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Life Settlements Investments
The unique alternative investment - with no correlation to the financial markets.Life Partners
Safety in a large managed pool of Senior Life Settlements
1. How to Invest in Life Settlements?
There are three main posibilities:
Open End Fund: expected IRR 9-12% in EUR
Close End Fund expected IRR 12-14% in EUR
Structured Product expected IRR 9.10 14,50% (4 times leveraged) in EUR
As of the nature of the investment there is no liquidity for the first 3 years unless the investor is ready to pay considerable exit fees, up to 7% !
An Open End fund is a very expensive tool and therefore the expected yield in EUR is around 8-10% pa.
Close End funds are the most attractive but need a minimum investment of 1 mio EUR.
Structured products have several advantages: the Structuring House has analyzed and quantified the risks, provided a tailored pay-off and risk profile and done the due diligence
What is the value of due diligence:
Ensure that there is a logical valuation method
Ensure adequate cross checking by independent parties
Ensure adherence to market best-practice
Ensure avoidance of conflicts of interest
Gives comfort on integrity of valuations
By creating a Structured product we are meeting the Investors demand:
Guaranteed Maturity Date
100% Participation in upside of the Fund
Enhanced Liquidity
Require a tailored payoff & risk profile
Capital Protection ?
Leverage ?
Annual income ?
2. The key features
· New and unique alternative investment concept.
· Not linked to stock market or economic volatility.
· Positive addition to a balanced investment portfolio.
· Expected minimum 9 -12% per annum yield.
· New stable value asset class.
· Pool of policies from the major US insurance companies.
· Minimum investment of US$50,000 or EUR equivalent.
· Adherence to strict evaluation process to minimize risk.
3. Could this be the safest alternative investment yet?
Recent world events and the adverse impact these have had on world economies mean that private and institutional investors are now looking for investments free from economic downturns and political volatility.
Investments that can deliver high value returns with safety derived from well defined risk management protocols. Investments that represent a valuable addition to any balanced investment portfolio.
Investments that pay an excellent stable rate of return far in excess of the money markets
4. A unique concept
Life Settlements are a new and unique alternative investment idea. Most significantly, the Fund has no correlation to the stock, bond or currency markets and no correlation to economic or political volatility.
5. What is a Life Settlement?
Some holders of life insurance cover experience a change of personal circumstances and choose to sell their policy for an immediate cash payment, or settlement. Policies purchased from older insured persons or their assigned beneficiaries are generally referred to as Senior Life Settlements.
Senior Life Settlements represent a new stable value asset class that offers an assured payment free from market trends, interest rate fluctuations and economic recession or slowdown.
6. What is the Life Settlements Fund?
A closed end, self liquidating, medium term fund comprised of a large pool of Senior Life Settlement policies purchased from persons of 65 years of age or older, who have an impaired state of health owing to one or more recognized medical conditions and a life expectancy of four to seven years. Full redemption is expected by the end of the seventh year.
7. Why a pool of policies?
Simply because there are considerable benefits in reducing risk by diversifying the risk of maturities across many policies as opposed to one. It is this key fact that interests sophisticated institutional investors in participating in this new asset class.
8. The Principle of the Secondary Market.
What is the Secondary Market for life settlements?
A life settlement is the sale of a life insurance policy to a third party, where the insured individual is usually over the age of 65. In these transactions, the life settlement investor becomes the new owner and/or beneficiary of the life insurance policy and is responsible for paying all future premium payments, and collecting the entire death benefit of the policy upon the death of the insured.
Why is there a Secondary Market?
The financial priorities and protection requirements/needs of an insured individual frequently change during the long life-span of the life insurance policy. Unexpected events or a change in personal circumstances may cause a sudden capital demand and/or a shortage of capital.
Thus, the sale of the life insurance policy may make a valuable contribution towards the insured individuals search for additional liquid assets and the reduction of existing payment obligations.
The principle of the Secondary Market?
The Mortality Arbitrage the arbitrage between different life expectancies - is the principle used by the new investor. An insurance company calculates the cash value of a policy based on average life expectancy e.g. for an 80 year old man, the policy value is based on the average life expectancy of all 80 year old men. Whereas, in contrast, the investor calculates the life expectancy of the individual policy holder based on a medical life expectancy assessment and draws on actuarial methods.
9. Policy Acquisition Steps
1. Life settlement broker solicits a policy owner to sell their life insurance policy
2. The policy owner signs a Medical Authorization form which allows the agent to obtain edical records of the policy owner
3. From the medical records, a life expectancy (LE) is determined (key factor in pricing the policy)
4. An illustration is ordered to determine and optimize future premiums
5. Brokers present policy to suppliers who present policies to a number of providers and potential investors.
6. The winning bid is presented to the policy owner for approval.
7. The sale of the policy is closed by closing agents, comparable to a real estate transaction
8. Numerous forms are signed by the seller Escrow agents may hold prepaid premiums
9. The purchaser of the policy becomes the new owner and beneficiary of the policy.
10. A tracking company tracks when the policyholder dies to ensure death payment.
11. Policies are presented to providers who present policies to investors
12. In some cases a formal bidding process is utilized, with the highest bidder winning the policy.
13. In other cases the process is shown to potential investors on a less formal basis.
14. Some investors are large institutions who market the policy to individuals or firms or package them into pools.
15. Policies are expected to provide a ROI of 10 to 20%
10. Investors
· Pension funds
· Mutual funds
· Life insurance companies
· Charitable trusts
· High wealth individuals
· Estates
· Hedge Funds (over $100 million)
· Corporate bond fund (collateral comparable to CMOs)
· Finance companies
11. Underwriters
Several firms specialize in determining Life Expectancy. Most utilize either a 50% probability or an 85% probability or both.
Most policies purchased have an LE from 3 to 12 years. Policies with a higher LE have little value.
12. Criteria for Policies Sold
Over age 65, preferably over age 70.
Policy size $250,000 to over $5 million.
Issued by a company rated B+ or higher.
Policies generally U.L. Some convertible term,
Whole life policies not as desirable since the cash value cannot be accessed to pay premiums.
Policies not contestable.
Premiums generally less than 8% of face, depending on LE.
13. Cost of Policies : Factors
Life Expectancy primary factor
Premium as % of face primary factor
Cash value
Kind of Policy 2 nd to Die lower value
Size of policy large policies not as marketable
Contestability
Commissions (gradually declining)
Price to provide expected IRR to investor (10 to 20%)
14. Actuarial Issues
Pricing a Policy
Generally, a single premium is paid to acquire ownership of a policy
Important Pricing Factors:
Attained Age
Life Expectancy (LE)
Benefit & Premium Structure
Premium Funding
Discount Rate
Expenses
Multiple Ways of Pricing
Deterministic Calculate a return based on maturity at a specific point in time
Probabilistic Calculate a return based on expected values using underlying assumptions
Stochastic or Monte Carlo Evaluate volatility in return based on underlying assumptions
Appraising a Portfolio of Policies
Evaluating Risk
Controlling Risk
Performance Bonds
Fund Strategies
16. Advantages of the secondary market: Legitimate benefits for both the seller and investor
...for the seller:
Activates income from an inactive asset
Realizes a surplus value compared to the surrender value offered by the insurance company
Boosts cash flow due to the elimination of future premiums
...for the investor:
· The acquisition of the policy at a much lower cost than the face value provides a high return (double digit returns on the invested capital)
· The acquisition of an existing capital market instrument with low/no correlation to common asset categories.
Investors in the US secondary Market
A number of institutional investors have invested up to several hundred million in US secondary market for life insurance policies. E.g. Bershire Hathaway Warren Buffets investment company invested about 400mio Usd in October 2001.
Other investors are:
Standard Chartered DZ Bank General Electric Company
Credit Suisse Barclays
Merrill Lynch ABN AMRO
16. The most important factors for success
1. Market access (policy purchase)
The policy purchase is subject to various legal and economical frameworks. Only a diversified network and more than ten years of experience in the policy selection process can provide the necessary security for a successful investment process.
2. Medical assessment
At least two medical assessments about the remaining life expectancy of the insured (plus a confidence interval) are used to estimate the discounting period used for the actuarial valuation of the policies.
3. Valuation
The actuarial valuation of each policy, as well as the permanent mathematical and actuarial audit of the whole portfolio, are the essential guarantees for success. In addition, discounting factors of at least 10% - 16% should be applied.
4. Transparency in the settlement
All the steps of the transaction must be transparent for all participants in order to guarantee the seriousness of the business there are no so-called soft costs (distribution allowances) in contrast to the limited partnerships.
5. Credit rating of the insurance company
Only policies from insurance companies having an investment rating (by A.M.Best) are bought.
6. Diversification
A diversified portfolio is achieved with 130 and more policies (law of large numbers)
17. The most important risk factors
1. Market access (policy purchase)
As the market as a whole is still very in transparent and inefficient, single incidents like the MBC-debacle or demand excesses (as we experienced when the German limited partnerships entered the market), may cause considerable market faults. In such situations, policies which meet minimum quality criteria may only have limited availability.
2. Medical assessment
Despite very conservative medical assessments used to estimate the life expectancy,
there is no guarantee against unexpected longevity. By diversifying over a variety of policies, however, the negative impact of such incidents on the rate of return is diminished.
3. Credit rating of the insurance company
80% of investments are carried out in policies with a rating of A or better from S&P (equivalent to B++ and B+ according to A.M. Best). In the USA, subject to very specific and complex conditions, there is an insolvency loss insurance for policies, depending on the federal state.
4. Currency risk
All investment and premium payments are made in USD. It is possible to structure products where the Structurer undertakes the currency hedging so that we have a EUR denominated product.
5. Longevity (premium payment risk)
In case the life insured lives far longer than expected the continued payment of premiums begins to offset the fixed capital gain and would lead to negative return.
18. Framework of the Secondary Market
The insurance companies:
Basically, the insurance companies are looking unfavorably on the secondary market as it undermines their monopoly market position and they lose revenues from policies that lapse or surrender.
By influencing their captive agents/brokers they try to avoid any support or encouragement of this business.
As a result of an amendment to a law in 1988, in which the right to replace several of the contractual partners (insurance holder, beneficiary etc.) has been confirmed, the insurance companies can no longer forestall the business of the secondary market which is to the advantage of the seller and the investor .
The Legislator
The increasing importance of this market has also been appreciated by many states in the USA. In 1996 the Life Settlement Model Act was decreed by the NAIC (National Association of Insurance Councils) at federal level. It is the foundation for the decreed regulations, acts and orders operating in many US States for the control of the viatical and life settlement market.
In 2002 more than 35 federal states joined forces and subordinated this secondary market, in the states concerned, to the control of the insurance authorities.
Now only national licensed brokers and providers are allowed to undertake the purchase and execution of secondary market transactions.
19. Are US-Second hand investments ethically acceptable?
It is a fact that the rate of return on this product is higher the sooner the insured person dies.
But the perception that the secondary market for life insurances makes money by taking advantage of the economic plight of insurance holders is not correct in that sense. Usually the insurance holders are at an advanced age and are well-off. Only a small minority of them are truly dependent on the money as confirmed by the following fact:
The average sum insured on the policies bought by the Funds amounts to more than 1 Mn. USD. Such insurance sums determine an annual premium of 3%-5% of the insurance sum, i.e. 30.000-50.000 USD. Only insurance holders with a substantial income or appropriate financial circumstances are able to pay such a premium in the first place.
No seller is obliged to enter into this deal. He may also lapse his policy or surrender it at the cash value to the insurance company. In its simplest terms, the secondary market for life insurance provides a competitive marketplace where consumers can realize market value for their underperforming or unneeded life insurance products.
20. Example Case 1
Initial position
The insured: John Smith (JS), born 1918, takes out a life policy in 1990 at Met Life (Rating: A+) following the advice of his agent. The face value of the policy is $ 3,000,000 and the yearly premium payments amount to: $ 90,000.
2003: JS has lost a lot of money in the equity markets and the tax situation has changed. As a result, and with the high yearly premium payments, he is short of liquidity. The agent recommends JS to sell his policy in the secondary market.
Consequences for the seller
A broker represents JS and owes a fiduciary duty to JS to act according to his instructions.
The broker offers or attempts to negotiate Sales Contracts, between JS and one or more Providers, the subject of which is his policy (Life Settlement). The provider represents the investors.
The different life settlement providers are bidding for the policy and after a maximum of two weeks JS is informed that the highest bid for the policy is $ 810,000. If he would have surrendered the policy then he would have got only $ 450,000 from the insurance company. By selling his policy in the secondary market JS gets $ 360,000 more than the surrender value.
After the settlement of this transaction, which takes 3 6 weeks, JS is just the insured person and the buyer becomes the new owner and beneficiary of this policy.
Consequences for the buyer:
Pays $ 810,000 for JS´ policy
Is responsible for paying all future premium payments, $ 90,000 per year, until the policy matures.
With an estimated remaining life expectancy for JS of 6 years, this means the buyer has a total obligation of $ 1,350,000 (purchase price and premium payments for the estimated remaining LE).
At the maturity date he receives the death benefit of $ 3,000,000
The rate of return for the purchased policy in case JS dies:
After 4 years at the age of 89 is: 23.92 %
After 6 years at the age of 91 (estimated remaining life expectancy) is: 14.62 %
After 10 years at the age of 95 is: 6.86 %
Because of the high number of policies in the portfolio (diversification) the expected average rate of return will be very close to the rate of return for the estimated remaining life expectancy.
21. Expectated Returns
The expected rates of return are:
9-12% p.a. for Life Settlement Mid Term USD
10-12% p.a. for Life Settlement Long Term EUR
This percentage should be approximately equivalent to an IRR at the same rate.
This calculation is justified because withdrawals from the Segment cannot be made for at least 3 years.
The expected rates of return have been calculated based on conservative financial mathematics and actuarial principles and have proven to be realistic.
The expected rates of return align with values experienced in similar markets dating back to the beginning of the 90´s.
22. How likely is a positive return?
Once again for clarification: the rate of return depends only upon the mortality rate
For safety reasons not less than 80% of the policies in the portfolio are issued by insurers having an S&P Rating between AAA and A and no more than 20% having an S&P Rating of BBB For safety reasons the percentage of policies issued by the same insurance company should not exceed 25%
There is a high probability of a positive gross rate of return. This scenario is only undermined if the average life expectancy increases within the next 12 years to over 100 years.
Even in the worst-case scenario we expect a rate of return of between 1% - 4% p.a.
23. Conclusion
1. Sellers and investors with legitimate mutual interests meet each other in the secondary market.
2. The secondary market provides a competitive marketplace where sellers can realize market value much higher than the surrender value or lapsing.
3. The expected rate of return is above the market average.
4. There is a low/no correlation to the capital markets, to realty investments or to other asset classes. As a result, it is ideal for decreasing the systematic risk of a portfolio and for risk-averse investors seeking a safe-haven.
5. The return/risk ratio for secondary market investments can be analysed and quantified very well.
6. Due to its inefficiency the secondary market offers attractive opportunities for an above average rate of return.
7. The market is expected to increase further for the next 10 years
8. Many institutional investors and an increasingly number of private investors are investing in the US-secondary market.
04-10-2006, 15:37
Geschreven door vic 
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