A Life Settlements Benchmark/Index: We are not there yet!

In all asset classes, both Investors and Managers alike, look where possible to have access to and industry wide benchmark/index to assess performance and compare themselves with their peers. Clearly this is a good thing when available.

The trap for the uninformed or novice investor is to distinguish between true benchmarking and the marketing “Spin”.

For instance it is at best unhelpful and at worst dangerous, to assume a higher headline return is better than a lower return unadjusted for relative risk. Clients need to have some knowledge or appreciation of the risk return trade-off in any transaction and be confident that they have fully taken account of known risks to make a valid comparison.  Many an investor, new to the game, has unwittingly taken on risks disproportionate to their appetite or missed value opportunities, through simple lack of knowledge.

In property it is clearly inappropriate to compare the headline gross return advertised on a highly speculative property development perhaps touted by an at best inexperience manager, to say a highly diversified listed property trust specialising in “A” grade commercial properties in large Capital cities that is managed by a well-respected “Household Name” Manager.

Similar in the Equities field it would be inappropriate to assume the returns on a “Long Only” Large Cap Fund, should be comparable to a Long/Short Strategy, or to a single sector specialist fund in say emerging markets or small Cap stocks.

The Life Settlement Asset class is no different.

In a perfect world where all life insurance policies in the life settlements market were identical, a Life Settlement Index would provide an enormous assistance to investors and enable them to benchmark and clearly evaluate life settlements funds. However, this isn’t a perfect world and not all life insurance policies are identical because not all human beings are identical. In addition, not all life policies have been originated in the same manner.

 

Comparison Is Difficult

First and foremost, for life settlements, there is no central exchange and uniform source of transaction data.

Secondly, the nature of the life settlement asset class is that individual life policies are not homogeneous securities like stocks or bonds. Even two life policies issued on the same life with the same life expectancy and issued by the same insurance company can exhibit wildly different internal economics. For instance they may be issued at different ages of the insured’s life when their medical condition may have changed, or policies may exhibit different contractual wording that creates risks or opportunities to the premium calculation or benefit payable.

It is also extremely common in the higher net worth cohort of insured lives that are offered as potential USA life settlements, that one insured life may have multiple policies issued by different insurance carriers all with unique contractual wording and unique policy dynamics.

Added to this is the phenomenon of legal risks associated with the origination of some policies at the time they were written due to questionable practices that plagued both some Insurance Companies themselves and certain sections of the Life Broker market in the early days.

The old English legal precedent “Let the Buyer Beware!” clearly holds true.

Also, post the GFC in all markets and the Life Settlement market is certainly no exception, is the prevalence of “Distressed Sales” compared to a normal “Willing Buyer/Willing Seller, arms-length” transactions.

The trade journals and media coverage occasionally make reference to portfolios of life settlements trading at “X” IRR or at Discount Rates of ”Y”, but there is to date no uniform and widely recognised method of grading individual Life Settlement Policies and therefore Portfolios. Ask any Broker or Intermediary about what the market is paying and you will get a wide variety of answers depending on the types of Policies they are currently marketing.

How can you compare a projected return or sale price quoted on a portfolio full of STOLI, Beneficial  to the Interest and or Aggressively Premium Financed paper from a Distressed Hedge Fund, with two well informed Institutional clients simply agreeing a sale between themselves at arms-length of low risk policies with high quality due diligence?

Similarly, is it reasonable to compare the price paid by a well informed and astute buyer of a single policy from a single retail seller with little experience or access to advice to the institutional buyer/seller’s transaction mentioned in the previous example?

Now there are some beginnings of market data analysis being touted as ”benchmark” returns and while these intentions are admirable, in practice they offer little help yet.

The data samples are so far, too small as to make reliance on these figures unsafe. They also make no attempt to filter the raw return numbers on any kind of risk ranking rendering valid comparisons impossible.

 

An Experienced Asset Manager

Enlisting the right services can go a long way in ensuring that your life settlements investment performs best for you and is a perfect fit with your investment strategy.  A manager with a significant amount of experience in the life settlements, with proven years of progress in developing accurate management techniques will be able to efficiently construct a portfolio for your appetite

It is only through a deep knowledge of the delicate interplay between raw Policy data like Premium construction, Policy contractual benefit clauses, Account value calculations and the probable mortality predicted through underwriting can the real value and economic risk/ reward frontier on a policy by policy basis be determined. 

Leaving aside any of the potential legal due diligence issues mentioned earlier, some policies are simply more economically robust than others.

The foundation of this investment philosophy should be that risk and reward in the first instance is assessed at an individual policy level, and only then can a pool of policies be assessed or compared.

It is our strong view that many investors (and some so called managers) have unwittingly taken on additional risks and missed substantial value opportunities to those normally associated with a longevity based investment such as life settlement policies, through a failure to grasp these issues.

Until the industry more adequately deals with grading of policies on a risk basis, we remain sceptical about published returns and so called benchmarks or indexing.

As always we wish you well with your life settlement investment opportunities and if you want to learn more about investing in this asset class please contact.

 

Contact Stephanie Nolan (COO)

 

Contact Stephen Knott (Director)

 

 

 

 

Disclaimer: This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.

 

Tags: Life Settlements, Investing, Fund Management, Index, Benchmark, Indexes

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