Understanding the timeline for performance, of a life settlements portfolio, is the key to a successful investment campaign. From a manager’s perspective, this is also vital in managing client expectations. Although the asset has many non-traditional investment features it still does operates within a “cycle” of sorts.
Like any asset class, life settlements provide certain potential excess return opportunities by “taking a walk down the risk profile path”, but this should only be the domain of experienced life settlement investors. We have noted, over the years, several portfolios come back on the market numerous times due to the original investors inability to manage the unique performance risks which were perhaps miss-judged originally.
We have previously explored how past performance is not necessarily the best indicator of future outcomes for a life settlements fund. If past performance is not the best indicator, then what is? Solely, the performance of this asset class is based on the health and lifestyle characteristics of the insured lives represented in the pool of life policies. The likely “performance cycle” can also be determined using these unique characteristics.
A Life Settlements Portfolio
Life settlements (secondary / tertiary life insurance policies) are normally a relatively long term asset and while they are high credit quality instruments, of course have an uncertain term. This lengthy “life cycle” gives an investor the opportunity to evaluate the performance characteristics of a portfolio.
To simplify this discussion, we will assume a portfolio of relatively similar size policies is acquired in a simple “buy and hold” strategy with surplus funds from net maturities distributed to investors when it becomes available.
Within the portfolio, some policies may have even been “cherry-picked” to ensure certain targeted return metrics at certain stages of the fund’s cycle. This also assumes there has been a consistent approach to risk appetite and risk management maintained during the origination process of fund policies.
While we would normally say that life settlements should only be the domain of patient investors with a 5-10-year time frame, the astute will recognise opportunities presented by the nature of the asset. An investor analysing a fund should not look to just the past performance for guidance but should also be looking at the “signs” of potential future performance.
Understanding how to read the signs of a “well-seasoned” portfolio can mean not missing the “peak” of maturities. What does a “well-seasoned” portfolio mean? Simple, in life settlements this means that a bulk of individual policies are reaching their expected maturity date. And the investor is confident in the robustness of the manager’s information and that the data is genuine.
These indicators are critical in understating the opportunities presented.
Beginning of the Life-Cycle
The certainty for many newly established portfolios is an initial period of small negative return, because of continued premium payments and initial purchase of policies. An initial negative return profile similarly observed in investments like infrastructure or a “Land Bank”.
It is normally unusual to see significant maturities in the first few years of a newly originated portfolio. One factor at play here is the phenomenon of “Anti-selection bias.”[1]
This phenomenon can be partly mitigated by several strategies including using a component of tertiary policies as well as secondary.
Anti-Selection bias is the phenomenon where individuals with a positive outlook on their health are more likely to sell their Life Policy and those of a similar health status but with a negative outlook. Hence the probability of experiencing early maturities by the new owner is reduced.
Middle of the Life-Cycle
So, when will I see returns you ask? The short answer is “What is the shape of the combined maturity curve?”
In a portfolio of relatively similar sized policies with a relatively even spread of estimated life expectancies, the bulk of returns would normally be expected in the second and third quartiles of the average mortality curve[2]. However, several factors can skew this outcome particularly if there is a big variation in policy size within the portfolio or if the portfolio is small in the number of insured lives. Periodic re-underwriting of the underlying cases (if adopted) potentially adds another variable into the equation. Actual individual case characteristics will normally be expected to each be idiosyncratic. This is the fundamental non-correlation basis of the asset class.
In fact, it has often been shown to be a “Red Flag”, for smaller funds, when published returns indicate regular and invariable positive returns from the very outset of a fund’s establishment. Any fund manager worth their reputations should be prepared to show prospective investors and “Attribution Analysis” to back up published returns.
This will eliminate any attempt to artificially “smooth” returns by using valuation assumptions.
A mortality curve is normally supplied by the Medical Underwriter of each life policy and shows the Historical mortality experience of a pool of lives which closely resemble the health characteristics of the insured life.
End of the Life-Cycle
This may not the most opportune time to invest depending on several factors. At this stage the portfolios may have already had the bulk of its maturities. Any remaining policies may have out of date Life Expectancy reports. The small number of these remaining policies may cause “lumpy” maturities because there are simply not enough data points to allow predictability. If total re-underwriting is required, the curve will move back to the beginning and a whole new investment horizon.
Larger scale investors who have control over their own portfolio (either by self-management or with assistance of an asset manager, can be pro-active around managing and controlling these “cycle” risks.
As always we wish you well with your life settlement investment opportunities and 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 as an umbrella type investment company with 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 and 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 and the Board of GISF select 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 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] Anti-Selection bias is the phenomenon where individuals with a positive outlook on their health are more likely to sell their Life Policy and those of a similar health status but with a negative outlook. Hence the probability of experiencing early maturities by the new owner is reduced.
[2] A mortality curve is normally supplied by the Medical Underwriter of each life policy and shows the Historical mortality experience of a pool of lives which closely resemble the health characteristics of the insured life.
