An uncorrelated asset class that can provide high returns
In an age of low bond yields, uncorrelated cashflows dependent on knowledge about mortality and insurance can allow for greater diversification than what bond investments provide.
Why life settlements?
With bond yields at historic lows, investors are increasingly looking at uncorrelated assets to provide the diversification that bonds used to provide.
Life settlements are one of the few asset classes in which the returns are dependent on the ability to understand and manage mortality and insurance risk—which are separate from managing market and interest rate risk.
With a diversified pool of life settlements, investors can access uncorrelated cash flows to help provide better portfolio diversification in an era of low bond yields.
The discount rate applied to life settlement cashflows are significantly higher than the discount rates applied to high yield corporate debt or high quality corporate debt.
A spread between the life settlements discount rate and the current rates of debt means there is an opportunity to realize greater risk-adjusted returns than current bond yields if investment groups have the right actuarial and insurance experience.
The discount rate applied to life settlement cashflows are currently in the 13-16% range.
Who has invested in life settlements?
Since the early 2000s, well respected institutional investors have invested in the life settlement space. Berkshire Hathaway, AIG, Apollo, Fortress, Blackstone, and CalPERS have collectively invested billions of dollars in the space.
AIG
$4B
2001 – 2011
Berkshire Hathaway
$460M
2002 – Present
Fortress
$330M
2010 – 2013
Apollo
$5B
2010 – Present
Large institutional groups have invested billions of dollars into the life settlement space seeking uncorrelated returns.
Prior to Colva’s Life Settlement Interval Fund, investing in life settlements was only available to institutional or accredited investors.
What is a life settlement?
A life settlement is a financial transaction in which an owner of a life insurance policy sells the policy to a third-party in exchange for a payment. The original policy owner gets to walk away from the policy, and the new third-party owner of the policy is responsible for making all the premium payments going forward. In exchange for making the premium payments going forward, the new third-party owner receives the death benefit on the policy when the insured passes away.
In a life settlement, a policy owner sells his or her interest in the policy for more than could be received if the policy was simply cancelled. The policy owner gets to walk away from the policy with cash without paying the future premiums on the policy. The life settlement investor agrees to pay future premiums on the policy in exchange for receiving the future death benefit when the insured on the policy passes away.
Why is a life settlement beneficial for the policy owner?
Nearly 50% of policy owners cancel their policy within the first 10 years and almost 70% of them will cancel their policy in total and never receive a death benefit.
Policy owners who cancel their policy often receive very little back because of the high surrender and expense charges in the policy. A life settlement allows certain policy owners to receive significantly more for their policy than they would receive if they were to simply cancel it.
As policy owners get older, they typically no longer need life insurance as their dependents have grown up and their liabilities have been paid down. Furthermore, some policy owners living on fixed income can no longer afford the expensive premiums on these policies as they get older.
A life settlement allows policy owners the liquidity to exit a long-term investment without the severe ramifications they would face if they were to cancel it. Regulation of life settlements in over 48 states helps to ensure that policy owners are protected and that the entire process is conducted with proper consideration for the policy owners’ needs.
Why is a life settlement beneficial for the third-party investor?
A third-party investor in life settlements realizes that some of the original policy owners are in worse health now than when they originally purchased the policy. As such, there is an opportunity to profit off the fact that while the premiums on the policy may be high in terms of absolute dollar amounts, these premiums are low in comparison to the insured’s current poor health status. Furthermore, with the right actuarial and insurance experience, these third-party investors can pay significantly less on the policy than what the original policy owner was paying for them.
By investing in a large pool of life settlement policies with the right team, investors can gain access to an underlying set of cashflows that are uncorrelated to traditional investment cashflow.
Why Colva Capital?
Colva has extensive actuarial and insurance experience and has been helping life settlement groups create strategy for policy acquisition, minimize premiums, and improve returns in their strategies for the past 11 years. While most capital groups in the space are great capital raisers, they often lack the depth of technical skills and proprietary software in the space that Colva has developed over the past 11 years. This allows Colva’s in-house actuarial team to identify undervalued policies in the marketplace that groups with less expertise are unable to properly value.
With Colva’s burgeoning relationship with RIAs and the insurance community built through extensive thought leadership in the space, it hopes to source 10%-20% of its policies through direct relationships with RIAs and other financial advisors. Doing this will help eliminate 15%-30% of policy acquisition costs that will further improve client returns.