The life settlement market emerged as an offshoot to the viatical settlement industry that developed in the 1980's as a source of liquidity for terminally ill patients. Unlike viaticals, life settlements involve insureds, or policyholders, who are not terminally ill, but have a variety of health impairments. Such individuals typically share a general risk profile: they are often wealthy, age 60 or older, have obtained coverage for estate planning needs and possess a life expectancy between two and fifteen years.
Most settlement candidates are over-insured, and the secondary market grew in response to those insureds seeking alternative options for coverage they no longer wanted or needed. Traditionally, when an insured no longer required insurance for financial or estate planning reasons, they had the choice of either surrendering the policy to the carrier for a predetermined cash value (often significantly lower than the true economic value of the policy) or allowing the policy to lapse. As an alternative, investors began purchasing these policies, paying more for the policy than was offered by the insurance carrier. The secondary market expanded as insureds started taking advantage of this settlement option, and institutional investors began deploying increasing amounts of capital into the space.
The last few years have seen myriad of mortality-based structures created in response to this level of institutional interest: derivatives, synthetics, swaps, secured lending, and securitizations to name a few. In 2006 and 2007, demand far outstripped supply. An influx of capital greatly increased the demand for policies, allowing sellers of such assets to command premium prices. Over the course of 2008, approximately $12 billion in US life insurance policies were settled, and by year's end, $31 billion of investor-owned policies were in force.
Although the underlying life assets are not correlated to other global financial markets, this is not the case for the investors. Tight credit markets in 2008 created a collection of distressed sellers with high quality life assets. These credit conditions have also prohibited new, under-capitalized investors from entering the asset class. Sales began to increase in the tertiary market in late 2008 and 2009 as portfolio owners and fund managers sold assets to raise capital in response to the lack of liquidity during the global credit crisis.
The current combination of a maturing asset class, ready supply, and continued tight credit markets is creating an opportune investment window for well-capitalized buyers to enter the asset class. Partnered with capable and experienced parties, new investors can rapidly assemble a diverse portfolio at attractive, unlevered yields, and often times leverage and hedging can be added to increase returns and reduce risk.