the life settlement market was anticipated to grow by a factor of 10.
Patrick McAdams, an investment director with SL Investment Management, Chester, United Kingdom and the newly elected ELSA chairman, discussed the importance of the investor and how without their capital, the market would not exist. “The investor has been overlooked, and in some cases ignored and taken for granted,” he told attendees. He noted that while there are many large institutional investors, there are also smaller investors who invest between 3,000-5,000 Euros. While the life settlement market is a win for policyholders who are given another option to sell an asset they either can’t afford or do not need anymore, there have been more mixed results for European investors, McAdams added. There needs to be better education and more well informed investors as well as more care paid to whether a life settlement is suitable for an investor, he told the crowd.
Brian Casey, a partner with in the Atlanta office of Locke Lord Bissell & Liddell, said that the industry is in a growth spurt, a teenager that has not yet reached adulthood. In the last five to six years, there has been both investor and product maturity with the growing interest of hedge funds and investment funds which have been key to establishing a healthy tertiary market. Pension funds, he continues, are trying to “crack the nut” with some interest from state and labor union pension funds. And a couple of private equity firms have expressed an interest to receive basic information about the life settlement market, according to Casey.
Casey spoke of the different ways in which life settlement products are being developed, from the use of synthetic life settlements to talk of using life settlements for collateralized bonds. He said that the industry needs “fair regulation and not overregulation and called for an effort to get the STOLI (stranger-originated life insurance) issue on the table. “To me [STOLI] is nothing more than a violation of insurable interest from the get-go.” He said that STOLI doesn’t help anyone in the life settlement market and that what will help is the greater transparency which the industry is starting to see.
Michael Crane, managing director-capital markets, with Coventry’s London office, said that life settlements offer benefits to potential investors including a lack of correlation with other assets for an attractive return both on an absolute and relative basis that can run in the low to mid-teens. And, if in a pool of life settlements, volatility can be low, he told Mission attendees. While life settlements are an attractive investment, he cautioned attendees against fractionalized policies, noting that larger pools of 200-300 policies reduces risks such as concentration and risks from certain impairments as well as risks from certain physical impairments.
Other speakers offered input on what it takes to move the industry from being a teenager to adulthood. Michael Fugler, head of global capital markets with Welcome Life Financial Group, LLC, noted that in with the complex issues such as the threat of STOLI, life settlement companies need to use technology.
“Companies need technology to manage [their businesses] or they will die.”
And, Mark Todd, senior vice president of capital markets with Maple Life, noted the importance of examining everything that is being done in your behalf because “you don’t want a 60 Minutes experience.” He noted that in the U.S. the life settlement market is highly regulated. He described a market conduct review conducted by Florida Insurance Commissioner Kevin McCarthy’s office noting that the department’s representatives can look at any file and most of Maple Leaf’s files are six to eight inches of paper each. “You as investor should be very happy that they do that. There is no way an investment bank would have two [people] sitting in [an] office unless there was some sort of trouble.”
“We screen everyone in the food chain,” he said. In fact, Todd continued, his firm screens potential sellers in an exit interview between Maple Life and the seller without the representative. “We need to hear and tape the transaction,” he said.
The first day of the Trade Mission also included a discussion of the tax implications of investing in life settlements. Kirk Van Brunt, a partner with Locke Lord Bissell & Liddell LLP, explained to attendees that there are two basic parts to the issue: U.S. withholding taxes and income taxes on businesses. With careful planning and work through countries with U.S. treaties, the tax issue can be minimized, according to Van Brunt.
Withholding taxes became an issue in May 2009 when the IRS issued a ruling which said that death benefit paid outside of the U.S. to non-U.S. investors may be subject to withholding taxes. Unfortunately, he continued, there is no reliable way to convey basis paid to a life insurance company and there is concern that there might be an over withholding. If a transaction is done in a country that does not have a tax treaty with the U.S., there could be a 30% in withholding taxes on the death benefit, he noted.
So, Van Brunt continued, the question becomes “how to get out of the tax trap the IRS put into effect last May.” One option is to work in countries that have treaties while other options include using derivatives, swaps and debt structures to shape the character of death benefits. So, for instance, he continued, debt vehicles that pay out dividend income can be created, although he noted that this is not necessarily easy to achieve.
Andrew Quinn, a partner with A&L Goodbody, said that the limitation on benefits rule is a way for the I.R.S. to protect against non-Irish investors from using Ireland to avoid tax rules. Most countries, according to Quinn, maintain that it is sufficient to be a tax resident but the U.S. goes one step further requiring an LOB test that includes requirements such as an ownership and base erosion test in which it must be proved who is the owner of the Irish company claiming the benefit to avoid the double tax as well as a base erosion test in which the company must prove that it is not paying too much out to those who do not have as good a treaty with the U.S. There is also a derivative benefits test, according to Quinn, which must be satisfied by proving that if an investor is not in a country with a similar treaty with the U.S.
A third way of satisfying the U.S. LOB test, according to Quinn, is to determine if you are a quoted company with regular dealing in shares defined as at least 6% turned over on a yearly basis and a listing on a recognized stock exchange. A fourth test, he continued, is an active trade test which states that if a company is in an active business, then ownership rules can be ignored which in practice can be difficult in the investment business if assets have to be turned over regularly. This rule can be forgiven by applying for a confirmation, Quinn added. But the one benefit of these rules, he noted, is that they are mechanical, so if you can satisfy them you can have access to a treaty.
Source: JIM CONNOLLY, Managing Editor, Life Settlement Review