Life Settlements Set for Strongest Year Ever in 2021• High Protection Fund delivered best performance ever of 9.91% net of fees in 20201
• IRRs of around 13% make life settlements attractive to investors seeking above average returns in low interest rate environment
• Market boosted by improving regulatory environment and ‘baby boomer’ policies
Life settlements are set to see their best year ever as an asset class in 2021, according to Managing Partners Group (MPG), the international asset management group.
Life settlements are US-issued life insurance policies that have been sold by the original owner at a discount to their future maturity value and are institutionally traded through a highly regulated secondary market. The market increasingly includes high profile institutional investors and service providers, including Apollo Global Management, GWG Life, Vida Capital, Broad River Asset Management, Red Bird Capital Partners, Partner Re, SCOR, Berkshire Hathaway, Coventry First, Wells Fargo, Bank of Utah, Wilmington Trust and Suisse Life Settlements LLC.
MPG’s High Protection Fund, which invests in life settlements, recorded its best year in 2020, delivering 9.91% net of fees over the calendar year with no drawdowns in any month.1 It has returned 145% since it was launched in July 2009. The standard deviation in its performance has been 0.19% since launch and its Sharpe Ratio of 2.7 reflects its excellent consistency in outperforming the risk-free rate. The fund has no initial or performance fees which has given it a performance edge on competing funds within the life settlement sector.
MPG expects 2021 will be an even stronger year for the life settlement asset class, which is in a sweet spot of supply and demand. Internal Rates of Return on policies are currently around 13%.2 So they offer inflation-beating returns with less volatility than equities but prices are sufficiently high to encourage more policyholders to sell their policies, thereby boosting market liquidity.
Strong demand is driving performance of the asset class going forwards. Investors globally are turning away from fully priced bonds and equities and the steady, incremental returns offered by life settlements are highly attractive to them.
Any reduction in US life expectancy clearly raises performance too and while COVID-19 had limited impact on this in 2020 we expect the effects will be more prevalent in 2021. This will not just be in terms of reducing the life expectancy of 80-plus year olds, who are most affected by the virus and common vendors of policies, but the increase in unemployment caused by the COVID pandemic and the depleted income on savings because of low interest rates will also drive more policyholders to sell their policies, driving a further increase to market supply.
Life settlements are seeing increasing interest from institutional investors and wealth managers in the US, Europe – especially Switzerland - and Asia, says MPG, which estimates that the face value of new policies coming onto the market rose by 10% in 2020 to $4.6bn and is set to rise to in excess of $5bn in the New Year.3
The volume of new life settlements coming on to the market has risen annually since 2016, when investors began showing renewed interest in the asset class, although it is still some way below the peak of $12.2bn seen in 2007. The total face value of in-force life settlements was estimated to be $21.6bn in 2019.3
MPG sees several key drivers of growth in the US’ life settlement market, including:
- Investors are seeking above-average returns in the current low interest rate environment
- The regulatory environment governing life settlements is established now and new legislation continues to support market growth. Several states are making it compulsory for insurers to inform policyholders wishing to lapse their policies that there are more lucrative opportunities to settle instead, for example
- An increasing number of baby boomers are seeking ways to pay for retirement or care. The US Census Bureau predicts a 37% increase in those aged 65 years and older to 78m by 2035, for example
- Retirees relying on income from savings have been badly affected by low interest rates that have depleted income and caused erosion of capital.
- The increase in unemployment and negative impact on retirement funds caused by the COVID pandemic will spur more policyholders to sell their policies
- The current policy pricing sweet spot is at an extremely attractive level for both buyers and sellers and is therefore a potent market driver. The current pricing range is optimal to generate stronger values for policy sellers than we have seen for some years, which is set to increase market supply, whilst IRRs of 13% enable life settlement funds the opportunity to deliver significantly higher returns than the risk-free rate, which in turn will continue to increase investor appetite for the asset class
MPG’s High Protection Fund, which invests in life settlements, is an absolute return vehicle that aims to deliver long-term capital growth of between 8-9% per annum by investing in a portfolio of life settlements.1Source: MPG monthly factsheet, January, based on performance of the HPF’s USD Growth Share Class
2Source: MPG analysis of AAP Life Settlement Market Update, December 2020
3Source: MPG analysis of industry data/Conning, Life Settlements: The COVID-19 Impact on Life Settlements, October 2020. The face value of new life settlements was estimated at $4.2bn in 2019; $3.8bn in 2018; $2.5bn in 2017; and $2.1bn in 2016. The face value of in-force life settlements was estimated at $21.6bn in 2019.