Understanding Vertically Integrated Providers in the Life Settlement Market

In the 43 states of the US that have a regulatory infrastructure for the life settlement secondary market, a life settlement provider is involved in every transaction. 

The reason is because one of the two model acts – the NAIC’s Viatical Settlements Model Act and the NCOIL’s Life Settlements Model Act – used by states that regulate the space require their presence. Whether the life insurance policy is sourced via the direct-to-consumer channel, or the intermediated channel, the provider is an ever-present market participant. 

The role played by providers in our industry benefits both the asset manager and the consumer – and ultimately, the investor allocating capital to the manager.  

On the asset manager side, providers are the buyer on record of the life settlement policy, working hard to source these policies for their client(s) either through the direct-to-consumer channel, or through intermediated channels, which often includes life settlement brokers (another licensed entity in both model acts, with a fiduciary duty to the policyholder).  

On the consumer protection side, providers are licensed entities that are required to furnish policyholders and insureds with certain disclosure forms and documents as part of their process in buying a policy. This requirement is a strength of our industry because it provides important information to policyholders in order for them to make an informed decision as well as the reassurance benefit that the insured is selling to an established, licensed, regulated company. 

Because providers are involved in every transaction, over time, significant information accrues to them. One example is that life settlement providers have more information about a policyholder’s health and situation than what’s typically available to an asset manager. Similarly, they can aggregate that information to understand policies on a macro level. This helps providers better advise their asset manager clients with regards to the life expectancy of the insured; it provides a second opinion to the external life expectancy underwriting firms that are used commonly in our space. 

But the buying process can still be cumbersome. Constant back and forth between policyholders to brokers to providers to asset managers makes for a slow process and has been known to put off both buyers and sellers, leading to a less efficient market, and sunk transaction costs. These costs – both time and money costs – ultimately impact the pension fund, foundation, endowment or insurance company that allocates capital to the asset managers. 

That’s why it may make sense for investors in the space to align with a manager that owns a provider.  

As I mentioned previously, the information that providers obtain during the course of doing business can become a competitive advantage. But other significant benefits accrue to the asset manager – and, in turn, their clients – that owns a life settlement provider. 

Deal Flow and Acquisition Costs 

Providers can work for multiple asset managers during the bidding process for a policy that comes to market through the broker channel, and this can represent a conflict of interest. Owning a provider – and having that provider work with an asset manager – gives the asset manager direct access to the deal flow generated by the provider, potentially at a lower acquisition cost than relying on external brokers. Additionally, it enables the asset manager to source policies direct from the consumer, another route to market that will enable an asset manager to source policies at lower prices originally than those that come through the broker channel. 

Selection and Quality Control:  

Asset managers rely on the quality of the policies they buy. Owning a provider allows for more control over the selection process and underwriting standards, potentially leading to a higher quality portfolio. 

Streamlined Operations:  

There can be efficiencies gained from integrating the acquisition and asset management functions. This could lead to faster deal processing and potentially lower overall costs. 

Reputation and Branding:  

Owning a life settlement provider allows the asset manager to build their reputation and brand within the industry, potentially giving them an edge in attracting new investment capital.   

Owning a provider brings complexity, however. You either need to launch one – which requires you to play the role of venture capitalist, hiring people, going through the licensing process (in multiple states) and building a brand. Or you play the role of private equity or corporate buyer, acquiring an existing provider, which comes with a higher price.  

Both of these options require an asset manager to have size and scale, long standing relationships and the ability to access the capital markets competitively. Not only that, but the asset manager needs legal resources to ensure it can navigate the complexities of life settlement provider regulation, which are not insignificant.  

But for limited partners that are either currently invested in the space, or those that aren’t but are considering it, hiring an asset manager that has the infrastructure to vertically integrate a provider means that the above benefits also filter up to them. Lower acquisition costs means, other things being equal, higher returns. An increased pool of policies to pick from and better quality control means better policies in the portfolio, leading to higher returns. Information asymmetry leads to better policies being acquired, which leads to higher returns. And streamlined operations saves time and money, leading to higher returns. 

The life settlement industry has evolved significantly over the past twenty years, becoming a genuine consideration for investors that are looking for a non-correlated asset class that can deliver acceptable, risk-adjusted returns. Partnering with an asset manager that has more control over the number and type of policies they are able to buy, via a vertically integrated provider, means more of those non-correlated, risk-adjusted returns. 

Bill Corry is Managing Partner at Corry Capital Advisors