The growth of the broader alternative credit ecosystem has meant more choice for sophisticated investors when considering where to allocate capital; that choice means that asset managers have needed to find extra gains to make their return profile more competitive. Greg Winterton spoke to Moritz Roever, Managing Director at Vitaro Group, to get his thoughts on how the servicing function in life settlement portfolios can be additive to alpha generation.
GW: Moritz, let’s start with premium optimisation, arguably one of the most important tasks in the servicing ecosystem. What should investors be asking life settlement asset managers during the due diligence process here?
MR: Premium optimization is important, yes. However, nearly all sophisticated asset managers and servicers perform this function, and all of the models used work the same way. Premium optimisation is a performance driver and therefore, a risk if it’s done incorrectly. Effective premium optimisation minimises the cash exposure of a life settlement portfolio which in turn can have an impact on the NAV of the fund in the short term and distributions in the medium to long term. Investors should be asking managers whether they perform this function in house or externally, how they manage the process and how they deal with more complex products for which bespoke modelling may be necessary. Investors need to understand that there is a significant amount of work that goes into managing a life settlement portfolio after a policy has been purchased; it’s about as far from ‘set it and forget it’ as you can get in alternative credit investing.
GW: What’s the sales pitch to use an external servicer?
MR: It’s the independent analysis angle – a similar reason as to why an investor might require an external fund administrator to perform that function on a hedge fund or private equity fund. An under-performing servicing function can lead to all sorts of issues including either overmarking or undermarking the value of the portfolio, improper monitoring of insureds, perpetuation of deficiencies in documentation, and potential lapse of policies. Given that auditors will require a fair market value and a valid basis and methodology to determine fair value to sign off their work, a proficient and independent servicer provides validity and credibility to these considerations — provided the servicer is truly independent. A good servicer should be able to provide these things to the manager in an unbiased, independent way, which in turn gives the investor the most accurate picture of the value of their allocation.
GW: What are some of the other functions provided by a servicer and what is their importance?
MR: The main ones are ensuring that the premiums are paid – critical, obviously, for keeping the policy in-force – and monitoring the insureds’ status. The asset manager needs to know when a policy in their portfolio matures, but they also need to know how the insured lives covered by the policies in the portfolio are progressing. We believe the “life component” of each asset should be more of a focus than it has been traditionally. There are more labour-intensive tasks tied to managing the lives that underpin the portfolio that are just as crucial, perhaps more so, than the task related to the policies involved. A good servicer will have processes and procedures that are rigorously followed to ensure that nothing slips through the net; every detail matters. I can’t stress enough the extent to which experience matters here. We believe a focus on the insured is an even more important function that most asset managers need. Tracking is critical, yes, but so is continual observation of the insured’s health from an underwriting perspective. Most asset managers do not proactively (or correctly) manage the lives to which their performance is tied – directly.
GW: What, if anything, has changed in your world in the past, say, five years or so? And is there any scope for innovation in what you do?
MR: I’m not sure about ‘changed’ but I will say ‘increased in focus’. Cybersecurity risk has grown, and consequently, providing clients with more secure portals – especially given the sensitive personal data that our market uses – has grown in importance and asset managers are increasingly focused on this. In terms of innovation, then obviously artificial intelligence is the buzzword, but we need to be careful about how we integrate it into our systems largely because of the sensitivity of the data and the considerable degree of contextual analysis the asset class and our marketplace requires. Also, some of the services we provide genuinely benefit from human involvement, such as contacting the insured and their contacts. In these instances, we’re dealing with issues like privacy, bereavement, and financial security. These are sensitive and personal topics, so discretion has real meaning in our role. I also think it’s important to acknowledge that the overall pace at which the market operates does not yet lend itself to the acceleration of one step in a more comprehensive process. In other words, unless all the steps in a given process can be automated correctly and without sacrificing critical considerations, accelerating parts of such processes with AI may not have a meaningful impact and overall, the process as a whole may not be meaningfully improved.
GW: Lastly, Moritz, how do you see the life settlement market in the next 12-24 months, both in terms of your corner of the space, and the industry overall?
MR: I think it’s well documented that 2024 delivered a pull back in the number of policies transacted in the secondary market and consequently we’re all hoping that we’ll see significant growth when the numbers get published later in the spring/early summer. I think they can, based on the conversations I’ve had in the past year and the activity we’ve seen. That’s the rising tide that supports our business and the industry overall. But I’ve frequently said that our market needs more investment in the businesses operating in life settlements, not just the assets. You do see a few sophisticated investors allocating more to asset managers, which is good – that’s our version of trickle-down economics. But there is a huge gap between the number of policies transacted annually in the life settlement market, and the potential. If we doubled the number of transactions in the secondary market each year to 6,000 from the roughly 3,000 today, then our market would be twice the size it is today and we would still only be barely scratching the surface of the potential we have. So, I think that unless a large firm (or group of such firms) makes a big splash and induces real market-wide change – an impetus for true growth – then we’ll continue to grow, which is great for everybody, but slowly. Right now, the growth rate of the secondary market might max out at a growth rate of perhaps 10% a year tops – even in a good year.
Moritz Roever is a Managing Director at Vitaro Group