The Origination Landscape: Perspectives from a Vertically Integrated Life Settlement Provider
The path to origination in the life settlement industry presents a varied landscape, with one of the distinctive structures being the vertically integrated provider-asset manager relationship. This model, where an asset manager owns a life settlement provider, offers a cohesive approach to policy acquisition and management. In this exploration, we discuss the benefits this specific structure brings to key stakeholders: asset managers, investors, and policyholders.
Asset managers in the life settlement industry’s secondary market – where policyholders sell their life insurance policy to a third party – acquire the policies through a life settlement provider, a company licensed by the states’ insurance regulator to purchase life insurance policies. The provider may work on behalf of multiple asset managers to secure policies for them that meet the manager’s own purchasing criteria.
Providers source these policies for their asset manager clients in one of two ways – either directly from the policyholder, or through an intermediary, such as a life settlement broker (which is also a regulated activity).
Some asset managers own providers; one example being Corry Capital Advisors owning SLG. A range of benefits accrue to both the American senior selling their policy, and the investors in the fund(s) managed by the asset manager, of this ‘vertically integrated’ structure.
Benefits to Asset Manager Fund Investors
Fund investors that allocate capital to a vertically integrated manager/provider benefit from the asset manager’s ability to have their provider focus almost solely on sourcing policies for the portfolio. Life settlement transactions are complex and the purchasing process can be lengthy, so enabling the provider to spend more time on origination and less time on administration benefits the manager.
The increased availability of sourcing time also enables the provider to conduct more thorough due diligence on life settlement policies under consideration for the portfolio. This facilitates better risk management, allowing for more accurate pricing models and ensuring that only high-quality policies are acquired.
Vertical integration also reduces redundancies and streamlines operations across the life settlement value chain. The asset manager can benefit from economies of scale, leading to lower transaction costs and improved margins. This operational efficiency not only enhances profitability but also allows for a more agile response to market fluctuations.
Additionally, vertical integration fosters a higher degree of transparency throughout the investment process. Investors gain confidence in the seamless operation from policy acquisition to asset management, knowing that a single entity is responsible for both sides of the equation. This consolidated approach reduces potential conflicts of interest and enhances overall governance.
The close alignment between the licensed provider and the asset manager ensures that policy valuations are informed by robust, market-driven analytics, which leads to more accurate bids for policies, reducing the likelihood of over-paying.
Investors and LPs stand to gain significantly from a vertically integrated model, as it provides a transparent and efficient mechanism for asset managers to manage risk and deliver strong, risk-adjusted returns.
Benefits to Policyowners
The process of selling a life insurance policy can be as complex for the consumer as it is for the buyer and, in the case of an intermediated sale, can take a significant amount of time, as buyers, brokers and policyholders go back and forth during the auction process.
Therefore, when a provider is backed by a major asset manager, policyowners can take confidence in the brand of the provider because they know that it is backed by a major capital source that has a vested interest in acquiring the policy, which means the provider will be more likely to stay the course during the process, as opposed to withdraw. And a vertically integrated manager/provider model actually expedites the overall process, providing policyowners with quicker access to liquidity as there is no back and forth between the provider and the external asset manager.
Conclusion
The integration of a licensed provider with an asset manager in the life settlement market is a significant benefit to fund investors, asset managers and policyholders alike. By streamlining processes and fostering transparency, such integration optimizes investment returns and mitigates risk but also elevates the overall experience for policyowners, ensuring that they receive their money quickly and efficiently.
As the life settlement market continues to mature, organizations that adopt a vertically integrated model are well-positioned to harness its full potential. The strategic advantages of this approach provide a robust framework for sustainable growth, offering a win-win proposition for all stakeholders.
Ryan Byrd is President at SLG Life Settlements.
