Hedge Funds Seek Alternative Investments in Life Settlements
Stephen
By Wm. Scott Page
Benjamin Franklin said “in this world, nothing is certain but death
and taxes.”
Because death is certain and has no correlation to the stock market,
today represents an excellent time for hedge fund managers to take
another look at life insurance settlements.
Life settlements are not new to the hedge fund world as many managers
identified the investment vehicle early on as a solid and steady
alternative to market fluctuations. Others have stayed on the
sidelines because they believe the industry needed maturation and
greater market acceptance.
As financial conventions fall by the wayside in this tumultuous year,
the life settlement industry looks more attractive than ever.
As a quick primer, life settlement companies buy insurance policies
at
a heavy discount from seniors who either can no longer afford or no
longer wish to own permanent life insurance. The life settlement
pays
more than the cash surrender value to the seller, and the investor
holds the policy until maturation, earning the full death benefit.
Creating a diversified portfolio of policies from a number of sellers
spreads the risk, and such portfolios have proven to offer a yield of
8-11 percent per year. By some estimates, the industry might be soon
buying $10 billion worth of life insurance per year.
The underlying reasons to invest in life settlements haven’t changed,
but the industry’s growth and evolution are a key reason why it
deserves a second look.
Here are the five main reasons that hedge fund managers should
consider investing in life settlements.
1. Non-correlated assets that can generate an attractive yield.
The
markets have little effect on life settlement yields. One of the key
aspects of a life settlement is that the investor earns a payout on
the demise of the policyholder. The strength or weakness of the
stock
market does not impact the life settlement arena. Diversified
portfolios have been performing well.
2. Life settlement assets are backed by highly rated financial
institutions. Life settlements are performed on policies held by
carriers with A.M. Best ratings of _ _ _ or better, so the payouts
are
regulated and solid. It is important to note that the life insurance
industry remains healthy despite the problems at carriers like AIG,
where the main business lines were solid.
3. Trading platforms exist. Several “household name”
institutions
have developed or are developing platforms to trade life settlement
policies and portfolios. Smaller markets also exist, so this is no
longer a strictly “buy and hold” investment.
4. Securitization is on the horizon. Though it may not be this
year,
securitization is definitely in the future for life settlements.
Portfolio analysis comprising the past several years proves that life
settlement portfolios will perform predictably and generate
consistent
cash flow. It remains an attractive candidate for securitization.
5. Third party tracking, servicing and underwriting simplify the
investment. In a sign of a maturing industry, life settlements are
not necessarily managed by one-stop shops anymore. The size and
scope
has made it profitable for third party companies to manage tracking,
servicing and some underwriting, thus easing entry by financial
players.
For fund managers looking for non-correlated opportunities during
these trying times, life settlements might be the answer.
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