Investing in Life Settlements: Fund Manager Review

As with any important decision one makes, a little homework can go a long way in choosing the best fund manager for your life settlements investment.With any number of options on offer how do you go about assessing which fund manager will perform best for you and be a perfect fit with your investment strategy?

 

The Expertise 

The best advice in choosing a fund manager is to look for one managed by a company with a significant amount of experience in the life settlements industry. Beware of new companies which are popping up due to the sudden growth in the industry. Observe the length of time the fund manager has been in operation and how many funds have been managed. It can take years of progress to develop accurate management techniques so it is essential that the fund manager has been operational long enough to have learned how to develop the optimum strategy for you.

The group has been successfully managing the asset class since 2006, and have acquired approx. 2.5B in face value that has been acquired for different varying structures designed to meet particular investor needs. These structures have also provided a high level of corporate governance and accountability for their clients.

A simple question to ask any prospective fund manager is, “Has you company been subject to research and due diligence by an internationally recognized research house?” We are on the Global Investment Manager Database for one of the largest research houses in the world.

 

The Size

If you are looking at building a relationship with a strong life settlements= manager, which you undoubtedly should bekeep a look out for one with a sound process and investment strategy. The opportunities awaiting a life settlements fund investor can be realised through the careful review of a qualified fund manager.

This may not mean opting for a managed fund from a big, well-known fund manager.Instead, select to review a few boutiques that manage just a couple of funds or the specialists that focus on a single area that are more likely to have the right investing mindset.A smaller fund has more flexibility to take decisions that can make a big difference to performance.

The Global Insurance Settlements Funds PLC (GISF PLC) is registered by the Central Bank of Ireland as a Qualifying Investor Fund (“QIF”) under Part XIII of the Companies Act 1990 on 4 November 2011. The QIF is the most flexible type of regulated fund structure in Ireland. We have developed a best practice approach to implementing structures that provides them with both the flexibility to utilise an investment vehicle and proven asset selection processes suited to investor needs.

 

The Regulation

The regulatory environment provides investor protection by enforcing certain behaviors on a fund manager so understanding the regulatory environment your manager is operating within is very important. Fund managers who have participated in developing good, responsible regulations and are more likely to commit to improving the regulatory environment for the asset class.

We operate under a first world regulatory scheme which is more compliant and accountable than many funds in this industry.This puts the manager in a class of its own in terms of compliance and accountability due to the regular and comprehensive review by both the compliance officer and the independent compliance committee, both of which must report to the regulator.

The manager also works closely with the Irish regulator, the Central Bank, and the Irish Stock Exchange to ensure comfort with their processes, people and their risk mitigation strategies. They gained approval in November 2011 to be an investment company with the authority to run numerous sub-funds (separate mandates).

The General Fund,under the umbrella of GISF PLC, is established a highly regulated and compliance-orientated environments and the services of leading custodians are employed to protect the underlying assets.

 

Fund Strategy 

Be realistic about what you expect from a fund. When it comes to investing in life settlements,at times it can be difficult to evaluate what perform best in the short term.

If you’re investing in life settlements your time frame should be quite long – a matter of many years, not a few months. So your focus should be on whether a manager seems likely to outperform in the long run, not whether they’ll do okay in the next quarter. Investors should not be fixate on short-term performance.

In fact, the best predictor of future performance is the quality of the investment process which enabled the investment manager to perform in the first place. If this process is robust and consistent, it is safe to say that you can have more comfort that the manager you choose is likely to continue to perform.

The GIS General Fund’s overall investment objective is to generate attractive risk-adjusted returns over time, by actively managing a large and diversified portfolio of life insurance policies through Life Settlement transactions. If you wish to further understand the Funds investment strategy please contact us.

 

Policy Acquisitions

It is important that the manager perform its own due diligence on policy packages or that it delegates this function to a suitably qualified third party to review cases. If the manager outsources this process they must still retain the insight and responsibility to adequately supervise third party service providers.

Some past life settlement transactions have included cases of dubious legality, from outright fraudulent activity to the more modern stranger-originated life insurance (STOLI). Furthermore incomplete documentation may prevent policies from being sold on in the market at a later date.

The portfolio construction for clients, has been managed by applying disciplined fund management techniques in addition to rigorous asset selection and due diligence processes only an experienced asset class player can provide. The single focus in this asset class, over a long period of time, has ensured that they have delivered to their clients a level of expertise at the highest level.

 

Valuation of Policies and Life Expectancies

There has been in the past no consistent approach to the valuation of life settlement policies in the market and this gives a wide range of reported performances. Life settlement policies are an unusual asset class in that they give rise to substantial realised gains on early maturities that may be offset to an extent by unrealised losses on policies that remain in force.  The asset manager needs to be have the knowledge and the experience to confidently provide successful valuations of policies. The investor needs to consider to what extent are actuarial models produced and how robust are they.

The standard practice for life settlement funds is to utilize multiple life expectancies in order to minimize dependence in any one underwriter.  Multiple life expectancies provide increased insight and more information for the managers to make an accurate purchase decision.  Investors should request information about the life expectancy underwriters and understand how the process is calculated, as mortality is the underlying asset in which you are investing.

If you wish to discuss varying LE and Valuation techniques which may affect your life settlements investment,  we would be more than happy to outline a best practise approach to suite your needs. The determination of life expectancy (LE) is one of the most important aspects of the policy purchase process. We have used a number of the best recognized LE underwriters over the years and have determined those that they believe to be the best in terms of consistency of life estimates over time.

 

Tax Efficiency

In 2009 the United States Internal Revenue Service published two tax clarifications addressing how buyers and sellers of in-force life policies should treat transactions. Although this bought some clarity to the market it also created a number of problems for funds and companies that held life settlement policies in countries that did not have a suitable tax treaty with the US.

Not all Life Settlement Funds operating internationally are domiciled in countries that can take advantage of double taxation treaties with the United States. It is very important that you ensure that your life settlement fund is structured to minimise the risk of unnecessary tax leakage thus reducing net returns to investor.

The GIS General Fund is one of the suite of products offered by Global Insurance Settlements Funds PLC for whom we are the appointed Investment Manager. This Irish Umbrella QIF structure takes advantage of the tax clarity in Ireland, enabling us to develop the most appropriate structure for each investor.

 

Operations

The legislation and licensing and the practical realities of running a life settlement fund means that there will be numerous third parties involved. Investors are dependent upon all of these functions operating properly. Tracking the status of the insured lives, renewing documentation, payment of premiums and other unglamorous functions need to be performed and the Manager needs to ensure that these are monitored and reported on and, where necessary, remedial action is taken. The impact of policies lapsing can be quite dramatic to the overall performance.

Is important to note that additional active management duties, performed by the Manager, goes well beyond that level required of a traditional managed fund. Most closed-end funds, where very little active management is performed, requires only that the policies are kept in force until maturity. The GIS Fund is different, however, because an open-end fund requires constant monitoring of policy values, premium impact, timing of policy acquisition, and so much more dynamic responsibilities of which are of no value or importance in the traditional policy “purchase and hold” approach.

As a result of the extensive due diligence procedures and quality operational management, we have never failed to collect a policy benefit that has become payable and has never allowed for a policy to lapse. The strength and safety of the process is based on a wealth of experience developed over time and the use of independent and financially strong service providers to oversee and carry out the process.

 

Key Partners

Before employing a fund manager to construct and develop your life settlements investment, you should assess if the fund manager is affiliated with respected industry organizations?

Establishing a partnership with highly regarded fund service institutions is essential not only in the success of the fund but also the credibility of the fund manager. If the fund manager has the flexibility to develop relationships with service providers for your individual investment it is important that the fund manager has established due diligence process to ensure that the external service provider is suitably skilled and qualified to provide the service at top tier level.

Investor comfort and security is paramount, so we only deal with blue-chip service providers and are domiciled in a regulated jurisdiction. The fund manager employs top tier accounting and audit firms, custodians and legal service providers.

 

Liquidity Provision

Life settlement portfolios generally require liquidity to meet premiums and expenses. Failure to meet these will result in a loss of value because policies will lapse. Liquidity provision is therefore a key to the operation of a successful life settlement fund. While no two funds are structured similarly it is important to be familiar with the fund’s cash management policies, and what the potential effects are to your investment performance of these procedures.

For further elaboration on liquidity provisions with in the Global Insurance Settlements Funds PLC please contact the investment manager.

 

Mortality and Longevity

Longevity is a key risk in the management of life insurance based investments. A disciplined and well thought out approach to identify and manage this risk is a key element to a successful investment in this asset class. In particular developing a strategy to a client’s risk appetite is essential. Experience shows that risk, if properly understood, can be effectively managed.

 

Conclusion

With interest in the life settlements asset class continuing to expand, investors should consider engaging and developing a relationship with a fund manager. The extensive experience of developing and managing a quality fund structure, we can guide you in the best possible solutions to ensure the success of your life settlements investment.

 

For further information on any of the above topics or how to succeed with your life settlements investment please contact the following

 

Contact Stephanie Nolan (COO & Director) 

Contact Stephen Knott (Director)  

 


[1]  Edward S. Adams, 1 May 2013,“The Emerging Alternative Investment – Life Insurance Assets”, Insurance Studies Institute 

 

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: Fund Manger, Review, Life Settlements, Investing

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