CROWN ALLIANCE CAPITAL LTD – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements." These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Company Overview
We are a publicly reporting
Overview of Life Settlements
A life settlement (also sometimes known as a "viatical" if the life insured has less than 2 years to live) is the purchase of a life insurance policy at a discount from face value from a person who no longer needs or wants the policy.
The policy owner receives a lump sum settlement and the title for the policy is transferred to the third party, which pays the future premiums due on the policy and eventually collects the death benefit.
Traditionally, policy owners of a life insurance contract would get access to the value built up in a policy while they are living by surrendering the policy for its cash value, withdrawing some of the accumulated surplus value (if there is any), or borrowing against the cash value. Generally, the actual value that can be accessed through these options is fairly limited. Life settlements are an alternative for those wishing to sell their policy. With a life settlement, the owner of the policy can sell their beneficial interest in a policy for cash - a life settlement. The owner often receives a higher value compared to the traditional options and is relieved from paying future premium obligations.
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There is a network of licensed brokers throughout
Life settlements are potentially profitable because the purchaser acquires a policy at a discount from the face value which is based on the insured person's life expectancy and the purchaser's desired return on capital. The investor then continues to pay the premiums and collects the death benefit when the policy matures. The annual rates of return that purchasers can expect typically vary between 8% and 12%. In the case of an early maturity (i.e death of an insured) the return on investment can be substantially higher. In the case where the insured person lives longer than anticipated, the return on investment will be lower, and can potentially be negative.
There are many reasons for policies becoming available for settlement. These include:
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Policy-holder is terminally ill and requires funds to pay medical and/or living expenses
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Policy-holder no longer needs coverage
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Change in business ownership makes policy obsolete
· Key-man leaves the business ·
Policy-holder needs to raise cash
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Non-profit organization owns a policy insuring the life of a key donor or benefactor who no longer wants to pay premiums
· Estate tax reform in USA ·
Growing number of sophisticated market participants
Further regulation, demographics and a low national savings rate will drive the expansion of supply to the life settlement market. The demographic of the baby boomer generation, people born in the U.S. between 1945 and 1965, is well known and is moving towards retirement with minimal savings relative to expected post-retirement expenditures.
U.S. Life Settlement Industry
The life settlement industry began in the late 1980's. The first year of credible data available is from 1989 when about
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Though individuals have many reasons for exiting their policies, few are aware of the life settlements marketplace and either accepts the cash surrender value from the insurance company (often only a fraction of what the policy could be worth in the life settlement market) or let the policy lapse. The fundamental reason for the rapid growth of the life settlements market is consumer value. The life settlements purchaser can pay more than cash surrender value and still expect a competitive rate of return on their investment.
A report by
Plan of Operations
Our primary objective will be to build a diversified inventory of life insurance policies both through new investment and the re-investment of the proceeds of matured policies. Initial management and administration of our life settlements portfolio will be provided by
Pursuant to the Administrative Services Agreement, USI has agreed to provide, on a non-exclusive basis, a number of services relating to the administration of our life settlement contracts and additional services. These services include dealing with change of ownership and change of beneficiary issues, verifying coverage under a policy, monitoring and validating premium payments required to be made, tracking each insured, managing claims, dealing with group insurance plans, maintaining records and reports on all insureds, and such other services as may be requested from time to time by us, including identifying additional policies for purchase. The Services Agreement has a fixed term of five (5) years with a mutual early termination provision of 90 days without cause. Fees for services will be charged by USI on a per policy basis.
After acquiring an initial portfolio of life settlement contracts with the assistance of USI, we intend to focus on growing our portfolio of life settlement policies going forward. The primary strategy will be to acquire additional life settlement policies that meet certain criteria and pricing guidelines, including the following:
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Policies must be issued in
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Policies must be issued by insurance companies rated at least "A-" or equivalent by AM Best, Moody's or S&P.
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Policies must be beyond any contestability and suicide period.
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Policies must allow for irrevocable beneficiary designations and absolute assignment of ownership.
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Policies must allow for coverage for the whole life of the insured or allow for conversion so that coverage will continue for the whole life of the insured.
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The cost of each policy acquired will be influenced by five major factors:
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Face value of the policy upon maturity.
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Annual premium on the policy.
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Life expectancy (LE) of the insured.
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Administration costs associated with the policy.
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Competitive bids from other potential purchasers.
Sources for New Portfolio Acquisitions
We will use USI's network of licensed providers and brokers throughout
Process and Procedures for Policy Purchases
As detailed in the Administrative Services Agreement between us and USI, USI will assist us in identifying and facilitating the purchase of policies. Each life settlement will be subject to the due diligence process as described below:
1.
Due Diligence Underlying a Policy Purchase
USI will source policies which meet our criteria from Qualified Service Providers (QSP's). If a policy meets the criteria, USI will conduct due diligence to ensure that the policy is valid and meets the necessary standards. Due diligence will include:
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Obtaining verification of coverage (VOC) from the insurance company. VOC will confirm various policy details such as: face amount, premium, issue date, contestability, loans, withdrawals, lapses of coverage, beneficiary and ownership information, etc.
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Obtaining and reviewing actual policy or copy of policy.
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Obtaining a Physician's Statement of Mental Competency for the owner of policy.
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Analyzing policy illustrations.
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Obtaining an authorization to procure and subsequent analysis of medical records.
2.
Required Documents for Due Diligence
Documents listed below are required as part of the due diligence process:
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Consent to Release Medical Information (Notarized)
We must be able to receive all medical documentation for at least 5 years from all physicians that an insured person may have in order to obtain an accurate life expectancy evaluation. We must also have the ability to receive updated medical records as the situation requires.
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Letter of Competency (Signed by attending Physician)
This ensures that an insured person is aware of what they are doing and that they are of sound mind.
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Release and Consent to Change Beneficiaries (Notarized)
All current beneficiaries must sign off with the acknowledgement that they understand and consent to being removed as beneficiaries.
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Authorization to Provide Death Certificate (Notarized)
This allows us to acquire a death certificate in a legal and timely manner.
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Seller's Premium Indemnification Letter (Notarized)
This ensures that all premiums are paid up to the point where ownership and beneficiary rights have been transferred.
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This gives us the authority to contact and obtain any required information from doctors or insurance companies.
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Personal Information of the Insured and their Contact Information
We must be able to monitor and track the insured. Contact is maintained either directly with an insured or through a friend, family member, lawyer, physician or financial planner.
· Payment Instructions
This details the method of payment to an insured for their rights to ownership and beneficiary status once the closing of a policy purchase occurs.
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3.
Life Expectancy (LE) Evaluations
Insured persons who seek to sell their policies on the secondary market usually retain qualified representation to facilitate the sale. These policy brokers typically provide all medical information and LE evaluations to us so that we are able to make an informed bid on a policy. The LE evaluation is completed by independent LE evaluators who have experience in the mortality assessment domain.
We will utilize the following LE providers to determine life expectancy:
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American Viatical Services of
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21st Services of
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ISC Services of
USI research indicates that over the last several years, LE evaluators have become more conservative in their reports, largely due to the adoption of updated mortality tables.
4. Closing
If a policy meets all necessary criteria and the due diligence process has been completed to our satisfaction, the parties enter into a "Policy Funding Agreement" which is the agreement between the policy owner and us as the buyer of the policy. The following documents are required for the closing of each individual transaction:
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Contract between us and the seller of the policy.
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LE reports from 2 (two) approved list of LE providers.
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Original insurance policy (certified true copy if original is lost). Identification for the insured, such as copy of social security card or driver's license. If the owner is a trust or corporation, a copy of the trust or a corporate resolution showing individuals who have signing authority.
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Completed and signed tax forms for all sellers and brokers.
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Executed Ownership and Beneficiary Change forms.
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Funds are not disbursed to the owner or brokers until all changes are reflected in insurance company records.
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5. Change of Ownership
USI reviews and verifies all policy information to ensure accuracy and to verify that there have been no changes, and submits the Absolute Assignment of Ownership and Beneficiary Change forms to the insurance company. Once the executed change forms are received back from the insurance company verifying that we are the owner and beneficiary of the policy, USI advises us to disburse funds as directed. This agreement with USI will be in place for the next 24 months. At the end of this time, the agreement will be reviewed and management will decide whether or not to extend them.
6. Tracking
Insured persons whose policies have been purchased by us are tracked by qualified personnel in USI's office and reporting to us occurs on a regular basis. Tracking includes the following:
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Periodic contact with the insured, attending physician of record, or a designated person such as a family member.
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Weekly social security death index checks.
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Other database checks on a monthly basis.
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Health statements of insured from attending physician on an as needed basis.
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Regularly updated information reports.
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Updated medical reports from primary physician on an as needed basis.
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Updated life expectancy reports from qualified providers on an as needed basis.
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Alerts when premium payments are due.
7. Premiums Management
Under the Services Agreement, USI will provide management services for our initial portfolio of life settlement contracts as well as for future acquisitions. Services include:
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Obtaining and analyzing completed VOC (verification of coverage) forms from insurance companies for each policy. VOC forms indicate policy information, cash value figures and premium data.
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Monitoring and validating premium payments required to be made.
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Providing us with a premiums due schedule at least 30 days in advance of required payments.
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Confirming receipt of premium payment by Insurance companies
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Obtaining and analyzing updated premium illustrations as required.
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Performing premium optimization analysis as appropriate.
8. Claims Management
Whenever there is a maturity, USI submits a death claim to the insurance company. This process involves obtaining the death certificate, obtaining necessary claim documents from the insurance company, submitting of completed documentation to the insurance company and following up verbally and in writing with the insurance carrier on the claim status until such time as the death benefit is paid to us. The death benefit check is sent directly to us by the insurance company.
As part of our long term growth strategy, we intend to vertically integrate and internalize some of the services which will initially be outsourced. There are cost reductions that could be achieved in policy tracking costs, premium management, claims management, and agent commissions.
We can accomplish vertical integration by either buying existing companies that provide the above services or creating an internal employee pool to accomplish these tasks. By integrating the above functions, we could potentially provide these services to other life settlement companies and develop an additional income stream.
Results of operations for the three and nine months ended
During the three months ended
The source of this revenue was the maturity of one of our insurance contracts.
Our costs for our insurance contacts during the quarter were
During the nine months ended
From our inception on
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We began the acquisition of our initial portfolio of life settlements on
Under the Agreement, we are required to pay all premiums due under each of the acquired policies until they mature. The Agreement originally required us to deposit the full purchase price of
On
On
To date, we have completed the purchase of two of the four policies under the Agreement, and a third policy has matured prior to completion of our purchase, as described above. We must pay
Estimated premiums to be paid for each of the five succeeding fiscal years to keep all three remaining policies being purchased under the Agreement, as of
Year 1$ 64,050 Year 2 256,200 Year 3 256,200 Year 4 222,000 Year 5 54,000 Total estimated premiums$ 852,450 12
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Liquidity and Capital Resources
As of
We will require substantial additional funding in order to continue the development of our business of acquiring a portfolio of life settlement policies. Although we are currently seeking and raising additional equity funding, we have no firm arrangements for financing and can provide no assurance that such funding will be received in an amount sufficient to pursue our planned line of business.
Off Balance Sheet Arrangements
As of
Going Concern
We have yet to achieve profitable operations, have accumulated losses of
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