The life settlement market has had more than its fair share of challenges in the past decade or so. PR issues plagued the sector as many investors – at least, publicly – stayed away from the perceived negativity attached to longevity risk, and the global financial crisis saw some open-ended funds gate their investors as redemption demands threatened their liquidity – and existence.
In the last five years or so, the industry had been on something of an upward swing as investors were forced into looking at alternative investments, like life settlements, that can provide an acceptable yield for their fixed income allocations.
Then the Covid-19 pandemic hit. At the time, the entire insurance and investment management industry was in a state of shock, but what impact did the pandemic have on the life settlement market specifically?
“There was a lot of uncertainty about mortality. As you can imagine, this was truly unprecedented in our professional lives. As a result, various insurance players started looking at transactions aimed at reducing volatility and creating some element of resilience on their balance sheet,” said Luca Tres, Head of EMEA Strategic Risk and Capital Life Solutions at Guy Carpenter. “But most of the transactions that started in March were pulled by summer because, with more mortality data coming in and with more clarity about public policies, insurers didn’t feel the need to act as urgently as they did in March. This said, something permanent still happened: the pandemic opened up the minds of many players in the insurance industry to what they can do about volatility and balance sheet resilience so that they can withstand a similar situation in the future.”
Short-term dislocations provide opportunities, of course, and pricing for life settlement policies was affected in the immediate aftermath of the first wave of the pandemic, with opportunistic investors looking to pick up assets cheaply, although this was short-lived.
“I saw a few players that tried to take advantage at the start of Covid-19 of the market shock to the lock down and opportunistically pull out of transactions or drastically change pricing. This ended up working against them as the behavior shut them out of transactions later in the year when the market swung the other direction and assets were challenging to access,” said Ann Juliano, Managing Director at D2 Alternative Investments.
The move to remote working had a significant impact on the life settlement market. Buyers of these policies on the secondary market regularly engage with the insured party’s physician, their insurance company, their broker, the list goes on – all of these actors in the space had to adapt to working from home, causing delays in the general communication chain. Simon Erritt, Managing Director at Coventry Capital, says that there was an increase in individuals looking to sell their insurance policy directly (as opposed to through a broker) due to being at home more and seeing more TV advertising. Something that didn’t change, however, was changes to medical underwriters’ life expectancy estimates.
“We may see some changes in the future, though, because of the impact of so-called long-Covid and the delays in unrelated operations and treatments caused by resource shortages in hospitals over the last couple of years,” he said.
Despite the short-term tumult, the life settlement market has arguably weathered the Covid-19 storm fairly well, and, like many other corners of the investment management industry, has settled into something of a ‘new normal’ and is better placed to tackle potential future disruption caused by new variants of Covid-19.
Other headwinds have recently presented themselves, however. Since late 2018, the industry has been battling what some in it call ‘carrier encroachment’ – that of an insurance company offering a cash sum directly to an insured party, which means the life settlement policy would not hit the open market. More recently, in November 2021, the industry was dealt something of a blow when the Supreme Court of Delaware issued an opinion in Lavastone Capital LLC v. Estate of Beverly E. Berland (“Berland”) which essentially concluded that certain policies issued in the mid-2000s using non-recourse premium finance lacked an ‘insurable interest’ and that the estates of the original policyholders were entitled to the death benefits associated with these policies. The ruling puts into question the value of any non-recourse, premium financed policies with a nexus to Delaware.
For Juliano, however, there is something of a silver lining coming from the ruling.
“We’ve heard about Delaware being a controversial state for years now, but I do think this ruling highlights the value of good investment managers or having a good advisory team behind you. Having transparent conversations and talking about what’s happening avoids the risk of surprises. It’s surprises that can scare off investors; as long as you understand the different types of risks that you’re taking on, you won’t be over affected by any kind of ‘little’ movements that are happening within your portfolio,” she said.
These setbacks aren’t putting the brakes on the industry, however. Since 2014, the number of policies coming to market has increased every year and has tripled during that time. Investors looking to access the benefits of life settlement exposure – uncorrelated returns with drivers unrelated to public equity markets and competitive yield – means that debt providers are increasingly casting their eyes towards the space.
“There’s been a big increase in interest in lending against life risks in general; firms are looking to strengthen their war chest as they think about acquisitions and use leverage to increase their returns,” said Tres. “In life settlements specifically, the more granular and the larger blocks are, the cheaper financing becomes and the easier it is to find interested lenders. But we’re seeing interest in lending money on smaller blocks, too. And the typical structures tend to be ‘payment in kind’ notes, with some element of flexibility to allow the fund to have the liquidity ready when they need it.”
Other flowers of maturity are blossoming. The increase in the availability of data and the number of firms using it is a rising tide that is lifting all boats.
“More time has passed since the industry began, and so we have more mortality data to work with,” said Erritt. “And managers are increasingly investing in underwriters’ databases and spending time analysing them – perhaps, making adjustments to the life expectancies that they received based on that analysis – and using the analysis to differentiate themselves as managers.”
Juliano agrees.
“I think there’s a huge data play. The fact that we can get access to such large data sets will give confidence around the industry and the investment,” she said.
Tres is also seeing green shoots in terms of the environment.
“In the last five to seven years we’ve seen an increasing element of institutionalisation – improved governance and better practice around valuations. This is key to growing the market further because you can’t do so without an element of certainty in the foundations,” he said.
In any sector of the investment management industry, the ultimate paymasters are the asset owners / end investors; for a sector to grow, there must be interest from these constituents in allocating capital to the space. Fortunately, for the life settlement industry, it’s good news.
“Life settlements is a lot more of a known asset class than it was in 2007/08. I’ve seen about 75 to 80 real money players that haven’t necessarily fully engaged in the market yet become at least more engaged as they are looking for an interesting, long-term asset that wouldn’t take big volatility swings,” said Juliano. “There’s a lot of curiosity out there – it’s a trend that’s in line with the growing appetite for alternative investments generally. Investors have a lot of choice in terms of finding a good partner now.”
At the midway point of 2022, supporters of the industry have plenty of reason to believe that it cannot only continue to survive, but flourish. A robust response to the pandemic and continued enhancement to mortality assumptions based on ever increasing experience and better data set the market in good stead for the year ahead, even with more macroeconomic risk uncertainties.
