Life settlements - what are they and why should investors be interested? A secondary market in the US and certain other countries', life insurance policies have been around for several decades, and are not quite the niche they once were. This publication spoke to a firm operating in the space.
The hunt for an asset class that doesn’t move in the same way as others is a constant wealth management diversification quest. The secondary market for life insurance in the US is a potential solution, so advocates say. With interest rates low or even negative, and vanishingly tiny bond market returns, this area deserves attention.
Investment houses such as Apollo, KKR, Carlisle, Blackstone and others have entered into the game, which remains an overwhelmingly North American one because US and Canadian laws enable such a market (a third is in Germany). (In the US, 45 states regulate transactions in such life policies.) Non-Americas investors, however, such as those in Europe and Asia, are waking up to this area, a Nordic region-based firm argues.
Life settlements can be seen in many ways as an alternative form of fixed income, Jonas Martenson, founder and sales director, Ress Life Investments, told this news service recently. (Ress Life Investments, which is managed by Ress Capital, is listed on the Nasdaq Nordic market.) Martenson and colleagues are cranking up their campaign to win clients.
Life settlements involve selling a life insurance policy to a third party. The buyer, who takes over ownership of the policy, takes over the premium payments in exchange for the death benefit when the insured dies. US legal rulings have allowed life policies to be traded with the same ease as bonds or stocks. In the 1980s, the market was stimulated by AIDS victims cashing out policies early. As the market developed it drew controversy and the kind of tags that might give pause, such as a “morbid niche” (US News, August 2017), but awareness of its benefits have grown. As many people allow their policies to lapse rather than claim back some of their premiums, defenders of the market say they are doing millions of financial consumers a favour.
An insured may choose to sell his or her policy instead of surrendering it to the insurance company because an investor will typically pay more for the policy, usually 10 to 25 per cent of the death benefit. The real driver of the sector has been retired people who did not need the money. In the US, nine out of 10 policies lapse and aren’t called, Martenson said.
The total life insurance market is about $20 trillion in face value – a huge field and the estimated volume of policies that are sold is $4-5 billion annually.
After fees, life settlements generate returns of between 7 to 8 per cent, a consistent level that’s very appealing at a time of low/negative rates and when people seek assets that aren’t correlated to stock, bond and other markets, he said.
The Ress Life Investments portfolio contains about 300 life insurance policies, with a total face value of more than $680 million. The fund has monthly subscriptions and redemptions. There is a fixed management fee of 1.5 per cent per annum and a 15 per cent performance fee above the hurdle rate (4-week US T-bill + 1 per cent) with high water mark. The annual performance fee is capped at 1 per cent