Life Settlement Provider Buying Appetite Trends

How much is my policy worth as a life settlement? That has to be the number one question we are asked. As with anything in a free market economy, something's value is only determined when a willing buyer and a willing seller agree.

So that begs the question, what are the buyers in life settlements looking for? As I mentioned in my last blog post, life settlement providers are really the buying agents of financial institutions investing in life settlement investments. Consequently, life settlement providers are charged with acquiring policies that fit the goals of the investors they work with.

Typically a financial institution such as a hedge fund or investment bank will allocate a set amount of money to purchase life settlement investments during a set time period. The life settlement provider is in essence given a budget to purchase life insurance policies. The investor then provides the framework for the types of policies, sizes, etc. that they want to purchase, which are known as their buying parameters. Many times, life settlement providers work with more than one investor or funding source. So they must in turn have multiple sets of buying parameters based on their respective clients. Presumably all of the hedge funds and investment banks are being run by very intelligent people, so one could reasonably assume they all are looking for generally the same policies. This isn't necessarily the case. In fact, the appetites vary widely and so do the buying trends.

Life insurance carriers are analyzed and tracked by credit rating agencies such as A.M. Best or Moody's. The more financially stable the life insurance company, the better rating they achieve. This is a very important for an investor committing hundreds of thousands, even millions of dollars into a policy through a life settlement. They want some reasonable assurance that the company will be able to pay the death benefit when the policy matures. Some funding sources will only authorize purchases of top rated companies. For example, when Phoenix Life Insurance Company was recently downgraded (yet again) a number of investors stopped purchasing those policies. However, some became more active as they saw an opportunity to buy the policies at a discount with less competition, albeit more risk.

Risk management is very central to the investment activities of any financial institution including those purchasing life settlement assets. Recently some investors stopped buying AIG policies because those policies already represented a sizable portion of their portfolio. To buy more, would have placed too much risk into the portfolio. So the buying appetite of a financial institution is shaped not only by the economics of any given policy, but also the other assets comprising their portfolio.

Policy size is the easiest parameter to track and understand. The average face value of a life insurance policy sold as a life settlement was approximately $1.7 million in 2007. However, that has been trending lower because there a far more policies available with a face value below $1.7 million than there are above it. Typically a life settlement provider has a set range of policy sizes that they will consider. For example, an investor may only consider policies with a face value from $500,000 to $3,000,000.

In general, we have noticed a narrowing of the ranges among providers recently. Specifically the difference between the highest face value they will consider to the lowest face value they will consider. What was once a range of several million dollars may only be a difference $1 million or $2 million dollars. What does that mean? It means investors are more laser focused on their sweet spot for policies they like to buy. Their appetite for policies is more specific in other words.

Many have been concentrating on policies in the $500,000 to $2,000,000 range. Does that mean policies outside of this range can't find a buyer? Not at all. It just means more buyers are active in the $500k-$2 million range and sellers will have more parties interested in reviewing their offering. It is interesting to note that funding sources have concentrated on this range recently. Most report, it is due to their funding sources' portfolio optimization and asset allocation. Meaning, the funders feel like policies this size are the best fit for their portfolios, while considering the policies they already own.

With the economic meltdown of 2008, many buyers became somewhat dormant. The buying activity is increasing today as investor liquidity improves. However, many buyers do seem to be conservative and their buying strategies exemplify that. What does that mean for the policy seller? If you have an attractive policy, buyers are still going to want to buy it. If you have an unattractive policy, buyers wouldn't have been interested before and they are still not interested. For those with borderline attractive policies, there will be fewer buyers available which will probably affect your settlement amount. It is always helpful to know how many buyers are available for your policy before you start the process. Our life settlement appraisal tool is tremendously helpful in understanding the market for any given policy in a general sense.

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