A recent study from Conning, Inc., a leading investment management company for the global insurance industry, found that investors purchased $1.7 billion worth of U.S. life insurance face value in 2014, bringing the total active life settlements market to more than $32 billion.
The analysts projected that “continued steady growth” in life settlements is expected for the coming years.
Against that backdrop, I had the opportunity to moderate a Q&A session at the Life Insurance Settlement Association’s (LISA) 21st Annual Fall Life Settlement & Compliance Conference, in Clearwater Beach, Fla. Our featured guest for the discussion was Jeff Serra, the founder and chief executive officer of institutional investor Vida Capital, Inc., who provided insights from the unique perspective of an investor in the life settlement industry.
“The life settlements asset class has undergone a major evolution over the past 20 years,” said Serra. “I’ve seen it go from an interesting idea and cottage industry, without much discipline, to what is now a niche asset class for institutional investors. In my view, over the next decade this industry is poised to become a main stream alternative investment asset class.”
From 1983 to 1997, Serra held various management and trading positions while employed at two large energy companies, where he was instrumental in building and managing one of the largest and most profitable independent petroleum refining and marketing companies in the U.S.
During this time, he became familiar with one of the basic economic principles of the oil and gas industry that would prove useful in spotting the potential of life settlements.
“I learned that the best way to spread risk in a drilling portfolio was to accumulate multiple oil wells, rather than hold just one and hope for a good result,” he explained. “The concept is similar with life settlements. The best way to capitalize on the most attractive characteristics of the asset class is to purchase hundreds – or even thousands – of life insurance policies in a single portfolio. In this way, investors can achieve the desired portfolio benefits of attractive risk adjusted returns, excess credit spreads, and non-correlation to the broader markets.”
Serra shared with us that his early forays into the life settlement asset class opened his eyes to the opportunity here: a chance for seniors to obtain a cash payment for an insurance policy they no longer need or can afford, and the chance for institutional investors to obtain attractive returns that are not correlated to the performance of equity markets or the latest maneuvers by the Federal Reserve.
“The transaction just makes good sense for the consumer, many of whom are under the impression that the only thing they can do with an unwanted or unaffordable insurance policy is to just surrender it back to the insurance company for whatever cash value is available,” he said. “As more seniors and their financial advisors become aware of the life settlement option as an alternative, they will often discover they can receive a much larger cash payment by selling their policy to a third party. That’s where we deliver value to consumers.”
In 2010, Vida Capital acquired Magna Life Settlements so they could own and operate a life settlement provider firm, better managing their capital and assets.
“We offer a couple different ways for investors to participate in the asset class with our funds,” said Serra. “We offer a closed-end fund, which appeals to longer-term investors who don’t want the potential for their investment pool to be disrupted by smaller investors who want to redeem at any given time, and we also offer an open-end semi-liquid fund, which appeals to investors who need to know they can redeem their shares and get liquidity within some reasonable amount of time.”
Serra identified a few key concerns he had years ago that presented some risk for the industry, but noted that the life settlement market participants in general – and LISA in particular – have made tremendous strides in cleaning up the business and promoting more ubiquitous regulations nationwide.
Still, he described a potential headline risk emerging now with the “Cost-of-Insurance” issue, in which five life insurance carriers have notified policy owners of their plans to hike premiums on long-held policies.
“These cost increases could hurt investors in life settlements who are paying the premiums on those assets, but they will be far more damaging for seniors currently holding those policies, many of whom are living on fixed incomes and may not be able to afford the premium hikes the insurance companies are seeking,” he explained.
“Diversifying a portfolio by insurance carrier concentration limits significantly reduces this risk for investors and is a further reason to seek an investment approach that diversifies the asset base,” the executive said.
In general, however, Serra projects that a significant growth curve is on the horizon for life settlements.
“I’ve been fortunate to have had my share of success in more than 30 years of investing, and I’ve seen very specific capital market dynamics in other asset classes – most notably MLPs, High Yield Debt and REITs – that I see coming together in life settlements,” he said.
“We now have a well-regulated marketplace, and a number of high-quality service providers in this business. From an investor’s standpoint, we now have actual to expected data across multiple underwriting methods, regulatory certainty and the emergence of several high quality asset managers and service providers,” Serra said.
“From a consumer’s standpoint, we offer an attractive alternative to what they can do with an unwanted or unaffordable life insurance policy and the beginnings of consumer awareness and acceptability. All of the ingredients are here for an exciting decade ahead of us,” Serra concluded.
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