Knott counters that synthetic access can be more expensive and heightens counterparty risk, and says he is yet to see a life settlements-based total return swap gain any institutional investor support. Once the initial structuring of the investment is set, Fishbaum describes life settlements as a relatively passive asset class, suited to patient long-term investors – the incentive to trade is dampened by wide bid/ask spreads which reflect the amount of administration it takes to change the beneficial owner of a policy, which also means resetting the life expectancy of the underlying individual. On that front, Fishbaum says there was good news for prospective investors in life settlements late last year, when America’s Association of Medical Underwriters dramatically changed the life expectancy assumptions which underlie the creation of the deals. “In the early years of this asset class, some investors got burned because the life expectancies were not as long as they should have been, so they didn’t earn as much because they were paying premiums for longer.
But if you buy a life settlement now, the price will reflect a life expectancy which has gone up by 10 years on what it would have been 12 months ago.” Knott says the bump up in life expectancies was less for the Life Settlements Fund, more like one year given the older profile of its pool of lives. He says the reduction in the Fund’s unit price late last year (referenced in the aforementioned Fairfax articles) was more due to adverse USD/AUD currency movements, which the Fund has since addressed by fully hedging. The Fund’s ordinary units have since recovered to record a 26.14 per cent increase for the 2008/9 financial year (7.7 per cent since its 2006/07 inception), although it is yet to pay a distribution of income from the ‘maturation’ of policies.
Knott says that barring any major inflows or outflows (the Fund froze redemptions in the wake of the AIG bailout but reopened five months ago), he expects the Fund to pay a distribution in the next 12 months. Knott adds that US life insurance companies have varying attitudes to the life settlements industry. While he speculates that much of the negative press toward the asset class is fed to journalists by insurers, he points out that many of them, such as AIG and Swiss Re, own large books of life settlements (not their own paper, of course) which they use to assist in liability-matching for their investment portfolios.