Investment Symposium
March 2009
A6: Securitization of Exotic Assets
Jason Sutherland
Boris Ziser
Moderator
Society of Actuaries
2009 Investment Symposium
March 30-31, 2009
Litigation Finance:
2
Structured Settlements—Industry Overview
Historically, personal injury lawsuits were settled with an upfront lump sum payment in exchange for a release from liability
In 1982, Congress passed the Periodic Payment Settlement Act that allowed claimants to receive the settlement award as a stream of tax-free payments tailored to their needs through a Structured Settlement annuity
Since then, the market has experienced robust growth, with outstanding Structured Settlements of more than $90 billion growing by more than $6 billion annually
More importantly, origination volumes suggest that purchasers of Structured Settlements have tapped less than 2% of the total secondary market
High barriers to entry should continue to prevent significant new market participants from entering the industry
X Highly regulated and complex legal environment
X Significant marketing costs necessary to find holders of Structured Settlements
X Importance of reputation and brand name, which affects ability to attract clients and secure low cost
funding
X Database of holders of Structured Settlements creates a huge competitive advantage
Large, under-penetrated market with high barriers to entry.
Structured Settlement Origination Market
“Structured Settlement” is a term used to describe a contract between a personal injury plaintiff (“Claimant”) and a defendant tortfeasor in litigation (“Tortfeasor”), whereby the Claimant agrees to settle the claim (usually for personal injury, products liability, or medical malpractice) in exchange for periodic payments made over a period of years.
To facilitate this Structured Settlement, the Tortfeasor arranges for the purchase of an annuity contract from an insurance company (“Payor”) that will provide periodic payments according to the terms of the settlement.
At some point in the future, the Claimant may decide that he no longer wishes to receive payments on an installment basis but would prefer to receive a lump sum payment instead. To meet this need, a finance company purchases the future payments at a discounted rate and pays the Claimant one cash amount.
Annuity Provider
(generally a highly-rated insurance company)
Finance Company Claimant
Tortfeasor Release of Claim
4
Receivables Description – Three Types
Guaranteed Payments
X
Pays according to a pre-determined schedule, until the final
scheduled payment.
Unhedged Life Contingent Structured Settlement Payments
(“LCSS”)
X
Pays according to a pre-determined schedule, until the earlier
of the final scheduled payment or the death of the Claimant.
Hedged LCSS
X
As with Unhedged LCSS, pays according to a pre-determined
schedule until the earlier of the final scheduled payment or the
death of the Claimant.
X
If the Claimant dies prior to the last scheduled payment, the
Issuer will be entitled to receive a death benefit equal to or
greater than the nominal value of remaining scheduled
payments sold to finance company (and therefore always
greater than the discounted value of those payments).
Structured Settlements—Regulatory Environment
Every Structured Settlement transaction completed since 2001 has been approved by a judge, who must find the sale is in the best interest of the claimant
The current environment protects all parties to a secondary Structured Settlements transaction and effectively mitigates associated risks
Regulations provide extraordinary consumer protection
X Court must find transaction in best interest of seller taking into account the welfare and
support of dependents
X Detailed disclosure statement X Statutory cooling off periods
X Final court order transferring the annuity payments
Litigation Finance:
Pre-Settlement Funding
Pre-Settlement Funding—Overview
Cash advances to individuals with pending personal injury claims
Extremely low credit loses
X
Defense-oriented lawyers used for file reviews
XExacting standards and conservative valuations
XNo more than 20% of case’s value advanced
8
Pre-Settlement Funding—Market Opportunity
Large addressable market: $150+ billion of tort claims paid per annum
X A virtual economy unto itself in US X Refreshes itself every couple of years
Total market penetration miniscule
X
$200 million of estimated advances per annum implies market penetration
of <.5%
Competitive landscape highly fragmented
X Mostly mom & pop shops started by lawyers
Purchasers of Both Asset Classes
Retail funds
Hedge funds
Investment banks
Pension funds
10
Contact Information
Jason Sutherland, Esq.
Head of Compliance & Operations
+44 203 1787 966 direct
+44 782 4322 939 mobile
[email protected]
Peachtree Asset Management, Ltd
42 Brook St, London W1K5DB
Important Information & Qualifications
This presentation has been prepared by Peachtree Asset Management, Ltd. on behalf of itself and associated companies, and is for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of an offer to buy. Neither Peachtree Asset Management nor any affiliate has acted or will act as a fiduciary or financial, investment, commodity trading or other advisor of or for any recipient of this presentation and any investment trading or hedging decision of a party will be based upon its own independent judgment after consultation with such tax, accounting, legal and other advisors as it deemed appropriate. Although the information in this presentation has been obtained from sources believed to be reliable, we make no representations as to its accuracy or completeness and it should not be relied upon as such. Any opinions expressed herein are subject to change. From time to time, Peachtree Asset Management, its associated companies and any or their officers, employees directors may have a position, or otherwise be interested in, transactions in any securities directly or indirectly the subject of this presentation.
SOCIETY OF ACTUARIES
2009 INVESTMENT SYMPOSIUM
March 31, 2009
Marriott Marquis, New York
Stroock & Stroock & Lavan LLP
Boris Ziser, Partner
212 806-7002
[email protected]
Securitization of Exotic Assets
What is an Exotic Asset?
•
General concept is that the asset is not commoditized
•
Some Characteristics
¾
Wider spreads
¾
More new structuring
¾
More difficult to find investors
¾
More difficult to get a rating
¾
Fewer deals
3
What is an Exotic Asset?
•
Some Examples
¾
Timeshare loans
¾
Life settlements
¾
Music royalties
¾
Film receivables
•
Is the definition of Exotic Assets different today than it was a year ago?
¾
Traditional assets more difficult to securitize today
¾
Possible additions to the list in today’s environment
9
Sub-rime mortgages
9
Equipment leases
9
Structured settlements (may be considered as having always been in
the category, but today, its long-dated nature leads to its inclusion)
Timeshare Loans
•
General Types of Timeshare Interests
¾
Deeded
¾
Right-to-use
¾
Hybrid
•
Resort Types
¾
Drive to
¾
Fly to
•
Seasonality
¾
Winter slow down
•
Exchange Networks
¾
RCI
5
Timeshare Loans
•
Underwriting
¾
Limited
¾
FICO Score
¾
Income ranges
¾
Marital status
¾
Age
•
The future
¾
Economic pressure increases likelihood of delinquencies in the
short term
¾
Locked in vacation cost
¾
Grew at good pace previously
Life Settlements
•
What is it?
¾
Purchase of an existing life insurance policy by investor on secondary
market
¾
Viaticals vs. life settlements
•
Why sell?
¾
Insurance no longer needed
¾
Options are limited
9
Lapse
9
Surrender
9
Sell
7
Life Settlements
•
Who are the buyers?
¾
Retail funds
¾Hedge funds
¾Investment banks
¾Pension funds
•
The parties
¾Agent
¾
Life settlement broker
¾
Life settlement provider
¾
Medical underwriter
•
Key components of pricing
¾
Life expectancy
¾
Future premiums
¾
