Rising Interest Rates

7 June, 2024

Episode 4 – Part 2, with Oleksandra Polishchuk

What has been the impact of rising interest rates on the Life Settlement market?
It’s a multifaceted question, I believe. First thing you have to know is that effectively the carrying charge of life insurance policies, the cost of insurance, right, which is paid to keep the policy in force. And this doesn’t necessarily depend on the interest rates in the in the general macroeconomic environment, one has to think that effectively the cost of insurance component does not increase with the interest rate. It’s rather depends on effectively on the likelihood of a certain person deceasing or not, within a certain given time frame. Another thing one has to keep in mind is that, of course, the interest rate, generally improve the return on the assets that life insurance can generate. So globally speaking, in, during the times of increased interest rates, whereby return on assets do improve as majority of life insurance company’s assets are effectively invested into fixed income products. So those fixed income products in return are capable of yielding much higher returns. And so therefore it improves effectively the, um, credit carrier ratings and generally the strength, the capitalization level and the strength of the balance sheet of the insurance company. Yes. So life settlements. Well, first of all, it offers a double digit returns. And at the same time, despite limited liquidity, one always has to remember the fact that even treasuries, of course, do offer liquidity. That liquidity comes at a cost and especially in highly volatile interest rate environment. As we see today, prices of treasuries are much more susceptible basically to a decrease in their in valuations.
The second aspect is that, of course, that in contrast to private debt, other private debt investments like high yielding, for instance, for instance, uh, corporate bonds, life settlements can offer much more favourable returns and better downside protection, very often an increase of in excess of 5 to 6% in treasuries generally tends tend to push, for instance, the default rates in excess of 10%. For high yielding bonds. Most of the high yielding bonds generally are backed by a nonstandard or substandard collateral, whereby when it comes to life settlements, our exposure in terms of credit risk is of course, the counterparty responsible for pay-out are, some of the largest and more most capitalized life insurance carriers in the United States. Most of them are at least A- rated and above. So the credit carrier rating is also in the credit risk is way limited when compared to other high yielding fixed income products.