The Six-Feet Over/Under

In a macabre backwater of finance, gamblers bid against each other to buy life insurance payouts on people who have yet to die. While the game sounds exotic, the close ties between two of its players are business as usual for Wall Street.

Advanced Settlements, a top broker in the fast-growing "life settlements" market, has an especially cozy relationship with one of the market's big buyers, a review shows.

The three co-presidents of Orlando, Fla.-based Advanced Settlements are the majority shareholders of Abacus Settlements, a firm that pays cash to people who are willing to bargain away the right to their death benefit while they're still living. Insurance industry regulatory filings reveal that Advanced Settlements executives Scott Kirby, Sean McNealy and Matthew Ganovsky each own a 25% equity stake in the two-year-old Abacus.

Craig Seitel, the president of Abacus, owns the remaining 25% equity interest. He's listed in regulatory filings as the operational manager of the firm, which is based in New York. The executives at Advanced, a division of National Financial Partners ( NFP), are described as passive members at Abacus, with "no day-to-day responsibilities relating to the operations.''

The ties between the two companies are no secret in the life-settlement industry, which last year reached the $10 billion mark in terms of future insurance payouts sold to investors. But it's not clear how widely known the relationship is among individuals looking to unload their unwanted life insurance policies -- even though Advance and Abacus have taken some steps to disclose their ties.

Some worry that the relationship between Advanced and Abacus has the potential for a conflict of interest, given that a broker primarily represents the interests of a seller. The concern is that disclosure alone doesn't eliminate the incentive a broker with Advanced Settlements might have to give Abacus preferential treatment in the bidding process.

Firms active in the life-settlements business include Abacus, Coventry First, Life Partners ( LPHI) and Maple Life Financial. Typically, the policies are sold by older people who would rather receive upfront money while they're still living than leave the policies' "death benefit" to their heirs. The buyers, known as "life settlement providers," often get financing from hedge funds, Wall Street investment banks and European investors.

Some behind-the-scenes financial backers to life-settlement providers are American International Group ( AIG), Deutsche Bank ( DB), Merrill Lynch ( MER) and London-based investment firm Fortress Group. The list of hedge funds jumping into life settlements, sources say, includes Dallas-based HBK; London's Pentagon Capital Management; London's Cheyne Capital; New York's Reservoir Capital; and New York's DB Zwirn.

In many instances, purchased policies are resold to other hedge funds and speculators seeking high-yielding investments. Abacus' Seitel, for instance, has ties to a European firm called Indemnity First, which works with overseas investors interested in betting on life settlements. Seitel is a director of the Spanish-based firm led by Mike Abraham, a veteran life-settlements financier.

But life settlements are a gamble. Relying on actuarial tables and physician reports, the buyers of such policies ultimately are wagering that the insured -- the person whose name is on the policy -- will die before the premiums eat up too much of the final payout.

Officials with Abacus and Advanced say there's nothing improper in their relationship, and they have taken steps to disclose their ties to would-be sellers.

An Advanced official points out that the application form signed by all sellers says the broker and its principals "are affiliated with a provider/purchasing company which could potentially acquire your insurance policy if it provides the best offer.'' If Advanced recommends Abacus as the buyer, the contract includes a clause noting that the buyer and its principals "are affiliated with Advanced Settlements.''

"The key thing is we certainly do disclose,'' says Elliot Holtz, a National Financial executive vice president for marketing. "It is really about getting the best sale for the client in a highly competitive market.''

Abacus CEO Seitel says the relationship is "not an issue,'' noting that it's fully disclosed in contracts. He says Advanced accounts for between 15% and 20% of the policies Abacus purchases.

"It provides me with a good relationship with a broker," says Seitel. "I get a good look at the Advanced cases, but I have to compete like everyone else. I have to show I have the highest bid from my investors.''

But the potential for a conflict of interest is of concern to an industry that's seen as less-than-savory by many on Wall Street and in the regulatory community. Industry sources note that life-settlement contracts are often lengthy documents, and the disclosure statements in the Advanced and Abacus documents might not mean much to some sellers, particularly unsophisticated ones.

A recently adopted Maryland law, for instance, makes it clear that the prime responsibility of a life-settlements broker lies with the seller of a policy. The law, which goes into effect next month, also bars brokers, in some situations, from having a financial interest in a company that's buying a life-settlements policy.

It's not certain what, if any, impact the new Maryland law would have on Advanced. But Todd Cioni, Maryland's associate insurance commissioner, says the law's clear intent is to limit potential conflicts and encourage fuller and complete disclosure by brokers.

"This industry is in its infancy, and we don't think people understand who all the parties and players are,'' says Cioni.

Meanwhile, New York Attorney General Eliot Spitzer, who two years ago went after the insurance industry over allegations that brokers received kickbacks for steering commercial insurance policies to certain underwriters, has opened an investigation into the life-settlement business. National Financial, a conglomeration of dozens of financial services firms, is one of the companies Spitzer's office recently served with a subpoena.

Spitzer's office has declined to discuss the investigation. Holtz says National Financial, led by CEO Jessica Bibliowicz, is cooperating with the investigation.

A source says Spitzer's office is aware of the relationship between Advanced and Abacus. Still, it's not clear if the New York prosecutor is looking into the relationship.

One issue Spitzer's office is believed to be examining is something called "premium financing,'' in which investors provide financing to an uninsured person so he can buy a policy. Some insurance industry executives say such financing is improper if a person buys life insurance solely for the purpose of selling the benefit to a third-party buyer.

Beyond the taint of the current Spitzer investigation, the life-settlements business continues to suffer from comparisons to the much-maligned viaticals industry, which specializes in buying life insurance policies from terminally ill people at discounted prices. Viaticals got a bad name in the 1990s when a number of firms engaged in unscrupulous tactics and were accused of taking advantage of the infirm, especially people with AIDS.

To distinguish themselves from the viaticals crowd, life-settlement buyers mainly target rich people who are over 65 years old with insurance policies that carry high premiums. Or they pursue corporations looking to unload policies that were taken out on former executives. The buyers pay an upfront lump sum for these potentially lucrative policies and simply wait for the former policyholder to die.

For the seller, the amount of money received upfront is usually far less than his heirs would receive at the time of his death. But the amount is also far more than he could reap by simply selling the policy back to the underwriter.

Last year, for instance, X-Rite ( XRIT), a commercial-graphics supply and manufacturing company, sold three unwanted life insurance policies it owned on its founders with a combined death benefit of $30 million -- for $6.5 million. X-Rite had taken out the insurance policies in the 1990s.

For successful brokers, who typically earn a 6% commission on each transaction, life settlements can be big business. In 2005, National Financial says Advanced's life-settlements business accounted for between 6% and 8% of its $891 million in revenue.

In the coming years, the life-settlements business is only expected to get bigger as the population ages and individuals look for a way to get some quick cash for their retirements. The dollar value of policies sold in 2005 doubled to $10 billion over the prior year. An analyst with Sanford Bernstein predicts the market for life settlements eventually could reach $161 billion over the next few decades.

"We understand 2006 is shaping up to be even stronger than 2005,'' says Bernstein analyst Suneet Kamath, in a recent research report. "As a result, the settlement market could reach $161 billion sooner than we originally expected.''

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