To combat the relative illiquidity of the life settlement market, some investors are searching for the holy grail of a centralised traded life policy platform. Lack of liquidity is one of the key disincentives for investors new to the market. With historical volatility in traditional investments, a limited liquidity market makes some institutional investors uneasy. However, sufficiently diversified asset allocation will compensate for some illiquidity in the life settlements market. Let us tell you how.
Why are investors looking for liquidity in the market?
It’s understandable that if an investor finds themselves in changed circumstances having access to liquid investments is desirable.
Potentially entering the life settlements market through a traded life policy platform would give investors comfort. To clarify, they could enter and exit the market based on it’s changing market value. However, when investing in life policies you are unable to determine the true value of return until all polices have matured. The cycle of returns heavily relies on the idiosyncratic nature of each asset.
Also, it’s typical of a highly traded market to be more volatile. In times of market stress, a consequence of easily traded securities is its correlation to adverse events. When there are more sellers than buyers in the market, the price goes down, often dramatically. However, this distressed price does not reflect the intrinsic value of this asset. Therefore, the concept of “Market Value” is not nearly so clear.
Low liquidity assets can certainly have their place in a diversified portfolio. However, it’s essential that portfolio construction can take advantage of this limited liquidity. Infrastructure investments (say a Toll Road) are a classic example. A high-quality asset but with little or no liquidity.
The lack of liquidity can shield investors from the volatility.
So why are life policies less liquid?
- Secondary US Life Insurance contracts (Life Settlements) are non-identical, longevity based investments. Evidently, these life insurance contracts can be traded several times. However, they certainly do not lend themselves to rapid trading like stocks and bonds. Transactions are very labour intensive with extensive due diligence and documentation required.
- US Life Insurance is regulated at State level so there is no uniform process and regulation. as well as non-identical documentation required.
- There are well over 1000 US Life Companies and no transfer forms are standard.
How are investors trying to introduce liquidity in the market?
Historically there have been several attempts to introduce trading platforms and electronic settlement for life policies.
Evidently, none has been successful.
Certainly, the most well-resourced of these attempts was by an arm of the large US Bond House Cantor Fitzgerald. This platform no longer trades.
These attempts serve a well-intended purpose. Investors are searching for a less labour intensive, more free moving and less costly process. However, having a freely liquid market is not possible for the life settlements market.
We support other initiatives to simplify the process which may help reduce the operating cost and provide a better return. One example of this would be uniform regulation. We are a long-time supporter of the Life Insurance Settlement Association’s (LISA) attempts to standardise state legislation for life settlements. This means less legal fees and transaction costs at acquisition. Evidently, leading itself to a better return for the end investor. Any reduction in processing costs would benefit the investor.
Why do we not want liquidity in this market?
Considering its limited liquidity the US life settlements market has thrived. Evidently, it’s precisely due to this reduced tradability. The market has withstood events such as the GFC. The assets have reflected their true longevity based returns uncorrelated to the volatility of listed markets.
If you can’t handle the heat of illiquidity don’t cook in the kitchen. This investment is not for everyone. But for the astute institution investor, this is a very interesting alternative investment. Especially if the investors has an appetite for uncorrelated returns.
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, GIS General Fund (the Fund), is 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. Policies are sourced by licensed U.S. provider companies. The Board of GISF selects 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. It 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.