Investing in life settlement funds is not a new idea, however it is one family offices seem reluctant to embark on. Is now the time to take the chance and invest in this evolving asset class?
A new asset class, life settlement investing, has been maturing and building a track record for several years without attracting much attention among family offices.
Indeed of the several family offices contacted by Campden FO, none had ventured into this niche area. Even executives at one of the biggest, Iveagh Ltd, which manages the Iveagh Wealth Fund and the Guinness family portfolio, didn't have much direct knowledge of life settlement funds.
It's not really an asset class that we are close to," said Paul Mack, partner and chief operating office.
But he provided a referral to Jordan Buchanan, a firm that evaluates alternative investments, and the London-based group provided a wealth of information in relation to life settlement funds.
Specifically, this evolving asset class may be worth considering by family offices because it offers a powerful, new tool for preserving financial assets during periods of severe and prolonged market volatility.
In its simplest form, life settlement investing amounts to nothing more than buying an existing life insurance policy from its owner and paying the premiums until the death benefit is paid.
The trading in existing life insurance policies attracts both buyers and sellers because of the huge disparity between what the owner of a policy is paid when cashing in a policy and the amount of death benefit paid when the policy matures, when the cost of the additional premiums is considered.
Typically, an investor can pay the seller of a life insurance policy substantially more than the cash value of a policy and still benefit from a generous yield upon payment of the death benefit.
Most individuals invest in life settlement by purchasing shares or units in a life settlement fund. The fund's managers handle all of the administrative matters, including evaluating and selecting life insurance policies for purchase, as well as paying the premiums and collecting the death benefits. Just as important, pooling the capital in a fund permits investment in whole portfolios of life policies. That brings the individual investor the benefit of diversification.
Some funds invest in derivatives linked to portfolios of life insurance policies. Others offer investors opportunities to hedge against related risks, including exchange rate exposure.
Almost since their inception, fund managers argued that one of the greatest virtues of a life settlement fund is the fact that it is "uncorrelated" with the public capital markets.
That argument wasn't really put to the test until the onset of the global economic crisis in 2008. As painful as it was for many investors, it was a meaningful test for the proposition that life settlement funds deliver the benefits of a new asset class that doesn't rise and fall in parallel with the public capital markets. Several well-managed life settlement funds that are readily available to investors today passed the test. They provided their shareholders with a safe refuge from the many market panics that followed the Lehman Brothers collapse.
In its December 2009 financial statements, the EEA Life Settlements Fund, which is run by EEA Fund Management (Guernsey) Ltd, reported 47 consecutive months of positive performance, starting in January 2006. The fund is designed to give investors a steady 8% annual net return.
EEA Life Settlements Fund performance for the 12-month period ending 30 November 2009, a time that includes most of the market volatility that followed in the wake of the Lehman Brothers collapse, was 8.64% for Euro class A shares, 8.96% for Sterling class A shares and 9.47% for US dollar class A shares. Extending the horizon to the 24 months prior to 30 November 2009, returns were more than double those of the 12-month period.
Other funds that have demonstrated their ability to deliver positive yields through times of market volatility include the Life Settlement Strategy Fund from Centurion Fund Managers Ltd, the Traded Policies Fund sponsored by Managing Partners Ltd and Life Settlements Funds, managed by Life Settlements Funds Ltd.
Some prominent suppliers of family office services, including UBS AG and its many operating units worldwide, are knowledgeable about life settlement funds and are prepared to assist family offices personnel, high net worth individuals and their families with investments in this asset class. Others have consultants and advisors available to help them respond to inquiries from clients.
"We see a certain client demand regarding de-correlated asset classes, such as life insurance linked funds," says Tatiana Togni, a UBS spokesman at the company's offices in Zurich.
"UBS does not have life insurance linked funds on the product shelf. However, if clients in certain segments show interest in those products we can offer tailor-made solutions in cooperation with external
Peter Pexton, chairman of the Vaduz, Liechtenstein office of Consilia Anstalt, which provides family office and other advisory services, says that over many years with several prominent financial institutions he has been aware of numerous discussions of life settlement funds. But they never seemed to result in a fund being incorporated into a portfolio.
Prior to joining Consilia Anstalt, Pexton was director of the Liechtenstein office of Fleming Family & Partners, one of Europe's biggest multifamily offices. "Although life settled funds have been considered as possible generic components in any 'alternative' element of investment strategy, I am not aware of any situations where such funds have actually become part of the portfolio," he says.
"In general terms many offshore trustees and family offices are able to invest for capital growth over the long term. So, perhaps there is less incentive for them to move outside the comfort zone afforded by the more traditional investment products, with their well understood track records and market mechanisms."
Private placement life insurance
Private placement life insurance is a specific model of life settlement investing available to high net worth individuals who want to reduce taxes on their investments and protect their assets from predatory claims and lawsuits. This form of policy allows returns on investment to accumulate without taxation until the funds are withdrawn from the policy. The most important difference between "off-the-shelf" life insurance and private placement life insurance is the fact that with private placement life insurance, every aspect of the policy is tailored to meet the unique needs of the client.
Unlike variable annuities, the investor isn't restricted to a checklist of approved mutual funds to be held within the insurance "wrapper." In fact, the investing mechanism doesn't have to be a mutual fund at all. A vast array of foreign or domestic, or hybrid foreign and domestic, structures can be employed to achieve the policyholder's individual and family financial objectives.
Private placement life insurance requires a greater level of expertise, customisation and personnel from the insurance company than more other forms of life insurance and for that reason this model commonly requires a minimum investment of $1 million or equivalent. This does not have to be made in a single payment, unless the insurance carrier decides to impose such a requirement. However, it is in both the purchaser and the insurance company's interest to arrange the payments as early as possible as the sooner the funds are invested within the policy, the sooner the returns begin to accumulate without being taxed.
Investments in the form of policy premiums in the range of $5 million to $10 million are more common and premiums above $25 million are not unusual either.
Private placement life insurance can prove of particular use to international executives who wish to retire to a different tax jurisdiction than the one in which they accumulated their wealth. These policies can be tailored to the very specific needs of the purchaser so they can be multi-jurisdictional and the insurance company can ensure the investments comply fully with all applicable tax laws and regulations.
This model could also be of interest to professionals in fields where predatory and abusive lawsuits are a serious concern because it is possible to create a private placement life insurance policy that can't be seized, attached or liquidated to enforce a court judgment.