Fortress Investment Group LLC, a major buyer of distressed life settlement assets, plans to exit the market and has begun shopping around its portfolio with about $4 billion in face value, according to industry sources.
Fortress entered the market with a splash in late 2010 when it bought the $6.2 billion KBC Financial Products portfolio out from under Apollo Global Management LLC. Fortress later acquired the SageCrest portfolio with $514 million in face value for $27.6 million in a bankruptcy sale as well as the $1.34 billion HM Ruby fund portfolio through a default on a $65 million loan by fund manager Himelsein Mandel Fund Management LLC.
Fortress began reaching out to potential buyers in mid-September, according to industry sources. It's still early in the process and there are no finalists yet in the auction of its portfolio. Not included in the sale at this time are its policies with $1 billion in face value issued by Phoenix Cos., which are embroiled in litigation.
Investment bank Macquarie Capital, which represented KBC when it sold the portfolio to Fortress, is said to be working on behalf of Fortress to arrange bidders. Erik Kushto, senior vice president of Macquarie in Chicago, declined to comment.
Robert Underhill, managing director and counsel for Fortress, declined to comment.
In late 2010, Fortress edged out Apollo when it bought the KBC portfolio with almost 1,000 policies for just more than $330 million.
As of June 30, Fortress had $344.8 million invested in two life settlement funds and an additional undisclosed amount in a credit fund that includes other assets, according to a filing with the Securities and Exchange Commission.
Fortress has also emerged as a high-profile advocate for public policy that would benefit the life settlement market. The company is lobbying state legislatures for laws that would prevent insurance carriers from retaining premiums when they rescind policies. During the last two years, Fortress has been lobbying without success to get bills passed on the premium-retention issue in Delaware, Florida, Minnesota and South Dakota. Jeremy Kudon, a partner with the law firm of Orrick, Herrington & Sutcliffe LLP who is working with Fortress, has said that he's hopeful that the Delaware bill will pass next year, despite resistance from the insurance industry.
Fortress was said to have been behind legislation this year requiring the Florida Office of Insurance Regulation to study whether state law and regulations adequately protect purchasers of policies, to ensure the life settlement market's viability. The office has a deadline of Dec. 1 to submit a report to the legislature.
A Fortress affiliate, Lima LS PLC, has been in a legal battle with Phoenix, accusing it of racketeering and fraud in a scheme to sell policies it knew would end up in the secondary market, collecting premiums and then avoiding paying death benefits. It also has been fighting Phoenix over its cost-of-insurance rate increases imposed in 2010 and 2011, which market players consider discriminatory to investors who own policies. Phoenix denies any wrongdoing.
In addition, Fortress has made complaints to at least three insurance departments, in California, New York and Wisconsin, about the cost-of-insurance rate increases.
A market player who asked not to be named said that Macquarie is not showing the portfolio to a lot of prospective buyers. The person said that Macquarie is being selective because few companies could execute such a large deal.
The person knows of several funds that have started looking at spreadsheets that give characteristics of each policy in Fortress' portfolio.
Over the years, Fortress has experienced maturities, lapsed policies and sold off other policies. That explains why its $4 billion portfolio is now smaller than what was originally purchased. In addition, the $1 billion in Phoenix policies are not currently on sale.
Fortress affiliate Lima LS plc reported in its racketeering suit that as of July 25, it had lapsed or surrendered 66 Phoenix policies with $303.5 million in face amount and received nothing for them. At that time, it said it still held interests in 181 Phoenix policies with $1.08 billion in face amount. Because of the litigation risk, Phoenix policies have less value than those issued by other carriers.
Industry players say only very big buyers who can afford to pay the premiums to keep policies in force would be able to buy such a big portfolio.
Jamshid Ehsani, who heads Apollo's life settlement group, didn't return a call or e-mail about whether his firm planned to bid on the portfolio.
Taylor Kushner, vice president of TPG Capital in San Francisco, didn't respond to a request for comment.
Ian Glastein, associate of Monarch Alternative Capital LP in New York, a buyer of tertiary policies, did not return a call or e-mail about whether his firm is looking at the portfolio. Matthew Popoli, senior managing director of Reservoir Capital Group, owner of provider Maple Life Financial, also did not respond to a call seeking comment.
Phil Hall, a managing director of Highland Capital Management LP, who runs the firm's life settlement business, said he could not comment on whether Fortress had reached out to him.
Dan Young, president of Vida Capital Management LLC in Austin, Texas, said in an e-mail that his firm isn't looking at the portfolio at this time.
In April, Fortress is said to have sold the $1 billion D.B. Zwirn & Co. life settlements portfolio for an undisclosed amount. It had been hired in 2009 to liquidate the hedge fund's $2 billion in assets, including the life settlements portfolio.
"I think they came in as a distressed buyer and they bought the KBC pool, which was a higher-risk, higher-return kind of investment," said Zohar Elhanani, CEO of New York-based provider Legacy Benefits LLC. "They may find that the yields have come down due to the shortage of supply and this is the right time to sell.
"There are going to be fewer bidders for that type of pool and wouldn't they expect higher returns?" he asked.
Elhanani said that the sale could demonstrate to prospective investors that there is liquidity for someone wanting to sell policies in the future.
Mike Fasano, president of Washington-based life expectancy provider Fasano Associates Inc., said Fortress' sale could hurt the market because so many policies will be hitting the market at one time.
"A stockpile of policies will be thrown out there," he said. "Their leaving will flood the market with a certain number of policies.
"I think the general issue, which is really independent of the specific players involved, is how long does it take for the market to absorb the excess number of policies out there," Fasano said. "In 2006, 2007 and 2008, more policies were sold than supported by the fundamentals. Until that overhang is worked off, the market is going to be challenged."
Chris Conway, managing director of Longevity Market Advisors LLC in Lawrenceville, N.J., said that Fortress' sale could benefit the secondary market because it would take a large number of policies off the market that probably won't trade again anytime soon.
"If it goes off at fair value, hopefully that will cause people to get back to originating non-premium-finance policies," he said. "Since there is demand for policies generally and no new manufactured policies to speak of, perhaps we will get back to originating policies in the secondary market."
Paul Hastings LLP landed David N. Shine, known for his work with Merck & Co., as a partner and chair of the firm's M&A practice in New York. For other updates launch today's Movers & shakers slideshow.
Privately held DHR International Inc. remains intent on buying CTPartners Executive Search Inc. (CTP), despite the CEO of the target recently turning down an offer valued at $61 million. Adding to the uncertainty is a New York Post report detailing alleged sexual discrimination against CTPartners employees. More video