The continuing effects of the economy’s implosion in 2008 are being felt in the life insurance settlement business, industry experts say.
For instance, the Life Insurance Settlement Association (LISA), Orlando, Fla., says that its membership roster has shrunk by about a third in the past two years.
Another measure of the downturn has come from the Amrita Life Settlement Index for July, which stood at 460 points, down from 500 in December 2009.
The index by Amrita Financial Inc., Oceanside, Calif., tracks buying activity among licensed life settlement providers.
But in a sign the settlement market may have bottomed out, the Amrita index for July was essentially unchanged from June. And it had actually reached its high point in April, when it stood at 537 points.
So the market is still in flux.
“My guess is that you are not going to see $13 billion in sales this year” for the settlement market, said Clark Troy, an analyst with the Aite Group L.L.C. Aite had forecast that volume for the secondary life market in January. While Troy still believes the industry will attain $13 billion in sales in the years ahead, earnings for the time being will continue to be suppressed, he believes.
Much of the industry’s future growth will come from policies purchased from the mass affluent, Troy predicts.
“The high-net-worth market of people who need to use their assets to finance needs, particularly for long term care, is still very much operative for this business,” Troy says.
Doug Head, executive director of LISA, says the recent decline in his organization’s membership reflects a considerable amount of consolidation in the industry as capital sources dried up.
“More and more, it is a buyers’ market,” he says.
Head believes a big impediment to the industry continues to be state regulation. Some states have been so restrictive as to have effectively killed the market for settlements within their borders, he says. He specifically cites New Hampshire, which requires that settlement brokers be appointed by the provider of a settlement. That provision has proved so unworkable that not one broker has applied for a license to sell settlements in New Hampshire, he says.
“They effectively regulated it out of existence,” Head says.
He believes, however, that nationwide, the market is about to stabilize. LISA is “not losing members at the same rate as we had been,” he says.
Also on the bright side, the industry has been showing it has “a valid place” as an investment, Head believes.
“No one argues that any more,” he says.
Recent reports from the Securities and Exchange Commission (SEC) and the Government Accountability Office suggesting that the life settlement market needs more regulation actually helped legitimize the industry, Head maintains.
“Both reports put us at a point where we could say, ‘We’re here, and we’re not going away,” Head says.
Also among those seeing a positive outlook for the secondary life market is Zohar Elhanani, chief operating officer of Legacy Benefits L.L.C., New York.
“I think the steps taken by regulators will help, and the dislocation of the market is being corrected, similar to other asset classes that have gone through turbulence,” Elhanani says. “The players that remain in the business are those that you want to remain. Bad actors won’t meet the requirements of investors.”
Although some brokers have left the market, providers are still active, Elhanani believes, even though they have downsized for the time being.
“Capital hasn’t flown in, and there is reduced industry volume,” he acknowledges. “But we believe this asset from a long term standpoint provides a viable investment. The risk in terms of the credit of insurance companies is good, and life expectancy estimates are better.”
He notes the revised estimates of life expectancies (LEs), which a number of settlement actuaries issued in 2008, lowered the projected values on existing pools of life insurance policies. However, improved LE methodologies, along with new investor classes entering the market and improved regulation of the market, have provided a “good recipe” for recovery, Elhanani says.
The buyer side is developing a true global base, too, he says. Until recently, the buyer base for the secondary life market was mostly domestic, with some European buyers, primarily German. Now other groups are expressing interest, including private equity sources such as pension funds and family office businesses, he said.
Capital sources also is now coming from wider geographical areas, including the Middle East, he reports.
“The globalization of capital is there,” he says.