The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Life Settlements

  • From Vol. 4 No.37 (Oct. 21, 2011)

    Federal District Court in Pennsylvania Rules in Favor of Investors in Life Settlements

    In the first case interpreting Pennsylvania’s insurable interest statute in the context of stranger-originated life insurance (STOLI) schemes, a federal judge denied a life insurance company’s bid to have policies declared null and void because they were allegedly part of a STOLI scheme.  See “Delaware Supreme Court Clarifies State Law Regarding Life Settlements,” The Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).

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  • From Vol. 4 No.34 (Sep. 29, 2011)

    Delaware Supreme Court Clarifies State Law Regarding Life Settlements

    The Delaware Supreme Court recently ruled on the validity of insurance policies allegedly purchased for investment purposes rather than insurance purposes.  The decision conflicts with a prior decision in New York, but is generally consistent with New York State insurance legislation subsequent to that inconsistent New York decision.  In addition to the longevity risk that historically has created both risk and opportunity in the life settlements market, regulatory risk in this area is becoming increasingly pronounced.  The SEC has focused on accounting practices on the part of at least one life settlements intermediary, and the courts have entertained challenges to the validity of policies purchased by life settlement investors.  This article is intended to assist hedge funds that invest in life settlements in appreciating the precarious and uneven legal environment in which they operate.  See also “In Blow to Opponents of ‘Stranger-Owned Life Insurance,’ New York’s High Court Rules that New York Law Did Not Prohibit a Person from Purchasing a Life Insurance Policy and Immediately Transferring that Policy to an Individual Who Does Not Have a Traditional Insurable Interest in the Purchaser’s Life,” The Hedge Fund Law Report, Vol. 3, No. 39 (Dec. 17, 2010).

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  • From Vol. 3 No.50 (Dec. 29, 2010)

    Ten Due Diligence Questions that Might Have Helped Uncover the Fraud Described in the SEC's Recent Administrative Proceeding against Subprime Automobile Loan Hedge Fund Manager and Its Principals

    On December 21, 2010, the SEC instituted and settled administrative proceedings against a San Francisco-based hedge fund management company and its principals.  A hedge fund managed by that company purported to invest almost exclusively in subprime auto loans, but in fact wound up "investing" largely in debt owed to the fund by entities controlled by principals of the management company and other hedge funds managed by the management company.  The SEC's Order in the matter is a study in conflicts of interest, strategy drift, material misstatements and omissions in offering documents and Form ADV and improper principal trades.  Working from the alleged facts of this matter, we derive ten due diligence questions that any investor should add to its questionnaire or incorporate into in-person meetings with managers.  Importantly, these are questions that should be asked periodically, not just prior to an initial investment.

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  • From Vol. 3 No.49 (Dec. 17, 2010)

    In Blow to Opponents of “Stranger-Owned Life Insurance,” New York’s High Court Rules that New York Law Did Not Prohibit a Person from Purchasing a Life Insurance Policy and Immediately Transferring that Policy to an Individual Who Does Not Have a Traditional Insurable Interest in the Purchaser’s Life

    The New York Court of Appeals, the state's highest court, has upheld the practice of “stranger-owned life insurance” (SOLI) transactions under New York’s Insurance Law as it existed in 2005.  In 2005, attorney Arthur Kramer (Kramer) purchased life insurance policies on his own life with aggregate death benefits of more than $56 million.  The policies were purchased through newly-established insurance trusts that named three of his children as beneficiaries.  The trusts then sold the policies to investors, and the children assigned their interests as beneficiaries to other investors.  After Kramer’s death, his wife refused to provide certified death certificates to the investors who were trying to collect the policy proceeds.  Litigation ensued in U.S. District Court for the Southern District of New York.  Appeals were taken to the Second Circuit, which determined that the validity of Kramer’s SOLI transactions turned on the interpretation of New York Insurance Law §3205(b), which governs purchases of life insurance policies by persons who have no insurable interest in the life of the original policy holder.  Kramer’s insurers claimed that the SOLI arrangement violated both common law and §3205(b).  The Second Circuit certified the question of the interpretation of §3205(b) to the New York Court of Appeals, which ruled that, under §3205(b), a person may purchase life insurance on his own life and immediately assign that policy to a stranger with no insurable interest in the insured.  This year, New York made SOLI deals illegal.  We summarize the Court of Appeals’ ruling.  For an overview of “life settlement” investments by hedge funds, see “Life Settlement Securitizations Offer Hedge Funds Efficient Access to an Inefficient Market,” The Hedge Fund Law Report, Vol. 2, No. 44 (Nov. 5, 2009); “Key Tax Considerations for Hedge Funds When Investing in Life Settlements,” The Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009); “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    Life Settlement Securitizations Offer Hedge Funds Efficient Access to an Inefficient Market

    As discussed in previous issues of The Hedge Fund Law Report, hedge funds have discovered in life settlements the potential for absolute, uncorrelated returns – a particularly attractive investment proposition on the heels of an era in which assets heretofore considered uncorrelated actually rose and fell (mostly fell) as a group.  Specifically, in our October 1 issue, we provided a detailed overview of the primary legal and business considerations applicable to hedge funds when investing in life settlements.  See “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  Then in our October 7 issue, we focused on the most salient tax considerations for hedge funds investing in life settlements, including discussions of income versus capital gain considerations, offshore versus onshore issues, implications of treaties for structuring and related issues.  See “Key Tax Considerations for Hedge Funds When Investing in Life Settlements,” The Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009).  This article – the third in the three-part series – focuses on the ability of hedge funds to invest in life settlements via securitizations, rather than directly.  The goal of the article is to help hedge fund managers that seek to access the life settlements market determine the most efficient way to do so.  To effectuate that goal, this article discusses: the mechanics of life settlements and life settlement securitizations; ways in which the risk profile of life settlement securitizations differs from the risk profile of other, more typical types of securitizations, such as those involving mortgages; real world examples of life settlement securitizations; reasons why life settlement securitizations are relatively infrequent; testimony at securitization hearings held on September 24, 2009 before the Capital Markets Subcommittee of the House Financial Services Committee; the financial, operational and regulatory benefits of life settlement securitizations; the various downsides of life settlement securitizations; salient points raised during the recent “Life Settlements and Longevity Summit” sponsored by the International Quality and Productivity Center; anticipated regulatory developments at the federal and state levels; and life settlement swaps.

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  • From Vol. 2 No.40 (Oct. 7, 2009)

    Key Tax Considerations for Hedge Funds When Investing in Life Settlements

    As discussed in an article last week’s issue of The Hedge Fund Law Report, life settlements offer hedge funds an uncorrelated investment category in an era when even assets heretofore considered uncorrelated have fallen in unison.  That article, the first in a three-part series, provided a detailed overview of the primary legal and business considerations applicable to hedge funds when investing in life settlements.  See “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  As in any investment, tax can have a profound effect on the economic return of life settlement investments.  Accordingly, this article, the second in the three-part series, focuses on the tax considerations relevant to hedge funds, hedge fund managers and hedge fund investors in connection with investments in life settlements, including: taxation of life settlements (including income versus capital gains treatment of the “gain” on life settlements); varying tax consequences for domestic and offshore hedge funds and hedge fund investors; the impact of recent Internal Revenue Service (IRS) Revenue Rulings on the tax consequences of life settlement investments; relevant tax rules for offshore hedge funds (including “limitation of benefits” provisions, treaties, “effectively connected income” considerations, relevance of the jurisdictions of investors and “anti-avoidance” rules); the special cases of Ireland and Luxembourg, and the “double taxation” treaties between those jurisdictions, on the one hand, and the U.S., on the other hand (and the absence of such treaties between the U.S. and other jurisdictions, notably the Cayman Islands); the utility of the UCITS structure for investing in life settlements; tax consequences of premium financing arrangements; and the future of life settlement taxation in light of certain items in President Obama’s proposed budget.  Part three in this series will focus in more depth on securitization of life settlements.

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  • From Vol. 2 No.39 (Oct. 1, 2009)

    Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns

    Among other lessons, the recent recession taught that the returns on many assets are more correlated than previously assumed.  From late 2007 through early 2009, it seemed that everything moved in the same direction: down.  Or almost everything.  A few asset classes – or more appropriately, investment categories – remained, during the recession and beyond, resolutely uncorrelated.  Litigation funding is one such investment category, as we discussed in a previous issue of The Hedge Fund Law Report.  See “In Turbulent Markets, Hedge Fund Managers Turn to Litigation Funding for Absolute, Uncorrelated Returns,” The Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).  Another such category is life settlements.  In a nutshell, a life settlement is the process by which an investor (often a hedge fund) purchases a life insurance policy from the person who originally purchased the policy – the so-called “insured.”  Specifically, the hedge fund or other investor generally pays the insured an amount greater than the cash surrender value of the policy, but less than the death benefit, in exchange for the right to collect the death benefit and the obligation to continue paying premiums for the life of the policy (and the insured).  For insureds, especially those that need money today, life settlements represent an opportunity to “cash out” of a policy for an amount often greater than what an insurance company will pay.  For hedge funds, life settlements offer an investment, the returns on which are driven largely by the fund manager’s ability to accurately predict the life expectancy of a group of insureds.  In other words, the success of a strategy focused on life settlements has less to do with microeconomic variables (such as corporate earnings) or macroeconomic variables (such as interest rates), and more to do with demographics.  It’s a different ball game, and a different skill set – the quintessential uncorrelated investment category.  Not surprisingly, hedge funds are becoming increasingly interested in life settlements.  Accordingly, this is the first part of a three-part series in which The Hedge Fund Law Report will provide a detailed analysis of the key legal and business considerations for hedge funds investing in life settlements.  In this part, we discuss: state and federal regulation of life settlements; premium financing; pricing of life settlements; advantages to hedge funds of investing in life settlements (including lack of correlation with other assets); concerns of which hedge funds should be cognizant when investing in life settlements (including illiquidity and longevity risk); structuring of hedge funds to invest in life settlements; cash management and adequate capital considerations; specific recommended items for disclosure in the private placement memorandum of a fund organized to invest in life settlements; due diligence considerations; a brief overview of the relevant tax considerations, including the recommended jurisdictions for organizing life settlement hedge funds; the tertiary market and securitization; and opposition from the insurance industry.  Part two in this three part series will focus in more depth on tax considerations relating to life settlement investing, and part three will focus in more depth on securitization of life settlements.

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