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Portfolio > Portfolio Construction

Life Settlement Portfolios Did Something Weird in 2018

By Allison Bell

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Life settlement industry players have this message for institutional investors: Life settlement portfolios made money in 2018.

In 2018, in the stock and bond markets, “there was no place to hide,” Dan Young, a senior managing director at Vida Capital, said today in New York, at the Life Insurance Settlement Association’s 2019 institutional investor conference. “Everything moved in the same direction.”

But, in the life settlement market, returns were positive, Young said.

(Related: Life Settlement Investors Head to New York)

Comprehensive market figures are still scarce in the U.S. life settlement market. Some attendees at the conference said their gut feeling is that overall life settlement returns might have been somewhere between 5% and 10% in 2018.

Alan Buerger, chief executive officer of Coventry, a major life settlement company, said that he believes returns have been “in the low to mid teens.”

Regardless of what the exact numbers are, “the market is growing organically again,” Buerger said. “All signs point to continued growth and progress.”

Definitions

The life settlement market gives holders of life insurance policies a mechanism for selling policies to unrelated parties, through “secondary market” transactions.

Life settlement companies may either hold the policies acquired themselves, through “warehousing,” or sell the policies to hedge funds and other institutional investors, through the tertiary market.

Numbers

Deal Flow and Conning have used a variety of sources to assemble some market data.

Buerger cited Deal Flow reports that the number of policies sold in the United States increased to 2,027 in 2017, from 1,123 in 2015, and that the total amount of death benefits provided by the policies sold increased to $2.8 billion, from $1.6 billion.

Buerger also talked about a Conning estimate that U.S. consumers may hold policies with about $150 billion in total death benefits that could be prime candidates for life settlement transactions.

“There is a significant opportunity for growing the number of life settlement transactions,” Buerger said.

John Welcom, the chief executive officer of Welcome Funds Inc., a life settlement broker, gave attendees a summary of the stats for his own firm’s book of business.

Welcom said his firm gets bids for about 75% of the policies that it agrees to broker.

  • The average age of the insureds is 78 years.
  • The average life expectancy of the insureds is 8.5 years.
  • The typical policy death benefit is about $2 million.
  • The average policy brokered attracts about eight bids, with the closing price averaging roughly 28% of the policy death benefit.

Buerger said it has paid $4 billion for $30 billion in death benefits over the course of its history, implying an average price equal to about 13% of the death benefits.

The TV Ads

Coventry and companies have been advertising life settlement opportunities directly to consumers, through television ads and other means, in recent years.

Coventry has found that about 80% of the consumers it talks to first learned about the possibility of selling their life insurance policies through the TV ads, Buerger said.

The average size of a policy to Coventry through the direct-to-consumer channel is only about $500,000, the number of policy issuers involved is much higher than in the pool sof policies that come in through intermediaries, and the life expectancy of the insureds is significantly lower than it is for the policies that come in through intermediaries, Buerger said.

Those characteristics are helpful for institutional investors that want well-diversified portfolios, Buerger said.

Welcom said that he believes that the life settlement community is now serving only about 1% of the consumers who could make use of life settlements, and that the direct-to-consumer market is expanding the overall size of the market, and even creating new opportunities for intermediaries, rather than taking business away from the intermediaries.

The Investors

Speakers at the conference said they now see strong demand for life settlement portfolios from institutional investors, in part because of a hunger for assets with returns not correlated to stock market returns, and in part because strict state regulation of the life settlement market has increased investors’ level of comfort with the market.

— Read 5 Life Settlements That Didn’t Get Away, on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.

Allison Bell

Think_Allison

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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.