The life settlement market, like many other alternative assets, has had to navigate its fair share of challenges in the past few years. Greg Winterton caught up with Ryan McTernan, Senior Managing Director at Fifth Season Investments, to get his take on the state of the space as we begin 2025.
GW: Ryan, starting with something of a retrospective. What would you say have been the main challenges that the life settlement market generally has had to face in the past couple of years, and how successful has it been in navigating them?
RM: A couple of challenges come to mind. The first is that we are seeing some investors using life expectancies (LEs) that, in our opinion, are too short, which for us, causes our bids to be less competitive. Unfortunately, I don’t think that there is a quick solution to this, but our opinion is that, over time, these LE companies, and investors relying on them, would be weeded out.
The second is the PHL Variable Rehabilitation. Thankfully, and by design, we have limited exposure to PHL, however anytime a carrier has issues paying a claim it’s a huge negative for the industry. It raises the question of whether there are other lower grade carriers we should be concerned about.
GW: A question about interest rates. The last few months has seen the Fed cut rates for the first time since the spring of 2020. What’s your view on the outlook for interest rates this year and how much impact do you think they have on the life settlement market?
RM: I’d prefer not to comment on the direction of interest rates but I do feel that there is a correlation between the Fed and discount rates we see in the life settlement market. This correlation is not one to one and the life settlement market has a lag, which I would attribute to the time it takes to raise capital and having that capital committed. If the Fed continues to cut, then it’s likely that, in a year from now, firms like ours will be buying at a lower discount rate.
I’d also add that I wouldn’t list rates as a major challenge. There was a period when our investors were expecting higher returns, and life settlements were lagging other markets, but since that time we’ve been able to deploy capital at higher returns than we were pre increases. The LS market hasn’t increased on par with rates elsewhere, but we have been seeing more attractive opportunities. I understand others may disagree as it’s harder to raise capital, debt costs have increased and it’s possible they had to take write downs on a mark to market basis, but I view it as a net positive.
GW: Moving onto Fifth Season specifically. The firm, in its current form, is a little over two years old. What have been some of the positives, and what have been some of the challenges for Fifth Season since the acquisition by Owl Rock subsidiaries?
RM: The biggest positive is their commitment to the asset class, meaning they are willing to commit material dollars and resources to funding us and helping us grow. We’ve had a significant increase in dollars deployed over the past two years, clearly that’s a direct result of our relationship with Owl.
The biggest challenge, which I would say turned out to be positive, was our growth. We went from a team of less than 10, the majority of which have been together for five or more years, to now 24 employees over two years. The people who have joined have added significant value to our company and investment thesis, but obviously there are growing pains when expanding rapidly.
GW: A recent report published by ELSA and Conning suggests that diversification and a lack of correlation to liquid assets are the main two reasons for allocating to the space. What’s your view here?
RM: I agree that most investors are here because of the limited correlation to other assets, but that’s not to say this asset is completely uncorrelated to the broader economy.
As I mentioned earlier, over the past year or so, we have been able to deploy capital at marginally better returns than we were pre-rate increases. That’s great for us, but that also means the investors selling now are selling for less than they would have several years ago. So, they clearly took an impairment, that was directly related to rate changes.
GW: Finally, Ryan, looking ahead: What’s your message to investors who are looking at adjusting their portfolios in the next few years now that rates are falling? Why life settlements?
RM: We’re always excited to hear about reputable institutional investors interested in the asset class. This is a great asset for investors with long dated investments horizons, but it is not necessarily meant for groups with short term liquidity requirements. One of the countless issues with GWG, for example, was their short-term liquidity needs and another situation like that is the last thing we want for this industry.
Ryan McTernan is Senior Managing Director at Fifth Season Investments
