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203: Profiting Through the Only Guarantee in Life.

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Buck: Welcome back to the show everyone. Today I have chief marketing officer of ASR Alternative Tim Wright to speak with us a little bit about this asset class known as life settlements. Tim welcome back to the show.

Tim: Well thank you it’s always a pleasure to be on your podcast thanks for having me.

Buck: Yeah too bad in these circumstances I know this is a good way to practice social distancing though we have a screen between us and yeah several thousand miles you’re in Dallas I’m in Santa Barbara California here. Well listen again thanks for coming back on the show and I want to start out talking about some basics before we kind of launch into this entire concept because it’s really based around again you know permanent life insurance and we have been speaking in the last week or two a fair amount about permanent cash flow, life insurance concepts, we’ve been talking about you know banking and you know leveraged IULs and things like that but let’s go back before we you know kind of launch into life settlements. Tell us about you know the role of life insurance companies in times like these right, in times of uncertainty and what we can glean from the past when it comes to the financial stability of these types of companies.

Tim: Yeah so just first by saying if you’re talking to you know Buck about life insurance at all we want one of the things that you’ll notice with us is that we’re very much aligned with the insurance industry and if you like life insurance for the assets or the valuable characteristics that life insurance has you’ll really enjoy and appreciate life settlements cuz there’s so many similarities. So when you go back in time Buck you have to go back almost well or over a hundred years to 1911 when all this started and that’s when the first they didn’t call a life settlements back then but that’s when it all started 1911. In fact there was a court case that made this all legal back in 1911 a Supreme Court case so we have a lot of history but the reason that we love the asset of life insurance is that it does go back a hundred and fifty years the legal reserve life insurance system that I’m sure you talk about with your clients all the time is what works well for our asset class and what does that mean, that means when there is a death claim guess what it’s going to pay out and the life insurance company that policy that is the underlying asset behind this whole thing and that’s the beauty of it.

Buck: Yeah and so we talk about specifically the emphasis again going up into you know I’ve called this you know I mean obviously it’s a debatable issue but perhaps the most stable asset in American history in that regard in in the regard that really if you look back it since the Civil War and you take a company like you know Penn Mutual or Mass Mutual or any of these companies they have not only you know continued to follow through on their contracts since you know through the Great Depression through multiple world wars and and you know Korean War hyperinflation etc but they’ve actually managed to not only pay the contractual you know required payments but they’ve actually even paid dividends. And so that created a significant I guess a loyalty particularly around you know people who live through very very hard times and remember hearing that the people who lived through the depression for example typically they would be people who had really either kept their money in cash or they kept it in life insurance and they didn’t really trust anything else because as the rest of the world crumbled around them their life insurance policies never failed them. They became the sources of liquidity in addition to investments.

Tim: Yeah, no doubt about it I mean that Great Depression taught all of our grandparents a valuable lesson and unfortunately I think we’re coming back around here as we see some of the stuff that’s going on right now in the market especially there’s a flight to safety but for many years following the Depression that’s what people did they they built up cash value and their life insurance policy they used it for loans they used it for tax-free retirement and we’ve gotten away from that as a society I think that’s gonna start to swing back as time time goes on I really do.

Buck: Well I think part of it happens you know in my opinion what seems to happen is that the farther we get from really you know bad financial situations you know the farther we get from 2008 the more we fall back into those habits. The Great Depression lasted for many many years to people and there wasn’t the type of safety nets that there were even through the last financial crisis and I think those kinds of things really hit people and they remind them that hey upside is great but you know what kind of investments can you make that are maybe less sexy but you know you won’t be up at night so I think that follows in this. Now let’s talk about for those who don’t know I mean what exactly you know what exactly is a life settlement can you can you kind of describe the process I know you talked about something really starting back in around 1911 maybe you could go through that story.

Tim: Yeah the greedy versus Russell story is a great one there was a doctor who was taking care of a patient and the patient could not afford for the services of that doctor and the insured did have a policy and he said well in exchange for dollars can I give you this death benefit and he did he gave it to gave it to them that person ended up dying the doctor went to file the claim and the claim was denied and at that point that brought up the big question can you gift or give or sell your policy to someone and that ended up going to the local courts went all the way up to the Supreme Court took a while for that to happen but when that happened that the judges decided that you know what at that point they decided your insurance policy is your property just like your car like your watch like a house you can do whatever you want with that policy. They do not have to have an insurable interest to give or gift or sell the policy they do have to have an insurable interest Buck for example if I say hey you know what Buck I’m gonna take a policy out on you and I’ll pay the premiums I can’t do that because I don’t have an insurable interest in Buck if we were true business partners in let’s say an LLC that would be fine but in this case we couldn’t do it but Buck could sell me his life insurance policy now eighty years went by Buck before there was really ever an industry that was created in the 90s and certainly in the 2000s that went on that was a bit of the Wild West we’ll talk about that in a moment. So the insurance companies love that 80 years because this wasn’t something that was going on a whole lot but when push came to shove and there was an opportunity for someone to sell their policy they went all the way back to 1911 and recognized that this was a very established law.

Buck: All right so you hit on let me let me ask you this I mean it may seem obvious to you and me but just to put this into you know perspective why would the insurance companies not want you to sell your life insurance policy?

Tim: Well the insurance companies do a lot of great things okay they offer protection tax-free growth although you know borrow from your cash value life they they offer security for your family and your business, but the one thing we know about life insurance policies as many of them lapse and that is the insurance company’s profit so for them to come out and say yeah go ahead and sell it no problem back in the 30s 40s and 50s that wasn’t something that they were just gonna voluntarily do.

Buck: So yeah I mean and I’ve emphasized this before we did webinar on hedge it’s it’s there’s a site and we did a webinar on called hedgetheeconomy.com and we we covered this there a little bit but you know one of the things that people when they first see this kind of this kind of investment they’ve is they think well gosh it’s kind of morbid but in reality let’s think about who that person who is selling their life insurance policy is. Who is that? Well Tim why don’t you answer that. Who is that person and why is it beneficial for them to sell their policy?

Tim: Would you seem you’ve been in business for 15 years now and if you ask that question 15 years ago people truly would have no idea of that of that answer but because you see on Fox and CNN a lot of networks advertising companies like Coventry and Harbor life settlements you know people are more aware of it because they’re seeing these commercials right they’re seeing things in the newspaper and online. So the reality is the insured’s who are selling their policy and this was what it really was what the number one I guess objection today it’s really not but let’s address it morbidity. Well people say well gosh isn’t it more but I got to wait for somebody to die before I’m actually gonna profit well you know we do things a little bit differently all just by one policy we can talk about that offline, but the reality is the people that sell their policies are fairly wealthy, they have bought larger policies a million to ten million dollar policies for estate planning purposes, they’re sophisticated individuals who went to their CPA went to their estate planning attorney and said you know what Bob I don’t need this anymore I can’t afford it or my family is out of the house my kids are out of college my business is sold whatever it might be you don’t have this need for this insurance policy anymore and by the way they’re expensive to own or I think I mean they great to have but they’re expensive own. So the CPA says well why don’t you sell your policy and I still think this happens to a certain and people will say well wait a minute I didn’t know you could do that I think I do know you could do it though so that starts the whole process of discovery figuring out you can sell it how do I sell it how much do I sell it for what’s that procurement process it’s a lot like a house.

Buck: It does and I think that’s an important distinction right? You’re not going after people and you know pulling a life insurance policy off their deathbed. These are people that are looking rationally and saying okay I don’t really need this thing and rather than just okay my kids are fine they don’t need this money but I really you know I could use a little bit more cash while I’m still living here and if they’re going to bring it back to their insurance company the insurance company be happy to give them their cash value because it’s almost certainly not going to be anywhere near what the death benefit is. So really what they’re saying is okay where can I get the best money for this and it works out to their advantage to actually sell it because they’re going to get more from a company as you just described are buying these things and brokering these things out then they are from their insurance companies cash values so that I think is an important distinction to understand, you’re actually helping people you’re not you know you’re not a vulture you’re waiting for them to die, you’re actually doing them a service by giving them more money today. I mean just think about it right now okay say somebody’s got you know somebody is in their 70s or 80s and the market just tanked by 30% and they have funds but they’re like you know what I don’t want to keep withdrawing money from a market like this where 30% has gone down what maybe I should sell a policy maybe I should do that that would be a good way so that you know I’m not you know burning through all of this money that just went vanished in the equity market so that’s that’s the kind of way you have to kind of see this.

Tim: Hey Buck one thing I want to point out to your listeners is that it’s a real discrete asset. If I have a cash crunch and you know that many people do sadly enough based on what has happened with business people laying off their workers cash flow is short. I don’t have to sell my house I don’t have to sell my car I don’t to sell my Country Club membership, I can literally sell a policy it might take me a month might take me a couple months to sell it like it would a house but no one has any idea what just took place and instead of lapsing the policy like a lot of people do out of desperation because they can’t pay their premiums for example not saying that everyone in this situation but some of them are, instead of lapsing that policy now we’re going to take that piece of paper that’s worth nothing to the person and sell it for maybe 10 20 30 cents on the dollar. That is helping this generation out a lot.

Buck: Right so you talked about this a little bit there you know one of the questions I get is, is this legal? Well obviously is legal, there’s a Supreme Court Supreme Court case that made this legal way back. Who are the players right I mean this is becoming a retail asset people things that people could like you and me accredited investors typically could participate in is a fairly recent thing but it’s not new you know to larger institutions who want to talk a little bit about that?

Tim: Yeah it’s about 95 percent in the whole market is institutionalized so you’re gonna see hedge funds banks insurance companies in fact are big investors in this as well not buying their own policies but buying other insurance companies policies so the retail side of this has been around for probably 20 25 years say the retail the mid to high net-worth individuals but I’m always surprised maybe I shouldn’t be because I’ve been doing this long enough 12 years I’ve been doing this that there are so many people that are really sophisticated individuals I mean your audience for example I’ve talked to a number of them really really bright smart people but they don’t know about this and that’s because Wall Street isn’t going with the big houses the retail houses and buying these for the big brokerage houses. So you’re not gonna hear about this from your financial adviser, what’d you name the company okay there’s a hundred thousands of mouths are you’re not gonna hear about it from them and that’s one of the reasons that I think even sophisticated investors aren’t educated on life settlements.

Buck: Yeah and meanwhile you’ve got Berkshire Hathaway buying a couple hundred million dollars of life settlements and doing arbitrage with them you’ve got you know Bill Gates has a big portfolio I understand. So this is stuff that’s been around. Talk about you know so we have this you know obviously when I first learned about the concept of life settlements I was like that’s great that’s a great idea and I want a piece of that right and I started doing due diligence and this is ultimately how you and I met. I realized there was a little bit of a I guess there was a little bit of a troubled history you can say in this asset class as it you know really first started out becoming available to mom-and-pop investors and particularly maybe around the AIDS crisis and that sort of thing. Do you want to talk a little bit about sort of the Wild West of the past and what kinds that you and and more of the more you know the the straight shooters in the industry have done to to you know create more of a regulated environment?

Tim: Yeah it’s really a great store it’s a fun story to kind of go through because it gives you the full scope of where we’ve come from but yeah if you went back the late 80s early 90s as most of especially a lot of you have a lot of doctors on here know that our country is going through a really rough time with the hiv/aids epidemic and we’re talking about another epidemic here endemic and it was a scary time for a lot of people and so a lot of the AIDS patients the full-blown AIDS patients they were 30 they were 40 they didn’t have much of an estate but they had these you know policies they had through work or they bought a small policy through time and they had fifty or hundred thousand dollars well what was happening is investors came along and said well listen I’ll buy this for twenty five thirty cents on the dollar and they have a life expectancy of less than two years remember viatical less than two years what the definition of that is they were terminally ill and everybody kind of won in that situation because here you have this person that was gonna you know live out the remaining years in dignity have a little bit extra cash to spend and then the investors were also getting a pal upon that death benefit. That concept was a real pure concept that’s how that’s how it started but because it was new it was not regulated unfortunately and it wouldn’t have been because it was so new at the time. Well there were some bad actors that came along and in the you can say all 90s from 91 92 all the way to really 2004 there were some good players but the bad actors really outweighed in terms of the media and the voice of this industry so if you heard about it or you did a search online back then you saw the bad stuff that was going on. Well thankfully by the mid 90s late 90s start regulation started to kick in but it really wasn’t until the mid 2000s that there were regulations on both sides of the market so what I mean by that is if you think about a real estate transaction you have a sell side that’s the insurers eighty-five one sells policy and then you have a buy side I’m the person who wants to go buy the house or in this case buy that policy. Well there was a lot of greed and people taking advantage of the senior citizen market when selling their policy and that was something they dealt with with a pretty heavy hand there was companies that really doing some really bad things I won’t go into the details you could probably go into American greed and here some of them. We started 15 years ago so we were kind of in that mix so what we decided from day one is listen, there is great opportunity for everybody here. The insured who sell their policy, the investors, us as a company, the advisors out there that are offering this strategy to people. So you know pigs get fed, hogs get slaughtered right, the old saying. So what we said is listen, we’re going to go above and beyond and add a level of transparency into our business that no one else is doing and so that really helped catapults our business because before you had talked to a company they wouldn’t tell you anything in fact you might not even know the insured’s name you might not know how old they were it was kind of a hey trust me I got this group of policies over here we’re just gonna have you put money into it and a lot of those ended up being pretty negative overall. So we have really attempted and tried and really perfected this process of making sure that not only is there a level of transparency but we’re following all the regulations that are fully established now you go into 2010 11 12 even more things came out so if you’re a bad actor or if you’re a wild west guy working in 2020 you’re gonna be doing that for about a month and someone’s gonna be knocking on your door and asking a lot of questions. So we’re very proud of the way we set this up. The companies that we work with are phenomenal companies and we’re really proud of the whole process.

Buck: Will you talk about the process because even that is very controlled I mean you don’t go out you’re not knocking on people’s doors I mean you there’s there’s a there’s a process that you as the master fund go through to acquire these that is no different from the way Berkshire Hathaway is right I mean you want to talk a little bit about that process?

Tim: Yeah I’d like to talk about the provider network. The providers are really the ones that you could say all kind of oversee the whole process. Without a licensed provider you could never do this and I kind of view that as kind of like the broker in the real estate transaction, you can do some for sale by owner in real estate it doesn’t happen a whole lot why because something gets the ball gets dropped and there’s something that happens and ends up being negative so that’s why you go through a broker typically in real estate.

Buck: Well it sometimes I think of that that broker that you’re talking about like settlements is almost title insurance right yes you’re right.

Tim: It is. The equivalent to a title company actually the real estate transaction so you you want to make sure that you’re going through and that’s what we do licensed providers know what do they do a licensed provider works with both sides of the life settlement world we have on one side the buy side which would be us ASR alternative investments and on the other side you have the sell side. So the sell side is really represented by a couple people one of them is going to be a broker a life settlement broker that’s working with insurance and the insured themselves so you know you have a client who’s 85 years old he probably doesn’t have the wherewithal to go to the provider but the life settlement broker does and so at that point there is a process that they go through they decide they want to sell so they do a HIPAA release form they get the life expectancy analysis on typically one or two companies right out of the gate they do a full review on the policy to ensure that it’s transferable and that will pay out upon the person dying and then once all that’s established then the provider would open it up to a company like us and other companies and say alright we’ve got the Smith policy he’s 85 years old he has a life expectancy of 60 months do you want to start bidding on this and at that point we say yes or no depending on our available funds and if we have the available funds we say absolutely and so we start that process.

Buck: So and at that same bid you’ve got all the major players who want to do it the right way right you’ve got the banks you’ve got the hedge funds you got Berkshire Hathaway all those doing it the same way so this is kind of the tried-and-true way of doing that.

Tim: That’s right.

Buck: Let me shift a little bit and ask you this when you mentioned that there’s the bidding. What is what is your what is the master funds by box because you know we talked about how Berkshire Hathaway actually buys a lot of different policies nearby young people might hold him for a couple years and then sell them to somebody else you know because that person may have developed a health problem and all sudden that becomes more valuable tool it’s an it a completely different model it’s not what really kind of philosophically what you guys have think or you guys are about but what kinds of things you look at as a master you know master fund to potentially add to your portfolios our philosophy.

Tim: Yeah and you can Buck you can look at this in any business there’s going to be some they’re really aggressive in any business or more conservative. ASR is definitely one of the conservative side and here’s what I mean by that. What we’re looking for is a really unique policy and they all kind of look about the same but of course they’re all different we’re looking for a policy where the insurance about 85 years old they have a life expectancy of about 5 years 60 months of life expectancy come in months not years we’re looking for a policy that’s institutionally rated at A or better it can be A minus but A minus or better so this is an institutional paper that we’re buying the policy has to be beyond the contestability period that’s if it’s below two years which is contestability and insurance in the insurance world that’s called a wet policy we stay away from wet policies why because the insurance company could if they suspected something was odd in the process could come back and contest that once it’s beyond two years they can’t do that we also look at policies that do not have open suicide clauses are maturities we call them deaths are not caused by suicide I don’t think we’ve ever had that but we want to ensure for our investors that if there was an open suicide clause in the policy that that would not come back to hurt us if that’s what in fact happened to have maturity. So there’s a number of things first, has to be a US citizen, the policy size is between one and five million, let’s see on average about three million that’s the death benefit not what we pay for it. So there’s a few things like that that fall into this parameter.

Buck: Right and you’re also looking for older people and people with health probably 85.

Tim: Yeah we’re looking for health impairments now here’s a combination if you’re 85 and you have a life expectancy of 5 years and I should have just said this because it’s so obvious to me and you but I’ll say it is that you have health impairments. If you’re 85 you have health impairments but you could get healthy 85 so what we’re looking for is not an 85 year old with a 90 month LE working for an 85 that has a five year LE.

Buck: One other thing I’ll clarify just so people understand and this is something I learned and you know just through my background in life insurance is that 2-year contestability, what is that? Most insurance policies most insurance policies basically after two years you know they have to pay rate they have to pay whether it’s you know suicide whether it’s you know you know they can’t go back and research after two years it’s basically done right is that right?

Tim: Yeah they have two years to do all of that and if they don’t do it by then all bets are off and it’s gonna pay off and that’s that’s been legally challenged over the last 150 years and it’s really really solid ground.

Buck: Now let me ask you this because you just mentioned again this was a bidding process and you have your buy box and if you’re talking about a buy box of people who are 85 and have you know other problems comorbidities is what we call them in the business of medicine what I mean this I have to ask you even though it sounds may sound a little morbid right now but are those policies going up in price because of coronavirus because those are the people who are most likely to you know be affected and ultimately have the highest mortality.

Tim: It’s probably too early to tell to be honest. I will say our provider network and there’s there’s about 25 licensed providers there’s probably about 10 that are good size around the country, we’re not exclusive to any one of them will work with anyone that’s out there, but we have a few that we get most for policies through and we’ve had these conversations with them in the last few days. It’s not substantiated but anecdotally there are people that certainly have taken a massive hit and they’re looking for liquidity and so the phones are ringing a little bit more with companies that are brokers and providers looking to really procure those policies. The other side of it which is exciting for us is that you know we’re not an institutional player you know like I said earlier we’re a retail player that operates funds and so when we think about the institutions out there what they’re doing what we see them doing is just holding off a little bit right there. They buy 95% of the policies out there so when they hold off prices drop a little bit because there’s not the competition supply and demand curve and so again a little too early to tell but there’s always an ebb and flow in this business.

Buck: Potentially going lower even though the risk is actually higher to these people for a for the fund at least to buy something right now. So ok so we’ve talked a lot about I think it should be pretty clear what the benefit of this kind of thing is there’s no such thing as something without risk right so tell us about the you know what are the risks of this kind of investment and you know just in put it in perspective compared to some of the other things we consider as safe investments.

Tim: Well you’re right I mean this is going to be on the lower scale of risk. Why because you have major insurance companies that are backing the policies, they’re the ones paying them out. But you have a couple of a couple of risks that we like to talk about right upfront, we don’t shy away from a risk and they’re really off yes actually there’s nothing really too surprising about them and the two are longevity and illiquidity. So when a third party medical underwriting company comes back and says well Mr. Jones has a 60-month LE they’re not saying that mr. Chen was going to die in sixty months but they’re saying is there’s a 50% chance it’ll died before or he’ll die after that LE so if Mr. Jones dies in 70 months or 80 months we’re still fine we could still make money well over the life expectancy. If Mr. Jones lives 120 months then there’s going to be some additional risk because the return that we were shooting for we’re not going to get but this is why we buy multiple policies it’s not just one at a time that’s longevity. Now I will say the opposite is also true if the person dies earlier than that five years let’s say they die in one or two years then the return is much higher at that at that point the illiquidity is a risk because this is going to be money that you’re not going to want to touch for quite a long time three to seven years it could go as long as 10 what we try to do is close out funds as quickly as we can as we can even if that means selling them in the selling of policy in the seventh or eighth year so the illiquidity is perfect it’s a perfect connection with qualified money. I’d say 60 70 percent of the money that we bring in is from an IRA is from a 401k rollover a SEP something that is qualified. Why is it a good marriage for qualified money? It’s because you can’t touch your qualified money for a long time anyway and it just grows tax-deferred and then you go from there. So those are the two big ones a couple others I’ll just share with you track record working with a company that has one which we do. Third-party escrow agents I don’t know if we have time to get into all that maybe not but we work with some of the very best third party companies that can use your third-party administrators making sure that you have a good bid process so you’re not overpaying for policies if you’re if you’re new in this business and don’t know who the players really are you can get caught up in a little bit of that overpaying for policies and mitigating the premium call exposure and the way we do that because as you know as I said earlier these premiums are quite a bit every year so what we do is we escrow premiums within the acquisition cost when we buy a policy for a number of years. And so it would not be prudent for us to buy a policy and have only one year of premium in it. It might be two or three or she’s might be four five or six years of premium and that’s kind of our average so those right there are the risks and then how we mitigate them a little bit about that as well.

Buck: So many people know already we we work with ASR within you know our accredited investor group. This type of investment is limited to accredited investors and Tim and actually Stephen as well would probably be will probably be joining us but we’ll be doing a webinar for our credit investor group probably to get a little bit more information which we can’t really get into necessarily on in this kind of forum or our accredited investor group sometime later on this week you should get an email on that if you are in the investor club. Tim is there anything else that you can tell us to wrap this up and have any sort of you know overall big picture on how to look at this stuff?

Tim: Well yeah I mean I you know like I said I’ve been in this business for a long time. We’ve raised a lot of money we’ve had that we’ve owned a lot of policies and when we look at the foundation of someone’s portfolio we think of cash right we think of cash. I think right above that somewhere and this is certainly debatable but I do believe that life insurance whether that’s permanent life insurance or life settlements or and life and settlements really creates a nice bedrock you know if you’re building your house on a solid foundation you’ve got a nice foundation of those three things: enough cash to live on for a period of time, you’ve got your life insurance, you’ve got your life settlements and then you just build from that. Again that could be debatable but the reason that I am so convicted and having a foundation based on life insurance a it’s been around for 200 years and people very wealthy people have grown their wealth using that but it also has a lot to do with the fact that the companies that are behind it are the biggest companies in the world, bigger than oil companies bigger than banks, insurance companies are massive and that that allows you to sleep at night Buck because you’re in a situation there where you know that these companies in the end are gonna pay off.

Buck: They’re contractually liable to do so they have to do it. So anyway that is good stuff I want to thank you again for being on the show, Tim

Tim: Thanks for having me.

Buck: And you know try to stay healthy and you know enjoy your time at home as you’re in shelter.

Tim: Right. Thank you.

Buck: We’ll be right back.