Martin Buck gives an overview of Life Settlements and how they can benefit pension funds
Why are Life Settlements a viable option for pension funds? Lower volatility than equities, low market correlation and attractive returns.
Value in Life Settlement Investments
The basis of value for an investor is the excess in future fixed death benefit over the acquisition price, premiums paid and any expenses. The primary determinant of investor return is accurately estimating the life expectancy of the insured: Life Settlements are a longevity risk-based investment. Therefore, accurately assessing the ‘right’ price for each policy acquired is fundamental. Using actuarially robust policy pricing and portfolio valuation methodologies are vital to sustainable investment performance which comes from getting the life expectancy factor right.
What makes Life Settlements attractive to pensions? Why should they invest?
Life Settlements represent a unique opportunity whereby policies are purchased at a significant discount to the fixed maturity amount (death benefit) that is underwritten by top US life insurance companies. The policies are the most senior obligations of any insurance company. The assets are segregated from the company’s balance sheet, offering security and protection to the policy holder.
Life Settlement products are a good investment option for generating stable investment returns and provide a consistent and predictable foundation of asset growth. This beta product represents a solid basis to build consistent and positive returns over the long term; which is the focus of the DB pension sector.
A well diversified portfolio of policies can offer a pension:
• attractive returns – Life Settlement investments offer projected attractive total returns above risk-free rates.
• low volatility – Life Settlement investments are less volatile than traditional investments, such as equities, as returns are primarily dependent on mortality.
• low market correlation – investment performance is primarily derived from the life of the insured. Therefore, the asset has a low correlation to equity, property, bond markets and other alternative assets.
• predictable returns – we believe that using sophisticated actuarially-based models and value-based pricing systems can forecast Life Settlement investment performance with greater levels of confidence than options that do not use modelling or pricing systems.
Surrenda-link Investment Management
Surrenda-link can guide institutional investors toward a range of potential solutions; primarily in pooled or segregated fund management. These services are available to pensions, large institutional investors and corporate treasurers.
Surrenda-link is considered to be the largest and most established full service traded life policy specialist in Europe. It has over £1bn of funds under management and advice (December 2008), and circa 100 employees. The company was established in 1990 to design, build and manage portfolios for global institutional investors based upon both US and UK traded life insurance policies.
Aggregating policies into investment portfolios that will generate real value for investors is dependent upon accurate modelling and pricing with rigorous asset selection including life expectancy. Surrenda-link has a proprietary bespoke and proven value-based pricing system to deliver results. Surrenda-link is unique in the market having its own in-house full actuarial and valuation services team, to deliver a full service solution to institutional investors.
Surrenda-link’s Partnership Approach
The key to Surrenda-link’s success has been the ability to work in close collaboration with clients to identify innovative solutions based on our highly developed expertise in the traded life sector.
High technical competence is key to providing a professional value added service. Surrenda-link’s fund management service is delivered by a highly technical and experienced in-house team; 15 qualified and experienced staff in the Actuarial and Valuation team including 10 members of the Institute of Actuaries, a 7 strong fund management department, dedicated Life Settlements acquisition team and experienced administration capabilities.
Robust Valuation Methodology
Surrenda-link’s valuation methodology is focused and highly detailed; incorporating numerous life expectancy assessments, optimisation of the premiums to maximise investor returns, analysis of extension risk, and many other factors, all of which are performed on each and every policy acquired.
Surrenda-link has, and continues to invest heavily in developing innovative pricing, management and fund modelling solutions. Bespoke MoSes actuarial software provides stochastic capabilities enabling stress testing scenario analysis.
Independent Actuarial Review
The valuation methodology and fund accounting of portfolios are independently and regularly audited by Deloitte & Touche, one of the world’s leading audit and accountancy firms.
Why should investors choose Surrenda-link?
1. Successful history and assured future – nearly 20 years as market leader and innovator in traded life markets.
2. Traded life and longevity risk investment specialists.
3. Authorised and regulated by the UK Financial Services Authority (FSA) and we hold a passport under the Market in Financial Instruments Directive (MiFID).
4. A unique, realistic and sustainable value-based approach to pricing assets and valuing portfolios.
5. Institutionally focused, relationship driven. Our expertise is in working with institutional clients, and we continue to focus on this client segment.
6. Experience of numerous jurisdictions and multiple investment entity structures – including structured products as well as stock exchange listings.
7. Industry reputation – founding member of European Life Settlement Association, Association of Policy Market Makers (UK), and member of Life Insurance Settlement Association (US).
8. Advanced proprietary modelling capability from an in-house actuarial team. Also, an in-house Compliance and Risk Management team.
9. An experienced executive management team with extensive experience in Life Settlements, the insurance sector, legal, compliance, fund management and the pensions industry on a global basis.
10. Highly regarded in the industry – established relationships with major investment banks and institutional investors globally.