The life settlement secondary market suffered a rare pull back in aggregate transaction activity in 2024, according to new data published by industry magazine the Life Settlement Report, part of The Deal.
In 2024, the total number of secondary market transactions came in at 2,732, which is down 14.1% on the 3,181 the magazine reported in 2023. The Life Settlement Report compiles 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.
Market participants have been noting for a while that activity last year was down when compared to 2023 and one reason on the supply side was the lag effect from the macroeconomy that year.
The policy termination rate – comprising of lapsed and surrenders life insurance policies – jumped in 2023 to 8.5% from 6.7% in 2022, according to industry group the American Council of Life Insurers (ACLI)’s 2024 edition of its Life Insurance Fact Book. Two factors likely influenced consumer behaviour: inflation, and interest rates.
“The higher inflationary environment of 2023 was almost certainly a driver of policyholders terminating their life insurance policy as consumers began to tighten their belts. And the corresponding higher levels of interest rates also played a role here, because on one hand, mortgages became more expensive for those on variable rates or remortgaging into higher fixed rates, and on the other, for those that strategically see life insurance as a retirement asset, higher rates made other investment opportunities more attractive,” said John Welcom, CEO at Welcome Funds.
There is another potential reason for any pull back in supply; a reduction in TV advertising in the second half of last year due to the US Presidential election.
It was an event that crowded out advertising spend for many advertisers, which could include direct-to-consumer licensed life settlement providers. A persistent source of frustration among life settlement market participants is what they consider to be a lack of awareness among the Senior population in the US that they can even sell their policy, so the lack of airtime for their market hardly helped.
“The TV advertising is a rising tide that lifts the life settlement boat. And cutting back on advertising is definitely something that would impact awareness for our space,” said Welcom.
Whilst these two factors likely influenced supply, arguably, the main driver of the decrease last year was demand-driven.
Life settlement asset managers, like other alternative/private asset managers, saw fundraising impacted by the higher interest rate environment of 2022-2023. Many institutional investors – pension funds, foundations, endowments, insurance companies, etc. – plan allocations ahead, sometimes up to a year in advance.
The relative increase in the attractiveness of liquid fixed income securities saw many investors rebalance their portfolios in favour of these products; total private markets aggregate fundraising in 2023 fell to a six-year low, which meant that private asset fund managers would have less to invest the following year.
Market participants acknowledge the fundraising slowdown; some see green shoots as we approach the halfway mark in 2025, however.
“From what I understand, 2024 was a difficult year for capital raising, not just in our market, but in alternative assets generally,” said Bill Corry, CEO at Corry Capital Advisors.
“While still slower this year I have seen activity picking up over the last six months with much more interest than in 2024.”
While the decrease in the availability of capital to deploy would make sense as to why there was a pull back, higher interest rates make policies cheaper due to the discounted cash flow model that life settlement buyers use to value policies.
Which means that those sitting on dry powder would surely want to take advantage of the reduction in valuation now so that, assuming rates fall – as they did in the back end of last year – they can sell for a higher price in the future?
As usual, it is not that simple.
“Yes, the policies generally became cheaper to acquire for investors in the past few years partly because of the effect of higher interest rates, but not by enough to have an offsetting effect on investor activity,” said Scott Rose, Chief Investment Officer at Fifth Season Investments.
“It is important to remember that life settlement pricing does not tie directly to the current interest rate environment, as purchasers consider a range of factors, such as life expectancy, carrier creditworthiness, documentation quality and other factors that do not strictly depend on price. Additionally, many investors who had previously raised capital may have deployed all or nearly all that capital and are not current buyers, despite availability of policies to purchase. These factors all have an impact on investor activity in the space.”
Those looking for green shoots might find it in the larger drop of the aggregate face value (20%) when compared to the number of transactions; the inference being that more smaller face value policies are/were transacting last year, which potentially opens up the market to those which historically might not have been able to access it because their face value was not deemed high enough.
But ultimately, like other private asset classes, the life settlement market is cyclical in nature. Prior to 2024, the life settlement secondary market enjoyed three consecutive years of growth in the aggregate number of transactions drove the market to highs not seen since the early part of the last decade. Indeed, at $4.7bn of aggregate face value transacted in 2023, many would have been forgiven for expecting the $5bn mark to be surpassed last year.
Alas, it was not to be. But the message to capital allocators speaks to the maturity of an asset class that, when compared to private equity, real estate, and leveraged loans, is a younger one.
“The life settlement market has a greater understanding of longevity risk, credit risk and liquidity risks now than at any other time in its history,” said Corry.
“Investors with life settlement allocations or those looking at it should feel good that our market is clearly, on aggregate, doing a better job of managing and mitigating investment risk and it is likely that this is reflected to some extent in the activity data for last year.”