The rebounding life settlement market
By Jeremy Leach, Chief Executive Officer, Managing Partners Limited

An investment asset class that has attracted substantial interest from major insurers over the years is enjoying a resurgence following the detrimental effects of the global financial crisis.

Latest figures point to a significant turnaround in the market for life settlements, which are US-issued whole of life policies sold before they mature by the original owners, who wish to enjoy some of the benefits during their own lifetimes.

The face value of policies traded in 2013 rose 17% from $2.13 billion in 2012 to $2.57 billion in 2013, according to The Deal, the institutional business of The Street (NASDAQ:TST). It was the first rise in some years and marked the first significant turnaround since the crisis.

In the UK, the market for life settlements was also heavily criticized by the FSA and its successor, the FCA, largely for being inappropriate investments for unsophisticated retail investors, a viewpoint we wholly support at MPL. However, the regulators themselves came under fire for the delivery of their criticisms creating a run on investments in the asset class and causing severe problems for the investors they were hoping to protect.

The market rebound highlighted by The Deal is reflected by new research (*2) from MPL that shows 61.5% of institutional investors expect institutions generally to increase their exposure to life settlements over the next three years and only 1.9% expects them to reduce it. The corresponding figures for five years are 69.2% and 0% respectively.

When asked why they think they will increase their exposure, 44.0% said it is because life settlements offer low correlation with other asset classes. This was followed by 40.0% who said that more policies coming onto the market and an increasing number of product providers will increase liquidity for investors. More than one in four (28.0%) said the increasing number of policies coming onto the market will improve opportunities for investors and nearly one in five (18.0%) said regulatory changes have made investing in life settlements much safer.

Other research by MPL also reveals that despite the regulatory controversy, there is a substantial minority of UK financial brokers who still anticipate an appetite for life settlements among sophisticated retail investors.

The research (*3) shows that 24% of brokers believe sophisticated retail investors will increase their exposure to life settlements as an asset class over the next three years, compared to 18% who expect them to reduce it. The corresponding figures for five years are 26% and 14%. Nearly one in 10 (9.6%) of brokers would consider recommending life settlements as an asset class to their sophisticated clients. 57.7% would not recommend them, and 32.7% are unsure.

The latest market turnaround is likely to be of interest to leading insurers such as AIG, Wilton Re, Partner Re, Scor and several others that have all bought and underwritten investments in life settlements, not least because while the market is returning, MPL's view is that life settlements are still currently more attractively priced than at any other time in the last 10 years.

In part, this is because there has been a significant increase in the number of current owners trying to sell them, but dramatic positive changes in the life settlements market such as tighter regulation and improved accuracy around longevity calculations has also made the sector more attractive for investors.

The life settlement market is set for substantial growth going forwards, making it a far more compelling proposition for investors. The reasons for this include:
  • The life settlement industry is undergoing much tighter regulation in the US, with the market now regulated in 42 of the 50 states
  • Policyholders are becoming increasingly aware of the option to sell their policies on the open market rather than surrendering them or letting them lapse. Product providers are coming under increasing pressure to notify policyholders of this option and several states have made it law with others set to follow
  • US census data shows that the life settlement market in the US is primed for substantial growth and liquidity in coming decades as the baby boomers – the most life insured generation ever – enter retirement and sell policies to raise cash
  • Having gone through the global financial crisis and delivered relatively uncorrelated returns, life settlements have proved their worth as an alternative asset class
  • The ability of life expectancy analysts working in the market continues to improve as they build experience and their data becomes increasingly accurate
  • Life insurance was widely sold as a way to offset inheritance tax but the American Taxpayers Relief Act 2012 has reduced this potential burden and should lead to a major increase in the number of seniors choosing to sell their policies

However, it is essential to have the necessary skills to manage a life settlement portfolio. Prudent actuarial analysis is required to assess when policies are likely to mature and the right diversification is needed across types of policies and insurance companies. The right experience and expertise is essential in what is still a nascent asset class, albeit one that is set to grow substantially in coming decades as the US population gets older and more Americans realize there is a market for policies they would rather sell.

(*1) Source: the Deal, a business unit of The Street, June 2014
(*2) 57 institutional investors in Europe were interviewed in June 2014
(*3) 65 UK-based financial intermediaries were interviewed between 29 May and 6 June 2014

This article first appeared in Insurance Day on 28 July 2014.

MPL Asset Management SA is part of the MPL Group and is regulated in Switzerland by the Organisme d'autorégulation des gérants de patrimoine OAR-G (membership no. 955).
OAR-G is a Self Regulatory Organisation licensed by FINMA under the provisions of the Swiss Anti-Money Laundering Act.