Has Anyone Ever Utilized Senior Life Settlements (SLS) used as 100% Collateral
I currently have a client that would like to implement SLS as 100% Collateral towrds their Construction Development Project - The Problem is Many of my Commercial Lenders will not get involved.
Senior Life Settlements-as 100% collateral
Collateral using senior life settlements as an institutional investment asset class, as a securitization facility for any business transactions bought at closing is a way of collateralizing any of our projects. The Explanation is below.
Various structural formats using the “collateral” exist, including 1) funding for an amount equal to the project requirements, 2) funding for an amount equal to the project requirements plus premium requirements, 3) funding for an amount equal to the project requirements, premiums, and interest requirements and/or debt service/operating costs, 4) funding for an amount equal to the project requirements as well as all other cash needs as well as total repayment of principal-all with no risk of loss of investment by the investor/lender.
BENEFITS TO PARTICPANTS
A- Issuer
-
Lower cost of financing
-
Faster funding
-
Lower or no equity “kickers”
B-Investment Bank
- Significantly faster funding
- More transactions completed per period
- Ability to attract new clients
- Higher fees, commissions and profits from “collateral”
C-Investor/Lender
- Remove risk of loss of principal
- Higher rate of return through participation in collateral
- Lower reserves due to securitized feature
- More investments due to lower reserves leading to higher investment income
Senior life settlements are a new investment asset class that provides an insured principal, high return, short term investment facility that is a safer and more efficient securitization of investment and debt capital than the higher return financial instruments of recent history. In the past, many investment bankers and financial institutions utilized zero coupon bonds purchased at a discount from face value as securitization or “collateral” to facilitate the consummation of various types of financing transactions, including debt, leveraged debt, quasi-equity and straight equity. Not every transaction was suitable for that model and a variation of concept known as “junk” bonds emerged to induce financing dependent upon the selection of successful companies that could not qualify for investment grade debt but could pay higher costs for “junk” bond debt and also repay the principal when due.
There are and have been a variety of different methods of providing additional securitization or “collateral” for projects needing third party financing. Each of these methods contains advantages as well as flaws and investors and financial institutions are always seeking better, safer and more profitable methods of accomplishing their investment goals of higher returns and repayment of loaned funds.
The senior life settlement asset class provides high returns of predictable terms with insured principal that is provided through the certainty of human mortality and the “Mortality Gain” that is produced either sooner or later during individuals’ economic life cycles. The life insurance defines the economic value of each individual’s life. Most individuals never capitalize the human economic value. The market place for the purchase of such individuals’ unused economic value has expanded to over $40 billion per year in the US alone and is increasing as the population ages. An active secondary market also exists that creates “market” liquidity.
Insurance industry data indicates that approximately 90% of all Universal Life Insurance policies lapse before a death benefit is paid. Further, there are currently in excess of $100 billion of such policies which can be sold by individuals for amounts in excess of the cash surrender values of their existing policies. Billions of dollars of un-used human economic value can be capitalized and purchased at a discount. Present market values and/or the future death benefit value are then used to securitize of “collateralize” financing projects to insure return on invested capital and to insure return of invested capital. All parties to the senior life settlement transactions benefit.
Currently, financial giants such as Berkshire Hathaway, HSBC, Deutsche Bank, Bank of Ireland, Scottish Re, Credit Suisse, AIG, UBS, hedge funds and individual investors are active in various aspects of the nascent senior life settlement industry. A question frequently asked is, "What is our firm losing by not participating in this industry segment?
Large financial institutions have quietly been responsible for the exchange of billions of dollars of senior life settlements. The senior life settlement asset class has produced significant fees, commissions and profits to these participants. Generally, senior life settlements have been aggregated by these participants for use as a “coupon” type of financial instrument similar to mortgage pools, which produces higher levels of yield with greater safety. The first senior life settlement securitization transaction done by this group was completed in 1975.
When the final structure is examined, one would agree that this method requires an over collateralization by the issuer to provide margins of safety for total “securitization” With proper analysis and evaluation, the correct type of issuer a transaction can be structured that produces an outcome in which the issuer, the investors/lenders, the sellers of the policies, and the investment banker all benefit from a completed transaction with no loss of principal.
The “Senior Life Settlement” segment of the life insurance and investment industries is expanding and maturing. Early participants in this industry tried to create a date certain/date of death provision for “Investment Grade Senior Life Settlements” with limited results. The entrance of many large financial institutions into the market has now accelerated the acceptance of senior life settlements as an alternative investment asset class that has multiple uses. Senior life settlements currently provide one of the most efficient methods now available for securitization and collateralization purposes.
LLC has developed proprietary processes that abate the need for re-insurance utilizing a normal life expectancy system of calculation. Senior life settlements are a form of “collateral” that makes a good transaction better, but does not make a bad transaction good.
In administering a senior life settlement transaction Structured Marketing, LLC examines and integrates a vast amount of data beginning with a true due diligence study of the transaction, the amount of the collateral that should be purchased to provide complete assurance for all parties. Implementation of the transaction requires access to the following capabilities:
a. A nationwide network to provide policies.
b. Developed proprietary financial software to evaluate policies.
c. Actuarial data used to review policies.
d. Insurance Policy Contract review to ensure transfer of ownership.
e. Ownership Purchase Agreements.
f. Insured Release Contracts.
g. Beneficiary Release Contracts.
h. Appropriate Power of Attorney, from all parties.
i. Irrevocable Life Insurance Trust Agreements.
j. Policy Purchase Agreements.
k. Policy Sale Agreements.
l. Funding Agreements.
m. Escrow Agreements.
n. Physical possession of original policy.
o. Change of Ownership.
p. Change of Beneficiary.
q. Notification from Insurance Company.
r. Premium Management.
s. Death Tracking.
t. Policy Claim Submission.
u. Payment to Escrow Agent for Disbursement.
v. Payment to Lenders.
w. Payment to Company.
Each transaction involving “collateral” has many financial structure issues as well as the usual other considerations facing any transaction. There are many companies in the market place claiming that they will merely “buy” policies and “deliver” them at closing. This simplicity is not an accurate portrayal of what is required to properly complete a transaction involving “Senior Life Settlements.” Such transactions require experienced, highly skilled professionals working as a team to accomplish the goals of Securitized transactions.
Various structural formats using the “collateral” exist, including 1) funding for an amount equal to the project requirements, 2) funding for an amount equal to the project requirements plus premium requirements, 3) funding for an amount equal to the project requirements, premiums, and interest requirements and/or debt service/operating costs, 4) funding for an amount equal to the project requirements as well as all other cash needs as well as total repayment of principal-all with no risk of loss of investment by the investor/lender.
While every transaction requires thorough evaluation and due diligence scrutiny to determine proper financing structure and “collateral” levels, the major consideration is sufficient cash flow activity of the issuer/project to justify the use of “securitized transactions.” Private investors/lenders are more flexible due to the underlying date certain threshold issues but are not a requirement.
Typically, a “secured transaction” will require the issuer to raise additional sums in order to acquire and service the “collateral”, usually at rate of 1.2 to 1.4 x of the original face amount of financing sought. The cash cost and underlying life expectancies of the policies is a matter which must be addressed early in the structuring process. Whether shorter (5 years)expectancy, more expensive policies or longer (8-10 years) expectancy, less expensive policies are chosen, as well how large a pool of collateral to use, can only be determined by professional evaluation. The entire process is better suited for longer range transactions as opposed to short ones (1-3 years). This structure allows an investor/lender to manage any downside volatility of the underlying investment while enjoying the upside potential without risk of loss of principal.
An Investment Banking firm must decide which portion of the transaction it wishes to participate in. Participation generates commissions, fees and equity participations that are generated by the “collateralized” transactions.