A recent study from Conning, Inc., a leading investment management company for the global insurance industry, found that investors purchased $1.7 billion worth of U.S. life insurance face value in 2014, bringing the total active life settlements market to more than $32 billion.
The analysts projected that "continued steady growth" in life settlements is expected for the coming years.
Against that backdrop, I had the opportunity to moderate a Q&A session at the Life Insurance Settlement Association's (LISA) 21st Annual Fall Life Settlement & Compliance Conference, in Clearwater Beach, Fla. Our featured guest for the discussion was Jeff Serra, the founder and chief executive officer of institutional investor Vida Capital, Inc., who provided insights from the unique perspective of an investor in the life settlement industry.
"The life settlements asset class has undergone a major evolution over the past 20 years," said Serra. "I've seen it go from an interesting idea and cottage industry, without much discipline, to what is now a niche asset class for institutional investors. In my view, over the next decade this industry is poised to become a main stream alternative investment asset class."
From 1983 to 1997, Serra held various management and trading positions while employed at two large energy companies, where he was instrumental in building and managing one of the largest and most profitable independent petroleum refining and marketing companies in the U.S.
During this time, he became familiar with one of the basic economic principles of the oil and gas industry that would prove useful in spotting the potential of life settlements.
"I learned that the best way to spread risk in a drilling portfolio was to accumulate multiple oil wells, rather than hold just one and hope for a good result," he explained. "The concept is similar with life settlements. The best way to capitalize on the most attractive characteristics of the asset class is to purchase hundreds – or even thousands – of life insurance policies in a single portfolio. In this way, investors can achieve the desired portfolio benefits of attractive risk adjusted returns, excess credit spreads, and non-correlation to the broader markets."
Serra shared with us that his early forays into the life settlement asset class opened his eyes to the opportunity here: a chance for seniors to obtain a cash payment for an insurance policy they no longer need or can afford, and the chance for institutional investors to obtain attractive returns that are not correlated to the performance of equity markets or the latest maneuvers by the Federal Reserve.
"The transaction just makes good sense for the consumer, many of whom are under the impression that the only thing they can do with an unwanted or unaffordable insurance policy is to just surrender it back to the insurance company for whatever cash value is available," he said. "As more seniors and their financial advisors become aware of the life settlement option as an alternative, they will often discover they can receive a much larger cash payment by selling their policy to a third party. That's where we deliver value to consumers."
In 2010, Vida Capital acquired Magna Life Settlements so they could own and operate a life settlement provider firm, better managing their capital and assets.
"We offer a couple different ways for investors to participate in the asset class with our funds," said Serra. "We offer a closed-end fund, which appeals to longer-term investors who don't want the potential for their investment pool to be disrupted by smaller investors who want to redeem at any given time, and we also offer an open-end semi-liquid fund, which appeals to investors who need to know they can redeem their shares and get liquidity within some reasonable amount of time."
