The life settlement market is set to continue its five-year boom in 2021 as investors seek alternatives to fully priced bonds and volatile equities, 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 asset class is 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 is set to increase by 10% in 2020 to $4.6bn and this will rise to $5bn in the New Year.(1)
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.(1)
Gan Wyndham-Jones, MPG’s Head of Investments, commented: “The volume of enquiries and interest we are receiving from investors has increased dramatically in Q2 and Q3 this year, especially from asset managers that are looking to diversify from core asset classes to preserve value and increase balance in their client portfolios, and to identify alternatives that have the potential to deliver more reliable future capital growth.
“Many asset managers have preferred in recent years to limit their exposure to equities and fixed income, which performed very well up to the end of 2019 but then COVID-19 triggered the correction that equity markets were due during Q1 of 2020. The challenge for investors now is to guess how significant the economic impact of the virus will be.”
MPG analysis(2) shows that life Settlements currently offer high Internal Rates of Return (IRR) of around 13% because of the discounts at which they can be purchased versus their fixed maturity values. Discount rates narrowed in 2020 as demand rose but they are still in a range of between 12.5% and 13.5%.
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
MPG believes that while bonds were buoyed in 2019 by declining interest rates, with rates now close to zero in most currencies there is little potential upside in sovereign bonds while the increased risk of defaults and ratings downgrades in the corporate market is encouraging investors to de-risk their portfolios by seeking alternatives. Furthermore, equities have challenged investors’ nerves in 2020.
Gan Wyndham-Jones added: “While good news has sparked occasional spikes in equities, there are many companies in financial difficulty that are struggling to prosper, which could lead to equities being set for a choppy bear run for the foreseeable future.”
MPG’s High Protection Fund, which invests in life settlements, aims to deliver long-term capital growth of between 8-9% per annum by investing in a portfolio of life settlements. Its USD Growth share class returned 0.77% and 9.96% after charges in the month and year to the end of October respectively. It has delivered an annualised return of 12.53% since its launch in July 2009.
MPG is an award-winning business, having been named the 2018 Alternative Investment Firm of the Year – Europe by The European business publication and in 2019 and 2020 Asset Management Company of the year – UK and Europe by ACQ5 Global Awards, whilst its High Protection Fund won Best Diversified Fund (Five Years) and Best in Insurance-Linked Investments categories 2018 by Corporate USA Today Awards.
High Protection Fund also came first in the Best Diversified Fund (Five Years) and Best in Insurance-Linked Investments categories for two years’ running in the 2019 and 2020 by Corporate America Today Awards. Most recently, MPG has won the award for Most Outstanding Asset Management Company 2020 by the Acquisition International 2020 Global Excellence Awards.
MPG was also awarded Best in Insurance Linked Investments 2019 by the M&A Today Global Awards, which also awarded High Protection Fund in 2019 and 2021 with Best Diversified Fund (Five Years) United Kingdom. High Protection Fund was also recognised by Global 100 in 2018 and 2020 as the Best in Insurance-Linked Investments & Best Diversified Fund (five years) – United Kingdom.
MPG was awarded as Most Outstanding Asset Management Company – Europe 2020 by Acquisition International Global Awards. MPG also won the award for Most Influential Leader in Asset Management 2019 – Switzerland by the CV Magazine 2019 Corporate Excellence Awards as well as Asset Management Group of the year – United Kingdom 2019 by Corporate Live Wire Global Awards.
MPG is a multi-disciplined investment house that specialises in the creation, management and administration of regulated mutual funds and issuers of asset-backed securities for SMEs, financial institutions and sophisticated investors. It currently manages funds with a gross value of $500m.