How European Hedge Funds View Life Settlements
Updated: Dec 20, 2021
What You Need to Know
A 1911 U.S. Supreme Court case helps make the U.S. life settlement market special.
Many U.S. insureds now understand that a life insurance policy as a form of private property.
European investors like the idea that life settlement values move on their own unique path.
The life settlement — an offshoot of the viatical life settlement market of the 1980s — is one of the many alternative investment assets that institutional investors bring into play for decades in their portfolio.
They mainly use this asset class during long-term bull cycles as a risk hedging strategy and diversification tool, to enhance the overall performance of their investment portfolios.
European Interest in U.S. Life Settlement Market
Since the advent of the 21st century, the life settlement industry has morphed into a more streamlined and specialized financial space. It is being predicted by prominent firms like Conning that, under certain circumstances, the cumulative value of the market could reach $212 billion by 2028. As life settlements continue to gain traction among the world’s largest financial institutions, the level of transparency and sophistication has grown constantly.
While the secondary and tertiary life settlement markets are located primarily in the United States, the European life settlement market is still nascent. Many investors in Europe have acquired life settlement funds or structured life settlement products in the U.S. market since its establishment in 2002. Investors in European countries, and especially Germany, were early entrants.
By 2004-2005, a few years after the 2000-2001 dot-com crash, liquidity for life settlements increased. Many Wall Street firms and European banks, including Union Bank of Switzerland, Deutsche Bank and Goldman Sachs, have invested in this asset class.
Interest in the asset class increased exponentially during the 2008 financial crisis. After that, in 2009, the European Life Settlement Association (ELSA) was established. ELSA lobbied for the life settlement sector’s interests and worked closely with European agencies to develop investor protection regulations.
Why are European investors interested in this asset class, and, specifically, in the U.S. market product?
The 2008 crisis showed that life settlements can provide a bond-like yield, without correlation with traditional financial markets and without the same kind of volatility.
Due to the life settlement market’s unique characteristics and efficiency, it attracts a vast pool of investors.
Many European investors have invested directly and indirectly in the U.S. life settlement market for years. One of the reasons for the focus on the U.S. market is because the foundation of a life settlement is inherent in U.S. insurance laws, and has been strengthened by the U.S. Supreme Court case of Grisby v. Russel 1911. That legal foundation makes the U.S. secondary and tertiary life settlement markets attractive and conducive trading arenas for foreign investors.
Second, life settlements have generated a great deal of interest in international markets due to the current U.S demographic environment, and due to the market growth expected from this asset class at present and in the future. More than 10,000 people in the United States turn 65 daily. In 2020, the number of retired baby boomers—— people born from 1946- 1964 — increased more than ever, according to a Pew Research Center analysis.
Nowadays, more and more senior insureds in the United States are looking into life settlements for various reasons, such as rising health costs, inflation, the need to support their habits and retirement planning considerations. Due to consistent outreach and marketing efforts, U.S. senior insureds realize that their life insurance policy shares the same characteristics as other forms of private property.
Instead of lapsing or surrendering their policies, U.S. insureds looking for cash relief consider life settlements a viable alternative solution, thereby increasing the industry’s market potential. According to the Life Insurance Settlement Association, it is estimated that U.S. seniors have more than $3 trillion in life insurance policies.
How International and Domestic Players Value Life Settlements.
A life settlement can be viewed as an international asset class, as European hedge funds such as Ress Life Investments A/S, a limited liability company managed by Resscapital AB of Sweden and Carlisle Management Company of Luxemburg have been active industry participants in the U.S. life settlement market.
Since the emergence of this industry, many financial institutions have been accumulating multiple life settlement portfolios that they expect to securitize.
There are several factors hedge funds must take into consideration when evaluating the policies, such as the health condition of the insured, as rated by a third-party medical underwriter; the insured’s demographic characteristics and lifestyle; the actual face value of the policy; and, finally, the insured’s estimated life expectancy.
Accurately valuing life settlements is vital to minimizing risk and to assessing the potential return on investment. For investors, longevity risk is one of the primary concerns when investing in life settlement contracts.
To mitigate this risk, depending on the firm’s respective fund type — closed-end, open-end or fractional — managers will adhere to standardized procedures to select and structure policies on an individual or block level that meet their defined criteria. For instance, a life settlement hedge fund might choose policies with a diverse range of life expectancy estimates and have these policies structured and distributed through a portfolio according to these varying life expectancy estimates in ascending or descending order.
In conclusion, interest from foreign institutional investors has increased significantly over the past few years, contributing to the growth of the U.S. life settlement market. One of the industry’s pioneers, Magna, says the market has an annual average growth rate of 34%.
Some of the world’s most prominent institutional investors, including hedge funds, sovereign pension plans, banks, and endowments, now recognize the unique benefits of investing in the life settlements market.
By Arthur Lee
Arthur Lee is the chief investment and operations officer at LifeXcel LLC, an alternative asset administration company specializing in structuring, distributing, and managing life settlement contracts.