Alternative Investments

How European Hedge Funds View Life Settlements

Second, life settlements have generated a great deal of interest in international markets due to the current U.S demographic environment, and due to the market growth expected from this asset class at present and in the future. More than 10,000 people in the United States turn 65 daily. In 2020, the number of retired baby boomers—— people born from 1946- 1964 — increased more than ever, according to a Pew Research Center analysis.

Nowadays, more and more senior insureds in the United States are looking into life settlements for various reasons, such as rising health costs, inflation, the need to support their habits and retirement planning considerations. Due to consistent outreach and marketing efforts, U.S. senior insureds realize that their life insurance policy shares the same characteristics as other forms of private property.

Instead of lapsing or surrendering their policies, U.S. insureds looking for cash relief consider life settlements a viable alternative solution, thereby increasing the industry’s market potential. According to the Life Insurance Settlement Association, it is estimated that U.S. seniors have more than $3 trillion in life insurance policies.

How International and Domestic Players Value Life Settlements.

A life settlement can be viewed as an international asset class, as European hedge funds such as Ress Life Investments A/S, a limited liability company managed by Resscapital AB of Sweden and Carlisle Management Company of Luxemburg have been active industry participants in the U.S. life settlement market.

Since the emergence of this industry, many financial institutions have been accumulating multiple life settlement portfolios that they expect to securitize.

There are several factors hedge funds must take into consideration when evaluating the policies, such as the health condition of the insured, as rated by a third-party medical underwriter; the insured’s demographic characteristics and lifestyle; the actual face value of the policy; and, finally, the insured’s estimated life expectancy.

Accurately valuing life settlements is vital to minimizing risk and to assessing the potential return on investment. For investors, longevity risk is one of the primary concerns when investing in life settlement contracts.

To mitigate this risk, depending on the firm’s respective fund type — closed-end, open-end or fractional — managers will adhere to standardized procedures to select and structure policies on an individual or block level that meet their defined criteria. For instance, a life settlement hedge fund might choose policies with a diverse range of life expectancy estimates and have these policies structured and distributed through a portfolio according to these varying life expectancy estimates in ascending or descending order.

Today’s Market

In conclusion, interest from foreign institutional investors has increased significantly over the past few years, contributing to the growth of the U.S. life settlement market. One of the industry’s pioneers, Magna, says the market has an annual average growth rate of 34%.

Some of the world’s most prominent institutional investors, including hedge funds, sovereign pension plans, banks, and endowments, now recognize the unique benefits of investing in the life settlements market.

Arthur LeeArthur Lee is the chief investment and operations officer at LifeXcel LLC, an alternative asset administration company specializing in structuring, distributing, and managing life settlement contracts.

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