The viatical securitization market will spark to life this quarter with a hefty $150 million "senior insurance settlement" transaction from Capital Resource Group One LLC, which intends to launch its version of a death benefits deal in the ABS market just before year-end.
The deal from Capital Resource is structured under Rule 144A, and is separated into two tranches, a seven-year $46 million class, and a nine-year $104 million class. The company lists Pryor, Counts & Co. as the placement agent and 21st Holdings, LLC as the master servicer for the bonds. United Funds LLC is named as both the subservicer and the seller of the senior insurance settlements to Capital Resource.
The sale comes at a bad time though, as it will price in the wake of a massive criminal probe initiated by government regulators that alleges fraud against various viatical companies in the industry.
Capital Resource would not comment on how or if the lawsuits might affect its upcoming securitization, but the company was quick to distance itself not only from the headlines involving the criminal investigation, but from the entire viatical industry.
"A viatical settlement is based on a terminal illness, a senior settlement is based on old age with chronic health impairments," a company official said. "My company does not deal with that sort of thing. I feel like my company is completely separate from that industry," he said.
Despite this distinction, the criminal investigation is examining the entire life insurance trading industry for deceiving both investors and the public. The probe began in January by Florida Treasurer and Insurance Commissioner Bill Nelson, and has recently resulted in the indictment of two officials at Justus Viatical Group for allegedly selling fraudulently obtained life insurance policies to various investors.
Nelson's investigation uncovered a viatical scheme that apparently went on from 1997 to 1998 and bilked more than 17 insurance companies out of $2 million. Ron Poindexter, the head of Florida's division of insurance fraud, has said that the investigation will continue and, in all likelihood, additional charges will be filed against other viatical dealers.
"We have significant numbers of investigations in various stages," Poindexter said.
Poindexter also confirmed that his probe has spurred investigations in other states and on the federal level, as his office is "cooperating with federal authorities on some investigations, and we have shared information with other state regulators and law enforcement agencies."
The companies targeted are being investigated for "clean sheeting," a practice where the viatical company hides terminal medical conditions from a life insurer in order to obtain a policy that it can sell easily to investors.
Viatical companies operate by purchasing the life insurance policies of terminally ill people at a percentage of the policy's face value, so the insured can get cash for medical expenses, travel, investments or gifts to children sooner rather than later. The companies then sell them to investors for a profit. Investors make money unless the original insured's death comes significantly later than anticipated. Investors have sued viatical firms in the past saying they were deceived because medical advances are keeping AIDS patients alive longer.
A south Florida-based company called American Benefits Services Inc. has been charged with deception and misrepresentation by the state insurance commission along with Justus Viatical.
An expert on viatical ABS said that headlines such as those facing viatical firms would "absolutely" make it more difficult to smoothly execute a sale on these types of bonds, even though there's a feeling in the ABS market that the situation down in Florida is not representative of the industry, but instead, is simply a case of "bad people."
"I think if somebody went out with a stand-alone deal in the market right now with this sort of cloud hanging around it, they would get absolutely hammered," the expert said.
The viatical market has grown from a $90 million market in the 1980s to a $2 billion market in the late 1990s as the number of AIDS patients has increased.