Reconsidering Life Settlement Investments

By: Bailey McCann, Opalesque

By Bailey McCann, Opalesque New York Published APR 10, 2014

Hedge funds were once the largest investors in the life settlement industry, now the industry is seeing more interest from pensions, endowments and family offices directly. Life settlements have always been considered a niche part of the investing landscape, and their high rate of return was attractive to hedge funds. However, as hedge funds have shifted to more short term investing allocators themselves are stepping in.

“The typical timeline for an investment like this is minimum 7 years, that can be a long time for a hedge fund to be locked up in an investment in the current environment,” Scott Page, president and CEO of The Lifeline Program tells Opalesque. “Instead, we’re seeing more interest from pensions, endowments and family offices that have a longer term investment horizon and can stay with these vehicles for the long haul.”

The Lifeline Program provides life insurance settlement options for life insurance policyholders that wish to get out of unwanted or underperforming policies. Typically one of these policies is considered underperforming if a policy holder took out universal life coverage when interest rates were much higher and now sees little help from interest rates in terms of cost and coverage. Depending on the age of the policyholder, investors who wish to purchase these policies can find a decent return multiple.

“Well constructed life settlement portfolios can have long term returns in the low- to mid-teens, but a commitment of more than 10 years is typically required,” Page says. This makes the investible opportunity more palatable to return starved institutions with mandates to meet. However, the due diligence process for these investments can be costly and specialized.

Conning, an investment management firm focused on the insurance industry, points to an emerging recovery in the space that started last year. Like many asset classes, life settlements saw a significant downturn following the crisis, lining up new private capital was also difficult.

“The life settlements asset class continued to struggle to attract new capital through 2012,” said Scott Hawkins, analyst at Conning. “Yet as 2013 developed, some indications of renewed interest in life settlements among investors surfaced. This renewal was driven in part by the prolonged low-interest rate environment, while at the same time; a new market opportunity emerged in the form of long-term care funding opportunities.”

According to Conning data, investors purchased approximately $2.0bn worth of U.S. life insurance face values in 2012. By the end of that year, investors held just under $35bn of in force U.S. life settlements. Transactions continued in 2013, with several large portfolios being purchased, coupled with the new interest in long-term care funding.

The trend speaks to the growth in secondaries markets for all asset classes – even the niches. Sources in several secondaries markets note that the secondaries trend overall is likely approaching the midway point, and getting close to being fully valued. “There is a lot of opportunity in life settlements for investors with a long term horizon, but a lot of it depends on education and working with experienced advisors. It can also be a way to add diversity to the total portfolio,” Page added.

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