Trends Watch: Investing in Life Settlements

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Richard Beleutz, Founder & CEO, Air Asset Management.

What is your outlook for investing in life settlements?

Our outlook for investing in life settlements is very optimistic. The life settlement industry has grown significantly in terms of assets, and in its level of sophistication and ability to appeal to a broad group of investors. We see higher amounts of institutional investment progressively entering the space, and supply continuously matching it. There is a two-way flow in the market, both through the origination of policies and between investors trading with one another directly in the tertiary market. Due to the strong two-way flow, we continue to see compelling rates of return that allow us to maintain a noncorrelation with the overall level of the U.S. dollar interest rates and the returns of other asset classes. Therefore, we have an optimistic view of the market moving forward. 

We also see a positive outlook for the continued noncorrelated nature of the industry, especially given the recent stress test we experienced during the COVID-19 pandemic. The life settlement market was largely unaffected by the COVID-19 pandemic and continued to grow in 2020. Life settlements provide an alternative to traditional life insurance products and allow policyholders to receive cash for their life insurance policies, allowing them to access funds to meet immediate financial needs. The life settlement market experienced stable growth as the pandemic brought economic uncertainty to many families. The demand for life settlements was bolstered by the fact that many policyholders could not pay their premiums due to job losses and financial hardship. This growth may also be attributed to the changing demographic dynamics of the baby-boomer generation, who now have 10,000 people each day hitting retirement age, providing more supply into the life settlement market. 

Where do you see the greatest opportunities and why?

Our background in the longevity markets allows us to invest opportunistically. For example, we source policies based on actuarial data and price to determine our risk metrics rather than clinical information to arbitrage when the policy will mature, which is the approach typically used by other members of the space. This approach allows us to diversify across a range of life expectancies and types of impairment and avoid some of the selection bias and concentration risk inherent to a more clinical approach.

In addition, life settlement portfolios pair nicely with other noncorrelated offerings, such as private credit investments. Given that life settlement managers must be well-equipped to manage sizeable premium reserves, leverage, and death benefit proceeds, the revenue streams from private credit have an element of “predictability” since there is designated interest income over the loan term. This compares to the revenue of a longevity-based portfolio, which has a different cadence due to a large portion of revenue being determined by mortality events. The income of structured settlements and private credit is noncorrelated and can help manage premium payments supporting our liquidity management needs.

What are the greatest challenges you face and why?

Like any hedge fund, we see challenges tied to fund-specific and asset-specific risks that are less macro in nature. The most significant challenges equate to risk in two facets. As discussed above, the first is liquidity risk due to defined liquidity terms that inherently come with life settlements being a level three asset. The second risk to the underlying assets is mortality risk, which refers to the probability that a policyholder will live longer than the actuarial estimate of their life expectancy. The amount of longevity risk in a portfolio is primarily a function of the portfolio construction process. Managers can add value to a portfolio by successfully navigating these risks by taking advantage of inefficiencies in the life settlement market to maximize returns, reduce risks, and diversify a portfolio from risks in traditional asset classes.

What keeps you up at night?

Liquidity risk is the most considerable risk for this asset class. The 2008 financial crisis showed how quickly people liquidate their assets, which can be difficult to anticipate. However, investments in self-liquidating assets, such as life insurance policies and private credit investments like loans to law firms or longevity players, help to mitigate this risk.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.