Industry Detail

Life Settlement-Market Grows 19% Last Year, Continues Upward Projectory

Transaction grew 19% in the life settlement market last year for a total of 2,.27 policy sales

Transactions grew 19% in the life settlement market last year for a total of 2,027 policy sales, reflecting continuing growth in the last two years as word gets out about the little-known asset as the market’s leader keeps up an expensive TV advertising campaign.

The annual market volume was compiled by The Life Settlements Report from life settlement provider reports collected mainly through public-records requests to state insurance departments.

The number of policy purchases grew to 2,027 last year from 1,707 policy purchases the year before, the data shows.

In addition, the amount paid to insureds selling their policies increased to $612.82 million last year from $488 million in 2016, representing a 25% growth rate. The face amount of policies purchased also went up to $2.8 billion from $2.6 billion, or about a 10% increase for 2017 from the previous year.

The top buyer, the Buerger family, which owns Coventry First LLC of Fort Washington, Pa., and Life Equity LLC of Akron, Ohio, purchased almost one third of the face value through its two providers, or about $993.75 million.

It bought 785 policies—634 by Coventry and 151 by Life Equity—that reflect 39% of the number of policies purchased overall.

This is a sharp increase from 2016 when the Buergers’ two providers bought a total of 427 policies with $660.54 million in face value.

Coventry also achieved the top ranking in 2016, buying 277 policies with $264.54 million in face value while Life Equity came in fourth place with purchase of 150 policies with $396 million in face value.

“We did very well for a combination of reasons. We really focused on the diversity of origination,” Coventry CEO Reid Buerger said. “It’s not the direct business that’s solely driving the number. The direct business is helping the market overall.”

He’s referring to direct origination from consumers reached by the company’s TV ad that’s been airing nationwide for the last three years, and in Quebec more recently, rather than purchases that come through intermediaries.

Buerger said Coventry’s focus on generating policies has long been through insurance agents and financial advisers, which is one of three channels that funnel policies to the firm. The second channel has been through life settlement brokers and the third is the newer, consumer-direct channel.

“Each of them has grown significantly,” Buerger said.

At the same time, he pointed out that the company’s average face value of policies purchased has gone down.

Coventry’s typical purchase had an average face value of just under $3 million and ranged from $2 million to $5 million every year from 2000 through 2016, Buerger said.

But since then company’s average face amount purchase is just under $2 million while the consumer-direct channel average face amount is under $500,000, Buerger said.

Buerger doesn’t see the growth in the market slowing down.

“We’re bullish on the future. I think the more the industry invests in education, the better and faster the business will grow,” he said.

Public awareness of life settlements has been a constant issue in the market, which has been around for about 20 years starting when AIDs sufferers sold their policies, known as viaticals, to pay for health care in their last years. Once the protease inhibitors came out and AIDs became a chronic condition that could be managed instead of a death sentence, the market morphed over to sales of policies by seniors whose demise wasn’t imminent.

Within the last year, Buerger said Coventry did a survey of the people who called in response to its TV ad during a one-month period and found that 90% had never heard of a life settlement.

Although it has been legal for people to sell their policies since the 1911 Grigsby v. Russell decision by the U.S. Supreme Court, the average member of the public still doesn’t know widely about the asset.

Like Buerger, Scott Kirby, managing partner of Abacus Settlements LLC, which came in second place in number of purchases last year, said: “All of our divisions have showed incredible growth—our consumer direct, agent and broker divisions showed really, really strong growth.”

Based in Orlando, Fla., Abacus bought 198 policies, paying $58.91 million for $252.74 million in face amount last year. Abacus moved up from fifth place in 2016 with purchase of 127 policies with $222.87 million in face value.

“What’s made a difference between 2016 and 2017 is we’ve got such aggressive money,” Kirby said. “If you represent institutional investors, you’ve got to spend the money.”

Kirby said Abacus also made “really strong improvements” in its underwriting, pricing and contracts and just hired eight new employees and is about to double its office size.

He was especially pleased that the numbers show out of the five top buyers, Abacus paid 23.35% per face amount, the second highest percentage, only following Magna Life Settlements Inc., which paid 30.6% per face amount, and the third top purchaser.

By coming in second place among the top five providers in percent paid per face for policies, Kirby said: “I think the message is that we have very aggressive, strong capital and we’re willing to pay a lot for our purchased policies. That’s the bottom line.”

Abacus barely edged out Magna, an affiliate of Vida Capital Inc. of Austin, Texas, for second place after Magna bought 195 policies, or three fewer than Abacus. Magna spent $75.13 million to buy $245.77 million in face amount, the figures show.

Magna also came in third place in 2016, buying 266 policies at a cost of $159.04 million for $501.26 million in face amount. It paid 31.7% per face amount that year.

Joe Lucent, president of The Settlement Group Inc. of St. Mary’s, Ga., who was the fifth-place finisher with the purchase of 160 policies with $161.94 million in face amount last year, sees a continuing trend towards purchase of smaller policies.

“There’s no doubt a lot of these policies were smaller policies last year and this year – what I call the real life settlement marketplace,” Lucent said. “The majority are $500,000. You’re talking about a lot more value with a lot less risk.”

A decade ago the market’s volume was artificially pumped up by large, stranger-originated life insurance, or STOLI, an abuse that no longer exists, as investors have shied away from such policies for fear of litigation risk.

Lucent, whose firm moved up from sixth place in 2016 with the purchase of 122 policies with $138.59 million in face value, sees no letup in an improving transaction picture.

“I see a strong market, it’s good, it’s healthy. We’ve had a very good five months. We continue to get inquiries from people who want to invest. We have enough cash. We’re sitting on millions of dollars,” he added.

He said providers are buying policies at 15% internal rates of return for mid- to large-size policies while heavier competition for smaller face pushes purchases to internal rates of return at between 11% to 15%.

What helps him in such a competitive environment he believes is his more inexpensive location – he’s not in a high-rise office building in Manhattan, but he owns his own building in the southern tip of Georgia.

But he also attributes his company’s success to the lack of bureaucracy to get deals done.

“We are able to move faster than most. … I run the show. I don’t have to answer to a lot of people,” Lucent said. “… We’re able to move quickly and at a lower cost.”

In addition, he said he’s been working mainly with the same five employees as when he opened his business 14 years ago, although he did add one staffer in the last year.

He also said he acquired two licenses in the last year, allowing his company to buy policies in Ohio and Illinois, bringing the total to 23 states, where he’s licensed.

He believes awareness of the market remains a challenge, but he said the market’s making a lot of progress in that area.

“Coventry is the gorilla carrying the burden” for educating the public about life settlements through its consumer-direct ad campaign, he noted.

Lucent said entrepreneurs are learning about the market and people are starting to do their own research – even the older generation in their 70s and 80s.

Two life settlement brokers who shop policies through an auction process to providers say they’re busier as well.

Pam Bancsi, vice president of life settlements for ValMark Securities Inc. of Akron, Ohio, said her firm has hired an intern to work fulltime in the summer and part-time in the winter to help with the workload.

In addition to herself, she also works with Tara Beachy, an insurance specialist who has been at ValMark fulltime for the last year and a half.

“I’m very optimistic,” Bancsi said. “We’re seeing growth this year. I anticipate probably, all things being equal, if the economy doesn’t blow up, to see 30% growth.”

She attributes this to the demographics reflecting the increasing percentage of the country’s senior population.

ValMark is a life insurance brokerage and a broker-dealer, which works with about 300 independent life insurance agents, securities professionals, wealth managers and investment advisers who funnel policies to the firm’s life settlement brokerage arm.

Bancsi said she works with this advisory group on developing seminar materials for attorneys, certified public accountants and others about life settlements. The advisers also do various types of advertising to increase public awareness about the asset.

Doug Himmel, managing director with Melville Capital LLC in Los Angeles, said his life settlement broker has been busy as well, although the number of active providers he sees buying policies has shrunk to about 15 from a high of 25 to 30 or more before the market hit the skids after the 2008 economic meltdown.

He, too, struggles to educate financial professionals about the asset.

Himmel said he made a presentation three weeks ago before a group of about 40 attorneys, insurance agents and others in an estate-planning meeting and found that only 10% to 20% had heard about life settlements.

He added that he’s done 10 similar presentations in recent months and the response was much the same, most hadn’t heard about the asset.

At the same time Himmel said he’s been seeing a dramatic increase in cases within the last two years in which the insureds are 85 or older.

“I got a case in yesterday, a survivorship policy. They’re both well into their 90s,” Himmel said.

He attributes this partly to large cost-of-insurance rate increases on policies that eight insurance companies have hit consumers and life settlement investors with beginning three years ago in response to the low-interest rate environment.

Although providers don’t report tertiary transactions to insurance departments, they say that’s a big part of their business as well, as previously sold policies are traded again and again.

Last year, Buerger said his company did well over $1 billion in face value in secondary and tertiary transactions combined.

“That part of our business has grown a lot,” he said, explaining that portfolio owners strive to shape their holdings by getting rid of policies they don’t fit with their strategy and others just want to sell their entire portfolios.

For example, GWG Life LLC of Minneapolis, which came in fourth place with the purchase of 188 policies with $259.63 million in face value in the secondary market last year, also bought tertiary policies that boosted its total purchases.

Last year, the company, which is affiliated with GWG Holdings Inc. (GWGH), reported that it bought 255 policies with $379 million in face value, according to Dan Callahan, spokesman for GWG.

GWG said in its quarterly calls that it was having a tough time competing on price.

That was borne out by its fall to fourth place last year from second place in 2016 when it purchased 266 policies representing $337.22 million in face value.

Still tertiary volume is harder to predict because it’s not always known when a portfolio might hit the market.

“Tertiary business is lumpy,” Buerger said.