Life settlement asset managers have plenty to consider as they construct a diversified portfolio. Not only do they consider factors such as age, face value and policy domicile as part of the purchasing decision, other risks such as longevity risk and credit risk also come into play, making portfolio management a complex, multi-faceted operation.
But one other investment risk that is less often discussed can have a profound impact on the returns delivered to clients: the portfolio servicing component.
For the uninitiated, the servicing function manages the life insurance policies after they have been sold, ensuring that the premiums are paid, monitoring the insureds’ status, and maintaining accurate records. They act as a liaison between the life settlement asset manager and insurance carriers, providing updates and compliance oversight to protect the value and integrity of the investment portfolio. It’s a role that has historically been viewed the way other alternative investment managers used to view some of their middle and back-office operations.
“Servicing is often an overlooked aspect of managing a life settlement portfolio—likely because it isn’t perceived as particularly ‘exciting,” said John McFarland, CEO of NorthStar Life Services, LLC.
That is partly because of the sheer number of person-hours that go into the operation.
“Comprehensive servicing involves many tasks, even ones as basic as contacting insured individuals every 90 days. Reaching someone can take four to seven attempts, so with 500 policies, that adds up to roughly 2,500 calls per quarter averaging approximately 28 calls per day. That doesn’t include the additional outreach to carriers and the hundreds of other tasks servicing handles, it’s a highly labor-intensive process requiring robust systems and processes to be effective,” he added.
This doesn’t mean that life settlement asset managers are dismissive, of course. They all have a servicing function of some kind; some perform parts of the operation in-house, some use external providers; some engage with an external servicer to help with policy sourcing, some after they have made a purchase.
Regardless of which option they take, communication is key, according to Moritz Roever, CEO at Asset Servicing Group.
“Being transparent with the asset manager client is a critical component of the servicing function. Sometimes, there could be an issue on the policy side before the purchase is made, or the tracking side during the day-to-day management of the portfolio, for instance, if the insured is not cooperating or in instances where we can’t contact the dedicated contacts. Making the client aware of potentially difficult situations enables them to contemplate alternatives and make the right decisions faster and more efficiently.”
Issues such as the ones raised by Roever relate heavily to the premium optimisation function carried out by a servicer.
Premium optimisation is a core servicing function that directly enhances the performance of life settlement portfolios. For institutional investors, it ensures that capital is deployed efficiently by minimising premium outlays while preserving policy value and coverage integrity. Through advanced actuarial analysis, policy-level cash flow modelling, and ongoing carrier monitoring, servicing teams identify the optimal premium funding strategy for each asset, reducing unnecessary expenses and extending policy longevity – ultimately, improving IRR across the portfolio.
It is something that Roever thinks that life settlement investors should be asking more questions of their current and potential managers about their portfolio servicing operation during the due diligence process.
“Premium optimisation is a performance driving function. It minimises cash exposure of the manager and directly impacts portfolio performance,” he said.
“It’s the second most important thing – after managing longevity risk – in my view. An under-performing servicing function can lead to either overmarking or undermarking the value of the portfolio. An auditor will require a fair market value to sign off their work, a good servicer should be able to provide that to the manager in an unbiased, independent way, which in turn gives the investor the most accurate picture of the value of their allocation.”
It is not only client relationships – and the reporting duty – where the servicing function plays a role. Life settlement asset managers, like those in many other alternative asset classes, sometimes use leverage in their portfolio management function. Having access to the debt market can play a role in both policy sourcing – leverage enables the manager to buy more policies, of course – and in the paying of premiums to the carriers, a requirement for the policies to stay in-force.
An effective servicing component can play a role here, too.
“We are often approached by lenders to assist as part of their due diligence process conducted on asset managers prior to lending,” said McFarland.
“A good servicer should be viewed as a strategic partner in these situations. While lenders will always assess the likelihood of a loan remaining performing, asset managers significantly improve their chances of securing capital and favorable terms by engaging an independent portfolio servicer with a structured, transparent approach.”
Longevity risk is, arguably, the main investment risk facing life settlement asset managers; the effective management of it impacts both policy and portfolio returns more than any other and so accurate mortality modelling prior to acquiring the policy is key in this regard.
But when the policy enters the portfolio, premium optimisation and ensuring records are up to date and accurate have a significant impact – one that, for McFarland, makes a significant difference to the ultimate bearer of risk – the capital allocator.
“The investment due diligence process for life settlements has nuances that aren’t typically associated with other alternative asset classes,” he said.
“One of these is the impact that the servicing function can have on returns. It is critical for the future success of the asset class that servicing is viewed as the most important decision a manager makes, second to the asset selection itself.”
