Life Settlement Market Turns Corner

By Cyril Tuohy

InsuranceNewsNet

Face values of life insurance policies sold in the life settlement market reached $2.57 billion in 2013, up from $2.13 billion in 2012, according to a newsletter that tracks industry trends.

There were 1,356 policies sold last year, an increase of 160 policies from 2012, the newsletter said. Buyers paid $406.2 million for those polices last year compared to $319.4 million in 2012.

Numbers were reported in June 19 edition of “The Life Settlements Report,” a newsletter published by The Deal.

“The market seems to be improving which is very consistent with the indications that we get from our own members,” Darwin Bayston, president and chief executive officer of the Life Insurance Settlement Association, told InsuranceNewsNet.

Coventry First, last year’s market leader, paid $71.8 million for a face value of $340 million, the life settlements report noted. The company closed on 637 settlements last year.

Coventry, which also led the market in 2012, paid $72.3 million for a face value of $393 million that year, the report also found. The company closed on 597 settlements.

The top five life settlement buyers last year were Coventry First, with 637 settlements; Magna Life Settlements, with 168 settlements; Settlement Group, with 71 settlements; Life Equity, with 65 settlements, and Abacus Settlements, with 56 settlements, the report said.

Numbers in the report were compiled from public records kept with state insurance departments. The information covers 36 life settlement providers.

In the settlement of a life insurance policy, the policyholder “settles” or sells his or her life insurance policy by signing over the policy to a buyer who continues to pay the premium but collects a portion of the death benefit.

The price the buyer pays falls somewhere between the cash value that’s built up in the policy and the benefit paid at death. A whole life policy with a $10,000 cash value and a $50,000 death benefit may sell for $12,000 or $15,000, for example.

Life insurance policyholders will settle an insurance policy if the policy no longer meets their needs, or if they own more than one life insurance policy.

A resurgence of buying activity means there’s more opportunity to sell for people who no longer want to hold on to policies on which they pay premiums.

Transactions are arranged through financial advisors or brokers.

In a January report titled “Life Settlements: A New Opportunity in Smaller Policies,” the consulting firm Conning & Co. also noted a renewed interest among investors in the life settlements asset class.

“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,” said Scott Hawkins, an analyst at Conning.

Bayston also said that not only have investors showed renewed interest in life settlements but that the “quality” of the life insurance policies they are buying is improving as well.

Higher quality life policies tend to resemble a traditional life insurance policy to which policyholders contribute regular premiums. When life insurance policies are paid for by premiums that are financed, the policies are considered to be of lower quality.

Leading up to the financial crisis, many life settlement investors bought life insurance policies where the premium was financed.

When the financial markets collapsed, credit markets tightened and banks refused to lend. In addition, longer life expectancies of older Americans meant investors would have to pay premiums for a longer period.

Investors fled as a result and the life settlement industry suffered from a major contraction.

Bayston said the rebound in life settlements is a good sign. It means more capital is coming into the market.

“It’s coming from institutional capital that appears to be buying policies for the long term and for the long-term investment value,” Bayston said. Pension funds, hedge funds, endowments and foundations, and even private family wealth are coming into the market, he also said.

Bayston noted that the life settlement report, which covers activity in the secondary market, doesn’t cover the entire market.

Nor does the report cover activity in the tertiary market. In the tertiary market, buyers settle numerous life policies, bundle them into a portfolio of many policies, and turn around and sell the portfolio to other buyers.

“What that means is that people who bought policies before are now willing to sell them,” Bayston added. “I’m not sure if that foretells anything about the future but a lively tertiary market is good for the marketplace. It indicates some liquidity.”

“We’re very optimistic about the potential growth in the secondary marketplace,” he added.

Investors can expect the next two to three years to be very different from the previous two or three years, he said.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].