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Are LE's The Biggest Life Settlement Obstacle?
Someone at life settlement provider recently told me that he felt LE's (life expectancies) are the biggest challenge in the life settlement market right now. After some serious consideration, I have to agree with him. At the end of the day, insured LE's have to be accurately assessed in order for investors to have confidence in their investment and continue to put capital into the market. If the confidence isn't there and investors direct capital elsewhere, the life settlement industry will be finished. It is in everyone's best interest to use life expectancies that are honest, based on sound data and ultimately accurate.
The life settlement industry is seeing a lot of good, new capital flowing into the market. This money is looking for quality, statistically predictable returns on their investment. If LE's are too high, the numbers don't work for an investor and consequently for a policy owner looking to sell.
The problem is that investors have hurt by life expectancies before. In late 2008, two major medical underwriting firms extended their life expectancy tables. That meant all of the policies that were purchased prior to their announcements were instantly devalued. Unfortunately, that changed the landscape for portfolio managers and helped contribute to a liquidity crisis. If you bought an investment with the belief that it would pay off in X amount of years and someone then told you it would be longer than X, it causes a problem. Imagine hearing that after you already spent tens or even hundreds of millions of dollars.
In today's market, the LE's are coming in so long that it makes it difficult for a case to price well. The more conservative life expectancies that are currently being thrown around are making policies too expensive for investors. This is because the projected premium obligations are prohibitively high, making the investment difficult to yield the targeted IRR's.
To further complicate the issue, most investors are requiring that LE's be provided from two different medical underwriting firms. These often come in with such divergent numbers that investors have no choice but to question what the insured's health is really like. It is common to see LE's, from two different underwriting firms, for the same insured be 40% or even 50% different from each other. Those are very big ranges for a piece of data that is critical to evaluating a potential investment. For example, we recently saw a female's LE's reported at 149 months from one vendor and 98 months from another. What would you do if someone asked you to buy that policy? You would either ask for a third LE, go off the higher one or blend them somehow. In any case, it doesn't help the transaction to have gross conflicts in key pieces of information.
Many of the providers have undertaken the cost and trouble to have underwriters on staff for an internal evaluation. This underwriting sometimes comes in much different than the 3rd party medical underwriting companies. Which of course, further complicates the issue and usually kills a deal.
As the life settlement market recovers from an abysmal 2009 and 2010, the road block to growth is not at the funding level. Capital is available. Rather it is the inconsistent and lengthy life expectancies projected for insureds that are impeding the market's growth. Hopefully as medical underwriters work to adopt agreed upon best practices, consistency will at return to the market and provide more predictable returns for investors.