Is it possible to have a life settlements benchmark? In all asset classes, we look where possible to have access to an industry-wide benchmark/index to assess performance and compare themselves with their peers. Clearly this is a good thing when available.
The trap for the uninformed or novice investor is to distinguish between true bench-marking and the marketing “Spin”.
For instance, it is at best unhelpful and at worst dangerous, to assume a higher headline return is better than a lower return unadjusted for relative risk. Clients need to have some knowledge or appreciation of the risk-return trade-off in any transaction. Many an investor, new to the game, has unwittingly taken on risks disproportionate to their appetite. Also missing value opportunities, through simple lack of knowledge.
Compared to Other Benchmarks
In property, it is clearly inappropriate to compare the headline gross return advertised on some funds. For example, a highly speculative property development perhaps touted by an at best inexperience manager, to say a highly diversified listed property trust specialising in “A” grade commercial properties in large Capital cities that are managed by a well-respected “Household Name” Manager.
Similar in the Equities field it would be inappropriate to assume the returns on a “Long Only” Large Cap Fund, should be comparable to a Long/Short Strategy, or to a single sector specialist fund in say emerging markets or small Cap stocks.
The Life Settlement Asset class is no different.
In a perfect world where all life insurance policies in the life settlements market were identical, a Life Settlement Benchmark or Index would provide enormous assistance to investors and enable them to benchmark and clearly evaluate life settlements funds. However, this isn’t a perfect world and not all life insurance policies are identical because not all human beings are identical. In addition, not all life policies have been originated in the same manner.
Comparison Is Difficult
First and foremost, for life settlements, there is no central exchange and uniform source of transaction data.
Secondly, the nature of the life settlement asset class is that individual life policies are not homogeneous securities like stocks or bonds. Even two life policies issued on the same life and issued by the same insurance company can exhibit wildly different internal economics. For instance, they may be issued at different ages of the insured’s life when their medical condition may have changed. The policies may even exhibit different contractual wording that creates risks or opportunities to the premium calculation of benefits payable.
It is also extremely common in the higher net worth cohort, that one insured life may have multiple policies issued by different insurance carriers. Also, these may have unique contractual wording and unique policy dynamics.
Added to this is the phenomenon of legal risks associated with the origination of some policies at the time they were written. This is due to questionable practices that plagued the market in the early days.
The old English legal precedent “Let the Buyer Beware!” clearly holds true.
Also, prevalent is the “Distressed Sales” compared to a normal “Willing Buyer/Willing Seller, arms-length” transactions. Common in most markets post-GFC. Certainly, the Life Settlement market is certainly no exception
The trade journals and media coverage occasionally make reference to portfolios of life settlements trading at “X” IRR or at Discount Rates of ”Y”. However, there is no uniform and widely recognised method of grading individual Life Settlement Policies and therefore Portfolios. Ask any Broker or Intermediary about what the market is paying for policies. You will get a wide variety of answers depending on the types of Policies they are currently marketing.
How can you compare a projected return or sale price quoted on a portfolio full of STOLI, Beneficial to the Interest and or Aggressively Premium Financed paper from a Distressed Hedge Fund? Even with two well informed institutional clients simply agreeing to a sale between themselves it can be difficult to compare.
There are some beginnings of market data analysis being touted as “benchmark” returns. While these intentions are admirable, in practice they offer little help yet.
The data samples are so far, too small as to make reliance on these figures unsafe. They also make no attempt to filter the raw return numbers on any kind of risk ranking. So, rendering valid comparisons impossible.
An Experienced Asset Manager
Enlisting the right services can go a long way in ensuring that your life settlements investment performs best for you. Further, they can ensure a perfect fit with your investment strategy. A manager with a significant amount of experience in the life settlements will be able to efficiently construct a portfolio for your appetite.
Leaving aside any of the potential legal due diligence issues mentioned earlier, some policies are simply more economically robust than others.
The foundation of this investment philosophy should be that risk and reward in the first instance are assessed at an individual policy level. Only then can a pool of policies be assessed or compared. The team at GI Asset Management Limited (GIAM) have an extensive track record as a regulated life settlements asset manager, structuring and managing funds for investors. Being one of the early entrants to the market we have gathered and adapted the knowledge to manage this asset class successfully.
Final Thoughts on Benchmarking
It is our strong view that many investors (and some so-called managers) have unwittingly taken on additional risks. Missing substantial value opportunities normally associated with a longevity based investment such as life settlement policies. Partly due to a failure to grasp benchmarking issues.
Until the industry more adequately deals with the grading of policies on a risk basis, we remain sceptical about published returns and so-called benchmarks or indexing in life settlements.
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.
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 is GIS General Fund (the Fund). 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. The Board of GISF selects those that best meet the Fund’s policy purchase criteria.
This information is intended for qualifying investors only. It 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.