Generating Liquidity in an Open-Ended Life Settlement Fund
Richard Beleutz, CEO & Founder of AIR Asset Management, provides insight into the significant total addressable life settlement market and its compelling growth potential. He also discusses how the firm manages liquidity in its open-ended vehicle with a multi-strategy. This unique approach favors the effective management of premium reserves, leverage, & death benefit proceeds while simultaneously generating portfolio liquidity through other means, such as trading.
Maturation of the Life Settlement Asset Class
Jeffrey Bollerman, Managing Director at Houlihan Lokey, explains his firm's role as a sell-side advisor to holders of alternative, illiquid assets like life settlements in the tertiary market. He also gives his perspective on the dramatic maturation of the life settlement industry due to developments such as large money center banks providing leverage, green shoots of securitization, and continued entry of large, sophisticated investors into the asset class.
The Importance of Life Expectancy in Life Settlements
Christopher Conway, Principal of Longevity Asset Advisors & ISC Services, provides an overview of determining life expectancies and the life expectancy provider's role in the life settlement process. He explains that accurate and accessible life expectancy information benefits two groups. First, it allows policyholders exploring a life settlement to secure the highest offer possible, and second, it helps investors price the policies they seek to purchase or sell.
Life Settlement Market Forecast
Jose Garcia, CEO of Carlisle Management Company, explains how the inflow of sophisticated capital, enhanced standardization, consolidation of procedures, and the robust asset base in both the secondary and tertiary markets are driving the market's evolution. He also gives his perspective on what's to come for the life settlement space.
The Case for Life Settlements
In the first installment of our Life Settlement Market Expert Video Series, Scott Romanek, Managing Director of Sales at AIR Asset Management, makes a compelling case for the life settlement asset class.
TRANSCRIPTS
Generating Liquidity in an Open-ended Life Settlement Fund
Richard Beleutz. Chief Executive Officer & Founder. AIR Asset Management.
Richard Beleutz: My name is Rich Beleutz. I'm the CEO and Founder of AIR Asset Management. I've been in the asset class since 2006, but I've been involved in insurance and annuities since 1993 when I started as a financial advisor.
What is the size of the life settlement marketplace?
Richard Beleutz: So, the life settlement market, I break it down into three components. The first is the primary market for insurance, life insurance, that's 23 trillion in the U.S. of enforced life insurance. That's a pool of potential policies that are available potentially for settlement. The secondary market for life insurance is when an individual settles their policy or sells it to a third-party investor for the first time. Last year, according to LISA, there was over 3,000 policies that were settled, representing roughly $4 billion of death benefit, putting over 660 million dollars into consumers' pockets, which is about 7.8 times their cash value, and did that in a socially responsible manner. There's a tertiary market for life settlements which is when an investor trades with another investor, and that represented about $10 billion of the death benefit as well.
How does AIR Asset Management generate liquidity in an open-ended life settlement fund?
Richard Beleutz: We generate liquidity in our multi-strategy hedge fund in three different asset classes. First is life settlements. Life settlements are self-liquidating assets that produce income when a person passes away. There's also trading that goes on in the tertiary market when the life settlement policy is sold. Additionally, we have cash reserves, we utilize leverage, we have fund controls, and then also we are selective about the types of investors that we bring into our fund looking for a long-term focus. The second complement to that is our structured settlements. Structured settlements are positive carry assets that represent a completely different liquidity market and then also can be traded on the tertiary markets for structured-settlement annuities. And then the third component of our investment strategy that complements Life Settlements, which are negative carry assets, is our private credit lending, which is a positive cash-flowing asset that, again, our self-liquidating loans that have the ability to sell in the loan market as well. So, by combining life settlements, structure settlements, and annuities, it brings our liquidity profile to a different level.
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Maturation of the Life Settlement Asset Class
Jeffrey Bollerman. Managing Director, Financial Service Group – Illiquid Financial Assets, Houlihan Lokey.
Jeffrey Bollerman: My name is Jeff Bollerman. I'm a managing director at Houlihan Lokey, which is a global investment bank. I'm in the New York office. In the financial institution's group, which focuses primarily on advising large institutional investors in the disposition of illiquid financial assets.
What is Houlihan Lokey’s involvement in the life settlement industry?
Jeffrey Bollerman: We are strictly a sell-side advisor. So, a very traditional investment banking model. We do not have sales and trading. We don't use our balance sheet to make investments or do any formal underwriting. So, we primarily are giving advice, at least in my practice, to holders of illiquid financial assets who are looking for either disposition alternatives or alternatives to dispositions, which would be financings and other joint ventures, Etc. So, we've been advising largeholders of life settlements specifically for over 11 years, I guess, and primarily in the disposition of large pools of life settlements and other activities in the tertiary market.
How have you seen the industry mature over the years?
Jeffrey Bollerman: The institutionalization and maturation of the life settlement industry has been, at least from my perspective, has been dramatic since our initial entry into the asset class. We've seen the introduction of a large Bunny Center Banks who are willing to provide leverage-sophisticated forms of leverage- to large holders. We've seen the “green shoots” of securitizations. Securitizations among the assets who are frankly the most difficult to securitize and we're seeing the continued uh entry of very large, sophisticated multi-asset class financial investors coming into the asset class. So, it's just been one development after another. These are all in the tertiary market. It complements what we've seen in the consumer-facing world, with state and other regulators basically endorsing the life settlement market as something other than a gray market. In fact, we're actually seeing it become an ESG category; whereas it used to have headline risk, now it's been embraced as something that has a positive social good.
The Importance of Life Expectancy in Life Settlements
Christopher Conway. Co-founder, Principal, & Managing Director. Longevity Assets Advisors, LLC.
Christopher Conway: I'm Christopher Conway. I'm a Principal of Longevity Asset Advisors, which is a life settlement consultancy, and also a Principal of ISC Services, a life expectancy underwriting company. I've been in the life settlements business for 31 years and originally got involved in the Viatical Settlement market, and then went to work in New York for a life settlement provider. I then built a provider in Atlanta. I've acted as a consultant expert witness, and we also run, again, a life expectancy underwriting company that estimates life expectancies for applicants for life settlements in the secondary and tertiary markets.
How are life expectancies determined?
Christopher Conway: Life Expectancy Estimation begins with the submission of a HIPAA authorization, signed by the insured, and medical records for the past three to five years of their medical history. Ideally, that includes records from their primary care physician and all the specialists and facilities that they may have been treated by in that period of time. The first step is to digitize those records and organize them, called “normalization”, in such a way that they can be summarized, and the summary is then used by the underwriter to cross-reference with the source records themselves to score the life using a debit-and-credit methodology that essentially establishes the difference between that particular insured and a group of like kind individuals of the same age, gender, and smoking status. The outcome is a rating that determines the degree to which the subject insured is more or less impaired than the normal member of that population. At that point, a calculation is run using proprietary mortality tables to establish a Mortality Curve. The midpoint of which is the median and the average of which is the mean. Those figures are used by the life settlement market to price a policy.
What is the role of a life expectancy provider in the process?
Christopher Conway: A life expectancy provider in the life settlement market effectively functions as an appraiser of one of the two key components of a life settlement: (1) the underlying insured whose life is covered by the policy. That estimate or that appraisal of their relative health condition and (2) their life expectancy is used by investors in the marketplace to price policies and determine the value of each life settlement that they purchase.
Life Settlement Market Forecast
Jose Garcia. Chief Executive Officer. Carlisle Management Company.
Jose Garcia: My name is Jose Garcia. I'm the CEO of Carlisle Management Company. Carlisle is a global investment management firm based out of Luxembourg, managing approximately 2.5 billion under management. We have clients all over the world, from Japan, the Middle East, North America, and most of Europe uh, and we specialize strictly on the life settlement asset class. I've been in the industry for a very long time, for over 20 years, and I've had the unique opportunity to work in a number of different sectors within the industry. I've worked in the supply side at a Life Settlement brokerage; I worked on the capital structure side as well as the provider side, having originated policies for some of the world's largest investment banks; and then, since 2008, I founded Carlisle Management together with Tim Moe and have built the business to what it is today.
What’s Driving the Evolution of the Life Settlement Asset Class?
Jose Garcia: Uh, I think the evolution of the life settlements class has really been driven by the sophistication of the market. Uh, When I started 20 years ago, the market was relatively unsophisticated and small. Uh, over the years, we've had more sophisticated capital join the industry. We've had live settlement companies drive standardization, and you know the consolidation of procedures. And I think that creates a nice environment because you have, you know, buyers and sellers looking at the asset class in the same way, and that really you know drives the market that really creates a market, and over the years the market has continued to evolve. We now have a liquidity market, known as the “tertiary market”, as well as a fairly complete standardization of valuation, underwriting, and trading procedures.
What do you see as the future of the space?
Jose Garcia: I think, like any financial market that is evolving, Life Settlements will continue that progression. Traditionally, what we've seen in evolved markets, we see more derivatives, we see more securitizations, we see more liquidity options. And I think that's happening with the live settlement space. I think that the industry has learned how to do a live settlement transaction. We now learn how to structure that transaction, how to standardize the transaction, as well as how to find liquidity for that transaction. I think the next step for Life Settlements is to take that one step further to maybe create options trading within life settlements, which is already starting to happen. Maybe securitization so that you can access a bigger investor base, and you know, the ultimate goal, of course, is maybe to create publicly traded vehicles so that a life settlement has a higher degree of liquidity.
The Case for Life Settlement Investments
Scott Romanek. Managing Director of Sales. AIR Asset Management.
Scott Romanek: My name is Scott Romanek. I'm the managing director of sales for AIR Asset Management. I joined AIR Asset Management in January of 2018, and predominantly because I understood the potential of this asset class. I found it very interesting and definitely wanted to be a part of its growth.
Why Life Settlements?
Scott Romanek: So, life settlements is a very interesting asset class, and it really has advantages to both policyholders and investors alike. Policyholders who often are ill-prepared for retirement are able to monetize an asset that, in many ways, they were unaware that they had and certainly needed the liquidity, and on average, they receive eight times what the cash surrender value would be to an insurance company. On the investor's side, I think that the reason is obvious: they're able to achieve very attractive, non-correlated returns, that really provide a diversifying component to their portfolios.
Where do Investors fit Life Settlements in an Asset Allocation?
Scott Romanek: So, because Life Settlements is really kind of a niche space, there’s really not a designated bucket to place us in. Many of the institutional investors, being foundations, endowments, and pension funds, will view us as a private credit-type investment. Certainly, an alternative asset class, but usually fits within the private credit bucket. The private wealth managers usually view us as an alternative fixed-income type strategy, and the reason for that is because the strategy itself has very consistent returns, equity-like returns, with very low volatility, sort of bond-like volatility. So very low standard deviation of historical returns.
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