Conning & Co. released an independent study of the market in November 2018 titled “Life Settlements: Continued Growth, Positive Outlook“. There are several interesting findings in the report.
Trend 1: Economic and capital drivers
Economic and capital drivers for life settlements are still encouraging. The low interest rate environment is still one of the contributing factors in the allocation of capital toward alternative assets. As a result, the merits of the asset being relatively uncorrelated to traditional markets is proving to still be attractive.
Trend 2: Increase in Volume and Maturity
Conning has also reported an increase in the volume of life settlements purchased. A strong percentage increase indicates a returned interest in the asset class by investors. Additionally, there has been a significant decrease of in force policies, reflecting an increase in maturities. Their ten-year forecast, predicting the future of the life settlement landscape, spells continued growth.
Trend 3: Growing Demand for Long-Term Care (LTC) Funding Sources
Connings’ latest research, suggests a large aging population is a key demographic trend toward policy supply. The cost associated with aging continue to increase and life settlements can provide an alternative to funding LTC. This combination suggests a positive force for the demand to settle life policies in the in secondary market.
Transparency and Uniform Valuation
To support these positive trends there are key industry positions which need improvement. Manager transparency and uniform valuation practices are vital to the evolution of the asset class.
Transparency is an important and ongoing fight. This asset class has exhibited an incentive for the manipulation of portfolio valuations. It is reasonable to use realized earnings such as death benefit payments instead of fund volume or unrealised NAV gains as a basis for fee structuring. When the fundamental return of a life settlements policy is the maturity/death benefit, it is unconscionable that investors pay performance fees on anything else. The transparency of fee schedules would go a long way in bringing validity to the market and overcoming questionable practises.
It is our belief that market players need to set more realistic expectations for investors. Additionally, investors need to place more scrutiny on valuation practices and performance returns. Demanding more transparency from their managers. We believe the asset is worthy enough not to be faked.
Manager’s View on the Life Settlements Market
The asset class has shown significant improvement in regulation, underwriting and valuation strategies. Overall, there has been an increase in confidence for the players who managed to weather the stall in capital post GFC.
As capital withdrew, post GFC, we saw an retreat in financial advisers and a drop-in supply of policies. Presently, demographic factors and the growing awareness of the life settlements option has seen a steady supply of policies.
Additionally, post GFC, saw many fund structures and portfolios struggling with liquidity, affecting premium payments. With an inability to seek financing many of these became distressed. Consequently, this opened an opportunity for the growth of the tertiary market. Investors have focused their energy in the investment of tertiary policies. Whilst there was a surge in the purchase of tertiary policies, sellers are now no longer distressed and more confident with their liquidity status.
Furthermore, there has been progress in creating new opportunities in the market. For instance, a development of direct buying programs for smaller face life policies to fund long term care. Subsequently, this has spurred on light touch due diligence. Making it quicker and economical to purchase smaller face policies.
We see investors are returning to the secondary market. Liquidity issues have been reduced with the return of available premium financing. Consequently, the availability of tertiary polices is decreasing and the supply of secondary life policies is on the rise.
This asset class is complex and requires a proactive, experienced investment manager. For instance, like a commercial real estate investment, you cannot just buy it and collect rental income. You need to work at this to minimise your loss exposure and increase your return potential. This takes experience, but also historical exposure to the market.
Is now the best time to invest in life settlements?
If we compare this asset class to other alternative investments the life settlements market is relatively small. Consequently, a small shift in capital commitment can alter the market dynamics. Shifting from a buyers’ market to a sellers’ market.
The secondary life settlements market is making a comeback, as a “defensive” alternate asset. The asset class continues to evolve. It’s becoming more attainable for different type of investors. It offers compelling returns in a low yield, low growth world. If you are waiting around to see what story this asset will tell you might miss out.
[1]Conning Inc, 2018, Life Settlements Continued Growth Positive Outlook
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