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Catalyst calls to ARM

Catalyst Investment Group has introduced a Dublin-based bond that invests in an asset-backed portfolio underpinned by US life policies. This product differs from similar products available to UK investors in the way it is securitised and set up through a trust to reduce risks.

To enable US life policies to be bought at a discount direct from the insurance companies rather than paying a higher price through a broker, Catalyst has established a company jointly with US broker Life Settlements International. The new company, Arm Asset Backed Securities, will issue bearer bonds to investors which have a term of five or seven years, returning the equivalent of 7.5-11.25 per cent a year.

Investors’ capital will be used to buy a diverse portfolio of US life policies for the over 65s who have a life expectancy of up to 12 years. The portfolio of life policies will mature at different rates and can also be traded before maturity. The mix of maturities will be based on an actuarial model designed by consultancy Mercer Oliver Wyman and will be held in trust by an independent trustee through an independent company known as a special purpose vehicle. Once a policy has matured the proceeds are held in cash or near cash and will not be reinvested in any more life policies.

The holders of the bearer bonds will own the SPV, while MeersPierson International, a subsidiary of European banking group Fortis that is rated A+ by Standard & Poor’s, has been appointed director. The assets will be held in trust by an independent trustee and will be ringfenced against any of the parties involved the bankruptcy of any of the parties involved.

As a further precaution the bond is securitised using a bond called the Z bond, which will be issued to cover the payouts if there is a shortfall at the end of the term.

As the US lacks a healthcare system like the NHS, elderly people who do not necessarily have a critical illness may sell their life policies to improve the quality of their lives. This provides opportunities for the purchase of life policies that deliver a fixed level of return to investors – the uncertainty is in the maturity date.

Catalyst has tried to open up this market to the UK retail while mitigating some of the risks that caused problems for companies such as Sheppherds, but this product may be a step too far for some IFAs.
It may have more appeal to private banks and institutional investors such as pension funds.

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