Michael Abraham

04 Jan 2011 | 09:34

David Rawson-Mackenzie

Longevity as an asset class has typically appealed more to institutional investors but it will start appealing to retail investors too, writes Centurion’s David Rawson-Mackenzie.

Investing in longevity is certainly not for the unsophisticated investor and we would be foolish to think otherwise. However, it would also be untrue to believe that it is only suitable for investors with a Masters degree in quantum finance and nerves of steel.

Investing in longevity is not just for investors with degrees in quantum finance

Enabling knowledgeable retail investors to benefit from investing in longevity is a view that is beginning to permeate the industry but first the dilemma facing this asset class needs to be resolved: the dichotomy is that longevity is a simple concept to explain but hard to understand and this is mainly due to a lack of standardisation in the longevity market.

The lack of industry standards is particularly true for macro longevity, which relates to the general population and is generally represented by a sample size in the tens of thousands of lives: it is based on derivatives such as swaps, longevity linked notes and longevity indices.

The International Swaps and Derivatives Association (ISDA) has set industry standards for many of the over the counter (OTC) global derivatives markets, but to date there has been no standard documentation or contract for longevity derivatives.

This looks all set to change with the announcement that the ISDA is working on a standardised contract for longevity swaps as a response to the increased interest in this relatively new market sector. It is early days but a new industry standard for longevity derivatives will help transparency and mitigate risk.

The concept of a derivative can also be difficult to grasp as there is no actual “physical” asset. However, the increasing number of longevity swaps being arranged by investment banks in recent years is helping to bring longevity more into the mainstream investment markets.

The most recent one was completed by BMW with Deutsche Bank in February 2010 for $4.6bn and market analysts predict that in 2010 the longevity swap market for UK pension funds alone will reach £10bn.

The introduction of longevity indices will also help increase transparency and raise standards. The newly formed Life & Longevity Markets Association is dominated by the top investment banks including Deutsche Bank, JP Morgan, Morgan Stanley and UBS and aims to provide a consistent and transparent set of standards for developing, producing and publishing longevity indices.

Currently there are three main indices in operation: the CSFB Longevity Index launched by Credit Suisse in December 2005; JP Morgan’s LifeMetrics Longevity Index released two years later and the latest entrant into the market – the Xpect indices developed by the Deutsche Börse – the German stock exchange.

Micro longevity is a different animal; it references a much smaller pool of lives – typically between 200 and 1,000 – and includes investment products such as life tenancies and life settlements. Being based on physical assets such as property and life insurance policies, micro longevity is relatively easy to explain but there are still a number of standardisation issues.

For example, in the case of life settlements, there are limited standards of policy origination so it can be difficult to ascertain the rationale and condition under which the policy was taken out in the first instance: if this was with the sole purpose of selling it back into the market this would bring into question insurable interest and fraud.

Life tenancies do not have this origination issue: the process and documentation for buying and selling property is standardised within a legal framework, although there is the ability to customise certain aspects of the contract depending on the nature of the life tenancy structure.

For life settlements there are also no industry standards for estimating the life expectancies of the underlying insured although life tenancies are different as they are based on using standardised population tables.

A final issue with both life settlements and life tenancies is pricing as establishing a market price is not as simple as looking up the price on Bloomberg or Reuters. For example, for life settlements, if we assume that on average a life company has five different products and then multiply that by the number of life companies in the US – currently over 1,000 – then it is easy to comprehend the impossible task of getting a daily price for all the assets held in one life settlement portfolio.

Life settlements in a synthetic format could be attractive to the retail market if they were made available via a “symposium” of investment banks whereby the banks take on both the origination risk and pricing the life settlements.

There would also be more data available to generate the life expectancy estimates as the banks would use their own mortality tables. In this way, the less quantifiable risks associated with life settlements disappear and the process becomes far more transparent thus making them far more attractive to the retail investor.

The investment banks would also provide the liquidity, which is a key ingredient in any retail product, but like all good things this comes at a price: lower yields, so investors expecting returns in the double figures will be disappointed.

Yet a longevity product with low volatility and minimum correlation to the financial markets should have a place in an asset allocation model and as we move forward, the next decade will see longevity filtering into investment portfolios.

With the aid of asset allocation simulation tools, investors and their advisers will be able to remodel the historic performance of their investment portfolios to introduce different levels of longevity and demonstrate how it can affect a portfolio’s performance and risk profile.

Up until now longevity as an asset class has typically appealed more to institutional investors such as pension funds, insurance companies and investment banks rather than sophisticated retail investors.

However, with the development of more innovative products combined with increasing regulation and standardisation, it is highly probable that in the next decade we will see a longevity investment product specifically aimed at the sophisticated retail market. Watch this space!

David Rawson-Mackenzie is director of Centurion Fund Managers

Commentary by Michael Abraham:

This is an excellent article but, though David makes every effort to simplify his concepts, longevity investment if for retail is certainly only for the few.  It would be interesting to know what percentage of the investing public actually understand the article – more or less than 1% – any guesses?
Read more: http://www.investmentweek.co.uk/investment-week/feature/1934582/longevity-innovative-retail-asset-class#ixzz1CDoemIup

  January 02, 2011 at 6:25 pm

As 2010 draws to a close and the dawn of a new year beckons, those in the life settlement industry look forward with renewed optimism. By most accounts, the life settlement industry’s bottom is behind it and the secondary life insurance market is now in the process of recovering. How much and how fast is still to be determined. However, below are the Top 10 Predictions For Life Settlements in 2011.

1) Secondary Market To See Increased Buying. As everyone knows, capital has been slowly reentering the life settlement market but it is still off the highs experienced prior to the Great Recession. Much of the activity in 2010 was focused on tertiary trades and investors looking for distressed policies or portfolios. As those opportunities become less available in 2011, capital will be redirected to secondary market activities and policy origination.

2) Private Equity Will Arrive: As the investment banks and other types of investors left the market in 2009 and 2010, everyone has been anxious to identify the next big player. Much attention has been paid to Private Equity and in 2011 it will arrive. Rumors have been swirling that PEG’s have been looking for acquisitions of established market players and have recently started funding some providers.

3) Higher Life Settlement Broker Utilization In the past, it has been relatively easy for producers to act as de facto life settlement brokers. However, new industry best practices suggest life settlement brokers are preferred as intermediaries for policy owners interested in a life settlement. Not only are brokers more able to source small pockets of capital, but more stringent licensing, regulatory and compliance requirements make it difficult for anyone but brokers to effectively navigate the landscape. 2011 will see producers more likely to refer cases to life settlement brokers than try to handle them autonomously as they may have in the past.

4) Small investors will make a splash: Many have been waiting for institutional investors to flood the life settlement market with capital, while forgetting that high net worth individuals and family offices in aggregate have the potential to play a serious role. With an eye towards diversification and predictable returns, expect accredited investors and family offices to be active buyers, as never before, in 2011.

5) Continued Push Towards Regulation While approximately 20% of the states remain unregulated, the writing is on the wall that change is imminent. Some of the key unregulated states already have legislation in the works and consumer protection is a hot button issue that resonates with legislators. Expect the trend of consumer friendly life settlement regulation to continue in 2011.

6) Agents and Advisors Will Have To Address Life Settlements Like Never Before In 2011 expect numerous states to adopt the new NCOIL model act requiring carriers to notify consumers of the life settlement option when policies are to be surrendered or allowed to lapse. Agents and financial advisors that previously didn’t consider life settlements in their practices will now be forced to address the issue as carriers drive policy holders with questions and inquiries to those on the insurance front lines.

7) Greater Focus On Information Security For too long, sensitive insured and policy owner information has been transmitted between agents, brokers and providers using insecure methods such as email. In 2011, as industry best practices demand secure data transfer, expect much higher utilization of specialized life settlement software such as Settlewerx and others.

Smaller Providers While the big players aren’t going anywhere, expect the trend of boutique providers serving smaller pockets of money and niche investors to continue into 2011.

9) Asian Investment US and European investors are the stalwarts of US life settlement investments. In 2011, expect to see more capital coming from Asia and the Middle East, which are relatively untapped sources of investment capital. Newly established offices and initiatives in that part of the world should begin to produce new funding sources in the coming year.

10) Broader Buying Parameters While cherry picking great policies at a discount was the name of the game in 2010, expect 2011 to bring a broader approach to buying. With increasing competition for policies, buyers will have to consider cases that might not have otherwise received bids in 2010.

With the broader economy improving and capital returning to the markets, 2011 promises to be an improved life settlement environment. For those that were able to survive the past two tumultuous years, they will hopefully be rewarded with a fruitful 2011.

Commentary by Michael Abraham:

As you know this commentator is always positive about the market and there is little above with which I would disagree.  However, there are a number of clouds on the horizon, particularly for the retail investor, not least the failure of the German fund managed by Berlin Atlantic.  As I point out in response to another article this is hardly their fault, nonetheless the wolves are massing and with the likelihood that there will be a 100% loss of investors’ and bond holders’ funds, for more than 8000 investors, the fallout will be tremendously damaging.

 http://technorati.com/business/article/top-10-life-settlement-predictions-of/#ixzz1CDnfLYIf

Story by: Julia Bradshaw

Advisers in the UK are calling for more guidance and education from the FSA on the life settlements asset class, according to research from PDL International.

The independent survey, carried out on PDL’s behalf by NMG Consulting with 353 investment IFAs, revealed that more than one-third of financial advisers wanted clearer guidance from the City watchdog.

The survey also revealed that 30 per cent would like increased transparency on how life settlements work and how risks can be mitigated. A further 27 per cent of those surveyed said they wanted more education and support from providers and industry trade bodies in dealing with life settlements.

Sven Kuhlbrodt, managing director of PDL International, said: “Advisers recognise that they have an obligation to their clients to possess a full understanding of life settlements so that they are in the best position possible to offer informed advice, whether they are recommending them or dismissing them.

“As an industry we have an equal duty to help advisers build up this understanding of life settlements. That includes the FSA, to whom IFAs are clearly looking for guidance. It also includes providers such as us.”

Since the FSA raised concerns about life settlements, the European Life Settlement Association has launched a code of conduct. PDL International is also using online guides, tests, microsites and presentations to fill the knowledge gap surrounding the life settlements asset class.

Mr Kuhlbrodt said: “With economic uncertainty set to continue into 2011, advisers are increasingly considering products that are uncorrelated to traditional markets. Life settlements are one such product. PDL International is committed to working with advisers, addressing their concerns over transparency and risk, and opening up this asset class to investors.”

PDL International recently launched a life settlements product, Cascade Portfolio, and investors can purchase interests in a range of life settlement policies, which the firm claims addresses many of the FSA’s concerns about transparency, longevity risk, counterparty insolvency and liquidity.

Christopher Wicks, director for Manchester-based Bridgewater Financial Services, said: “I am not an expert on life settlements and I do not use them, but I did investigate the asset class before I rejected it because there were too many uncertainties about the way life settlements work.

“There are also risks incurred when people invest that are too unpredictable and the asset class went badly wrong last year.”

In February last year, Peter Smith, head of investment policy in the FSA’s conduct policy division, said: “We are monitoring the provision, marketing and uptake of these products.

“Where we have discovered issues with the firms involved in the production or distribution of these products in the past they have been subject to supervisory actions and, where necessary, enforcement proceedings. This is an approach that we will continue to pursue in future.”

Commentary by Michael Abraham:

Education is definitely necessary but why oh why doesn’t  the FSA, rather than keep complaining and acting like spoiled head teachers, actually do something and insist that all IFAs take extra courses on products such as Life Settlements and furthermore ensure that they must pass the relevant exams in order to retain their licence.  It is so simple and if only the Life Assurance Association and Sir Mark Weinberg had been listened to in the early 80s licensing and continuing education  would have become mandatory and many errors and frauds avoided.

Life Partners Holdings Inc. ended its latest fiscal quarter with lower profits but more cash.

Life Partners, Waco, Texas (Nasdaq GS:LPHI), is reporting $7.1 million in net income for the quarter ending Nov. 30, 2010, on $26 million in revenue, compared with $8.4 million in net income on $31 million in revenue for the comparable period in 2009.

The amount of cash on hand increased to $28 million, from $23 million, and total current assets increased to $47 million, from $42 million.

“While revenues for this quarter were somewhat lower than expected, our balance sheet grew stronger, and investor interest in life settlements remains consistent,” says Life Partners Chief Executive Brian Pardo.

- Trevor Thomas

Source: Life and Health Insurance News

Commentary by Michael Abraham:

Let’s hope their financial success will be mirrored in their dealings with the SEC. We cannot do with another scandal!

Submitted by Steven Meyerowitz on Fri, 10/22/2010 – 11:13am

A life settlement is an investment in which a person sells his or her life insurance policy for a cash payment, which is a percentage of the policy’s face value or death benefit. When they work properly, these transactions can provide needed cash to the insured, and a profit to an investor. They don’t always work properly. Consider the case of Eric M. Kurz.

Kurz has just pleaded guilty to conspiracy to commit mail fraud and money laundering in conjunction with his actions as a wholesaler of investment products for A&O, a group of businesses that acquired and marketed life settlements to investors.
 
Three principals of A&O were charged last month in an 18 count indictment for their alleged roles in the scheme. They are awaiting trial.
 
According to the government, A&O was founded in November 2004, and obtained life settlements from a wholesale life settlement company, then marketed and sold whole and partial interests in those life settlements to investors. In the statement of facts filed with his plea agreement, Kurz admitted that from September 2005 to November 2007, he was affiliated with A&O, creating marketing materials for A&O’s sales agents to distribute to potential investors. He also admitted that with his co-conspirators, he published information on an A&O website. Kurz knew that the website and marketing materials contained specific misrepresentations about A&O’s management and past success. According to the statement of facts, A&O obtained approximately $100 million from investors in 38 states and in Canada from 2005 to January 2008, based on the material misrepresentations and omission by Kurz and his co-conspirators.
 
Kurz pleaded guilty before U.S. Magistrate Judge M. Hannah Lauck to a one count criminal information alleging conspiracy to commit mail fraud and money laundering. At sentencing, he faces a maximum penalty of five years in prison and a $250,000 fine.

Commentary by Michael Abraham:

Fraud is an unacceptable aspect of most, if not all, emerging businesses.  The unscrupulous will take advantage of the lack of knowledge of the public and the regulators. How bad was this misrepresentation, did it actually affect the purchaser? Without reviewing the case papers it is difficult to say.  But what will be interesting to see will be the severity of the sentence, this will surely indicate the seriousness of the transgressions.  I await the release of that information with interest.

http://www.financialfraudlaw.com/lawblog/guilty-plea-100-million-financial-fraud-involving-life-settlements/1614