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 looking at entering the market. And we appreciate that, with historical volatility in traditional investments, a limited liquidity market makes some institutional investors uneasy. However, a 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. It provides a safety line and a buffer when cash is required at all costs.
Potentially entering the life settlements market through a traded life policy platform would give investors comfort to enter and exit the market based on it’s changing market value. However, when investing in life polices 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. It’s an unfortunate consequence of easily traded securities that in times of market stress they take on unwelcome correlation to those adverse events. When there are more sellers than buyers in the market, the price goes down, often dramatically. This distressed price does not reflect the intrinsic value of the asset. Therefore, the concept of “Market Value” is not nearly so clear.
Low liquidity assets can certainly have their place in a diversified portfolio if the manager has gotten their portfolio construction right. Infrastructure investments (say a Toll Road) are a classic example of a high-quality asset but with little or no liquidity.
The lack of liquidity shields investors from the volatility of electronically traded markets.
So why are life policies less liquid?
- Secondary US Life Insurance contracts (Life Settlements) are non-identical, longevity based investments that are offered for sale on behalf of their original policy owner when they become surplus to that owner’s needs. These life insurance contracts sometimes are traded several times over their period of existence but they certainly do not lend themselves to rapid trading like stocks and bonds. Transactions are very labour intensive with extensive due diligence required and a very extensive documentation.
- 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 has been several attempts to introduce trading platforms and electronic settlement for life policies.
None have yet been successful.
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 and better return for the end investor. Any reduction in processing costs would benefit the investor.
Why do we not want liquidity in this market?
In the US life settlements market, where liquidity is quite limited, the market has thrived precisely because of this reduced tradability. The market has withstood events such as the GFC and 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 who has an appetite for uncorrelated returns for a portion of his portfolio, this is a very interesting alternative.
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.
