AIG Says It Settled Legal Dispute Over ‘Life Settlements’
March 1, 2016 by Leslie Scism
End of Coventry First Dispute May Pave Way for Insurer to Sell $3.6 Billion Portfolio
American International Group Inc. said it has resolved a legal dispute with a firm that helped it amass a large investment portfolio of “life settlements” in the 2000s.
The agreement could pave the way for AIG to sell the portfolio, which AIG valued at $3.6 billion as of the end of last year. The life settlements are among several “nonstrategic assets” that AIG identified for sale in a strategy update Jan. 26. The company is seeking to return $25 billion in capital to shareholders through next year.
Life settlements are policies typically sold by ill or elderly people to investors, often because they can’t afford or no longer need the coverage. Investors bet the future death benefit will exceed the cash spent to buy the policy and premiums they will need to pay while waiting for the person to die. Critics sometimes call them “death bets.”
The settlement, on confidential terms, ends litigation between AIG and Coventry First LLC, a suburban Philadelphia firm.
In a 2014 lawsuit in federal court in Manhattan, AIG accused Coventry and its founder, philanthropist Alan Buerger, of running an “egregious criminal scheme” that inflated prices and cheated it of at least $150 million. Coventry disputed the allegations and maintained AIG was using the allegations of wrongdoing as a pretext to get out of a servicing contract, which had terms that industry participants said were lucrative to Coventry.
While a tiny portion of AIG’s overall asset base of approximately $500 billion, the life-settlement holdings make AIG one of the biggest owners of the investments in this obscure corner of the financial markets.
The litigation with Coventry had complicated AIG’s effort to divest the holdings, according to market participants. AIG declined to comment beyond a brief statement.
U.S. District Judge Jed S. Rakoff in Manhattan heard testimony in a nonjury trial last summer and fall and was poised to deliver a verdict. Some key early rulings went against Coventry, including dismissal of its claims against AIG for alleged breach of contract.
Among the terms of the confidential settlement, AIG’s Lavastone Capital LLC affiliate, which holds the life settlements, “will be able to transfer Coventry’s servicing of AIG’s life settlements portfolio to another party, and Lavastone will be able to freely market or sell policies that were originated by Coventry,” according to a joint announcement from AIG and Coventry.
Apollo Global Management LLC and Blackstone Group LP, which have acquired life-settlement portfolios from financial firms or hedge funds over the past couple years, are expected to be among those examining potential deals with AIG, according to industry experts.
AIG is under pressure from investor Carl Icahn to break itself into three parts as a way to shed new federal regulation as a “systemically important financial institution” and dramatically improve results. AIG has maintained an immediate breakup isn’t in the best interests of shareholders, but agreed in early February to expand its board to give seats to a representative of Mr. Icahn and another critic, billionaire investor John Paulson.
As of Dec. 31, AIG’s Lavastone unit held 4,554 policies with total anticipated death benefits of nearly $15 billion, according to AIG’s financial filings.
Write to Leslie Scism at email@example.com