Fortress Investment Group LLC (FIG:US) has taken its clash with life insurer Phoenix Cos. (PNX:US) from the courthouse to the statehouses as the firm seeks to salvage a bet on policies with a face value of more than $1 billion.
The private-equity and hedge-fund manager, which purchased policies on the secondary market, has proposed rules to make it harder to cancel insurance and to mandate the return of premiums if coverage is voided. While efforts stalled in states such as Florida and Connecticut, an attorney for Fortress cited progress in Delaware where a proposal advanced from a house committee, only to die as the legislative session ended three weeks ago.
“It takes time to pass bills,” Jeremy Kudon, a lawyer for the New York-based company, said in a phone interview. “We have every intention of coming back.”
Victories could boost liquidity in the life-settlements market, which Fortress said has been chilled by concerns that Phoenix, and possibly other companies, will deny payments. The firm told lawmakers it is seeking to protect and expand a market that can aid seniors by allowing them to get more cash than their policies’ surrender value. The investors take over premium payments and count on eventually collecting the death benefit.
“Fortress sees a way to make money,” said Joseph M. Belth, a professor emeritus of insurance at Indiana University in Bloomington. “They want to enhance the value of their inventory of policies.”
Fortress spent about $330 million four years ago for a life-settlements portfolio with a face value of about $6.2 billion, a regulatory filing shows. The largest of its 2010 Life Settlements funds had a $19 million deficit as of March 31, according to a report to the Securities and Exchange Commission.
That reflects $64.9 million in assets after a $383.2 million investment, and $299.3 million in distributions. A smaller fund had a deficit of about $1.7 million.
“We’re being asked to bail out an out-of-state hedge fund,” Minnesota State Representative Greg Davids, a Republican, said at a hearing last year. “We get very nervous about passing laws that are going to affect current litigation.”
Lima LS Plc, a Fortress investing vehicle, said in a January document that it struck an agreement to exit about 80 percent of its life-settlement policies. The buyer was Apollo Global Management LLC (APO:US), and Fortress was left after the sale with policies tied to Phoenix, said people familiar with the deal who asked not to be identified because the transaction was private. Fortress said in court papers that it is harder to find a buyer for Phoenix policies and faulted the insurer’s underwriting.
“To get its hands on more and more premiums, Phoenix turned a blind eye to obvious application inaccuracies,” Lima said in a suit in U.S. District Court in Connecticut in 2012. “But now, to avoid paying out on such policies, Phoenix has seized on such errors, feigning false surprise about them.”
Lima cited a $10 million Phoenix policy that covered Faye Keith Jolly, a Florida man. Hartford, Connecticut-based Phoenix had sued Jolly in 2008 for fraud, saying he falsely claimed to have more than $1 billion in assets, mostly in uncut emeralds recovered from a sunken ship.
Phoenix won a judge’s permission to rescind the policy. A trust tied to Jolly said in a court filing that the policy was valid. Phoenix, which was founded in 1851 to cover people who abstain from alcohol and later insured Abraham Lincoln, said that it pays benefits on legitimate policies.
The Lima suit is a case of “buyer’s remorse through which a hedge fund seeks to lock in massive returns on a high-risk investment through judicial action,” Phoenix said in a court document.
Fortress said in its suit that it has owned policies tied to Phoenix with a face value, or death benefit, of about $1.4 billion. Part of Fortress’s statehouse push is to require that insurers respond to inquiries from prospective life-settlement investors about the validity of policies they want to buy.
“If you don’t have these sorts of rules, your investors are at risk,” said Kudon. “This market will need certainty to expand and flourish.”
Fortress faces skepticism from lawmakers like Minnesota’s Davids and Florida’s insurance watchdog about why state officials should get involved. Also, the regulator has said that changes sought by Fortress may contribute to fraud by encouraging people to take out policies with the sole intent of reselling them.
“The courts are addressing these issues,” the Florida Office of Insurance Regulation said in a December report to the Legislature. “The treatment of life insurance solely as a commodity from inception is at odds with the purpose of life insurance and may have negative ramifications.”
Fortress told the Florida watchdog that it manages assets for clients including university endowments, public pension funds and unions. The firm also said that the California Public Employeesâ Retirement System invests in the market. Joe DeAnda, a spokesman for Calpers, declined to comment.
Banks have also been involved in the market, both by arranging sales or investing in the contracts. The Institutional Longevity Markets Association, a trade group that represents lenders such as Wells Fargo & Co. (WFC:US) and Credit Suisse Group AG along with Fortress, has also pushed for rules benefiting investors.
“We want to ensure that there’s clarity and that there’s transparency and that there’s surety in what you do,” Jack Kelly, managing director of ILMA, said in a phone interview. Investors’ returns fall when insured people live longer than expected and when companies deny benefits or change policy terms.
Fortress has been working to get life-settlement rules passed for about two and a half years, focusing on states where it has the most at stake, according to Kudon. Bills in Minnesota, Connecticut and South Dakota died or were tabled, according to the American Council of Life Insurers.
The advance of the bill in Delaware caught the attention of the ACLI, which put out a statement on June 30, as the legislative session approached its close, to say there was a danger of more financial fraud if the proposal became law.
“After failing to get what they want in the courthouse for a couple years, they moved to the statehouse,” said David McDowell, a lawyer who represents Phoenix in the suit and testified for the ACLI in Minnesota.
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