Here is a good piece of information for life settlement investors…
SL Investment Management recommends asking the following questions:
1. Where is the manager or the fund regulated? The regulatory environment provides investor protection by enforcing certain behaviours on the manager and in some cases can even provide some degree of compensation. Knowing the regulatory environment your manager is operating within is important.
2. What due diligence does the manager perform at acquisition? Some past life settlement transactions have included cases of dubious legality, from outright fraudulent activity to so-called “wet paper” transactions, which fall under the more modern definition of stranger-originated life insurance. Furthermore incomplete documentation may prevent policies from being sold on in the market at a later date. It is important that the manager perform its own due diligence on policy packages or that it delegates this function to a suitably qualified third party to review cases.
3. How are policies valued? There is no consistent approach to the valuation of life settlement policies in the market and this gives a wide range of reported performances. Life settlement policies are an unusual asset class in that they give rise to substantial realised gains on early maturities that are offset to an extent by unrealised losses on policies that remain in force. It is not usual for policies to be sold on at a profit, although this can happen. Additionally it is important to consider how much a valuation basis may deviate from a realisable value – particularly with open-ended funds where if policies are overvalued, redemptions may lead to draconian gate-keeping measures on redemptions. To what extent are actuarial models involved and how robust is this.
4. How are parties remunerated? It is normal for funds and companies to disclose in some detail the fees on a fund structure and it is worthwhile comparing these stated fees against the fee outgo in a company’s reports and accounts. Origination fee arrangements are typically disclosed in much less detail and it is worthwhile exploring how the fee process and controls work for the origination process. In particular it is worth asking what proportion of the origination price goes to the manager; the provider; the brokers and advisers; and to the policy owner. Funds that remunerate advisers should provide full transparency on their remuneration structure. Avoid funds that are not prepared to openly disclose their fees and remuneration packages.
5. How are fees calculated? Some fees may be expressed as a proportion of value or price whilst others are a proportion of face value. The face value of a policy is the amount that will be paid on the death of the life insured. Typically this will be three to five times the size of the value or price of the policy. When comparing providers and funds an investor would be advised to bear this in mind. Performance fees are another important consideration. In a market where there is very little uniformity in valuation methodology there is considerable scope for abuse in arriving at performance fees. How the performance fees are calculated is a key consideration and front-loaded fee structures are best avoided. Read the rest of this entry »
