US Life Settlements

A De-Risked Approach to "Active Alpha" Investment

Overview of US Life Settlements

A life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. The vendor voluntarily sells his/her policy through the regulated broker market to investors who take on the obligations and rights of owning these policies. Prior to purchase there is a medical review undertaken. The result of this review forms the basis of the amount offered and is based on a number of facts such as how long the individual is expected to live (Life Expectancy or "LE"), the amount paid as premiums under the policy, the rating of the insurance company and the terms of the policy (e.g. premium waivers, etc). This is an emerging asset class which is not well understood in relation to either the risk and return or portfolio construction. As such life settlements offer investors the potential for attractive risk-adjusted returns. Life settlements can also be created as a form of fixed-income arbitrage with a 10-year investment horizon and an average annual return of circa between 9% and 11%.

Given the inherent capital protection, with above-market return opportunities and the low-volatile, uncorrelated nature of life settlement investments, a growing number of fund-of-funds, multi-strategy funds, investment banks, asset managers and family offices are requesting advice regarding available life settlement products best suited for their portfolios and asset allocation needs. One solution is to use a portfolio of US Life Settlement policies to provide capital protection.

The concept is not new and has two key benefits for investors:

1. The return of the original investment at maturity, and
2. The ability to earn additional returns that are tied to the performance of some other investment such as an index, commodity or a range of funds - so called "active alpha" underlying investment.