Life settlements offer low correlation

Life settlements have received negative press, most recently from the fraud behind the demise of Keydata.

And in 2009 the IRS determined life settlement policies would in fact be liable for US witholding tax, sending many providers into a flurry of activity in an effort to re-register their funds in a suitable jurisdiction.

Jose Garcia, chief executive officer of Carlisle Management, told schemeXpert life settlements should not have been made available to retail investors until suitable structures were available, perhaps in the future through a Ucits fund.

“Life settlements are sophisticated, mortality-based products and the average Joe in the street can’t understand them.

“They can be used as part of insurance-linked strategies and pension fund clients certainly want low-correlated assets.”

Jeremy Brettell, chief executive at SL Investment Management, admits life settlement has been hit hard in the past 12 months but still has much to offer an institutional investor, as it is “a very robust, and low-correlated asset class”.

Although the class operates more like bonds, it is generally considered an alternative and so generally only attracts a small allocation, he told schemeXpert.

“But it provides pension schemes access to a different cohort from their own, which has been medically examined and will provide them with short-term cash flows.”

Brettell claims cash flows are “very predictable” and a  scheme could expect 8%-9% if the investment manager manages the liquidity of the fund, so it may meet the premiums payable on these policies and ensure life expectancies are assessed properly.

Hemal Popat, senior investment consultant at Towers Watson, said although some funds show interesting internal rates of return, the underlying cohort exposure is concentrated among relatively wealthy US investors.

“Although the expected return might look interesting at first glance for a pension fund’s portfolio, when you allow for longevity risk, these assets look relatively unattractive,” he said.