Life Settlement Funds Emerge as Asset Class
By Amy Glass
Life settlement funds are emerging as a fresh asset class as investors seek alternative investments uncorrelated to traditional investment markets.
Heralded as a socially-responsible alternative investment, a life settlement involves the purchase of a life insurance policy issued to a US resident after the insured is found to have an impaired life expectancy.
EEA Fund Management is offering the life settlement asset class to UK retail investors through its Guernsey-domiciled EPIC Life Settlement fund. Launched in November 2005, the vehicle’s investment aim is to purchase, hold and manage a portfolio of US life settlements. The investment objective is to provide a benchmark 8% annual net return on a stable long-term basis.
The US-based specialist life settlements provider ViaSource Funding Group is investment adviser to the EPIC Life Settlement fund. Christopher Daly, chief financial officer at ViaSource, said purchasing an insurance policy can often be of huge benefit to the life assured.
He added that, contrary to the perceived negative image of the industry, purchasing
policies from clients with impaired expectancy is a socially responsible act.
“We make their policy become an asset to them,” he said. “These people all have stories, maybe they cannot afford their mortgage repayments or maybe they have outlived the need for insurance or would like to give their children their inheritance before they die.” Daly explained that in exchange for a payment of excess of the policy’s cash surrender value, the purchaser becomes the new owner of the policy and pays all future premiums during the life of the insured.
The purchaser ultimately collects the full value of the policy on maturity. To protect the investment made into the policy, and reduce risk, ViaSource employs a financial model and tracks medical progress on policies purchased.
EEA Fund Management marketing director Peter Winders said the fund is suitable for
low-risk investors, or those with a large portfolio seeking diversification in alternative investments. He noted that the fund is receiving interest from investors in highly-volatile regions such as the Middle East, which were attracted to its stable returns and US-dollar asset class.
Justin Modray, investment adviser at Bestinvest, agrees life policy funds benefit from a lack of correlation with most other asset classes. “Traded life policy funds are an interesting concept,” he said. “These funds buy life policies from individuals in the US that have large sums assured. The individual benefits as they receive money to spend while they are still alive and the fund hopes to benefit by buying at an attractive discount to the payout received when the individual dies.
“Historically this approach has consistently returned around 5% to 10% per annum,
which, coupled with its lack of correlation to other asset types, makes it a
potentially attractive diversifier.”
However, Modray warned that the biggest risk to such a fund is that the individual
on whom the policy is issued lives well beyond the expected period. “Obviously if
they die sooner than expected this enhances fund returns,” he added. “It is morally
questionable though that you want people to die sooner than later to boost your
investment returns.”
Modray said key issues that investors should consider when looking at this type of
asset include how comprehensively the manager gauges the life expectancy of the
individuals when purchasing a policy. “The more accurate the manager, the more likely the investor will enjoy consistent returns,” he said. “Managers that consistently underestimate life expectancy will end up paying over the odds for policies, hurting returns.”
Additional concerns should be the sourcing of policies and the manager’s strategy, he noted. “Focusing on individuals with longer life expectancies means greater volatility, albeit with the potential for bigger returns,” Modray said. “The fund must have reasonable liquidity, as having to sell policies to cover fees and any encashments could hurt returns.” Modray noted that the EPIC fund is expensive but has a reasonable track record.
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