Two recent life settlement industry data reports – trade association the Life Insurance Settlements Association (LISA)’s 2022 Market Data Collection Survey and industry magazine The Life Settlement Report, part of The Deal’s annual report on secondary market transactions – suggest that activity in the secondary market improved in 2022 versus 2021 – albeit, very modestly. Life Risk News’ Greg Winterton hosted a virtual roundtable in late July with Simon Erritt, Senior Managing Director at Coventry Capital, Aaron Giroux, Chief Executive Officer at LifeRoc Capital, Michael Freedman, Chief Executive Officer at Lighthouse Life Solutions, and Perry Koons, Vice President of Sales at Maple Financial, to get their thoughts on the state of the life settlement market.
GW: Let’s start with secondary market activity. You’ve all seen the data published in June by The Life Settlement Report, part of The Deal, that suggests that secondary market activity only increased by 4% from 2021 to 2022. If you speak to a life settlements broker, they’ll say that they are seeing a much larger increase, which suggests something of a disconnect. Why do you think the increase was actually so low and what’s the broker disconnect?
SE: Certainly, the secondary market has grown. It’s strong and poised to grow materially. I’d point out that the Life Settlements Report’s 4% increase was by number of policies purchased and was a 13% increase by their total face value.
Don’t forget that 2022 was a challenging year in other financial markets. The S&P 500 was down 18% and the Nasdaq was down 32%. In light of that, even a modest increase is very positive. And if market participants were to do more to generate business, the market will grow more.
MF: Expanding on Simon’s comment about what more market participants can do to grow the market, the biggest challenge I see is that the life settlement market needs more growth capital to support the business of life settlements. Today, and historically, the capital in our market is asset capital, which is great. That said, however, asset capital is often restricted or reluctant to invest in origination efforts that would stimulate growth in the number of new policies that come into the market. Investing in marketing and advertising by brokers, providers, and third-party advertisers, for instance, would benefit asset managers and funds by generating more assets. Some recent venture and growth investments in the business of life settlements have been made in recent years and are continuing, which is encouraging, but more is needed for the overall growth and success of the market in the business of life settlements.
AG: We don’t originate much with brokers, but observationally, there is difference between submissions and closings. The data in The Life Settlements Report is closings focused. But it can take up to six months for a submission to become a closing. So, there can be a ton of submission activity occurring today that may not show up in the closing data for another six to twelve months. The is just the nature of the pipeline in our industry.
Also, we feel the quality of the submissions coming in the door today is a bit lower than it was several years ago. That’s because there is greater awareness around life settlements with advisor and consumer exploring their options.
I would concur with brokers, though. I think submission activity is up, but how much of that activity is going to lead to increased closings is TBD. But my guess as an industry is that we’ll demonstrate growth again this year.
PK: We’re heavily broker focused, and the quick answer is that I see the broker market getting top heavy. We are seeing large increases with the brokers who work with national accounts and a larger volume of individual producers, so I don’t doubt the narrative. There are a smaller number of specialty settlement brokers overall and some of the groups who may have submitted five-10 policies in past years are no longer in the business. For some specific brokers there has definitely been continued growth and we’re seeing that borne out by our performance as well.
I think it’s also important to mention how cyclical advisor focus can be. Advisor focus was on new life insurance policies in 2021 and first half of 2022 because so many people wanted to buy new insurance policies after Covid. This has been a driver of slower overall growth than what we might have expected, but still promising for future years by virtue of growing the available pool of policies.
GW: What’s your view on smaller face policies and how do you see the brokers reacting to these policies? Are they bringing them to market, or do you think they are discarded in favour of larger face policies? Have any of your fund managers/clients taken more interest in smaller face policies, meaning less than $1m net death benefit (NDB)?
MF: There is clearly an uptick of activity in mid-face policies. In addition, more asset managers and funds are getting comfortable with smaller face policies. It’s not traditionally been an area that settlement brokers have dedicated themselves to but it’s an area of tremendous growth for the entire market not only because of the growing American senior population is going to double in the next 15 years and because the current economy – with volatile markets, higher interest rates inflation – more seniors today are faced with the lapse or surrender their policy. Direct-to-consumer marketing to these seniors is driving more responses than ever.
PK: We have several fund clients who regularly buy policies under $1m. It’s a sizeable part of our business, if not a specific focus. Smaller face policies can be tougher to make the economics work if there are too many hands in the pot, but I’d say the threshold is $500k, not $1m. At $500k, we do see quality submissions. The positives are that a lot of times, the sellers of these policies are more likely to be confirmed sellers, so if such cases are coming in from a broker, they have done the vetting already to ensure that it’s worth everybody’s time. Essentially, these policies tend to be from needs-based sellers where we have a high likelihood of a win, versus a seller with many strategic angles to their financial planning, where a confirmed sale may be less likely.
SE: Brokers regularly submit policies to us with face amounts less than $1m. We buy policies with face amounts of $100k and up, and the average face amount in our direct business is between $5-600k, small face and direct going hand in hand. And, yes, we have seen investors specifically targeting smaller face policies, particularly when starting new funds and looking for diversity.
GW: What are some other observations you would like to mention when it comes to supply in the secondary market generally? Are there any frustrations, and if so, are they solvable?
AG: Awareness is directly correlated to origination and overall volumes whether it’s firm specific or industry wide. We’re not in the direct-to-consumer space but we do focus on and invest heavily on origination in the advisor space. Without those investments I don’t think we would be growing as a firm. As providers, we’re in the business of origination, and if you’re not investing in origination, I don’t know what it is that you’re doing to drive growth.
You have to educate, and it can be tedious, you have to pound the streets and meet people in person. Investing in origination is a large financial commitment. That can be challenge, to make a commitment and it’s a long-term one that does not pay off quickly. Investing in origination is a one, two, or five-year investment return proposition. So, you have to have a long view of the resources you’re putting into awareness, whether it’s in the direct-to-consumer space or with advisors.
PK: Our biggest challenge, which is also our biggest opportunity, is driving organic growth in the broker and agent-advisor channels. Managing relationships with brokers, broker dealers, national accounts and individual advisors each necessitates a different approach. Our forte is with brokers and large agencies, and we aim to provide tools to help identify and build cases, giving us the best chance to see increased volume, compete, and win the business. But whatever channel you’re working with, being a resource and providing the hand-holding to make the process easier for everybody is a driver of growth for the entire market.
SE: We don’t have any frustrations when it comes to supply in the secondary market. We control the supply that we receive and, to a certain extent, how much the market receives. A significant portion of our supply comes from the direct market, and we can scale that up and down when we want to through our advertising.
Every time we scale up our direct and intermediary marketing efforts, we see commensurate increases in supply. One reason for this is the very low penetration rate of our industry. The ACLI’s figures suggest more than 8,000,000 policies were lapsed or surrendered in 2021, compared to the approximately 3,000 policies purchased in the secondary market.
MF: One of the areas the life settlement market players could improve upon that would have an impact on the supply of policies in the secondary market is more co-operation among the market participants. We’re competitors in the field but we’re colleagues when it comes to such things as public awareness, professional education and legislative/regulatory advocacy. We can always do more and co-ordinate better on education and awareness to consumers and insurance and financial advisors. Greater consumer understanding and professional acceptance would positively impact policy supply; state and federal advocacy can be used not only to protect against insurers’ efforts against life settlements but also to promote the benefits of life settlements to seniors and their families.
GW: The growth in policy flow from the direct-to-consumer market seems to be having a positive impact from the perspective of overall secondary market growth. What trends are you seeing in this space and what is the impact of this on the broader market?
SE: Coventry established Coventry Direct back in 2015, which is our dedicated brand in the direct-to-consumer market. It’s become a key driver of Coventry’s growth – in the past few years, we’ve acquired approximately 60% of our policies through this channel. From an investor’s perspective, it’s a significant source of policies that are unavailable elsewhere. The policies typically have a straightforward history and ownership structure, they’re generally well-seasoned and come from a wider range of carriers than traditional channels. For Coventry, the direct contact that we have with policy owners allows us to better understand their needs going into the transaction, and the ability to maintain contact with them should their health or needs change.
MF: Direct-to-consumer is still a largely an untapped opportunity for the life settlement market to grow but asset investors will need to get further comfortable with the characteristics and costs associated with policies sourced from DTC, including underwriting and servicing. Also, more marketing dollars for DTC origination in the space would help expand this channel of policies from a growing number of American seniors. The recent investments into companies, such as Lighthouse Life and Abacus, for instance, are positive signs for the further growth of the direct-to-consumer channel.
Also, some managers and asset funds are in greater need of assets than even a year ago, primarily because of the lack of supply of tertiary blocks of policies. There are some funds that are actively sourcing and purchasing secondary market generated policies for the first time, including those generated via direct-to-consumer. This reinforces the point that the commitment to seeing the secondary market reach its next level – to continue to expand the direct to consumer and advisor channels – is key for continued growth in supply. The need for growth in origination strategies is fundamentally really important.
PK: We don’t do any marketing directly to consumers. But from a macro perspective, direct-to-consumer drives activity in the smaller face market. For us, the biggest value add is that the direct marketing should cause consumers with higher face amount policies to discuss the life settlement option with their advisors. Ultimately, the efforts in direct to consumer made by firms in that space drive more activity for all of us.
GW: Let’s finish up with a look at future secondary market growth. Firstly, do you think the Baby Boomers aging into the market – who all have smart phones, tablets and laptops and are more internet savvy – will increase the amount of policies brought to market? And second, what else might affect activity going forward?
MF: We have seen tremendous response in digital marketing and advertising for seniors, especially in the current “recessionary” environment. Seniors are on social media and their phones, accessing products, services and shopping. The oldest Baby Boomers are now in their mid-to-late 70s and are internet savvy and tech capable, so digital marketing and social media and other on-line strategies are going to continue to grow.
Our growth opportunity is not an issue of objects in the mirror being closer than they appear. Yes, there were only approximately 3,000 transactions in 2021 and 2022, and some 8,000,000 estimated policies that could qualify for a life settlement in each of those two years. Our challenge is about reaching seniors, educating them, convincing them to make that first click to being the process of selling their policies.
AG: We’re clearly bullish, but I think the question ties to a ‘back end’ problem, which is “transaction friction”, which acts as an impediment to our industry’s overall growth. The process can be so involved and can take so long. Some of these drivers are outside of our control, as Perry mentioned, two examples are how much longer it takes to get medical records and how much longer it’s taking to get data from insurance carriers.
However, there are things within our control that technology can help to improve, such as the length of time it takes to do price discovery, and potentially using limited electronic medical data to underwrite more quickly. We do get negative feedback from the marketplace that the friction to transact is too high which leads to advisors and consumers shying away from the process. To the extent that we can collectively make that process better, quicker, and faster, I believe will lead to more growth. A lot of that will be technology driven; Sure, we can market online, but if we can’t deliver on the same frictionless promise that consumers are used to in other channels, like banking or insurance, I think we’re going to have break limiters on growth. We’re big believers in tech and know that technological process improvements must be applied across the entire life settlement process.
PK: We’re super bullish on the demographic piece – the math is there. Boomers are still aging in, and all of them will have crossed the age 65 threshold by 2030 so we’ll continue to see growth in policy count in the coming years. But in terms of the technology side, I think this comes back to market segmentation by channel. The 55-year-old who bought their term policy online is very likely to come back and look for life settlements information online ten years down the road when his conversion period is up. The 75-year-old who perhaps owned a business and is a high net-worth individual, and worked with advisors to purchase the policy individually, is a different scenario – even if they see the messaging online, they’re more likely to circle back through the advisor channel.
What’s also going to have an impact is that carriers are making their conversion products more expensive. There’s cheap term coverage, and really expensive permanent coverage. The stats on people owning cash value life insurance policies are down, so a challenge for all of us is going to be how we figure out these term policies that are a little bit more pricey. I still think that the market will grow, it’s just a question of how much.
SE: I’d echo the comments about Baby Boomers – the technical sophistication is there, and the platforms are there for them to use that increased sophistication. An obvious point is that there are more of them, so size as well as sophistication should play into it.
But I’d repeat what I said before, which is that we see the constraints on secondary market growth as largely demand driven. Broadening the investor base will be key to the industry’s future success. We can increase our marketing efforts to bring more policies into the market if demand is there from investors to purchase them. From my perspective, it’s about continuing to demonstrate good mortality performance and attractive risk-adjusted returns – particularly in the face of volatile financial markets elsewhere. If we can do that as an industry, then we will be in very good shape for growth in the coming years.