Outlook for life settlement funds in 2022
February 2022 | TALKINGPOINT | FINANCE & INVESTMENT
Financier Worldwide Magazine
February 2022 Issue
FW discusses the outlook for life settlement funds in 2022 with Brian Forman and Corwin (Cory) Zass at ARM (Actuarial Risk Management).
FW: Could you provide an overview of the impact of the coronavirus (COVID-19) pandemic on life settlement maturities? In addition, what impact has COVID-19 had on the availability of policies for purchase, or on the prices for which policies can be transacted?
Forman: As we are all aware, coronavirus (COVID-19) has taken a toll in the US as well as around the world. Clearly there have been deaths associated with insureds who settled their policies – a also known as life settlements – that would have not occurred during this period. Data shows many deaths from persons with pre-existing age-dependent comorbidities, such as cardiovascular disease, diabetes and hypertension. One study found that number to be around 93 percent of COVID-19 deaths. The influence of COVID-19 reflects what is likely an acceleration of death for some of those insureds which would have occurred in the next few years, while other deaths on those with few, if any, comorbidities are unlikely to cause any long-term trend to consider. While all this leads to different impacts on life settlement portfolios, both have resulted in some marginal increase in maturity cash flows due to COVID-19 over the recent periods. The level of increase is very much dependent upon the profile of the insureds within a portfolio. Policies clearly remain available for purchase during the pandemic and we have not recommended materially altering the long-term mortality assumptions because of COVID-19. By way of example, for an insured with other respiratory conditions, the effect of a previous infection may cause a buyer to express concerns about long-term impacts and thus a perceived view of greater mortality. In our view, the traditional life settlement market has not seen a big boost from the pandemic.
FW: What has been the impact of the last six months of supply and demand for life settlement policies on discount rates used to purchase?
Zass: Discount rates continue their downward trajectory for a number of years even though we have continued to operate in a low interest rate investment environment. This can occur for a number of conceptual reasons – a reduction in the perceived longevity risk premium that occurs from non-precise science of predicting an insured’s death, to lower risk premium for the asset class over and beyond a comparable yield of a similar asset class. The latter tends to result from added competition while the former is due to greater confidence that life expectancy underwriters provide more clarity as to reasonable expectations of the insured’s remaining lifespan. For the past year we have not seen any major changes to supply and demand for life settlement policies when compared to the previous few years, with more new entrants looking for lower correlated investments. We also note that the pandemic has put some owners in a distressed position unrelated to their life settlement positions.
“Discount rates continue their downward trajectory for a number of years even though we have continued to operate in a low interest rate investment environment.”
FW: To what extent may recent lawsuits by estates of life settlement insureds present a serious issue to life settlement owners?
Forman: Recent lawsuits by the estates of life settlement insureds is a relatively new development that creates an additional risk for life settlement owners. The real message is that due diligence at the time of purchase remains extremely important, especially related to the beneficiaries at the time the policy was originally settled. If all acknowledgements were obtained and documented, then things should work as planned. However, it is always hard to predict the outcome once lawyers get involved.
FW: Do you consider carrier enhanced-cash-value offers to be a serious issue for life settlement owners?
Zass: This is not really an issue at all for life settlement owners. Once the policy has been settled, any carrier offer is moot. However, the issue is really with potential policies considering the secondary market option for the first time, that has become a life settlement. If life insurers can create an offer for these types of policyholders – increased illustration requests from a life settlement broker could be a warning sign to the carrier – then it is always possible for some policy slippage away from entering the secondary market. In these scenarios, the carrier will almost certainly not have the same visibility as to the life expectancy as the secondary market participant, unless they also request a life expectancy to assess the life settlement market viewpoint. Regardless, the life insurance company is hoping to offer the enhanced-cash-value that is just marginally greater than the potential settlement value. At this point, only a couple of carriers are attempting to make these offers. The economics to the carrier is that they also release their reserve and associated required capital on such policies. If this trend broadens, then it becomes clear that there will be at least some impact on future settlements. I am not touching the legality of the carrier operating with this form of factoring on its own policies.
FW: In what ways has the willingness of some firms to buy more policies at smaller face amounts impacted the marketplace?
Forman: The good news is that this helps get the concept of life settlements further into mainstream knowledge. It also makes it easier to fill certain buying requests without getting into an auction. The only real negative is the cost-benefit impact; in other words, what is the cost to underwrite and evaluate these smaller face policies? This is the same trade-off being debated by life carriers as they too try the path of building automated underwriting platforms that speed up the evaluation process. This shift to smaller face amounts will continue to expand as the market is certainly larger, yet a holder must recognise the added risk from doing less underwriting.
“Recent lawsuits by the estates of life settlement insureds is a relatively new development that creates an additional risk for life settlement owners.”
FW: Do you foresee any progress in the comparable valuation of life settlement funds of public companies?
Zass: Our hope is that the larger players, along with the couple of industry associations on both sides of the Atlantic, keep the dialogue going in some capacity. In our view, any reduced demand from investors likely comes from their realisation of lower than predicted returns. This comes about for many reasons, yet we believe one driver is that valuations are both hard to evaluate and, in some cases, even disconnected from actual experience. These valuation concerns will drive the need for changes from a solely mark-to-model valuation – a Level 3 non-observable market – toward a Level 2-lite hybrid version that considers adjustments to a set of life settlement industry specific mortality experiences with a base discount rate that requires policy-level adjustments. We note that these views have been conveyed for many years within this asset class. Design management tools can help funds unravel the aggregation of a single point in time valuation. We also have advocated for years the need for rollforward analysis to help investors understand valuation movements. We have seen little variation in the mathematics behind the basic discounted cash flow approach, yet the valuation assumptions do vary. Sometimes the adjustments are minor and sometimes they have a significant impact. Speaking with an audit mindset, regardless of adjustments, it is imperative to have support for the selections.
FW: Do you believe COVID-19 long-haulers will have any impact on life settlement policy valuations?
Forman: At some point in time there will be evidence that certain insureds with specific profiles have been impacted by long-term impacts of COVID-19. Our belief is that such evidence will be useful only for specific insureds where some of their medical issues result from a COVID-19 diagnosis. We do not believe that there will be any general ‘rating’ applied to those previously infected with COVID-19. It will be critical to differentiate between a person dying with many comorbidities yet with a positive test, versus the death of a healthier person tragically succumbing to death from COVID-19. These examples cover distinct cohorts in need of deeper study. We have started doing some of this variation analysis, yet it will take a few years before we begin to see the true impact from studies assessing the long-term effects of the pandemic.
FW: What are your predictions for the life settlement market in 2022 and beyond? Are there any particular trends you expect to see?
Zass: As is the case with any peek inside the crystal ball, predicting the outlook of this asset class must be taken with a grain of salt. We believe there will be a few successful bond offerings with life settlements as collateral. The supply side will see an increase in settled policies as the pandemic caused insureds to revisit their own life insurance needs, and with some realising that they can part ways with their coverage. While it will continue that many such policies will lapse via the policyholder stopping premium payments, there will be an increase in people exploring the settlement option. We foresee that the industry will move toward the creation of a life settlement mortality table – something we have espoused for many years – that can be the basis of valuations. On the underwriting side, a move toward a harmonised standard report format among all life expectancy underwriters is needed, and likely accepted behind the scenes by them too.
Brian Forman leverages his knowledge of life insurance companies and their products to provide a deep understanding of the risks and pitfalls of investing in life settlements as well as the benefits. He has developed and refined the ARM model that provides life settlement analysis, and his 14 years as senior consulting actuary with ARM are an important component of his 43 years of actuarial experience. He can be contacted on +1 (512) 345 5200 or by email: bforman@actrisk.com.
As the founder and principal of ARM, Corwin Zass provides the firm with both strategic direction and technical expertise. Mr Zass, as a trained life actuary for close to 30 years, has advised on topics such as M&A, product & risk management, capital strategy and financial reporting paradigms. With more than 150 actuarial global resources, Mr Zass and his team regularly advise global clients on mortality, morbidity and other risk matters important to those participating (or investing) in the insurance space either directly or indirectly, including life and structured settlements. He can be contacted on +1 (512) 345 5200 or by email: czass@actrisk.com.
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