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Institutional investors are reshaping the U.S. viatical and life settlement markets.

Viatical settlement brokers created the modern secondary market, or resale market, for in-force life insurance policies in the 1980s. Back then, most of the sellers were insureds with life expectancies of less than 2 years. Most of the investors were individuals who were willing to put money in a new, untested investment vehicle.

Now, the market is becoming “totally institutionally funded,” according to Moritz Roever, an analyst with Scope Group, Berlin, a German fund rating agency.

For money managers, a portfolio of life settlements is “a great asset class because it diversifies investments,” Roever says.

Medical advances that improve insureds lifespans can and do hurt life settlement portfolio returns. But life settlement returns are almost completely independent of the fluctuations in interest rates, inflation rates and other economic factors that drive returns on most other investments, Roever says.

German closed-end funds contributed about $650 million of the $2.5 billion in capital that flowed into the U.S. life settlement market in 2003, Roever estimates.

Scott Page, president of Lifeline Program, the life settlement unit of Page & Associates Inc., Fort Lauderdale, Fla., sees major banks expressing an interest in buying life insurance policies.

Institutional funding “will be the only fund source for this industry,” Page predicts.

Scope has reacted to the shift in life settlement funding sources by starting a program that rates the German and U.S. life settlement companies that attract the most capital from German closed-end mutual funds.

Many executives in the life insurance industry say selling a life insurance policy is usually a bad strategy for most insureds.

One traditional argument against the practice is that giving an investor an interest in rooting for the death of an insured is a bad idea.

Another argument has been that the prices insureds get for their policies are too low.

Although Page is a strong supporter of life settlements, he notes that reasonably healthy insureds in their 60s and 70s might get 30% to 40% of the policys face value. That compares with a typical payment of about 80% of the face value for a policy that covers an insured who has a life expectancy of less than 24 months, Page says.

But for life insurance agents and brokers who believe that selling unneeded life insurance policies is a valid option for at least some of their clients, the shift means that the type of client who ought to hear about the concept has changed, life settlement advocates say.

Doug Head, president of the Viatical and Life Settlements Association of America, Orlando, Fla., says he hopes there will continue to be a place in the market for brokers who want to sell small contracts owned by terminally ill viators.

But, today, the typical seller is no longer the terminally ill person but “the sophisticated, high-net-worth individual,” Page says.

When institutional investors buy life settlement portfolios, about 80% of the policies are universal life policies, the average age of the seller is 75 to 77, the contracts are issued by carriers rated AA or better, and the average yield on each contract is 15% to 17%, Roever says.

At Lifeline, policy sizes have increased to an average of $1.2 million today, from an average of just $112,000 in 1988, Page says.

Pages firm is looking for returns of about 16% to 20% on the transactions that it handles.

Greater institutional involvement eventually should lead to greater standardization in the viatical and life settlement market, says Carole Fiedler, owner of Innovative Settlement Solutions, San Rafael, Calif.

Fiedler has been a broker in the viatical and life settlement market for the past 12 years.

Fiedler says differences and conflicts between state laws and regulations, the Internal Revenue Code, and the major viatical and life settlement model acts and regulations can make it difficult for agents to negotiate the sale of life insurance policies.

Until the industry becomes more standardized, agents will continue to need to work with brokers who specialize in viatical and life settlements, Fiedler says.


Reproduced from National Underwriter Edition, September 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.