Traded life settlement fund industry hits back at comparisons to US sub-prime scenario
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Warnings that the ‘securitisation’ of life settlements could turn into the next ‘sub-prime’ disaster were universally rejected at a recent major industry conference in Washington, according to manager Policy Selection Limited.
PSL, which manages Assured fund, the US senior citizen traded life policies reports that the conference concluded overwhelmingly that the market infrastructure did not exist for the securitisation of life settlements.
Finance director Andrew Walters says: “Clearly, with the world still reeling from the mishandling of the financial markets, there is a fear that the smart guys on Wall Street are rushing to replace their lost revenue with little regard to investors.”
Securitisation is the process of bundling up these policies either in a closed ended fund or by way of private placement and issuing bonds to the market which should reflect the underlying performance of the assets.
Walters says: “But let’s get it into persepctive. The potential Achilles heel of a securitisation is the liquidity pressure that will result from marrying the asset and the investment product.
“To maintain the assets there is a continual cash outflow by way of premium payments and at the same time there is a continual cash outflow by way of coupon on the bond and, ultimately, the repayment of expected repayment of capital.”
Walters says the cash inflows will come initially from the subscription for the bonds and then from the various life offices as those insured pass away.
He says: “But, particularly during the early ‘ramping’ phase, where there are insufficient policies maturing, the product will come under liquidity pressure. This pressure is relieved with a variable funding note, ie a liquidity line which then introduces a credit market risk into the product.
“Of course, there is a fear that over-aggressive origination practices may occur in order to feed the industry but often these are short lived and are quickly weeded out.
“The asset class is less correlated to the credit market than most any other asset. Once a life settlement has been purchased the return is set, provided the life expectancy of the insured is accurate.”
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