Life Settlements industry publication The Life Settlements Report, part of The Deal, publishes data each year on the size of the secondary market in life settlements, where individual policies are purchased by investors from the original owner through intermediaries. Much of the data comes from freedom of information requests to state insurers, and only a small percentage is contributed directly by providers.
Unfortunately, little to no data exists about the industry’s tertiary market, where life settlements are traded both individually and in blocks between investors; investment managers are not under any obligation to disclose their activity in this market. But what is well understood is that the tertiary market comprises a significant chunk of the overall market activity and value, making understanding this part of the life settlement market of significant importance for institutional end investors analysing existing or potential life settlement allocations.
One of the main differences with the tertiary market is that buyers don’t have the same access to information that they do when dealing in the secondary market.
“In the secondary market, you’re in direct contact with the insured individual and their advisors. Medical records are up to date, for example,” said William Corry, Managing Director at life settlement investment manager Corry Capital Advisors. “But in the tertiary market, you can’t talk to the insured. The documentation you have to conduct your analysis on is from someone who has already bought the policy. Depending on the length of time that has passed since the initial life settlement, that information could be good or spotty.”
The lack of information does impact the valuation of the policy and is something essential for the manager to consider when offering a price.
“If the documentation is not up to date, then you’ll need to price the risk into the value offered as a buyer,” said Corry. “You don’t know if a previous health impairment is not as bad today as it was when the secondary market deal was done, so their health might be better. Or it might be worse. That pendulum can swing easily both ways, so it’s something that needs careful consideration.”
Pricing life settlement policies accurately is a difficult task in the secondary market, let alone the tertiary one, and managers’ approaches vary. Nate Evans, CEO at Maple Life Analytics, says that the size of the manager also has an impact.
“Larger buyers have access to information based on other portfolios of policies that they will have seen historically. They also have access to databases that others might not, and this allows them to price differently.”
The portfolios referenced above provide another notable difference between the two markets. The tertiary market is block trading. Reasons abound for these sales: a closed-ended fund manager winding up their fund by selling the remaining policies in their portfolio; a manager of an open-ended fund looking for liquidity or to rebalance their portfolio; or a market player simply looking to exit the industry. Naturally, the reason behind the block sale drives part of the marketing logic, and Evans identifies three sale types, each of which see notable differences in price.
“On one end, there are bankruptcy sales. The administrator has to publish the sale, and this makes it public, available to anyone that can participate. You might see 30 to 40 bidders here and you see the initial bids, the highest x% move to the second round and then the bids are binding. Then there are the deals who go to all the people active in the market. A good sales agent will know the best buyers based on the characteristics of the portfolio. There are also sellers who wish for a smaller / less public process. These sellers will ask their sales agent to approach 2 or 3 of the most aggressive buyers to quietly get best execution,” he said.
Regardless of the reason for a portfolio coming to market, Evans says that currently a typical discount range is around 9-12% for a generic portfolio. Whilst he says that some portfolios with ‘origination risk’ – mainly the original purchase structure as well as the legal situation of the state in which the life settlement is domiciled – have seen discounts approaching 30% or even being unsellable. Most blocks hitting the market have benefitted from IRR compression due to the large amount of deployable capital in a sellers’ market.
“I think we have seen more compression in the “vanilla portfolios”,” he said. “That suggests pressure in that segment is affected the most by the competitive landscape. But origination risk is very large in the tertiary market. We continue to see portfolios with high origination risk get no bids at all.”
Corry goes further and says that there isn’t much of a discount at all in the tertiary market for quality portfolios. The driver of higher pricing for him, however, is a familiar gripe about the industry’s secondary market.
“There aren’t really any discounts to be had in the tertiary market. There may have been before, but not today. Prices can be held by sellers because of the lack of deal flow in the secondary market which filters to the tertiary market,” he said.
Competition for deals in the tertiary market is set to increase, making increased deal flow from the secondary market even more important. Carrier encroachment – the term life settlement industry players give to insurance companies that are essentially buying back policies they wrote – is on the rise.
“Some tertiary market buyers are in the market quietly, and we’re starting to see more insurance companies in the space on that basis. These types of buyers tend to buy and hold the assets to maturity – that will have an impact on tertiary market volumes,” said Evans.
Increased competition for life settlements in the tertiary market will likely have an impact on pricing but without access to reliable data, it’s difficult to predict the extent. Still, going forward, the main obstacle to tertiary market growth is deal flow in the secondary market. The Life Settlements Report’s figures suggest that 2021 saw a contraction in the number of deals done in the market; that could be feeding into the tertiary market this year, according to Boris Ziser, Partner, and Co-Head of Structured Finance & Derivatives at law firm Schulte, Roth & Zabel.
“It feels like this year has seen fewer deals than last year. I think the pandemic had an impact and I think what we’re seeing in the capital markets has had an impact. Investors are picking their spots – there are more opportunities to make similar returns in more traditional asset classes than there were before.”
Despite the slowdown in activity in the past twelve months or so, Ziser says that interest in life settlements is generally growing.
“One trend is that over the last several years, more and more investors have come to the market who were not comfortable with the asset class before but are now. There has been an expansion in the types of institutional investors deploying capital in the life settlement market. And recent market volatility has highlighted the benefits of an uncorrelated asset class like life settlements, so I’d expect activity to pick up again. Investors are coming around to the fact that ultimately, the credit behind their investment is a highly rated insurance company. Not many asset classes provide double digit returns from an uncorrelated investment where the credit is a AA-rated insurance company.”
The life settlement market will be keeping a keen eye out over the next twelve months to see if there is a rebound in activity in both the secondary and tertiary markets, and if so, to what extent. Corry agrees that capital market volatility supports the life settlement pitch, but regardless, the message to investors is one of encouragement.
“The capital markets being choppy helps life settlements. But the secondary market is fundamentally very healthy, healthier than it’s been in years. Expanded regulation, more states regulating the asset class, more consumer education and financial advisors understanding the applicability of the market are all driving that health. And that in turn fuels the tertiary market,” he said. “But life settlements are complex, so the key from an LP perspective is finding an investment fund manager who has proven track record and experience in the secondary and tertiary markets because while they are symbiotic, there are nuances to each that require specific skills and experience to generate success.”