If you are in the market for an investment that shows little correlation to traditional asset classes, life insurance policies are a candidate - that is, second-hand policies.
SG Life Settlements is marketing an Australian-domiciled fund - the Life Settlements Wholesale Fund - that pools together life settlements or life policies that have been sold by the insured individuals for a number of reasons.
In the US, life settlements are a growing market, estimated to have expanded from US$200 million in 1998 to between US$20 billion and US$26 billion by 2005.
Life settlements are distinct from viaticals, which are critical illness policies purchased in the secondary market in the US.
Life settlements are typically term life or life with cash value policies bought from the elderly who are likely to be high-net-worth individuals.
They are typically in their 80s, with a life expectancy of about five years. There are a number of reasons why individuals would give up their life policies.
These include a change in life circumstances and a need for cash. By selling it to a life settlements provider, they can realise roughly 30 per cent of the face value of the policy, compared to just 6 per cent when they surrender it to the insurer.
Life settlements providers in turn sell the policies to funds like the Life Settlements Wholesale Fund. Using investors' capital, the fund undertakes to pay premiums on the policies.
When the insured individuals die, returns are realised. In Singapore, life settlements were marketed to individuals about four years ago, when agents pooled together capital from individuals here to invest in a single life settlement. Such sales are understood to have ceased.
The Life Settlements Wholesale Fund invests in a total of just over 550 policies. The fund has about US$1.2 billion in assets, and the average face value of the policy is about US$4.2 million.
Its investors include the Victorian Funds Management Corporation and a number of superannuation funds. It is open only to accredited or sophisticated investors, with the minimum investment set at US$30,000.
Danny Lee, director of SG Life Settlements, says an advantage of the fund lies in its being regulated by the Australian Securities and Investment Commission (ASIC).
The pooling of numerous policies also helps to mitigate a number of risks.
The major risk is that of longer life expectancies, which will lengthen the investment horizon, raise costs, and lower returns. With the fund, the average life expectancy is about 62 months, and the average age of the insured is 80.
The fund only purchases policies from the US as the US has non-contestability provisions in policies. This means life companies cannot contest the payment of death benefits during the contestability period of one to three years, until the death of the insured.
So far returns have seemed to be impervious to the credit crunch and other market worries. Since its inception in May 2006, the fund has delivered about 27 per cent in US dollar terms, based on Bloomberg data.
There is, however, currency risk which is evident in its Australian dollar tranche. In Australian dollars, the fund's returns over the two years fall to minus 1.2 per cent, thanks to a weak US dollar and the strong Australian dollar.
Singapore investors may have to brace themselves for a similar predicament if the US dollar weakens against the Sing dollar, as experts expect. Some financial advisers are cautious on the fund.
IPP's Albert Lam says: 'It's not that the fund is not good. We would consider it an alternative investment. But I'm not sure how well regulated it is.'
While the fund vehicle is regulated by ASIC, the underlying policies are subject to US regulations.
Joseph Chong of New Independent says his firm has signed on as distributor but has yet to market the fund. 'We'll be careful... It's not a core portfolio allocation.'
In a column in The Sunday Times last weekend, Providend's Christopher Tan wrote on life settlements and viaticals: 'When you invest in such products, the only time you reap returns is when people die... Before investing, ask yourself: Do you need to take on the related risks? Can you accept the fact that your returns depend on how fast someone dies?'
A number of fees apply, including a 5 per cent recommended sales charge, management fee of 2 per cent a year and performance fee of 20.5 per cent when net income exceeds 10 per cent of the value of the fund's assets.
This article was first published in The Business Times on 2 July 2008.
