Can ESG metrics be used to identify material risks and growth opportunities in the life settlements market? The adoption of environmental, social and governance (ESG) investing continues to accelerate as more investors seek out investments that reflect their humanitarian, ethical, environmental, and social values. Investors are increasingly applying these non-financial factors as part of their analysis process. How can life settlements unlock value in your ESG Investment?
The ‘S’ in ESG Metrics and Investment
Social metrics include a company’s treatment of its employees, as well as its impact on wider society through its relationships with customers and local communities. In this sense, it is not about limiting potential damage as is seen in the environmental matrix. But also creating social benefit in the community.
So, how does the Life Settlements market fit into the social matrix? The existence of the secondary market for the sale of life insurance policies meets social principles. It gives seniors more options to obtain liquidity for a personal asset. It gives the insured more control of their retirement and the funding of their future healthcare needs.
Investing in life settlements means purchasing life insurance policies and subsequently paying the premiums, until such time as the policy matures. The investor receives the death benefit proceeds when the insurance policy pays out.
Without the secondary market, policyholders would cancel their policy, or in a best-case scenario accept a small ‘surrender value’ offered by an insurance company. In the secondary market, however, the policyholder can sell the unwanted life insurance policy at a much higher price.
Regulations and Life Settlements
The US Government seems to agree on the positive social contribution of the life settlements market. Offering better tax incentives for seniors to sell their policies to the life settlement market with the Senior Health Planning Act in 2020. There have been numerous regulations encouraging the growth and sustainability of the Life Settlements market.
The regulative environment is making the sale of policies a compelling option for retirees whose health care needs have increased. The life settlements market is a legitimate and ethical opportunity for both investor and policyholder. A win-win market.
- Further support of the Life Settlements industry was shown on June 14, 2013 when Texas lawmakers signed into law a bill that lets Texas state Medicaid officials tell policyholders applying for Medicaid assistance that they can sell their contracts to a life settlement company to cover custodial healthcare expenses.
- Recently, the National Association of Insurance Commissioners (NAIC) has endorsed life settlements as one of many financial mechanisms for funding long-term care (LTC). This is a monumental movement in LISA’s awareness campaign for life settlements.
Clearly, it brings a new mark of legitimacy to life settlements while helping those most in need pay for medical care.
The Value in Life Settlements
When ethical funds were in their infancy, a common assumption was that funds that incorporate ethical matrix and screening involved a trade-off with performance. However, the case of using ESG characteristics to generate investment opportunities is viable. This is true especially for small to medium investors looking at entering the life settlements market.
The primary value is that Life Settlements is uncorrelated to the economic cycle. Additionally, the low volatility and predictable cash flows of a well-diversified life insurance portfolio offer a highly attractive, risk profile, well suited to investors prioritising capital preservation.
Additionally, investment in US life policies offers the opportunity for very attractive US$ denominated returns once you appreciate its strengths and limitations. It has the potential to generate superior alpha returns compared to other alternatives such as trees. Certainly, the low volatility of a well-diversified portfolio means the asset offers a highly attractive risk profile for capital preservation.
The lowest risk entry point, to the asset class, offers “rule of thumb” returns of 500-600 bps over the equivalent tenor US treasury rate. A carefully considered walk up the risk profile path could potentially add 50-100% to this return target. This is even more attractive when you consider that the underlying credit risk of these instruments is very low.
The socio-economic factors drawing sellers into the market is the key to market growth. Furthermore, some believe that these factors will also sustain the supply of policies in the market. However, for many investors looking to add this to their ESG portfolio, it may be out of reach.
The initial capital outlay needed proves to a high barrier to entry for some investors. To diversify away from the longevity risk associated with individual policies, and the initial loss-making period, a large capital outlay is needed. Additionally, and perhaps less immediately visible, are the expertise, experience, and established network required to operate successfully in this space. Which is where GI Asset Management can assist investors in entering the market. The GIS General Fund means investors are no longer limited to entry into this alternative space.
About Global Insurance Settlements Funds PLC (GISF)
Global Insurance Settlements Funds PLC (GISF) is incorporated in Ireland. An umbrella type investment company. The fund permits segregated liability between sub-funds. The first sub-fund launched, GIS General Fund (the Fund), is listed on the Irish Stock Exchange.
This structure is aimed at Sophisticated / Institutional investors. It provides tax clarity by ensuring there is no tax leakage. It enables a number of different investment options to suit the specific needs of our investors.
The Fund’s core activity is to actively manage a large and diverse portfolio of life insurance policies (life settlements) issued by companies in the USA. Policies are sourced by licensed U.S. provider companies. The Board of GISF selects those that best meet the Fund’s policy purchase criteria.
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. It 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.
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