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.
Typically, Hawkins noted, investors in life settlements have a specific set of criteria for policies they wish to purchase. In general, these criteria look for older policyholders, certain health status or life expectancies, and a minimum value of the policy’s death benefit. As the competition for policies increases, he said, investors, or fund managers, will have to expand those criteria or risk depleting their investment, and potentially the market itself.
“If capital continues to flow into life settlements from an increasingly diverse number of investors and through a variety of infrastructures, the challenge will be in finding enough policies for investment,” Conning noted in the study. “If investors question their investment manager’s ability to acquire a sufficient number of policies, they may turn away from the market, diminishing its growth potential.”
In terms of geography, Hawkins said that the movement to globalize the life settlements industry is already underway, and is expected to gain steam as it continues.
Already, he said, the investor side is “clearly global” with institutions from Europe and increasingly from Asia investing in life settlements. However, he noted that the market for policies themselves is also expanding across the globe. Investors and funds, he said, “will increasingly look at other markets as well as the U.S.” with the United Kingdom and Germany currently among those with the most developed secondary markets. As competition heats up, he said, investors will more and more seek out other markets as well. Those investors, he said, look for “well regulated, well developed” markets.
In making its estimate of the market, Hawkins said Conning looked to a number of sources for information, including company prospectuses and offerings of life settlements funds. In looking forward, he said Conning used a “refinement of our approach from the last study” it conducted of life settlements, looking at the potential policyholders who might decide to access the secondary market based on their age, health statistics, policy type and the face value of policies.
The life settlement industry, according to Conning, grew from $5.5 billion in face amount of policies transferred in 2005 to $6.1 billion in 2006. That estimate, he said, was based on information gathered from a number of sources, including the U.S. Census Bureau, LIMRA and the Insurance Information Institute. Additionally he said Conning sought to use information filed by life settlement companies with regulators in the states that require filings.
Ultimately, Conning estimated a range of $90 billion to $140 billion for the life settlement market going forward. While that is a broad range, Hawkins noted that there is little actual data that can be easily accessed on the market.
However, Al Weinberger, a senior partner at AAA Life Settlements, Inc. said actual data on life settlements has been collected and it shows Conning’s estimates on the market’s current size to be far short.
Weinberger said his company has worked on an estimate of its own in the past few months, “based on actual data” from 10 companies. By themselves, he said, those companies saw an increase of approximately $1.3 billion in face value transferred in 2006 compared to 2005. Weinberger said the information shows that the Conning study’s estimates “make no sense” given that all of these companies represent less than half of the secondary market.
In July, the Life Insurance Settlement Association announced that it estimated the total life settlement market to have reached $12.1 billion in face amount transferred during 2006. At the time, LISA Executive Director Doug Head, said the estimate was based on information from LISA members, who told the group their business had generally doubled between 2005 and 2006.
Weinberger said the data he had seen showed a similar growth. “Most of the companies we’ve seen had 100% growth” between 2005 and 2006, he said, and “these 10 companies doubled” in that time period.
One area in which he did agree with Conning, however, was in the tremendous growth of institutional investors in the secondary market. Based on the data he has seen, Weinberger said the secondary market is “probably 90%” institutional investors.