Institutional investors are serving as a driving force behind changes in the life settlement industry that are bringing it in line with more traditional financial services products, according to a study by Conning and Co.
Scott Hawkins, an analyst at Conning and one of the authors of the study, said the study had two parts, one looking at the estimated size of the market and its potential for growth, and the other looking at what’s happening on the investor side.
Conning’s previous work on life settlements, he said he had looked at it from the perspective of the supply side, focusing either on policyholders or life settlement companies. For this study, Hawkins said, “we wanted to look at it from the opposite end of the transaction.”
What Conning found, he said, is that the investor side is becoming “increasingly professional” in that institutions are moving in and establishing formal investment structures for settlements that are not very dissimilar from other financial products.
As an example, he noted that the study found institutional investors setting up their life settlement funds in a manner like their other offerings.
“Originally we looked at life settlements as being private placements,” he noted, “but now we’re seeing the emergence of a mutual fund type structure.”
These funds, he said, generally take two forms, either as a closed fund in which capital is gathered from investors, policies are purchased and liquidated at a specific date, or a more open-ended format in which new investors are brought in and new policies are purchased on an ongoing basis.
Jack Kelly, a spokesman for the Institutional Life Markets Association, also noted the structuring of funds investing in life settlements and predicted that these funds would continue to develop along the lines of other securities.
“Obviously, there’s already been some private securitization,” he said, adding it is “only a matter of time before a public securitization occurs and is submitted” for a rating.
Bringing a life settlement portfolio to the credit agencies may further cement the structure of funds, Conning noted in the study, rather than investors seeking out and purchasing policies on their own.
“Because securitized life settlement portfolios may be rated by credit agencies, investors may feel more comfortable about committing capital to life settlement securitization than directly investing,” Conning said in the study.
These funds will serve as drivers for what Hawkins and Conning said will be another driving force for the secondary market: increased competition. “With the emergence of these types of structures, there will be increasing competition, especially for the open ended funds,” he said. “They’ll need to restock their supply of policies” as they collect on older ones.
From that increased need for policies, Hawkins said Conning foresees a broadening of the market, both in terms of the criteria used to select policies for investment and in the market’s geography.