The life settlement industry’s secondary market has grown for the third consecutive year, according to The Deal’s life settlements league tables, published in early June.
The Deal collects transaction data by licensed life settlement providers via public records requests to state insurance departments. Providers are a mandatory participant in the life settlement market, so the data has become something of an annual bellwether for the health of the market overall.
This year, the two main points are that the number of transactions completed in the secondary market is up for the third consecutive year, and the aggregate face value of all transactions is, at $4.72bn, the highest since 2010.
The increase in the number of transactions continues the slow-but-steady upwards trend in secondary market activity of the past couple of years. Last year, 3,181 transactions were recorded; in 2022, 3,057 deals were done, and in 2021, 2,937, for an average of around 4% growth per year.
The type of life insurance policy that accounts for these transactions most often is Universal Life. Historically, it’s been the septuagenarians – and older – with a UL policy that entered the market through the broker channel who have been the mainstay of the space. That’s still true, mostly, but increasingly, albeit slowly, that’s changing.
“A few things were different last year compared to historical trends,” said Rainer Gruenig, CEO at Zurich-based Plenum Investments.
“Notably, we saw the average age of insured tending to be younger, with higher mortality multipliers.”
That’s not all. Another feature of the market last year was driven by a trend that has been establishing itself significantly in the secondary market in recent times.
“We saw more smaller face value policies in the secondary market last year,” said Anton Pozine, Portfolio Manager at Ress Capital.
“This was mainly due to the direct-to-consumer efforts by several providers in the market.”
The aggregate face value of transactions in the secondary market last year was, at $4.7bn, the highest level since 2010, when $8bn of transactions were concluded. Those days, however, were when premium financed policies, where policyholders borrowed funds to pay the premiums to keep the policies in force, were popular.
Legal risk – the life settlement industry has been on the wrong end of a few court decisions that declared premium financed policies as lacking an insurable interest in the past decade – has had the effect of reducing the amount of these types of policies that entered the market and although some still remain in the tertiary space, in the last decade, a more stable secondary market has emerged.
Since the aggregate annual face amount hit a low of $1.3bn in 2011, only twice has the secondary market shrunk, in 2014 and 2021. Rob Haynie, Managing Director at Life Insurance Settlements Inc., puts that down largely to market awareness.
“Growing the secondary market has been a slow process. And it continues to be slow. But there are plenty of efforts by industry groups to raise awareness, and media advertising by some providers has certainly had an impact. Also, the RIA channel continues to evolve and learn about our market. It’s made a notable difference,” he said.
In some private market segments, large deals can occasionally distort the market; indeed, Legal and General Retirement of America’s quarterly pension risk transfer monitor recorded an estimated $15bn of deals in the US PRT market in the first quarter of this year, $11bn of which was accounted for by just two deals. It is a similar story in the life insurance Insurtech space, where in 2023, 19 deals were completed in North America worth $326.5m, with just one of these, Devoted Health’s Series E round, accounting for $175m of that.
Not so with life settlements. While there is a wide range in policy size, they need to be large enough to make the numbers work for investors. And, when compared to the two markets above, there is a much higher frequency of transactions. But in order to get the attention of investors the way that other private markets do, Pozine says that more significant movements are required.
“It is of course positive that the number of transactions increased last year, but you could argue that the market size is still rather small in absolute terms,” he said.
“It would make much more of a difference if we saw some larger increases over a number of years.”
Still, the market shows few signs of slowing down. The drivers of supply in the life settlement market – the insured senior simply doesn’t feel that they need the policy anymore – perhaps their children have left home, and their mortgage is paid off, for example, the need for cash to help with personal bills, such as healthcare-related expenses and senior living costs, or that they simply can’t afford the premiums anymore – are ever-present, and, according to Gruenig, driving activity this year as well.
“The first half of this year has been even busier for us. We have been offered hundreds of policies,” he said. “I think that there are lots of policies being marketed where the current owner can’t afford or doesn’t want to pay the premiums anymore. Cash definitely has become a value – so instead of paying premiums, the policy owners prefer to sell the policies and get some cash at hand. And there is enough demand to clear the secondary market supply,” he said.
Anecdotal evidence suggests that tertiary market activity has been slower in the past twelve months or so, driving asset managers that play in both sandpits to the secondary market to flesh out their portfolios.
Whether the tertiary market experiences a renaissance this year or not; whether aggregate face values exceed $5bn for the first time since 2010 or not; and whether the number of transactions increases or not, remains to be seen. But the general trend is, for Haynie, encouraging.
“You can’t expect the numbers to go up every year – you never know if there will be an extraordinary situation like Covid, for example, that might impact the space. What’s most important is that the general trend is up over time, both in terms of the number of policies transacted in the secondary market and the aggregate face value. The data coming out of The Deal this year, and LISA’s own member data published in May, show that we have a growing market. We continue to see encouraging data and trends in our industry.”