Creditors of an ontario-based life in-surance settlements company that has landed in provincial court have until the end of October to make claims on its assets.
New Life Capital Corp. <\/b>and a handful of related companies had bought individual life insurance policies, repackaged them and then sold them to individuals as so-called \u201calternative investments.\u201d But the business failed last year after the Ontario Securities Commission<\/b> put New Life under a \u201ccease trade\u201d order.
The court has set the Oct. 30 deadline for creditors\u2019 applications after New Life\u2019s receiver, KPMG LLP<\/b>, came up with a plan to liquidate the assets. During the summer, KPMG had hired New York-based Proverian Capital LLC to value New Life\u2019s portfolio of life insurance policies and to recommend a course of action. Proverian\u2019s report includes recommendations that KPMG continue paying the premiums of some of the policies, surrender some policies and sell some policies.
Last year, the OSC shut down New Life, alleging that its executives had sold securities to unqualified investors without proper registration to sell the securities and without a preliminary prospectus to describe the investments.
The OSC also alleges that New Life\u2019s directors, Jeffrey Pogachar and Paola Lombardi, who are spouses, spent more than $600,000 of investors\u2019 money and racked up credit card bills of more than $1 million. The directors have admitted that only a portion of the bills were related to their business.
At one point, New Life paid monthly distributions to inves-tors before there was any income. Court documents state that New Life was not in a position to realize any revenue until sometime in the year 2012, when its first policy was supposed to mature, and that the directors were only redistributing investors\u2019 cash.
KPMG says in one of its reports to the court that based on the information KPMG has received so far, the amount that may be returned to creditors and investors is \u201cvery uncertain and may be significantly less than the aggregate amount invested.\u201d The report also notes that the timing of any asset sales is uncertain, partly because of difficulty in evaluating the business, which kept poor records.
The life settlements industry is next to non-existent in Canada, because the trade of domestic life insurance policies is illegal in most provinces. New Life is one of two failed life settlements businesses in Ontario courts. Ernst & Young LLP<\/b>, monitor for Universal Settlements International Inc., <\/b> is in the process of unwinding USI\u2019s assets; that process is further along.
New Life and USI were both registered in Ontario and had sold foreign life insurance policies.
Through third parties acting as brokers, life settlements companies buy policies from the people who no longer have any use for them or from those who would rather have quick access to the policies\u2019 inherent value.
For example, USI, based in Mis-sissauga, Ont., once owned a portfolio of 567 life insurance policies with a combined face value of $36 million that were previously owned by individuals infected with the HIV virus. Court documents show that USI then sold those assets to SDM Holdings LLC<\/b>, another life settlements company, for $2.5 million as part of the liquidation of USI\u2019s portfolio.
A life settlements firm continues to pay premiums on the policies it holds until: the insured person dies, at which point the life settlements firm collects the death benefit; or the policy matures, at which point the company takes the guarantee. In either case, the proceeds are then distributed to the life settlements company\u2019s investors.
The timing of cash flow is critical to the business model; premium payments must be met with income from death benefits or guarantees from other policies. Both New Life and USI got that timing wrong.
New Life had bought a relatively small number of policies \u2014 which makes the timing of payouts especially unpredictable \u2014 and had offered investors the chance to take profits from those policies through two programs. One program offered shares; the other offered a percentage payout from individual life insurance policies.
USI, by contrast, had owned 134 policies with a notional benefit value of $187 million. Its court documents say the original policyholders didn\u2019t die according to the projected mortality tables. USI\u2019s financial troubles were compounded when Italy-based bond agency San Remo SpA, which USI had paid to reinsure its premium payments, went out of business.
@page_break@While the life settlement industry is stagnant in Canada, it is growing in the U.S. Connecticut-based Conning Research and Consulting Inc. <\/b> estimates that life policies worth about US$12 billion were sold in the U.S. in 2007, up from US$6.1 billion in 2006. By 2012, Conning Research says, that figure will approach US$21 billion. \tIE<\/b>
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