Institutional investors may be shaking off any reputational aversion they had to life settlements, desperate as they are for genuinely uncorrelated assets. MICHAEL BAILEY examines the current state of the asset class and its two means of access – synthetic or physical. The life settlements market has benefited from the entry of large investment banks, which have helped the industry shake its “cowboy” image, according to a visiting actuary and advocate for prospective investors in the asset class. David Fishbaum leads the actuarial unit of Oliver Wyman, a sister company to Mercer under the Marsh McLennan umbrella. He was in Australia last month to speak to a growing number of local institutions interested in life settlements, attracted by the promise of a 13 per cent annual coupon, but worried about the reputational risk of investing in a ‘death fund’.

This unflattering moniker was bestowed by the Fairfax press upon Australia’s hitherto leading player in the life settlements market, the Gold Coastbased Life Settlements Wholesale Fund, in a December article questioning Victorian Funds Management Corporation’s $600 million investment. It’s the type of media reaction that Fishbaum has seen before, but which hearkens back to a “cowboy environment” in the asset class which he believes is disappearing. A director of the Life Settlements Fund, Stephen Knott, suggests that investment banks can hardly be said to enhance the counterparty risk of investing in the asset class. “We own 570 life policies issued by 70 different insurers, most of which have higher credit ratings than the investment banks.

Why would you trade the credit rating of 70 insurers for a synthetic exposure to life settlements through one bank?” Knott asks. Life settlements is a peculiarly US asset class, as since 1911 Americans have had the right to transfer ownership of a life insurance policy. However the ‘surrender value’ paid by the life insurers for their own policies has always been low. The asset class came of age during the AIDS epidemic of the 1980s, when the relative certainty of a sufferer’s lifespan encouraged brokers to pay them more to take over their policy than life companies were willing to give. Fishbaum admits that as the life settlements industry has developed over the past two decades, any bad press has usually been associated with a particular death, when it is revealed what a broker paid to take over paying premiums on the deceased’s life insurance policy, and this figure is compared to the final (much larger) payout accruing to the life settlement investor. However, he says increased competition in the marketplace is closing this gap.

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