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13 June 2017

Life Settlements in high demand and supply volumes growing

Ioan RobertsIn what is now a prolonged low interest rate environment and with global markets in traditional assets being at or close to all time highs, more investors are looking at alternative investments.  Life settlements are attracting a lot of interest as they offer higher projected returns with only a minimal correlation to traditional markets.  Over the last few years we have seen a flood of capital enter the market and a large proportion of this is from investors that are new to the asset class. 

The market is still young, but has evolved significantly over the last decade and is now much more attractive to investors.  There is greater regulation, most of the bad actors have gone and life expectancy underwriters now have more experience with the life settlement cohort and many are more realistic in their assessments of the insured individuals.  In addition there is now a well established tertiary market where policies can be traded quickly on an individual or bulk basis, providing reassurance to investors concerned about liquidity.  As a result of the cash inflows competition for policies has increased and achievable yields have been squeezed but policies can still be picked up at projected double digit IRRs. After management and servicing costs have been deducted, a projected investor return of between 9% and 11% per annum is not unreasonable to expect - and is significantly better than the yields that traditional investments are likely to produce at present.

Increased demand for policies has encouraged brokers and providers to look for ways to grow supply via advertisements on TV and radio, e-mail campaigns and marketing events. In addition, many providers are attempting to go direct to the policy seller, thereby reducing intermediary fees and potentially increasing the amount of cases that are eligible for life settlements. The baby boomer generation is now heading into their 70s and it is important that they are made aware that they can sell their policies rather than lapsing or surrendering them to the insurance companies for much less than they are worth. Some US states have introduced laws that require insurance companies to inform policyholders that they have alternative options if they are considering lapsing or surrendering, and further states have similar laws under consideration.

Such a law was introduced in the UK Traded Endowment Policy (TEP) market in 2002 and led to a significant increase in public awareness; and a considerable increase in supply of policies to the market.  SL estimates that the impact on policy supply through direct referral agreements with UK Life Companies was an increase of over 30% (*); and this excluded additional, non measurable enhancements to supply due to general policy holder awareness; for example from Life Companies without direct referral arrangements with the market. Whilst there is unlikely to be any direct referral from insurers in the US, a life settlement normally offers a significantly higher premium to surrender value than the 5-10% average achieved by TEP sellers, making policyholders even more likely to choose the alternative to surrendering.

The efforts to increase supply are already paying dividends as is demonstrated by the results of a recent survey conducted by the industry publication The Deal.  This showed that the number of policies traded on the secondary market in 2016 had increased by 47% since 2015. The amount of face amount traded increased by only 30% - which highlights the fact that the number of smaller policies being traded is increasing as the market becomes more efficient. This growth in supply has continued into 2017.

More capital and a similar boost to supply in the US Life Settlement market can only be good for future growth in this exciting asset class.

 

 

*based upon an SL analysis of the increase in policy enquiries between 2 year period 2000-2001 and the 3 year period 2004-2007 (once majority of direct supply arrangements in place) attributable to the new legislation.