Viaticals To Securitize Life' Policies


Following the lead of viatical settlement securitizations, life settlements could be a catchy new asset class to hit the market this year, with commercial paper conduits and private term deals popping up as early as this quarter, said sources close to that market.

Kelco Inc. and Viaticare Financial Services are among the companies currently collecting policies.

"I think that for an up-and-coming asset class, there's no shortage of aging baby boomers that are going to fit that market place who might want some liquidity on an insurance policy," said a source.

Life settlements (formerly called "senior settlements"), like viaticals, are based on the purchase and advance settlement of a life insurance policy. However, unlike viaticals, the criteria is not illness but rather age, so a senior selling a policy would generally be healthy and would be expected to live for a certain number of years depending on statistical data.

"So it's more of an actuarial play than it is is someone gonna die of AIDS in the next 16 months,'" the source said.

According to a research report put out by Conning & Co., this year's market for life settlements was roughly $1.2 billion, with the potential to grow to $10 billion over the next few years. Conning estimates the current volume of all existing eligible contracts at $108 billion.

"The average purchase price is about 22%, which would mean that there could be over $2 billion dollars a year in securitization [when the market reaches potential]," said Alan Buerger, chairman and chief executive officer of Coventry Capital.

Coventry Capital is currently the largest originator of life settlements, representing more than 25% of the market. Though Coventry is by no means looking to securitize, the company is actively selling its loans to companies that are, admitted Buerger.

"We originate for the companies that are raising the capital and trying to securitize," he said.

Jay Eisbruck, an analyst at Moody's Investor Service, said, "The idea is that in certain cases people are going to allow their policies to lapse, and this allows them to receive payment for that policy, if that amount is larger than the cash surrender value of that policy."

In terms of issuers, Eisbruck speculates the first to securitize will be the same companies offering viatical services.

"The life-settlement side of the business is relatively new, so most of the public information is on the viatical side," he said. "It's a lot of the same companies that are doing both sides of the business."

Life settlement deals, when they get moving, are likely to be larger than average viatical deals, on account of the size of settlements.

"The life settlement policy tends to be larger," he said. "So if they were able to get the same amount of policies as they do on the viatical side, you're talking about larger transactions."

David Reape, recently promoted to senior vice president of operations at J.G. Wentworth, said, "I know a number of people have been looking at [senior settlements]. A number of trustees have approached us confidentially and said Where can you help us? What are the issues?'"

J.G. Wentworth specializes in back-up servicing for non-traditional asset classes, as well as securitizing settlement-related assets.

"The typical servicing on a viatical, and certainly senior settlements would be similar, would involve confirming the whereabouts of the individual, and confirming the health status," Reape said. "And if it's a policy that you need to continue to make payments on, you need to confirm that the premiums are paid; and then when the time comes, to process the death claim."

Noting one major difference between the securitization of life settlements and viaticals, Reape said, "There's the scope of investment - it's a much longer term."

"Now you'll probably do better from a risk perspective even on longer term," he added. "Because a large pool of seniors have a very predictable death rate, whereas with a viatical, a change in technology or medicine could have someone who's expected to die 18 months from now live another 18 years."