Wall Street West—Tragedy Forces New Look at Long-Term Insurance Value

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It’s not the way one would like to see business surge. But Keith Wagner, a star life-insurance salesman who plies Wall Street’s West Coast on behalf of Milwaukee-based Northwestern Mutual Life Insurance, said he’s getting unsolicited calls from customers. “I didn’t call them,” he said. Usually, life insurance salesmen are the ones doing the calling.

The events of Sept. 11 amplified feelings of mortality among many in America. Wall Streeters, especially, were left with a sense of vulnerability, reports Wagner, who has 1,000 clients in Southern California. Many Los Angeles investment bankers, private equity investors and venture capitalists visit clients or investment portfolio companies all over the world. “They are always on planes heading east,” says Wagner.

Suddenly, they want to be assured that their families are taken care of if they don’t come home one day. “Now, when I meet with investment bankers, I don’t have to talk them into buying the right amount of coverage. They want it,” says Wagner, who consistently ranks among Northwestern Mutual’s top 10 salesmen nationwide.

For a financier making $500,000 a year, a lump-sum settlement between eight and 12 times income is usually sufficient, says Wagner. Such settlements are paid out tax-free, and cost about $25,000 annually, give or take a few thousand depending on individual circumstances.

In an added benefit, monies and capital gains made within a life insurance policy are tax-free, and can be borrowed against for any purpose, notes Wagner. Life insurance can actually become a tax-sheltered investment vehicle.

While Wagner is experiencing brisk business, even he has felt the World Trade Center’s destruction. “I didn’t lose anyone, but a close colleague of mine in New York had five clients, all under 40, who died,” Wagner said. “They had a total of 15 kids. They were covered … but you can’t feel good about it.”


Holding On

Troubled Global Crossing Ltd., the big telecom outfit run by financier Gary Winnick in Beverly Hills, may not be headed for bankruptcy court anytime soon, says David Takata, an analyst with Gerard Klauer Mattison in Century City. (By the way, Takata says GKM recently picked up some investment banking business from Global Crossing).

Global Crossing has an interesting provision buried within it covenants with banks. Even if the company falls out of compliance, it has four quarters to get back into compliance. In other words, worried banks can’t push the company into Bankruptcy Court.

Takata interviewed Global Crossing’s in-house finance experts last week, and was told the company was currently in compliance with bank debt terms, meaning that it might have at least a year to play with. And so far, Global Crossing has honored payments to holders of $9 billion of Global Crossing bonds.

Nevertheless, Global Crossing bonds last week continued to trade at under 20 cents on the dollar, a sign bond traders expect a serious restructuring on the debt.

“Some bond traders (who are aware of the bank covenants) are actually buying the bonds expecting to get a coupon (quarterly interest payment) or two, and then see what they get (when and if they exchange for their debt for equity in a restructured Global Crossing, going forward),” says Takata.


Fads

When it comes to trends, Wall Street rivals the fashion industry. Over the years, such investment fads as real estate investment trusts, tech stocks, home shopping, e-commerce, theme restaurants or alternative energy sources have boomed and busted, usually with the investing public the poorer for the experience.

Now, hedge funds are hot, but the buzz is probably off-tune again, said Jeffrey Bronchick, chief investment officer with money shop Reed Conner Birdwell Investment Management in West Los Angeles. “I can always tell when an investment strategy isn’t going to work. The people I call my ‘telltale clients’ always go into the wrong fads. They loaded up on tech stocks. Now they are pouring money into hedge funds,” Bronchick said.

The definition of a hedge fund can vary from shop to shop, but in general a “hedgie” is a portfolio manager willing to go long or short on the market or individual stocks, and perhaps leverage a bit while doing so. Buying distressed equity or bonds is okay, and so is arbitraging. Some hedge funds invest based on past historical relationships, such as the spread between long-term U.S. Treasuries and junk bonds. If the spread gets wider than normal, then junk bonds are considered.

But hedge funds are expensive, charging management fees as much as 2 percent of assets every year and 20 percent of all profits, subject to various hurdles. By contrast, an investor in an index stock mirroring the S & P; 500 can pay about 10 basis points of assets in fees (one-tenth of one percent), while well-heeled investors can set up private, “separate accounts” with managers for 60 basis points or less.

By leveraging, hedge funds can increase returns on statistically reliable bets. But they have to be right very often, or face bruising losses. And history doesn’t always repeat itself as managers of the Long Term Capital Management Fund found out in 1998, when that fund collapsed after heavy leveraging. Interest rates didn’t move the way they were “supposed” to in that case, and paying back borrowed money required federal intervention.


Heads I Win, Tails

By the way, since so many hedge fund managers are compensated based on performance, the temptation to place riskier bets rises in a year of lackluster performance. A hedge fund manager having an off year might try to bet the farm on a leveraged play, hoping for a big killing and fat performance fees.

If the bet is wrong? Well, even the managers of Long Term Capital Management got new jobs, and nobody went to jail. If you win, you win; if you lose, it’s “OPM” other people’s money.

Bronchick’s advice? The fundamentals always bear out over time, and that’s how investors should hew. “Look at cash flow, invest in businesses you understand,” advises Bronchick. Invest for the longer term, and don’t jump on bandwagons.

One stock Bronchick likes is Price Legacy Corp., a San Diego-based real estate outfit converting into a real estate investment trust. New York-based finance house Warburg Pincus put $100 million into the company recently.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].

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