Although stranger-originated life insurance (STOLIs) policies are frowned upon by the insurance industry and illegal in most jurisdictions, investors still find imaginative ways to bypass regulations and make money off these complex schemes. STOLIs involve an arrangement where an agent or broker, often representing a large institutional investor, encourages an elderly person to take out a life insurance policy in exchange for a quick payout.
After buying the policy, the senior citizen sells it to investors fronted by the broker in exchange for a lump sum of cash. The insured receives immediate money and is relieved of the obligation of paying the future premiums, and the investors hold and finance the policy’s premiums, waiting for the insured’s death to collect the tax-free benefit.
STOLI arrangements are generally illegal because they allow the policyholder to benefit from a stranger’s death. They are considered unethical because they essentially allow gambling on the lives of others. Additionally, many STOLI schemes involve fraudulent financial reporting, with wheeler dealers who piece together these policies exaggerating financial statements to secure large policies and fat payouts.
Despite their ill reputation, STOLIs can be very lucrative and many investors often find indirect ways of participating in this controversial corner of the financial market. They largely do this through the clever use of trusts and front companies to maintain plausible deniability and forestall any legal and reputational risks that may arise from directly underwriting this line of business.
It’s a dodgy business no doubt, but one that is so lucrative that even Apollo Global Management, one of the world’s leading private equity firms, is said to be dabbling in through a network of sham trusts. Apollo is accused of holding billions of dollars’ worth of these controversial policies, according to a new lawsuit filed by the Estate of Martha Barotz, a New York State resident who passed on in 2018, aged 83.
Lawsuit Lifts Lid On A $20 Billion STOLI Stash
A lawsuit filed in Delaware’s Chancery Court, lifted the lid on the firm’s alleged use of a network of sham trusts to hold stranger-originated life insurance policies valued at approximately $20 billion. The suit claims Apollo orchestrated this through a secretive affiliate called Financial Credit Investment (FCI).
The suit reads in part: “FCI’s managing director estimated that, as of 2019, the tertiary life settlement market generated “between 80 and 90 billion policy face.” Within that figure, “FCI’s presence is . . . probably the largest investor in this special asset,” with an estimated $20 billion aggregate investments as of 2019.”
The complaint states that in 2006, New York State resident Martha Barotz received a $150,000 payment from Life Accumulation Trust III (LATIII), which took out insurance that would pay out a $5 million lump sum on her death. Barotz agreed to form a Delaware statutory trust, named after her, after which she signed away control to LATIII. From a legal standpoint, it was LATIII that took out the policy, dutifully paid all the premiums, and stood as the sole beneficiary. In 2011, LATIII sold the Barotz trust to a fund allegedly controlled by Apollo, with FCI said to be at the center of this move. This fund banked the $5 million lump sum when Barotz died in 2018, aged 83.
Barotz family, keen to access the payout, has been unsuccessfully seeking to have the policy voided since her demise, prompting this lawsuit that alleges Apollo was using a network of phony trust companies to dodge and frustrate claims from the the families of deceased individuals who participated in the STOLI policies.
“Following Mrs. Barotz’s death, Defendants illegally and fraudulently collected the Policy’s death benefit. Worse, Defendants then went to great lengths to move those proceeds through a complex maze of purported trusts and other entities in an effort to thwart Delaware law and hinder the Estate’s ability to recover those proceeds.”
Nothing More Than Bad PR
Should investors be worried about Apollo Management’s involvement in this suit or its alleged exposure to STOLIs? Probably not. Apollo has denied the allegations, meaning the case will play out in the judicial system over time as the market moves on to newer concerns and debates.
“We believe these claims to be baseless and the suit’s description of Apollo’s historic activities within the life settlements market to be a gross mischaracterization, disingenuous, and flat out wrong,” Apollo said in a statement.
While Apollo acknowledges setting up FCI as a vehicle to acquire pools of life settlements and other insurance-linked securities from banks and other large financial institutions, it says FCI has never participated in the origination of any life insurance policy.
“The law firm that brought this current lawsuit has a cottage-industry practice of challenging life settlements all over the United States, including some in which the FCI funds or their subsidiaries are indirect beneficial owners.”
Allegations of Apollo profiting from STOLIs, while serious, are nothing more than bad PR as far as investors are concerned. The supposed $20 billion valuation offered by the lawyers representing the Barotz Estate is at least five years old, and as such, does not provide a reliable view into Apollo’s true exposure to STOLIs, if at all. And even if, indeed, Apollo indirectly held STOLIs worth $20 billion, that would represent less than 5% of its $671 billion asset base, which is hardly a risky level of exposure given STOLIs are literally guaranteed by the grim reaper himself. Controversial though they may be, they are the closest thing to sure money in the life settlements markets.
Strong Inflows Underscore Shareholder Trust
Despite the debate and uncertainty that a highly publicized lawsuit attracts, Apollo’s investors remain confident in the firm’s long-term trajectory. This is evident in the rapid pace at which inflows have grown over the past year amid robust double-digit performance.
Apollo’s fee-related earnings and spread-related earnings totaled $1.3 billion in the first quarter, increasing 18% year-over-year, even as quarterly net income reached $1.4 billion. “Total AUM of $671 billion benefited from inflows of $40 billion in the first quarter and $140 billion over the last twelve months, driving a 12% increase year-over-year,” Apollo’s Q1 earnings release states.
Nearly 60% of Apollo’s total AUM consists of permanent capital vehicles, the company notes. These vehicles provide a stable base of assets under management that is less susceptible to fluctuations, thus solidifying shareholder trust. Apollo is also reputed to be one of the highest-paying private equity firms in terms of all-in compensation for its associates, meaning it’s able to attract the brightest minds in finance and, for the most part, deliver attractive returns over time. These factors make Apollo a darling among investors and finance professionals alike. The latest lawsuit about its alleged involvement in STOLIs is unlikely to change this in any significant way.
Author: Acutel
We are global investors who invest in good companies at fair valuation and speculate on all else subject to the risk exposure we can afford.
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
