Market Volume Grows 47% in 2016 As Small-Face Policies Gain Traction
The volume in the life settlement market continued its upward trajectory, growing about 47% last year from the previous year, as small-face policies gained traction and marketing efforts began reaching consumers.
A total of 1,650 policies with $2.14 billion in face amount was purchased last year, compared with 1,123 transactions reflecting $1.65 billion in face value in 2015.
In fact, the secondary market had its busiest year last year since 2009 when 2,249 policies with $6.29 billion in face value were acquired.
The slow, steady climb back from the depths of the economic downturn has energized market players who say they are seeing more capital looking for yields in the mid-teens in the alternative asset that’s uncorrelated to the stock market.
And market members say they are seeing more deals so far this year than at the same time last year, which means they envision further growth.
These are among the trends reflected in the annual market survey for last year compiled by The Deal from life settlement provider transaction data obtained mainly through public-records requests to state insurance departments.
Last year’s transactions came from 31 providers, including 10 who did no business at all. This compares to 34 providers reporting deals in 2015, which included eight who bought no policies.
Coventry, based in Fort Washington, Pa., bought 277 policies with $264.54 million in face value in 2016, a 65% increase from the 168 policies it purchased with $108.78 million in face value in 2015.
The situation is the reverse for Life Equity of Hudson, Ohio, which fell to fourth place in the lineup last year with purchase of 150 policies with $396 million in face value. This represents a drop of 17% in the number of transactions from 2015 when it acquired 181 policies with $332.78 in face value and shot up to the number one ranking.
The Buerger family, which owns Coventry, bought Life Equity last year. When the numbers for the two firms are combined, Coventry again holds a commanding presence in the market, much as it did in the past except for 2015. The number of policies bought by Coventry and Life Equity totals 427 with $660 million in face value.
Nipping at its heels is Magna Life Settlements Inc. of Austin, Texas, which bought 266 policies with $501.26 million in face value last year, or a whopping 216% increase from the prior year when it acquired 84 policies with $108.10 million in face value.
Magna tied for second place on the number of transactions with GWG Life LLC, which also bought 266 policies last year. But the face value for GWG’s policies at $337.22 million was smaller. The increase in the number of transactions by GWG of Minneapolis shot up 153% last year compared to 2015 when it bought 105 policies with $180.37 million in face value.
But the story here for both Coventry and GWG continues to be the concentration on small-face policies with their direct-to-consumer networks. Coventry continues to draw policies from its marketing campaign by affiliate Coventry Direct, which has advertised nationally on CNN, Fox News and MSNBC since 2015.
GWG sources an increasing number of policies from its appointed agent program, which also raises capital for the company through bond sales. GWG uses the bond proceeds to buy policies and pay premiums for its life settlement portfolio and other costs.
Both origination channels favor life insurance agents and financial advisers, and in Coventry’s case, consumers themselves, over life settlement brokers, the traditional intermediaries who brought policies to the market. Life settlement brokers still supply policies to both companies as well as other providers, but they no longer are the sole source.
Alan Buerger, board chairman of Coventry, declined to say if his company has recouped the cost of the TV ads from the policies generated by them, but conceded the ads are expensive.
He said he began advertising on the Rush Limbaugh program a few months ago. He also advertises with Bloomberg.
“We’re everywhere,” Buerger added.
He’s seen a TV ad by Abacus Settlements LLC, but doesn’t anticipate other market players will advertise on the same scale as Coventry.
“I think we’re going to see each year more and more consumers aware of it,” Buerger said of the market. “With Baby Boomers, more policies will come on the market.”
He believes consumers appreciate the ability to monetize their policies.
“We get a report from our internal people on every policy we buy and what the motivation was,” Buerger said. “We get letters thanking us. They get an operation, they go on a trip, it’s a supplement for their retirement.”
Joe Lucent, president of the Settlement Group Inc. of St. Mary’s, Ga., said “it’s a very difficult model to make work,” referring to the leads generated by the Coventry marketing campaign that have to be sifted through. “I have to assume he [Buerger] went into the venture knowing the losses will be significant.”
But he said Buerger’s “a bright guy” and he’ll be monitoring the effort.
In the meantime, market members say the Coventry ad is continuing to benefit them as well because it brings awareness about life settlements, which still aren’t well-known by the American public.
Rob Haynie, managing director of Life Insurance Settlements Inc., a life settlement broker in Pompano Beach, Fla., said he was visiting the school attended by his 11-year-old twin daughters, Brooke and Skyler, when a friend asked: “Hey Rob, don’t you do that Coventry Direct stuff?”
“The great thing about the ad is that it was able to catch his attention,” he said, adding that it has created more public awareness of the market than any initiative he’s seen in his 24 years in the business.
Clay Gibson, vice president of policy acquisition with Magna, said “our phones are ringing more. We’re seeing more consumers than we ever have. The business is trending more to direct-to-consumer.”
He said once consumers see any of the advertising about the market, they do further research and then look to see what companies they can contact.
“I’m hearing more and more from what you might call lead-generation companies,” Lucent said. “There are lots of people chasing these leads on the Internet.”
He said he has transacted some deals through referrals brought to him by a couple of lead generators.
Coventry and Life Equity follow two different business models. Buerger explained that Coventry acts as a principal in buying policies and taking the risk of ownership.
In contrast, Life Equity adheres to the traditional provider model, acting as an intermediary in passing on policies to funding entities. Coventry was forced to reinvent itself after losing its main source of funding when American International Group Inc. (AIG) decided to exit the market in 2011 and then when it lost the AIG servicing business following litigation that was settled last year.
Coventry reported a $48.8 million loss in its servicing fees last year compared to a $21.1 million gain the year before in a financial statement to one of the states. But it showed income last year of $4.9 million on the sale of life settlement contracts compared to $4.3 million in income the year before. Overall, it reported a $46.7 million loss in net income after federal income tax last year compared to a $26.4 million loss in 2015.
However, the financial statement doesn’t give the complete picture of the business. Buerger said Coventry sells policies it acquires to another company it owns, which then sells them off when it makes sense.
“We’re broadly pleased with the market,” said Bill Acheson, CFO with GWG. “… At least in the broker market, we see a lot of competition. … We continue to be very positive on the market writ large.”
Last year, GWG generated about one-third of its business through its direct-market channel, he said, adding that that channel has been growing.
The company uses a group in Las Vegas that handles some of the closing activities, but also does outreach to insurance agents and financial advisers, Acheson said.
As to when the market will become widely known by the public, he said “that’s the $64,000 question.”
He envisions a field of dirt without any vegetation at first, but one day, a couple of small shoots sprout up.
“From my personal perspective, it’s the drip of low-interest rates, the drip of the aging population, lobbying for using life insurance for long-term care, the little blades grow up,” Acheson said.
One of the principals of Abacus Settlements is pleased with what he’s seeing in the market. Although the Orlando, Fla.-based provider bought more policies last year, it came in fifth place compared to third place in 2015.
In 2016, the company bought 127 policies with $222.87 million in face value, up from 106 polices with $184.53 million in face value in 2015, or an increase of 19.8% in the number of transactions.
“We’ve definitely had a busier year and we’re very happy with the results. The market has expanded, we are able to purchase policies on younger insureds with smaller face amounts. And I think because of the tremendous appetite of our capital partners, we’re able to expand the buy box,” said Scott Kirby, co-president of Abacus.
He said the company also can buy policies on healthier insureds with longer life expectancy estimates. It will buy policies on insureds in their early 70s and on insureds with life expectancies of up to 15 years.
Abacus also is one of the providers that has gravitated toward the small-policy arena. Kirby said it previously bought policies consistently in the $500,000 range, but now can go as low as $100,000.
The company has implemented a program that allows it to price policies using different methods besides the standard life expectancy estimate. Abacus uses health questionnaires to gauge a person’s condition.
“There are a number of ways to capture peoples’ impairments. … We’ve interviewed clients, their doctors and health-care providers,” Kirby said.
The Settlement Group is another provider whose ranking dropped, although its transaction volume grew in 2016.
It came in sixth place last year with 122 purchases of policies with $138.59 million in face value compared to fifth place the year before with 93 purchases and $87.43 million in face value, or growth of 31%.
Habersham Funding Inc. of Atlanta, which came in seventh place in the rankings last year compared to eighth place the year before, saw a large spike in purchases, almost doubling its volume.
It bought 102 policies with $44.57 million in face value in 2016 compared to purchase of 56 policies with $32.5 million in face value in 2015, an 82% increase in the number of transactions. Habersham pays more than any provider, an average of 56.9% per face, reflecting its appetite for viaticals and policies with short life expectancies.
“From my perspective, things haven’t changed much. We are seeing a lot of small face and doing a lot of small-face transactions,” Lucent of the Settlement Group said.
Like others, he predicted that this year’s volume would be up over 2016.
But in addition to seeing growth in the secondary market, he also sees an active tertiary market in which already purchased policies or portfolios are traded. He said he purchased 60 policies in two tertiary portfolio trades already this year.
David Serra, president and general counsel of Magna, said in an e-mail that his company closed many more tertiary files than secondary ones last year.
“I think that was due to a lot of portfolio action in the industry,” he said.
In an offering document previously obtained by The Deal, Magna’s parent company, Vida Capital Inc., said it had bought 313 policies with $699.1 million in death benefits in the tertiary market last year through August.
The number goes up as well for GWG Life when tertiary purchases are added to the secondary deals. The company reported that it bought a total of 317 policies with an average face amount of $1.5 million for a total face value of $465.8 million in death benefits last year.
Buerger of Coventry said the tertiary activity brings capital into the market and creates a lot of value because it makes it more liquid.
Lucent said he’s hearing from prospective new investors in the market such as high-net-worth individuals, small groups of investors and those representing private equity.
“It’s a healthy business, it’s a healthy industry,” he said.
This article was produced by the staff of The Deal, a financial intelligence service that provides actionable information on deals and dealmakers, offering over 100,000 users the unique opportunity to find potential deals and target dealmakers. Not a subscriber? Request a personalized demo here.