Life Settlement: Is Valuation Complexity Cause for Dispute?

The trouble of calculating cash-flows under many scenarios

by Ron D’Vari, CEO, James Frischling, President

Weekly market view from NewOak
NewOak is an independent financial services advisory firm built for today’s global markets. Led by a team of experienced market and legal practitioners, NewOak provides a broad range of services across multiple asset classes, complex securities and structured products for banks, insurers, asset managers, law firms and regulators, including financial advisory and dispute resolution, valuation, credit and compliance, risk management, stress testing, model validation and financial technology solutions. We have analyzed or advised on more than $4.5 trillion in assets to date.

Lavastone Capital LLC, a unit of AIG, and Coventry First LLC filed lawsuits against each other on Friday, each alleging breaches of long-dated agreements for Coventry to source and purchase life settlement contracts to sell to Lavastone. In its lawsuit, Lavastone alleges that Coventry bought life policies at prices below what it knew Lavastone would buy them at. Hence Lavastone is alleging that Coventry is manipulating the selling price of policies sold to them.

A life settlement is a transaction where an insured person sells to a third party a life insurance policy he/she owns that is no longer needed. The selling party receives an immediate cash payment for the policy. The buyer of the policy then becomes the new owner and is assigned as the beneficiary, but will be responsible for payment of all future premiums. When the insured dies, the purchaser receives the policy’s benefit.

There are many reasons why a policy holder may no longer need life insurance. The reasons include changes in family structure, financial situation, tax laws, or the policy’s expected performance. Typically, the direct surrender value obtainable from an insurance company doesn’t include any death benefits, only the accumulated cash value. However, life settlement value does include a portion of the death benefits depending on the medical record and life expectancy of the insured.

Settlement contracts are typically done as an exercise in calculating cash flows under many scenarios and discounting them at a high discount rate, often over 20% depending on quality and characteristics of each policy. Due to the complexities involved in estimating the life expectancy of the insured and the exact features of each policy, there often is a large range of variance in estimating the value of individual policies. The uncertainties in valuation lead to market illiquidity as well as potential disputes, even among such long-term business partners such as AIG and Coventry.

Weak August Jobs Report: A Bump or Something More?

The most watched economic report last week was the August jobs report and the numbers were surprisingly weak. Non-farm payroll grew by only 142,000 and ended a streak of seven consecutive months of 200,000-plus increases. The disappointing report raises concerns that the economy, and specifically the labor market, may not be recovering as much as economists expected. Is a weak month of job growth a bump in the road or a sign of things to come?

Due to the complexities involved in estimating the life expectancy of the insured and the exact features of each policy, there often is a large range of variance in estimating the value of individual policies

Economic data has been fairly robust of late, so there’s reason to discount the weak August jobs report. However, with the Federal Reserve being so intently focused on the labor market regarding any changes in its zero-rate policies, there’s speculation that the disappointing jobs report will tone down the rhetoric of the hawks that want to see rates move sooner rather than later.

While the August report itself may not be enough to change sentiment, when added to the surprise move by the European Central Bank to cut key rates and launch its own bond buying program, there’s now some substantial headwinds that may push the Fed into keeping rates low for a considerable period longer.

The debate will now center on an economy that is growing at around 3% versus a sub-200,000 jobs growth number for the first time in eight months. August is typically a tough month to predict and revisions will likely be made, but the weak report does give Fed Chair Janet Yellen some ammunition to use against those that want to see rates increase more quickly. The report may very well prove to be a bump in the road, but it just gave the Fed some added flexibility.


Saluting Letterman: The Top-10 List of the Greatest Financial Movies of All Time

Everybody loves a good top-10 list. Just ask David Letterman, who has made his nightly top-10 list his bread and butter and turned it into a comedy icon. So in a nod to Dave, who is set to retire next year, here’s my top-10 list of the greatest financial movies of all time. The great thing about these lists is that they are pure opinion and meant to foster debate. My list does not include documentaries on financial subjects, of which there are many great ones, with The Smartest Guys in the Room about Enron and Inside Job about the 2008 subprime mortgage meltdown among my favorites. Hey, that’s two for a future list! I’ve also left off TV movies such as Barbarians at the Gate, the humorous portrait of KKR’s leveraged buyout of RJR Nabisco.

But for now, here are my top “big screen” financial movies of all time, counting down, a la Letterman, from number 10. Let the debate begin:

  • 10. Limitless (2011): Writer takes experimental drug and becomes a financial wizard. It could happen.
  • 9. Working Girl (1988): From the secretarial pool to the corner office, put a new spin on mergers and acquisitions.
  • 8. Wall Street: Money Never Sleeps (2010): Gekko gets out of the big house looking to get even.
  • 7. Glengarry Glen Ross (1992): A cut-throat real estate sales contest. First prize is a Cadillac; second prize is a set of steak knives; third prize is you’re fired.
  • 6. The Wolf of Wall Street (2013): There’s no way Jordan Belfort’s life was really that wild, is there?
  • 5. Boiler Room (2000): The low-budget precursor to The Wolf of Wall Street made on one-tenth the budget.
  • 4. Margin Call (2011): A gradually rising sense of panic…shades of Lehman Brothers anyone?
  • 3. Trading Places (1983): “Looking good, Billy Ray!” Frozen concentrated orange juice futures were never so funny—or profitable.
  • 2. Wall Street (1987): The original still holds up. “Blue Horseshoe loves Anacott Steel.”
  • 1. It’s a Wonderful Life (1946): Surprise! Yes, the holiday classic is really a movie about integrity versus greed and deception in the struggle over a building and loan company. Where have all the George Baileys gone?