Investing in longevity, 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.
Rigorous asset selection and acquisition
Origination risk centres on the rationale and condition under which the life policy was taken out (originated) in the first instance.
To mitigate this risk, we have a dedicated and experienced team responsible for asset selection which works closely with industry professionals and follows industry best practice and guidelines. These include ensuring that the policy does not have any insurable interest issues; not purchasing Stranget-Originated Life Insurance (STOLI) policies and only buying premium financed policies which are part of a carrier approved full disclosure non-recourse programme.
Conservative valuation approach
Illiquid assets such as life settlements and life tenancies should be priced as close to market value as possible to protect shareholders' investments, should these assets need to be sold into the market to raise liquidity.
Life settlement and life tenancy assets are valued probabilistically based on two inputs - discount rate and anticipated longevity, which are not always readily observable in the market. A portfolio of such assets valued probabilistically without a death at the anticipated moment will drop in value whilst an earlier than expected death will increase in value. If the portfolio size is sufficiently large, then the expected return will be in line with the model. To overcome this volatility in a smaller portfolio and to create a uniform return with equitability for all shareholders, our conversation valuation technique uses a reserve with a system of debits and credits where proceeds from early deaths are credited to the reserve to balance the debit of any late deaths.
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 for life settlements and properties for life tenancies
- Acquiring policies and life tenancies 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
- For life settlements, diversification by having policies from multiple life insurance carriers with superior credit ratings
- Regular reassessment of life expectancy estimates
- Appropriate currency hedging strategy
Prudent liquidity management
Liquidity must be carefully managed to meet redemption requests as welll as paying for policy premiums or annuities and to meet any currenty hedging requirements.
Our liquidity management strategy includes:
- General liquidity - we aim to keep a reasonable level of liquidity in the funds to meet obligations such as premiums, annuities and currency hedging.
- Shareholder diversification - we try to avoid large shareholder concentration in our funds to prevent huge redemption requests from a single shareholder.
- Regular updating of life expectancy reports - we ensure that the funds' assets are valued based on market conditions, so that the assets can be sold at prices used in the fund valuation.
- Use of synthetics - we use certain types of synthetic instruments to enhance cash flow as they tend to be more liquid compared to physical life settlements.
Managing 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.