Published on 06 Sep 2011
Longer Life Expectancies Eat Into Returns
A private bank is cautioning clients against investing in life settlement funds, saying longer life expectancies eat into projected re-turns, and the funds carry more risk than disclosed.
Arbuthnot Latham issued a recent report highlighting what it called the “structural pitfalls” of these funds, which contain US life insurance policies sold on before the holder dies. The UK private bank said certain of these funds failed to recognise that people are living longer each year and the rich outlive the poor, which further diminishes the returns of funds holding life insurance policies worth more than $1m.
While the report did not name the funds it criticised, it did say they were being heavily marketed to UK independent financial advisers. These advisers may not be aware of the contentious valuation methods or the risks, such as using cash from new subscribers to meet monthly premiums on the policies they hold.
“Although many of these life settlement funds retain recognised accountancy firms to audit their numbers, after reading the fine print, one learns that the valuation process is ‘the sole responsibility of the directors/management’ of the fund”, the report says.
Ned Cazalet, independent analyst, said investors must pay close attention to how funds account for life expectancy. “The key question is what are your assumptions and how much slack have you built in to allow for people living longer?”
Professor David Blake, director of the Pensions Institute at the Cass Business School, said the industry had a “vested interest” in inflating the values of policies, giving more money to the policyholders and to the providers and brokers receiving cuts worth up to half of the total return.
“If you told investors that policyholders are going to die in five years instead of two, that undercuts returns and the premise that investors would get paid back quickly, and that’s why the industry is discredited”, he said. “But these models can be improved and it can be a valid asset class in future.”
Copyright The Financial Times Limited 2011. By: Sara Silver.
Commentary by Michael Abraham:
for once I must agree with Ned Cazalet as anyone who has taken any notice of what I have been saying since 2004 they will know I am in complete agreement. Furthermore the ‘slack he wants built in’ is not just through LE’s but through the valuation methodology. This is where the reserves should be built in to allow for people living longer. Professor Blake is however out of touch with today’s market the transparency now demanded ensures that the gargantuan fees are not charged to the new funds. The ‘vested interest’ comment is naive.
