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Settlement Market Grew Apace Last Year

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The secondary market for life insurance policies expanded significantly last year, reaching a record high for the total value of policies involved in life settlement transactions, according to the Life Insurance Settlements Association.

Policies totaling about $12 billion in face value were sold on the secondary market in 2006, showing a “significant” increase over the prior year, LISA reported.

The $12 billion figure, explained LISA executive director Doug Head, is essentially a “score” kept by LISA “based on a lot of anecdotal evidence” given by the group’s members. Head said LISA members generally reported their business doubling in 2005 after increasing roughly 50% in 2004.

“It’s an ongoing scorecard,” he said, adding “we’re growing in fits and starts.”

One factor contributing to the “fits and starts,” he said, has been the influx of institutional money. As an example, Head said that 2005 saw money come in from German institutions looking to invest in the secondary market. “Everyone had a surge” at that time, he said.

In its announcement, LISA also said it expected that the market will continue to grow. Although a record, LISA noted that the market in 2006 is “still a fraction of what some predict will be the size in 10 years.”

“I keep listening and trying to figure out where we’re at,” Head said. Some reports have said the life settlements industry has only achieved a 10% penetration of the potential market. Head, however, said “we try to be conservative” and offered his own estimate of 20%.

The group may have reason to be confident in the continued growth of the industry. Head noted that there is “greater interest from institutional investors” and more awareness among seniors of the life settlement option. An example of the former could be seen in the formation of an association of institutional life settlement investors in early 2007. The Institutional Life Markets Association, based in New York, includes Bear Stearns & Co. Inc.; Credit Suisse; Goldman, Sachs & Co.; Mizuho International plc; UBS AG; and WestLB AG.

One of the potentially major factors that could impact the secondary market is how Congress responds to estate tax issues. Currently, the estate tax is set to be phased out gradually under a deal worked out by members of Congress in the Economic Growth and Tax Relief Reconciliation Act of 2001. Under that legislation, the estate tax is gradually phased down until it disappears completely in 2010. However, the law expires in 2011, returning the tax to 2001 levels, or as Head put it, “all bets are off.”

Because of the uncertainty beyond 2010, Head said many people, and particularly high net worth individuals, have been increasingly purchasing life policies. Based on what Congress decides to do, he said, many of those policies may or may not end up being sold in life settlement transactions.

“There could be a big surge,” after 2010, he said, “or there may not.”

There are, however, continued challenges ahead for the secondary market, including a National Association of Insurance Commissioners model act that LISA has opposed as unfair to the industry and as limiting consumer choices. That model, which has been approved by the NAIC, would restrict the ability of consumers to sell their policies for up to 5 years in some cases. LISA has instead expressed support for a model act developed by the National Conference of Insurance Legislators, which has a 2-year ban.

Overall, however, Head said he expects “continued growth” in the market, with life settlements eventually reaching a level of around $60 billion annually.