Participants:
Rob Haynie, Managing Director, Life Insurance Settlements, Inc.
Jon B. Mendelsohn, CEO, Ashar Group
John Welcom, Founder & CEO, Welcome Funds
Data from The Life Settlement Report, a part of The Deal suggests that 2021 saw a reduction in deal activity in the secondary life settlement market, the first such reduction in seven years. Life Risk News’ Greg Winterton spoke to life settlement brokers Rob Haynie, Managing Director, Life Insurance Settlements, Inc.; Jon B. Mendelsohn, CEO, Ashar Group; and John Welcom, Founder & CEO, Welcome Funds to get their views on the current state of supply of life settlements in the United States, and what the picture looks like going forward.
GW: Did you observe a pullback in activity – i.e., life insurance policies coming to market – in 2021 and if so, what drove that retraction?
JW: We did. The most obvious issue was the Covid-19 pandemic. The past few years have probably been the most important time for a senior to keep their life insurance policy as opposed to sell it on the secondary market. Until the beginning of this year, there was also a historic run up in the stock market as well as real estate values, which drove consumer confidence amongst seniors and enabled them to continue to pay their life insurance premiums. Also, due to Covid-19 lockdowns, many advisors were unable to meet with their clients to discuss the life settlement option. Overall, it was a slight slowdown for a year or so to sell a product that frankly, seniors should have kept during this time, if they could afford to do so.
RH: The market definitely pulled back in 2021 and I agree that Covid-19 was the primary driver of that. Different states had different approaches to lockdowns, so it wasn’t that part of the pandemic that drove the pull back – it was the uncertainty. It seemed like every time that the data seemed to improve, another variant appeared, and it became something of a Groundhog Day experience. 2021 seemed like a year of false starts, for many people, of course, and certainly for our industry.
JM: It’s important to point out that this transaction can be a very personal transaction. There is typically someone there to assist the senior through the process of selling their life insurance policy; when you would send a one-to-two-inch package of contracts to a client, and ask them to execute the documents virtually, that can be a difficult task. Obviously, there are electronic signature solutions in real estate and other sophisticated markets, so maybe there could have been opportunities to speed up the transaction, or at least, have it not stall. There was still the challenge that clients were unwilling to meet with their attorney to review the documents. This definitely held up activity for those who were still willing to sell during the pandemic.
GW: Have you seen deal flow return in 2022, and if so, what is driving the increase in activity?
JM In the last 3-6 months or so, we’ve seen a 20-30% monthly increase in policies for review. We have a process to determine if the life settlement value will meet the client’s expectations or whether there is a mismatch, but there’s still a significant uptick in policy holders looking to sell.
In terms of what’s driving an increase in activity, we’re seeing advisors start to become re-engaged. Most importantly, we’ve seen a focus on best interest regulation and the potential liability on an advisor of not disclosing the life settlement option. There’s a huge shift occurring in the financial planning space related to life settlement and the importance of disclosing all available options. This is signalling that we will receive an uptick in policy flow.
JW: I agree. When we go to producer networking events, while we typically have seen the same faces for the past decade, a good percentage of advisors are finally accepting the marketplace. Their change in view is most likely due to consumer awareness brought on by TV commercials or due to clients asking them about the life settlement option. They know it’s a regulated industry, they know that consumers are educated, and this is almost forcing them to accept it into their practice. We’re seeing a big pick up with first time advisors and also with distribution networks beginning to do RFPs so that they can conduct due diligence on brokers to become their premier partner on settlements. Those are some great future indicators for the market.
RH: When the data comes out next year looking at 2022 as a whole, I’d bet heavily that we’ll see a significant increase in transactions. I would also add that many potential sellers who choose not to sell their policy in late 2020 and into 2021 ultimately sold their policy after they became vaccinated, or they simply grew more comfortable living in a post-covid world – or both. There has been a significant backlog in our market and I’m sure that industry data for 2022 will show an element of catching up.
GW: When you take a policy to an investment fund or their provider, has the buy box shifted at all in the past couple of years?
RH: The parameters for the industry as a whole have expanded. Funds are buying longer life expectancies and smaller face values. This all stems from increased competition in the space – more buyers have entered, so funds are being more flexible in the sense that previously, they had a very defined buy box – it was much more rigid. Now, it’s a bigger buy box and even then, the limits aren’t as hard and fast as they were even a few years ago.
JW: I think every policy is able to be sold if the economics are positive but there are those that are more attractive to investors, such as guaranteed universal life and return of premium products. Those policies garner increased competition and more aggressive discount rates. It’s just the nature of those products and how well they are priced. These policies have low back-end tail risk, and typically never go negative, so that’s a great investment for a fund. More of those products were sold over the last 5-10 years and I think that more will continue to come to market.
JM: We’re seeing the acceptable range for longer life expectancies expand. There is a huge opportunity to purchase policies at a better IRR and at a lower spend. This could be a unique approach for investors grow the market, while building even larger portfolios. It still better than the policyholder surrendering a policy for minimal value. It’s a binary decision – do they want more money or less?
GW: What kind of impact has the direct-to-consumer business had on deal flow? Is TV advertising driving enquiries to your businesses?
RH: TV, Radio and Social Media advertising has helped raise awareness for both the general population as well as the advisor community. Obviously, the advertising is primarily targeted at individuals to call up the advertiser and sell their life insurance policy directly to them but a range of people see the ads, including advisors. Also, fiduciary duty concerns are also driving renewed interest from the financial planning community. It’s becoming increasingly difficult, borderline ridiculous, to not have a life settlement strategy as part of your financial planning toolkit and we’re seeing financial planners coming around to that now.
JM: It’s had a significant impact. It’s like a pharma company that markets direct to the consumer and then people call their doctors to ask, ‘will this work for me?’ We receive incoming calls on a daily basis telling us that ‘my client saw a commercial on TV, and could this be an option for them, or could you give me an idea of what their policy could be worth?’ DTC has positively impacted the industry. A rising tide lifts all ships.
GW: Let’s move onto the other side of the table. Many funds think that the buying process is slow. How can it be sped up?
JW: Look – we’re going to bring an excellent file to market with as much documentation as possible to price the policy quickly and accurately. And, since we have all of our historical trading data and an internal valuation completed when we take a policy to market, we already know the target discount rate that a policy is likely to trade at. So, when funds start the bidding off with low offers (at high discount rates), we know we have a long way to go. We think that funds and providers should make aggressive offers early on – it’s the small incremental bidding that drags negotiations out for 2 weeks. The majority of these policies will sell for low double digit discount rates so when bids start out at 18-20% IRRs, that’s just a placeholder to get the bidding started. I’d say to funds that want to speed up the auction process, they should consider sharing their maximum valuation with their provider and trust them to bid on their behalf as the price increases. The bidding process will be expedited since the provider can immediately respond when new bids come in. That can save a week or 2. We understand the negotiation process is painful, but the incremental bidding is what causes that. We’d love to speed that up. The reality is that we represent the consumer, and it’s our job is to get them the highest offer…and that’s what we do.
RH: Closing documents often cause a hold up. Sometimes, I see documents in the closing packages that honestly, I feel are unnecessary. Some situations, for example when an offer is based on a longer life expectancy (and therefore the offer is lower) on a smaller face policy, require multiple designees to sign off on the deal versus a larger face value settlement where a larger sum of money is expected. But the client isn’t always comfortable with sharing his or her personal business with multiple individuals, so this can cause days or sometimes weeks of delays. Another one is that I think that some contracts require too many pages to be notarised. It’s pretty obvious that the faster the contracts are delivered to all parties, and the easier they are to execute, the more transactions we’ll complete as an industry.
JM: We all run analytics for what a policy could be worth. We have comps of similar policies and life expectancies. Our job is to manage the expectations of the client, as well as the advisor, the lawyer, or the CPA. We show those numbers up front. We invest thousands building a complete file before we send it to market. Many times, the initial offers are too low for an acceptance and issuing contracts. As the bidding and contracting process comes to an end, there can be some transaction fatigue. We’ve heard many times that it can take the client less time to sell their house, or their business. We have a lot of ability to compress time frames in a life settlement transaction; however, it would be helpful if the funds started bidding higher and responded faster during the policy auction process. That would speed everything up.
GW: Is there anything else that can help increase the supply of policies coming to market?
JM: More success stories from clients and advisors is the key. Also speeding up the transaction. It’s not uncommon that providers will say something like ‘our fund has a 5-7-day turnaround’. They feel that their hands are tied to some extent. I think that giving more authority to the provider in certain areas would be more efficient. If we can save 1-3 business days 4-5 times during the process, you have cut a couple of weeks off of the overall sales cycle. We’ve heard talk of feeder funds where the investors can place policies that are just outside their main portfolio’s buybox. Funds often say that a life expectancy is 2-3 months too long, even if we tell them that the policy will 100% close with a 1-3% total offer. If we get a couple wins just outside the traditional parameters, that could create a tremendous upside as billions continues to be lapsed or surrendered annually that our industry should be able to find a way to capture that value and help the consumer.
JW: I think more success stories will help. When we go to a smaller study group of advisors with, say, 50 people, and 80% of them have been against life settlements for the past 15 years, all it takes is for a couple of them to have done a deal for advisors to start sharing stories. You call out someone, ‘hey, Jim, you did your first deal, you got commission and your client got $900,000’, Jim says their 20-year client is thrilled, and all the advisors start talking. Success stories are huge and can play a big part in advisor awareness.
