Probe Into Life Settlements Now on Spitzer's Radar
By Matthew Goldstein, Senior Writer
March 9, 2006
New York Attorney General Eliot Spitzer isn't finished with the insurance industry. Now, he's going after one of its more tawdry businesses -- life settlements.
Insurance broker National Financial Partners (NFP:NYSE) disclosed late Wednesday that it recently received a subpoena from Spitzer's office seeking "information regarding life-settlement transactions.'' The life-settlement business is a fast-growing corner of the insurance market in which hedge funds and other investors buy and sell unused life insurance contracts taken out by wealthy individuals and by corporations on top executives. In this somewhat morbid area of the financial world, speculators buy up these insurance policies in the hope that the insured will die before the pricey premiums eat up too much of the final payout.
The life-settlements business is a close cousin to the much-maligned viaticals industry, which specializes in buying life insurance policies from the terminally ill at discounted prices. That practice got a bad name in the 1990s, when a number of firms engaged in unscrupulous tactics and were accused of taking unfair advantage of the infirm.
To distinguish themselves from the viaticals crowd, life-settlement buyers mainly target rich people who are over 65 years old with insurance policies that carry high premiums. Buyers pay an upfront lump sum for these potentially lucrative policies, which the insured might otherwise have allowed to lapse or have sold back to the insurance company for a modest sum.
In 2004, TheStreet.com reported that American International Group (AIG:NYSE), Merrill Lynch (MER:NYSE) and Dallas-based HBK were some of the big investors in the then $4 billion-a-year life settlements business.
National Financial disclosed few details about the subpoena, which it received in March, in its 2005 annual report. The company said its dealings in the life-settlement business accounted for between 6% to 8% of its $891 million in revenue in 2005.
The company warned that its revenues could be "adversely impacted,'' if regulators imposed new rules or practice on the life-settlements business.
National Financial is led by CEO Jessica Bibliowicz, daughter of Citigroup (C:NYSE) Chairman Sanford Weill, a man who is no stranger to battle with Spitzer. During the investigation that led to the $1.4 billion Wall Street conflict-of-interest settlement, Spitzer's office portrayed Weill as a hands-on manager who fully approved of using Citigroup stock analysts to tout the shares of investment banking clients.
Weill, however, was never charged by Spitzer with any wrongdoing.
A National Financial spokeswoman declined to comment. A Spitzer spokesman also declined to comment on the subpoena.
This is not the first time that Spitzer has gone after the life-settlements industry. A portion of the $1.64 billion settlement Spitzer's office reached earlier this year with AIG covered allegations the New York prosecutor had raised about improprieties in the big insurer's life settlements business.
In a civil complaint filed against AIG last year, Spitzer alleged that the insurer tried to conceal that it was buying life settlement policies from a Philadelphia-based firm called Coventry First. Spitzer charged AIG set up a special trust called the Coventry Life Settlement Trust both to hide that it was buying these unused insurance policies, and to avoid an accounting rule that requires the polices to be initially booked as a loss.
The complaint said buying and collecting on life settlements was a $1 billion business for AIG. Spitzer's office did not allege any wrongdoing on the part of Coventry First, which was founded in 1999 and is the nation's biggest buyer of life settlements. TheStreet.com reported in 2004 that AIG was one of the main financial backers of Coventry First.
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