Reasons abound why seniors in the United States might seek to sell their whole life insurance policy to a third-party investor. Two of the most frequently cited are that the insured simply can’t afford the premiums anymore – and so selling their policy via a life settlement gets them more cash than the surrender value offered by the insurance company – and the need to be able to fund medical bills or pay off a mortgage.
Many life settlement sales run into five, six, and even seven figures, depending on the policy value. But the more financially savvy American seniors are increasingly seeing life insurance as part of an overall asset allocation model, which in turn is driving more of them to view life insurance as one part of a broader portfolio, something which can be changed depending on the prevailing market environment and their risk appetite.
“Seniors are increasingly undertaking an opportunity cost analysis of maintaining their life insurance policy versus re-deploying that capital to other investment opportunities, such as private investments like real estate,” said Aaron Giroux, CEO at Los Angeles, CA-based life settlements provider, LifeRoc Capital. “This is one of the fastest growing reasons that we see people exploring the life settlement option.”
Activity generally in the secondary market is seen to be on the up. The Life Insurance Settlement Association (LISA), a Washington, DC-based trade association, unveiled its annual transaction data survey results at its investor conference in May; 3,079 deals were completed by 20 providers in 2022, an improvement on the 2,998 in 2021 – when three additional firms participated in the survey.
Giroux says that he expects that number to push even higher when 2023 is said and done.
“We anticipate that the secondary market will transact around 3,250 deals this year. The general chatter in the industry is that policy submissions are going up.”
Not all whole life policies that hit the market get bought, however. Reasons abound for this, including that brokers tend to focus on larger face value policies, restricting supply, and some of the smaller face value policies and younger insureds are perceived as too risky. But this year, those seniors that are managing to realise a sale are considered a safer bet.
“The capital that is in the market at the moment is looking for paper that is less risky – that is, policies with a low probability of survival to maturity. These policies are not really trading at any discount rate,” said Giroux.
Whilst brokers remain a significant source of deal flow for life settlement providers, particularly in the medium-higher face value segment of the secondary market, other types of third parties are increasingly getting involved in another boon to those active in the market.
“The direct-to-consumer channel has driven a lot of awareness, but we’re also seeing a trend of origination coming through the institutional market. Much of the existing US advisor base is ageing out of the industry, and the newer blood is much less independent and more closely aligned banks, broker dealers, and other institutional players,” said Giroux. “Plus, we’re seeing sourcing direct from CPAs and attorneys, which is down to the educational efforts that the industry has been involved in.”
The industry’s tertiary market is experiencing changes in drivers of supply, both structural and cyclical. Macroeconomic factors are also having an impact on the tertiary market; Giroux says that activity in 2022 was higher than in 2021, with one driver being the impact of higher interest rates on portfolios.
“There was some forced selling last year. Some of it is redemption management by open-ended funds and some funds that utilise leverage have had to sell to manage debt and lines of credit. Both of these have brought supply onto the tertiary market last year,” he said.
One permanent source of blocks of policies in the market is that of closed-ended funds which are at their end-of-life, so the manager simply sells the remaining policies in the portfolio to liquidate the fund entirely and returns the remaining capital to investors. But an industry that largely operated on a ‘buy and hold’ strategy is increasingly displaying an interesting change in behaviour.
“One of the developments that’s most impacting the tertiary market is that more and more asset managers are approaching life settlements as an actively managed asset class, like an equity hedge fund would,” said Giroux. “Previously, this was something of a ‘set it and forget it’ space, but now the core thesis has evolved to the extent that portfolio managers are actively trading in and out of assets during the life of the fund, re-deploying that capital, and not waiting to the end of the fund’s life to execute sell side opportunities.”
Ultimately, the impact of the macroeconomy on activity in the life settlement market may last a while longer. But for Giroux, what’s most notable is that the changes that are having the biggest impact, both in the secondary and tertiary markets, are those which are of a more fundamental nature.
“We need a constant supply of new policies in order for our industry to grow,” he said. “I’m mostly encouraged by the developments in the secondary market, like the growth in direct-to-consumer, and the increase in different types of advisors and fiduciaries playing in the space, that should support continued growth in the coming years.”
