High time to curb life settlements

Murky and suspicious, I couldn't agree more...

I hope I am wrong.

But I do not, and will not include in my clients portfolio's.

Wanna invest in a low risk asset class that returns 20% each year?

Now where have we heard that before?

I would argue life settlements add choice for the TOP end of the retail market, and institutions.

If you do not have any securitisation, then it follows that you would kill off the market in its prime. No shares or bonds issued - which would mean that investors simply could not access them at all. Unless, of course, they are to buy a policy outright which seems really risky, since investors wouldn't have any diversification.

Personally, I don't believe you should call for a whole market to be banned - that's anti free market thinking, and definitely what's at the heart of the securitisation discussion. It should be a separate debate whether or not these are suitable investments, and for whom.

Let's not be in any doubt, life settlement funds have a compelling investment case - the arbitrage of life company imbedded profits. The logic of the return generation is not difficult for any adviser to understand.

The problem - which should prevent any sane adviser in their tracks - is that it is the same people managing and valuing the funds.

The is a massive conflict of interest. No life settlement fund manager has been able to convince me that they have adequate audit measures in place to over come this.

Then there's the polical risk for these funds.

And don't get me started on the nightmare which is: how do you judge which manager's black box is actually capable of delivering the returns promised?

Get me a barge pole...

Life settlement investments do not rely "on another human being dying on time". They rely on a good understanding of the longevity risks of a population segment AND building a portfolio of policies that sample that population group.

Life settlements use actuarial science much like opinion polls that sample likely voters to predict elections. It would be silly to say that pollsters rely on citizens voting properly.

Pollsters rely on proper sampling and a good understanding to craft a question that yields an accurate answer. Both endeavors predict a range of outcomes which the eventual results lie within, if done well.

I can already feel protests coming that some LS investments don't offer a portfolio that benefits from the law of large numbers; but that is changing the subject, which is securitized portfolios.

Like with all other types of investments, there are naively wrong and fraudulent players. I welcome a discussion of those horrible ventures but it is wrong to stigmatize the industry with emotional and misleading statements.

You are also wrong to think that DB pension plans rely "on another human being dying on time" to meet their budgets. They also use actuarial science and have been known to underestimate longevity...fortunately for us but not for them.

More people are coming aware of life settlements thanks to the stock crashing a few years ago.

Do you know that the life insurance industry have made over $9 trillions dollars over the past decade on lapse or surrender policies? Thats money that a person paid over years and for (x) reason can't afford it any longer. Instead of giving the senior his money back, they rather keep it.

The seconday market only helps that senior get some of the money back that he was counting on and paid over several years.

Now, there is fraud in the industry aswell as any other industry. The agents committing fraudulent acts if you follow the trace they are hired by a life insurance company and not by a life settlement broker.

So if a elderly couple is offering you their life policy so they can pay some medical bill and some other things that they can't pay because of a fix income, you would say NO?

Is the life insurance industry arguing who gets the money or who pays it? Does it matter who gets the money as long as the premiums are being paid, right? A customer is paying for a service (life insurance) so the right thing is to have the service completed since it has been paid for.

I couldnt agree more.

Life Insurance and their Life Settlement derivative products by their very nature include a little bit of a yuck factor as they involve accurate prediction of mortality to generate a profit.

What most of these commentaries seem to focus on is the fraudulent few that are not a good representative of the market as a whole.

Additionally, what about the financially distressed senior who has run out of options? One recent client case comes to mind where a 78 year old male with a $2 million dollar term policy found that his company imploded in this recession, taking with it his ability to sell and left him unable to reach his retirement dreams.

By selling this policy onto the Life Settlement markets, he netted over $500k which, combined with his pension and social security, allowed him to move to Mexico and realize his dream retirement.

How is that a bad thing?

I like the idea of Life Settlement policies and the comments that have been made above about them offering older Americans choice rather than simply surrendering their plans back to the Life companies makes a lot of sense.

But, and it is a big but. These funds are producing a steady and consistent return of circa 0.9-1.5% per month. Never falling in a month, never rising more than this is a month.

The returns are several times the risk free return with no apparant volatility. This is something that always makes me suspicious.

The funds pay soft commission to IFA's. This is something that always makes me suspicious.

The funds are invested in a limited number of assets. Liquidity will be an issue if they get net outflows.

It may be that I am missing out on the one asset class in all of history that produces 10% returns year on year without any discernable risk or volatility, but after serious consideration I wil be giving them a miss.

The value of the investment is a discounted present value of future death claims based upon the annual rate available from the risk free asset, life expectancy and a margin for error.

If the annual rate of interest from the risk free asset goes down, guess what happens to the value?

In fact the assets in question have no to negligible value until a valid claim is made, and the risk warnings from the providers explicitly state this.

It's like picking up 50 pences off the road in front of a steam roller.

Avoid at all costs!

Life settlements have their place,and they offer benefits all round:

The seller gets cash now when they need it.

The buyer gets an uncorrelated investment asset.

The middleman gets to run a business that is funded by what in many cases would be windfall profits for the life industry as people either surrender for poor value or lapse for no value their life policies because they can no longer afford them or whatever other reason, it matters not.

Until I hear that gangsters are seeking out lives assured to get a quick return on their investment, I will support this market.

Legal Risk

Policial Risk

Fund Structure and Management Issues

Offshore juristictions such as Caymen and Guernsey.

Valuation issues

Actuarial science.

Morality issues.

Synthetic life settlements

Liquidity issues

If you can satisfy yourself on all of the above go ahead and recommend them.

What can I say?

Will people never learn?

Even a fool learns from their own mistakes.

Wise men learn from the mistkes of others!

Are we not still suffering from the consequences of securitasation and opaqueness in the extreme which brought us close to financial armageddon.

My view is so long as it is not allowed anywhere near the retail market (directly or indirectly via structured products and the likes) and seriously tight controls are imposed in the professional investment sector then perhaps these should be allowed however since we have seen the manipulation of the investment markets by Arch Cru and the Split Cap Trust debacle it still causes me serious concern as there ill always be those who will aim to manipulate the rules for their own ends and god help the rest of us.

If the regulators cannot impose the degree of controls with any degree of certainty then it calls the whole thing into question. All too often the regulators arrive after the horse has bolted and point the finger of blame everywhere else.

Regarding the competence of some actuaries, we only need to look at the state of most final salary schemes to cast doubt on their effectiveness but that's a point for another day.

I might use these products as the theory is fine, but I have serious concerns about transparancy and accuracy. The Keydata debacle doesn't exactly bread confidence in this market.

One almost needs an independant body to assess and check companies actuarial models.

On the risk and worries. First of all there is no illegal act of it. A life insurance is a legal asset just like a house, car, etc... So you can do with it as you please. Its like buying a car from the dealer and the dealer would tell you can't sell it later. Non-sense.

There is political risk because most insurance companies are sponsor of polical faces.

Synthetic life settlements. I think your talking about STOLI not sure. But life insurance companies nor life settlement brokers benefit from that just the agent.

I do like that example about the steam roller. However, I see it like this:

Same 2 coins to make 50 cents, right? The only difference is that when the steam roller goes by it will leave a $1 dollar bill (more or less) then you pick it up.

The asset has to mature to be liquid asset (cash) true, either way it will mature aswell as the steam roller will go by.

It's evident from both the article and some of the responses on this board that many still haven't got their heads round this asset - and understanding hasn't been helped by the atrocious NY Times article (and numerous copycats) at the end of 2009.

There have been some high profile fund failures of course, but these failures were not related to the assets themselves but to simple human fraud as is so often the case.

The ACLI's claim that STOLI policies will end up in the bundles of underlying policies is spurious at best, and most US providers originating policies have very thorough due diligence and will have nothing to do with these policies.

Ironically the only succesful and rated securitisation to date was completed last year (face value of $8.4bn) by AIG and rated by AM Best; part of the proceeds went to pay off some of the bailout they received from the Fed.

The rating agencies' highly rigorous requirements are the reason this has been the only succesful securitisation to date and that should provide comfort to investors regarding the quality of the assets backing the notes.

Anon's list of 'risks' is frankly silly. The Life Settlement industry has matured enormously since the early days, with due-diligence improving vastly, the prediction of life expectancy now firmly on the conservative side, and legislation now in place in the majority of states.

All asset classes have growing pains and LSs have had their share. However, this is an asset with a known future cash value - unlike the equities, property-based funds etc that the detractors here are no doubt currently recommending to their clients.

Yes there can be merits but this sector suffers from a supply demand challenge, a liquidity issue, leverage issues and a mark to market pricing issue.

It doesn't mean that it is inappropriate for investors, but it does mean that at least in the factors listed above it may in time behave more like PE/VCT.

The supply side has apparently already resulted in some pf the LS funds picking up longevity swap business to supplement to supply of policies from individual protected lives ie individual longevity short combined with institutional longevity long ?

Eyes wide open stuff