This “New Normal” world if filled with low yields and low growth. It is not surprising that increasing allocations to alternative investment is the new mainstream rather than unusual.
Asset Managers take note, during the recent AIMA Australia Annual Forum, one message came across loud and clear, ‘What value are you delivering to your investors?’. Looking beyond the obvious, there are three common themes, investors noted to be considered with alternative investment.
Uncorrelated, scalability and a low market crowding, are the three main components that investors are looking for when investing in alternatives. We have made some comments in this article around those points in relation to the life settlements market.
Uncorrelated
The post-GFC world has left a cautious vibe in air with many investors seeing the need for truly uncorrelated investments. Rightfully so. In the post-GFC world, alternative investment managers are changing the investment landscape. There is no better time than NOW for strategies which show a low correlation to traditional markets. There are plenty of reasons to invest in the life settlements market but uncorrelated nature of the asset is a primary motivation.
Insurance-linked securities generally, particularly the Life Settlements market (Secondary Life Insurance), shows a true low correlation to traditional markets. Investment performance is primarily derived from the longevity characteristics of the pool of insured. This longevity asset displays stable long term trends that are non-volatile and are unrelated to the ebb and flow of financial markets. Consequently, the asset has a low correlation to equity, property, bond markets and other alternative assets.
Success With This Alternative Investment
Success in this asset class reaches beyond simple month to month performance. It has a quite different return profile to traditional investments and requires the patience of a disciplined investor. The resilience and ability to sustain itself in the long run, through the volatility of the traditional markets, is what sets this asset class apart. We have seen this asset class grow tremendously and pass through the GFC unscathed. What the future holds is the potential to grow, as capital returns to the market. But one thing remains certain if the asset characteristics remain unchanged, (non-tradable, non-derivative) the asset will remain truly valuable and well-diversified asset in investors’ portfolios.
Also, US life insurance contracts are high-quality credit instruments. It is backed by the statutory reserves of heavily regulated insurance companies. No US Life Policy has ever had a credit default, even during the depths of the GFC.
Scalability
One of the key concerns was scalability. Some investors also noted that they would not consider a boutique manager. We propose that small can, in fact, be beautiful. For the Life Settlements market, it’s the potential to scale, which is more important than any individual manager. The ability to scale relies on three aspects;
Structure and Relationships
Appropriate structuring of the holding vehicle is crucial, particularly for non-US domiciled investors. The asset manager’s ability to sustain a positive relationship with intermediaries will impact on the efficiency of any strategy. Additionally, the investor needs to consider whether the asset manager has shown that they can operate effectively. Can they meet investor’s requirements and within the chosen jurisdiction. Lastly, does the manager have a proven record of creating structures? Do they have the ability to scale up and meet the underlying investors’ tax, compliance and reporting requirements?
GI Asset Management Limited has a proven track record of structuring and operating different vehicles. Significantly, the appropriate for institutional-grade clients in multiple jurisdictions.
The Market
Conning Inc has indicated that there is a potential for growth in the market. They forecast that an annual volume of new life settlements will average approximately 1.8 billion per year.[1]
There is every growing concern for the retiring population, in the US, and the expense of long term care (LTC). According to Merrill Lynch, the USA retirement population will increase by 10,000 new retirees a day. Therefore, the primary financial concern for retirement are the costs associated with health and long-term care. [2] (Merrill Lynch, 2017, p.12). Certainly, as more baby boomers enter retirement, life settlements are becoming a very attractive method of obtaining the necessary funds to pay for LTC. Additionally, investors who are unable to compete in higher face policies, $1 million-plus policy, are considering lower face policies to enter the market.
The Managers
You should never trade scalability for poor asset selection skills. We would like to argue that the size of the business is not necessarily a good indication of success. In fact, it is more appropriate to balance this with the quality assets in the pursuit of scale. It is the quality of asset selection and ongoing service delivery process which is the true measure of success in the Life Settlements market.
We deliver a unique set of risk-adjusted returns to meet the expectations of our investors. Specifically, we generate a level of fund returns that is presently better than some traditional and alternative investment. However, we have traditionally taken on a lower level of risk (as measured by volatility) with a long-term investment horizon.
The asset demands a unique blend of insurance experience together with fund management disciplines. Our “Small Firm” culture is to emphasise the importance of communication and consultation with our clients both pre and post-acquisition. The strategy around timing and implementation of larger amounts is important as the effect on pricing can be consequential.
We also pride ourselves on transparency as to fees and performance reporting.
The GI Asset Management group has previously executed acquisition mandates at the volumes in excess of USD 100 million per month for institutional clients.
Crowding
Although life settlements remain one of the smaller markets, within the alternative asset space, investors have shown an increased interest and this is likely to translate to steady growth. The Willis Towers Watson survey into global alternatives in 2016, found that global alternatives AUM reached USD $6.2 trillion at the end of 2015, Real Estate having the largest portion of AUM at USD1.2 trillion.[3]
In comparison, life settlements were the smallest at USD$29 billion for 2015 as per Conning’s estimates.
The chart below illustrates the compelling contrast that currently exists between the Catastrophe Bond element of Insurance Securities compared to the Secondary Life Insurance Market. The Catastrophe Bond market has seen large scale cash inflows with yields being driven to very low levels.
In contrast, the Secondary Life Insurance market has not seen the same large inflows since just before the onset of the GFC. It was clearly the non-correlation story that drove those inflows. This can be verified in the research produced by Conning Inc, who have been recording statistics on the life settlements market since 2002. It is clear, that the life settlement market is currently not suffering the kind of price pressures clearly evident in the CAT bond market.
(Image 1: Issuance of catastrophe bonds and related investment by year)
Transparency
If you’re looking at Life Settlements as part of your alternative investment profile you need to consider transparency. Not just transparency in reporting, which we have looked at in the past. But also, transparency in the context of expectation and delivery. The investor needs to set clear expectations from the start. The life asset manager needs to clearly evaluate if these expectations are achievable within the framework of asset class characteristic.
Some asset managers promise returns with an unrealistic valuation model. They are unable to deliver promised long term real IRR. Some are promising asset class liquidity, where asset characteristic prevents easy trading. Transparency and realistic expectations are essential to sustained success. Some managers have over-promised and under-delivered, negatively impacting the credibility of the market.
As always, we wish you well with your life settlement investment opportunities. If you want to learn more about investing in this asset class please contact us.
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.
[1] Conning Inc, 2016, ‘Life Settlements, Secondary Annuities, and Structured Settlements: Rate Increases Squeeze Returns’, pp. 11
[2] Merrill Lynch Wealth Management, March 2017, Finances in Retirement: New Challenges, New Solutions A Merrill Lynch Retirement Study, conducted in partnership with Age Wave, <https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_Finance-Study-Report_2017.pdf > [Accessed 28th July 2017].
[3] Willis Towers Watson, (2016) ‘Global Alternatives Survey 2016’, [online] Available at: https://www.willistowerswatson.com/en-AU/insights/2016/07/Global-Alternatives-Survey-2016 [Accessed:14/11/2016].
[Image 1] Original Source”: Aon, Reprinted Source: Scism.L, Das.A, 2016, ‘The Insurance Industry has been turned upside down by catastrophe bonds’, The Wall Street Journal, Available at:
http://www.wsj.com/articles/theinsuranceindustryhasbeenturnedupsidedownbycatastrophebonds1470598470 [Accessed:26/10/2016].
