Data from Managing Partners Group suggests that traded life settlements have proven a reslient asset class in recent months and days, as capital markets globally have struggled in the wake of the impact of the Coronavirus and Covid-19.
Also known as traded life policies, these consist of life insurance contracts issued in the US, where the original owners have sold them at a discount to their future maturity value. Institutions can buy and trade these settlements, at prices that are uncorrelated to other asset classes.
According to the AAP Life Settlement Market Update, February 2020, data cited by Managing Partners Group (MPG), prices have remained stable since the Coronavirus outbreak began, and are up over 12 months.
The internal rate of return on the asset class was 14.5% in February, versus 13.9% in January and 17% in February 2019. MPG said this indicated prices had fallen just 2.5% on the month, but were up 12.5% on the year.
The manager said its High Protection Fund, which invests in life settlements, saw its USD Growth share class returning 0.76% and 9.02% after charges in the month and year to the end of February respectively. Over five years, the fund returned 44.83%.
Jeremy Leach, CEO at MPG, said: "Equities have been overpriced for some time and an event of some kind was always going to spark an overdue correction. Highly liquid assets are being hammered but life settlements are largely unaffected - they are correlated with mortality rates, which are certainly not set to fall because of the coronavirus."
"Life settlements are increasingly being seen as a defensive asset class by investors and their prices are set to rise as their popularity strengthens."
MPG added that "Unlike other asset classes, which are likely to see pricing pressure as a result of the spread of corona virus in North America, Life settlements funds are more likely to see spikes in their returns rather than drawdowns."
Certain investors remain wary of investing in life settlements. While returns are indeed correlated to mortality rates, which tend not to change rapidly, changes can still occur that imply downside risk. For example, in the 1980s and 1990s, returns on so-called viaticals, which preceded life settlements, were hit when medicines extended the lives of HIV sufferers. At the time, the asset class was also castigated over mis-selling claims, linked to allegations of brokers pressuring policy owners into selling at discounts. In the 2000s, life insurers became increasingly able to finesse their models while continued rising longevity put pressure on expected returns.
in 2016, the UK FCA restricted access to the asset class for retail investors, stating: "TLPIs may pay a regular income or can aim to grow in value over time. Most death bonds are sold as unregulated collective investment schemes (UCIS), but some take other legal forms."
"Our review of sales in the TLPI market revealed high levels of unsuitable advice. We are worried that this market could grow and cause more customers to lose out in the future."
"As a result, we have recommended that these products should not reach ordinary retail investors in the UK. This would mean that firms should not be marketing, recommending or selling these products to the mass retail market."
The situation in the US market is not the same, although use of the market is regulated for those original owners seeking to sell their life insurance policies - as outlined by the Life Insurance Settlement Association, which represents the industry in that country; https://www.lisa.org/industry-resources/history-of-life-settlements-in-the-us.
For sophisticated investors, restrictions linked to retail investors in the UK or elsewhere are less valid, meaning portfolio managers can pool risk into the asset class and take advantage of the low correlation to traditional equity and bond asset classes.