Get A Life!: Life Settlement Company, Forum National Investments, Rebounds from BCSC Stoppages
In Frank Capra’s classic holiday movie “It’s A Wonderful Life,” the protagonist George Bailey is forced to beg for leniency from his rival, the evil banker Mr. Potter. The scene involves a desperate Bailey trying to use a $15k life insurance policy as collateral for an $8k loan. Potter responds by asking, “How much is it worth if you sold it today?”
The life settlement market is nothing new. A landmark US Supreme Court case (Grigsby vs Russell, 222 U.S. 149) was fought and won in 1911 by a gentleman who wanted to sell his life insurance policy for cash. The prevailing argument was that the policy itself possessed all of the ordinary characteristics of property, and thus was an asset that the holder could legally transfer without limitation. Then sitting Justice Oliver Wendell Holmes remarked that, “Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.”
Now over a hundred years later, the view of policies as property is still alive and well. In the aftermath of 2008’s collapse, many faced with financial situations of George Bailey proportions see the salvation of life settlement transactions to be a financial shot in the arm to bring about relief.
Ontario-based Forum National Investments [OTCBB:FMNL] broke into the life settlement market in 2007. Despite the financial conditions of the following year, the company was able to make its transition through a $10 million financing, and some valuable letters of intent from investors to lead the way to a potential $100 million financing down the road. At the time the stock was trading in the $17-18 range.
Dour market conditions saw the stock’s price come off slowly over a period of time. It took a little while to fully wind up the life settlement division of the company’s strategy, but over that time Forum managed to buy $30 million in life settlements, with the first maturity coming within the first 8 months. Those particular settlements cost the company $3 million, and the company saw its first maturity for one of the policies to the tune of $6.3 million (which the company paid roughly $500,000 for).
“That’s typically not the return that you’re going to expect from life settlements,” says Dan Clozza, President and CEO of Forum. “But it can happen because the first year you’re buying secondary life insurance polices from people in their late 70s and early 80s and things do happen.”
“Typically you’re buying these policies to hold them from somewhere between 6 and 10 years, and your anticipation is a mid-teen sort of return on an annualized basis. But you can have windfalls from time to time, earlier maturities tend to balance out the later ones.”
LIFE SETTLEMENTS EXPLAINED
When you’re talking about people’s lives, it’s worth really looking at the realities at play. An investor in life settlements, such as Forum, agrees to pay the seller (or client) a cash sum less than the face value death benefit, while at the same time greater than the policy’s current cash surrender value. The benefit to the policyholder is that the surrender value is typically quite low in comparison to a proper payout. To return to the example laid out in Frank Capra’s classic film “It’s a Wonderful Life,” George Bailey insists that his policy is worth $15,000, but the cash value was only $500 (or just over 3%). With a life settlement market option, policyholders get a lot more than what the insurance provider would give them for their troubles.
In many instances policies are purchased for peace of mind, in order to know that one’s family is taken care of. The hope is to protect the holder’s loved ones in the case of an untimely passing in the earlier family rearing years, or for other reasons. As the policyholder ages, their premiums increase, all the while their children age and the importance of receiving the full amount of the settlement decreases.
It’s not uncommon for many seniors to pay premiums for most of their lives, only to have to surrender the policy near the end of their lives due to a lack of ability to keep up payments. According to a December 2006 article in the NY Times, it was estimated that insurance companies saved $1.1 trillion when 19.8 million policy holders stopped making payments in comparison to the industry paid death benefits on 2.2 million policies. That’s an 88% lapse rate that is rarely addressed. A life settlement option allows the holder to receive a greater payout than the cash surrender value, with no further risk of losing the policy all together.
A scathing reaction in the Duluth Tribune in the aftermath of the NY Times article called the practice “appalling.”
“Its appalling for consumers to learn that life insurance companies want polices to Lapse, when insured are most vulnerable in the senior years and most likely to be hospitalized,” said the author citing obstacles that can get in the way of seniors making their payments. “When simply putting a check in the mail may not be even a possibility…” “[It can be detrimental to] alzheimer’s and dementia patients who simply forget.”
“Typically the cash surrender value from the insurance carriers on these policies were so very low, that it’s almost not worth it considering for the holder, in most cases,” says Clozza. “What the life settlement market did was start to give people 10,12,15% and in some cases as high as 20% back on a living policy.”
For the investor, such as the case with Forum, the investment is safe, as it’s certain that the policy will be paid out eventually, as it’s underwritten by AA or better rated US insurance companies. In over 100 years, there has never been a case in the US of a fully paid life insurance policy that met the requirements (ie. no fraud) of the policy, that hasn’t been paid out. It’s actually quite a safe model to work with. Insurers themselves have dabbled in this secondary market, with AIG having close to $18 billion invested in this space, based primarily on the policies of other carriers.
What Forum has done is streamline its process. A typical settlement from start to finish may require 70 or 80 signatures, which needs to be repeated over and over again every time a settlement is made and a transfer of beneficiary ownership is completed. Prior to entering the space, Forum had witnessed traditional large paper files transported for each review. The company spent a number of years developing an electronic platform, and now track in excess of $11 billion worth of death benefits. The company is closing in on 1,800 lives now. In essence, they have made the whole process a lot less stressful compared to the way it was before.
That is, until things went awry in British Columbia...
TROUBLE WITH THE BCSC
For over a six week, stretching between June and August, the British Columbia Securities Commission (BCSC) halted the stock, on suspicion of an alleged marketing campaign directed at BC residents. The result was a disastrous hit to the stock’s price, and a shadow of doubt that some might say continues to linger over the company, despite the vindication of the BCSC’s three-member tribunal ruling.
The case got even stranger, when you try to assess the charges levied against Forum, because officially there weren’t any. The stock was halted/CTOed in late June, only to be lifted, and resumed trading again in mid August. But Company CEO Dan Clozza insists there’s never really been any real allegation of wrongdoing, which was eventually the conclusion of the tribunal. He also states that a large majority of British Columbia shareholders have fled the stock, including in one instance where Haywood Securities sold their entire positions to the tune of approximately 500,000 shares. This was over ongoing concerns regarding the BCSC and the potential tradability going forward.
“People are just concerned that they may wake up tomorrow and not be able to trade their shares ever again in this province,” adds Clozza. “They’ve been scared off in British Columbia due to the treatment that US over-the-counter companies get here. Recently a shareholder tried to withdraw some of his shares from Canaccord Genuity, wanting physical delivery of his Forum shares, and was quoted $875 to get delivery of his stock. Ask yourself if that’s what you get when trading a typical Canadian stock. We felt so bad for the shareholder we are going to pay the cost for him to get his shares. But it’s unfair how OTC companies are treated here.”
Since the interview with Clozza, Canaccord has officially dropped its price for delivery of OTC stocks to $700, which is lower, but still quite restrictive.
FMNL PRICE HISTORY: YOU BE THE JUDGE
Looking over the price history of the FMNL stock, on April 11, 2012, the stock was trading at $0.15 per share. Steady doses of volume ranging from 3,900 to 55,000 from April to May 17 pushed the price up incrementally to $0.45.
Then a series of high volume days hit in a row, and the price soared. Four days straight of more than 400,000 shares were traded, which saw the price lift to as high as $0.94. It cooled off after that, with only one day with more than 400,000 in volume after that on May 29. Prices weren’t always steadily going up, as there were plenty of down days, including the 29th that saw the price dip back down to $0.75, and again down to $0.66 the next day.
After hitting a month low of $0.64, the stock went on another run, eclipsing the $1 mark on June 5th, on 228,651 shares in volume. A couple of down days followed before the stock rallied again significantly. Seven trading days with 6-digit volumes saw the stock hit the $2 mark on June 19th. It would hit a high of $2.17 before closing the month out with a price of $1.88.
Steady climbs after a July 7th close of $1.73 would see the price hit a 2012 high of $2.80 on July 18th. Now it is worth noting that the halt trade order came on June 28th from the executive director of the BCSC, when the stock closed at $1.42.
Allegations of a promotional marketing campaign directed at BC residents are a very serious matter. And though the price of the stock did get a big boost over a couple months (more than 20x), parabolic shifts are not impossible. Nor should they automatically be assumed to be nefarious.
In Canada, at least a few mining or petroleum stocks go parabolic every year. Occasionally a new technology firm or pharmaceutical company will do the same. This is what investors dream of for their stocks. But based on the reaction to FMNL’s meteoric rise, parabolic stock charts might become something to actually dread in the future, out of fear of not being able to trade your property.
When FMNL started its climb, was around the same time that the company announced its formal negotiations with ALIYA LifeSpan LLC to merge business interest in the life settlement space. At that time, ALIYA was giving a renewed vote of confidence to Forum’s transition into being a life settlement entity, after making an original investment of $6.4 million to own a 27.67% stake in Forum. ALIYA seemed to be tipping its hand that it would look to acquire an even bigger stake.
Within three days of this announcement, the stock had its first of many 400,000+ volume days. The stock made a massive gain of 38.24% on the day that the company released news regarding the $10 billion in life settlements that Forum was tracking. Could it be that the market was just waking up this company’s unusual business model and were starting to see the potential? It’s not unlike a company hitting a gusher oil well or bonanza grade mineral assay, except in this case it was the realization of a $22 trillion market place that continues to grow. Except with this sector, there is no limit to the blue sky, unlike that of a resource that depletes over time. It’s more like a renewable resource, because we’re talking about people, and populations continue to grow.
THE US MAIL AND INTERNET MARKETING EQUATION
Part of the BCSC’s purported allegations against Forum came from an apparent direct-mail, and internet marketing campaign. But according to Clozza and Forum management, they had no connection to the sponsor of any campaign implicated in the promotion of the stock, which included Caropath Ventures Ltd., which purportedly was running on a marketing budget of just over $650k. This is not a typical amount allotted to any marketing campaign of publicly traded companies, so the number attached is suspicious at best, and possibly in this writer’s not credible by any means. If that kind of money was really involved, the influence on trading would be far greater than what was witnessed last summer.
“There is no question that there is information that has been publicized,” says Clozza. “But as I read through the information, for the most part it looks like a reprint of information that is already publicly available or it was someone speculating on the possibility that Forum might be a good buy.”
“We already had discussions with the BCSC that our company doesn’t engage in IR at any level and are not actively promoting the company other than the information that is released publicly for news releases. In fact, none of the principles, officers or insiders of the company had even sold any stock.”
Clozza’s claim about insiders would later be proven true, despite a heavy cost to shareholder privacy. Clozza was a founding Director in 1995, and has been with the company ever since. All of his shares are in his own name. He insists that there isn’t any kind of large block of stock in any clandestine location held by anyone unidentifiable.
With ALIYA owning close to 10 million shares, and Clozza himself holding approximately 5.5 million shares, any large sales from one group would be very easily recognizable. So all of the major volume shifts must’ve came from the retail sector, market makers, and shorters.
One shareholder was indeed identified by the BCSC after he tried to allot portions of his position to friends and family. But because no broker would accept privately sold certificates, they recommended that he not go the route of using a transfer agent, but use a licensed broker.
What resulted was an ill-fitted strategy of bringing the friends into the brokerage house in question, crossing them over shares, absorbing the brokerage fee and going about their business. In British Columbia there used to be a system called the Cub System, whereby a broker had the ability to deem a trade not worthy for print, or avoiding a show of market activity when really none had transpired. This Cub System worked to show the regulatory authorities of the transaction, but would hide it from the general market.
But, that system was done away with in the last few years. So, in this case, the broker in question had no choice but to print the trade. In what was a friendly re-allotment of shares, turned into approximately $750,000 worth of trading. In reality, the shareholder had more realistically had actually sold about $50-60,000 in shares, and shuffled the rest.
Now the question is, even if this shareholder who is not a director, officer or insider, had sold his entire position instead of shuffling it amongst his friends and family, what law did he break?
What resulted was a full-scale investigation that according to Clozza illegally revealed the private and confidential information of a number shareholders. Despite no convictions being made, coverage on the story cast Forum in a very negative light. Even a press release put out by the BCSC would incorrectly label the company’s market cap at “USD $120 million,” when in actual fact the company was trading at $1.48 at the time of the halt with only 32 million shares outstanding (that makes for USD $47.36 million for anyone counting, unlike the $120 million claim).
“(The BCSC) claimed that we had refused to put out a news release disavowing our involvement in the US marketing campaign,” says Clozza. “This was after we had not only had verbal but written discussions with them denying our involvement. So, yes, we didn’t put out a news release on the matter, but there is no law that says that we had to. But we later did issue a press release once sufficient due diligence over the officers, directors and insiders of the company had no involvement.”
So Clozza and his management team issued a formal complaint about the $120 million misstated market cap, which should’ve been corrected before it went to the BCSC tribunal; But it wasn’t. Even if the commission took the highest price of $2.80, then the market cap would’ve been $89.6 million. This is over a 25% discrepancy.
Next, in the affidavit presented to the panel, sensitive information including the full names, addresses, passport numbers, banking information and more was attached and on display. As Clozza aptly points out, the RCMP doesn’t have this power without a warrant, thus the BCSC in fact has special powers that the main branch of law enforcement in the country doesn’t have. Those documents were not sealed until very recently, when on January 17, the BC Supreme court order the protection of those implicated. It appears that this was also in violation of section 11 of the Securities Act, which states that facts, information and records obtained under the act must be kept confidential. Thus, it could be said that the only party in violation of the Securities Act in this saga at all has been the BSCS themselves.
The commission tribunal had previously ordered this information redacted when in the public eye. The panel agreed that portions of the first and second affidavits contained confidential private information of and concerning selected shareholders, and that they should be removed from the public record. And in the words of author Kurt Vonnegut, “So it goes.”
THE DAMAGES DONE
Since the halt the stock has gone back down to where it currently sits at $0.25 (as of March 4, 2013). As well, the relationship between Forum and ALIYA was strained but not broken. With the difficulties that arose in British Columbia, ALIYA wanted nothing to do with the BCSC drama. As a result, Forum pulled the plug on its BC offices, and moved the company to Toronto, Ontario, moved the transfer agent to the United States. All BC employees were to be laid off.
What shouldn’t be lost in this story is how viable life settlements are as an investment vehicle. When selected correctly, the maturities pay out double-digit returns, and unlike exploratory resource stocks, there is a biological certainty to each investment that Forum makes. Every policy that they buy eventually pays out, with some earlier than others.
With the aging baby boomer populations moving forward towards retirement age, new sets of policies become available. As well, the legitimacy of selling one’s life insurance policy should increase with awareness. Much like second mortgages, life settlement gives another avenue of revenue for seniors in need of financial support. Rather than let those policies be forfeited, and save insurance companies up to $1.1 trillion dollars (as cited in 2006), there are definitely billions to be made on the secondary market. Forum should emerge from this situation as a stronger business, and gain a second life of its own.
Given the size of the market, and the potential of the payouts, this company could be a homerun if only this string of incidents hadn’t occurred. From an economic standpoint, the business plan appears sound, and once freed to go about their strategy unfettered, has potential unlimited blue-sky opportunity in a $22 trillion industry.
“If we start receiving orders, then there’s really no limit to the amount of business that we can do, despite all this noise that has been going on,” says Clozza. Once Clozza can gets beyond this BCSC issue and move on to the more important matter of putting together a multi million order, then perhaps the story can right itself and get FMNL back on the track it was on when the run started in May.
G. Joel Chury
DISCLAIMER: The author does not hold shares in any of the companies mentioned in this article at the time of its publication. The author reserves the right to trade shares in any of of the companies mentioned after 48 hours have elapsed upon the publication of this article. This article is not an offer or solicitation to buy or sell securities of the companies featured. You should not consider the information to be a recommendation or indication as to when you should buy or sell securities or if you should buy or sell securities of the companies mentioned. You should consult your financial and legal advisers before purchasing or selling the securities of any company mentioned in this article. Any investment in the companies mentioned in this article involves a high degree of risk and involves risks and uncertainties, which may result in investors losing all of their invested capital. No fee or commission were involved in the creation of this article.