Longevity fund investment is seen increasingly as an attractive option for both investors and asset managers who are looking to diversify their portfolios to include alternative investments.

Investing in longevity has some distinct advantages:

• Low correlation to traditional asset classes and stock markets
• Low volatility because life expectancy changes are slow to emerge and mortality tables are adjusted only once every seven years
• Consistent and stable growth.

Type of investor and their suitability to various types of longevity risk

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What to look for in a longevity fund

Investing in longevity products, like any other investment, is not without risk. As a prudent investor, you should seek to ensure that the fund you choose has addressed these risks appropriately.

Careful monitoring of life expectancy changes

The estimation of life expectancy is not an exact science so if the insured live longer than anticipated, the costs increase thus reducing the return on investment.

At Centurion we have taken a number of steps to manage this risk. We regularly update life expectancy estimates to ensure that they remain in line with market best practice and also review the actual to expected maturity ratio of our policies to ensure we have sufficient risk diversification in our life expectancy underwriters.

Managing carrier and counterparty risk

In the case of physical life settlements the risk is if the insurance company that issued the insurance policy becomes insolvent and is unable to pay out the death benefit due. The counterparty risk in synthetics lies with the banks and financial institutions involved in the transaction which will either need to hedge their exposure by transacting on the cash life settlements or by finding another counterparty to take the other side of the trade.

We mitigate this risk by diversifying our assets across a number of carriers with superior credit ratings as rated by Standard and Poor's or similar credit rating agencies and by using synthetics to rebalance our exposure to different carriers.

Conservative valuation using appropriate actuarial models

The use of over aggressive valuation models may result in overinflated values and returns which may lead to volatility and underperformance in later years. Using an actuarial model which takes into account equitability to all shareholders will produce more accurate and sustainable results in the long term.

In conjunction with regularly updating life expectancy estimates, we use a hybrid methodolology based on a mark-to-model valuation technique which incorporates a reserve similar to that used by insurance companies.

Prudent liquidity management

For longevity funds, liquidity is not just about meeting redemption requests. The fund also needs to have sufficient cash to pay for policy premiums and to meet any currency hedging requirements.

Our liquidity management strategy includes:

• Valuation reserve - putting in place a valuation reserve to buffer the vagaries of the market such as modifications in life expectancy underwriting, changes in the market discount rate or delays in policy maturity.
• General liquidity - we aim to keep a reasonable level of liquidity in the funds to meet obligations such as premiums and currency hedging.
• Use of synthetics - we use certain types of synthetic instruments as they tend to be more liquid compared to traditional physical life settlements.
• Shareholder diversification - we try to avoid having any investor with a significant holding in our funds. This helps to avoid huge redemption requests from a single shareholder which can cause liquidity issues within the funds.

What to look for in a fund checklist

There are a number of factors which influence an investor's choice of longevity fund and investment manager:

• Five year plus of sustainable track record
• Fully diversified portfolio of physical policies and synthetics
• Life settlements with longer life expectancy estimates to minimise the impact of changes in underwriting methodologies
• Valuation technique which ensures equal treatment for all investors regardless of when they buy into the fund
• Diversification by having policies from multiple life insurance carriers with superior credit ratings
• Regular reassessment of life expectancy estimates Appropriate currency hedging