September sees the start of autumn – unofficially – and more of the year has passed than remains. So, as the home stretch of 2024 begins, Greg Winterton caught up with Rainer Gruenig, CEO at Plenum Investments, to get his thoughts on how the life settlement market has fared generally so far this year.
GW: Rainer, to begin, give us your thoughts on the year so far for life settlements.
RG: I think it’s been a challenging year. All of the firms in our market have felt the impact of higher for longer interest rates in the past couple of years both in terms of capital raising and in terms of deal flow. However, I was encouraged by the data published by The Deal in the summer that there were more transactions in the secondary market than last year.
GW: That’s an interesting observation. In many subsets of the private markets, when there is a fundraising downturn, there is also a deal activity downturn. What does that say about the life settlement market?
RG: It supports the low-correlated nature of our asset class to other markets. It’s important to remember that there are many reasons why an insured sells their life insurance policy – it could be that they need the money for medical bills, or a divorce, or they may simply think they don’t need it anymore. Activity in the secondary market has been good for a few years now, and that’s something that I think both current and potential investors in our market should be encouraged by.
GW: What about the tertiary market? There is no publicly available data that can provide insight into the deal flow activities in that market.
RG: I can only speak to what I see and hear generally, which is that activity does seem to be down this year. But the reasons for that aren’t simply interest rate-related. Other factors such as how many funds are at or near end-of-life impact this market in terms of the supply of policies. That said, we are seeing activity coming back in the tertiary space – although it is very slow – which is good for firms like ours and the market as a whole.
GW: You mention above that there are other drivers of activity in the life settlement market aside from interest rates. But the fact that rates have begun to come down in both the UK and Europe, and the fact that many commentators expect them to do so in the US, surely is a positive?
RG: Yes, of course. It is definitely a good thing for capital raising, and in terms of buying policies, there is a consumer benefit, as the present value of future cash flows is higher, which typically means higher prices paid for policies. However, as long as the equity and bond markets are still performing well, alternative investments generally do not find it easy to attract the attention they deserve from investors. And there is still a great deal of uncertainty in the markets about the direction interest rates will take in the short term, especially in the US – surprises not excluded.
GW: Lastly, Rainer, a life settlement bull would say that the market has been fairly resilient over the past few years. What’s your view?
RG: Obviously, I’d agree with that within certain limits. We have had two ‘events’ which have directly impacted our market – the Covid-19 pandemic, and the rising interest rate environment.
For Covid-19, the main impact for us was capital raising and the general rush to what were perceived as ‘safe’ assets. You saw that both equity and bond markets fell in tandem after the initial announcement of lockdowns around the world. So, the capital raising cycle was lengthened significantly there. Also, there was a lot of uncertainty around the availability of policies, as policyholders wanted to keep their policy in place.
While it is true that activity in our market normalised quite quickly, we then saw interest rates begin to rise. As I said earlier, other factors also impact activity in our market, and I think that they have definitely made the ‘recovery’ – if you can call it that – slower than it might have been and it remains constrained to high quality portfolios with current meds and LEs.
But yes, resilience is a good word. This market is now 20 years old in its current form and has had its share of bad press – some deserved, some undeserved – and we saw the opportunistic buyers leaving the space. But I think that the core of the life settlement market – those institutional investors that are strategic buyers, together with the ecosystem of providers, medical underwriters and asset managers – has weathered the storm well, and the signs for the next year or so – you mentioned interest rates coming down, for example – should see the market continue to grow.
Rainer Gruenig is CEO at Plenum Investments