Introduction
Due to the Covid-19 situation, we have gotten many requests to examine and outline our thoughts on the effects of the corona-virus on Life Settlements as an asset class. Of course, while we will not be able to give a definitive answer on the magnitude and scale of damage Covid-19 will deal to the world, it is nevertheless certain that the life settlement population will be affected severely.
We are not experts on the matter, and hence we link a few independent research studies from insurance companies as well as information we have gathered from our extensive research on various Life Settlement Funds to provide our two cents on the matter.
The Life Settlement Population
A typical life settlement fund often holds large number of life insurance policies of the aged. We take an example of a Life Settlement Portfolio from one of our watch-list funds (Fund X) which holds a total of little over 350 life settlement policies that are currently in force and all polices beneficiary payouts have legally been transferred to the fund.
The average age of policies in Fund X’s portfolio is 81 years. The distribution of age varies, but majority are over the age of 80.
Life settlement funds often utilize a cash-flow based calculation that is derived from the life expectancy of the policies’ insured. These life expectancies are calculated through rigorous actuarial analysis and medical underwriting. Using this method, Life Settlement funds can choose policies that are able to achieve their target IRR.
For Fund X, the life expectancy of insureds were 69.75 months at the time of purchase. Again, the distribution of life expectancy varies.
Covid-19 Deaths in US
According to the CDC, there is an estimated fatality rate of 10.4-27.3% for the age group above 85 years old, the largest rate of the study. The fatality rate dramatically falls to 4.3-10.5% for the age group between 75 to 84 years old. We will not get into the medical specifics of Covid-19, but there is a disproportionately higher risk of fatalities for the older population to the virus.
Summary
So, what do all these statistics mean?
In purely investment terms, the IRR of investments increases the earlier the profits are realized, and returns are given back to investors. Similarly, returns to life settlement funds increases when the life insurance matures earlier.
At pre-Covid estimates, funds with a good track record have averaged from 12% to 18% annualized returns.
Hence, with the ongoing Covid-19 crisis and the large percentage of life settlement population at higher risk of fatalities to the virus, it is highly probable that a lot of life policies would mature much earlier than the 69.75 months average life expectancy. Added to the fact that policies are acquired with an intended IRR already in mind, it is hence not crazy to expect 2020 to be a good year for life settlement funds in general.
Sources: