The meltdown in the global equities and bond market is having positive side-effects for managers of ...
The meltdown in the global equities and bond market is having positive side-effects for managers of life settlement funds.
As the global appetite for longevity-related capital growth products increases against the backdrop of market turmoil, larger investors are now looking at this investment vehicle as holding out the prospect of steady growth and solid returns with a lower volatility rating.
The life settlement market will also draw great comfort from the Federal Reserve's willingness to offer support to AIG (the largest US insurance company by assets).
A life settlement involves the sale of a US life insurance policy at a discount to its maturity face value. In addition to paying an upfront cash sum to acquire the policy, the new policy owner will need to continue to pay premiums in order to be able to qualify for the full cash payout upon the insured's demise.
The idea of a life settlement fund is to give investors exposure to a basket of these policies, which so far have proved a non-correlated asset class with potential for smooth and consistent month-on-month growth even in volatile market conditions.
Among the factors driving interest in these policies is that they offer some elements of certainty. The cash amount paid to acquire the policy is known from the outset, as is the fixed maturity payout from the underlying US life insurance company (typically rated at S&P 'A' or above). Clearly, the maturity claim date is not known at point of purchase, but one certainty is that human beings cannot live forever and the new policy owner will be able to file a claim for the full maturity proceeds upon the demise of the insured. The full extent of servicing costs such as tracking the insured, and premium payments required to keep the policy in force, are similarly unknown. But when many insured are pooled, actuarial assumption provides a degree of mathematical (payout) certainty over time.
The number of exposures required to deliver consistent cash flows is a moot point but cash returns should become predictably smooth with life settlement portfolios consisting of approximately 250 exposures.
Many investors and their advisers will be focusing on wealth preservation at present. Many mainstream asset classes have posted negative returns this year, but so far well-managed life settlement funds have produced growth throughout the credit crunch.
The fundamentals of sound administration, good policy pricing practice, portfolio construction and fund valuation remain essential to a life settlement fund's success.
The life settlement market is also proving increasingly popular with new territories such as the Far East and Middle East. Indeed, it is apparent that in the current environment some banks now prefer the collateral protection afforded by a well-managed portfolio of US life settlements to that afforded by real estate.
- So far in the credit crunch, returns from life settlements have held up well;
- A diversified fund of life policies can smooth out returns;
- Some institutions currently favour life settlements over commercial property.
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