Life Settlement Investing News
Heard off the street: Political pull, not performance, wins ‘vulture investing’ firm business
Sunday, August 27, 2006
By Len Boselovic, Pittsburgh Post-Gazette
When a firm that includes former U.S. Rep. Ron Klink approached him about investing in life insurance policies, Beaver County Controller Richard W. Towcimak was creeped out. He abhorred the thought of taking advantage of dying people swapping death benefits for cash while they’re living.
“That’s like a vulture sitting on a rock. That was distasteful to me and I didn’t want any part of it,” said Mr. Towcimak, recalling his reaction when Mr. Klink’s Atticus Fund first made its pitch to the Beaver County Employees’ Retirement System.
But Mr. Towcimak says he and directors of the $170 million pension fund changed their minds, committing $10 million — or approximately 6 percent of the fund’s assets — to the Atticus Fund.
“One of the goals we’ve had is to try to diversify. That’s what we’ve done,” Mr. Towcimak said.
In June, the Virgin Islands’ government pension plan authorized investing a yet to be determined amount in Atticus, joining the Retirement Board of Allegheny County, which unanimously agreed in November to invest $5 million in Atticus.
Allegheny County still hasn’t turned the money over to Atticus. Some directors are having second thoughts about their votes, which marked the first time the board went against the advice of its consultant, Yanni Partners. One reason for concern: Bruce Campbell, the retirement board’s attorney, told them going against Yanni’s recommendation exposed board members to personal liability.
“When that came down, I said, ‘This is not good,’ ” recalled Ted Puzak, a retired probation officer who is one of the board’s two employee-elected members. “I’m 110 percent against Atticus.”
Atticus has offices Downtown as well as in Washington, D.C., and Greenville, S.C. Mr. Klink, a lobbyist, is vice president of the firm, which did not return calls.
According to Mr. Towcimak, Atticus invests in high-dollar life insurance policies that companies provide to senior level executives. The executives don’t really need the insurance, so they are willing to sell the death benefits in exchange for cash, he says. Atticus continues paying the premiums and will pocket the payout when the executives are 6 feet under.
Mr. Towcimak offered this hypothetical example: a $400,000 profit from giving an executive $600,000 for his $1 million policy. While the pension fund won’t pocket the $400,000 until the insured leaves this world, the payment is inevitable, he says.
Yanni found the investment far less straightforward, reiterating its objections last week in a letter to Allegheny County Treasurer John Weinstein, also retirement board president. They include concerns about being able to get out of the partnership, the fact that Atticus can borrow up to 20 percent on top of what investors contribute to buy additional policies, the fees Atticus wants to charge, and the firm’s lack of a track record. Moreover, Atticus has had trouble finding policies to purchase. As of February, the firm had only 20 of the 300 policies it wanted to acquire even though it had been shopping for more than two years, Yanni noted.
The consultant says Atticus’ strategy is to buy policies of executives about 70 years old who are expected to live another five to seven years. But those people have an average life expectancy of about 15 years and medical advances could keep then alive even longer. The longer they live, the longer Atticus has to pay premiums and the lower the firm’s profits will be.
“Senior settlements are considered to be extremely speculative investments because predicting when someone will die is impossible,” Yanni senior consultant Charles Gregor wrote Mr. Weinstein.
Similar concerns were raised by Carl Hess, who heads up Watson Wyatt’s U.S. investment consulting business. Mr. Hess is not familiar with Atticus. He says life settlement partnerships got their start when AIDS patients sold their death benefits so they could pay for medical treatment. “Vulture investing at its finest,” he added.
Investors who purchased the policies bet AIDS victims would die quickly, but that was a losing bet in many cases because new drugs prolonged the lives of those with the disease, Mr. Hess says. Another problem is gauging what kind of profits to expect. Stock investors know what kind of returns Wall Street has generated historically, but there’s no track record on what kind of profits investing in a limited number of life insurance policies will produce, he says.
“What that’s going to work out to be is an utter guess,” Mr. Hess said, adding that there are a lot better ways to diversify.
Beaver County’s investment in Atticus doesn’t surprise those who believe that when government pension plans are involved, political considerations can trump financial ones. They point out that the Beaver County fund also has stuck by Mark D. Lay, like Mr. Klink another politically connected Beaver native who manages pension fund money.
Atticus has offices in Mr. Lay’s MDL Financial Center on Smithfield Street, which MDL Capital Management calls home. Mr. Lay and his investment firm are being sued by Ohio’s Bureau of Workers’ Compensation over about $215 million in losses in a leveraged fixed income fund managed by MDL, which specializes in fixed income investing. Before that unhappy incident, pension funds were dropping MDL because of subpar performance.
MDL has been on the Beaver County pension fund’s “watch” list for three years for the same reason. That distinction notwithstanding, the county authorized MDL to invest in stocks this year. According to the pension fund’s first-quarter report, MDL violated investment guidelines by putting too much money in a single stock. Mr. Towcimak says that has been resolved by raising the ceiling on single stock holdings and asking MDL to reduce its position in the stock in question.
“That’s a very minor thing — more housekeeping than anything,” Mr. Towcimak said.
As for investing $10 million with Atticus, Mr. Towcimak says it reflects the board’s policy of managing the pension fund conservatively. Yanni finds that brand of conservatism too creepy for Allegheny County’s workers and retirees. Beaver County employees and retirees might be creeped out too if they understood what vulture investors were doing with their money.
Source: Post-Gazette.com
