Life settlement investments prove popular with family offices

Family offices are gratified by the way stock markets have bounced back in recent weeks, but their volatility has left them nervous.

According to one family office, traditional portfolios are driven by a “groupthink” mentality exposing investors to market risk. Its portfolio invests extensively in private assets like subprime auto finance, trade finance, clean energy and venture capital – each of them uncorrelated with the market.

Life settlement investment is a hands-on strategy, like venture capital, which involves lengthy due diligence by experienced professionals

Another way to avoid market risk which has been attracting family offices involves the purchase of US life settlements prior to maturity to achieve annualised returns, net of fee, as high as 15%.

The total market is worth $30 billion on an annual basis. One of the largest investors outside the US, managing $2 billion, is Luxembourg-based Carlisle Management. 

It is led by Jose Garcia, who has devoted nearly twenty years of his career to wading through the small print to seek out decent opportunities. Money from family offices comprises 40% of Carlisle’s assets under management.

The opportunity has emerged from the way the priorities of individuals change, as time passes. In their earlier years, affluent individuals become tempted to take out life policies to leave a lump sum to their families and pay death duties.

When they get older, however, they have generally managed to generate their wealth in other ways. The returns on offer from their life policies look low by comparison so they decide to cash them in. Some let their policies lapse. 

Others receive up to 5% of face value by selling policies back to insurers. Smarter individuals put the policies up for sale on a life settlement market, which is where the likes of Carlisle pays up to 20%.

Carlisle buys a diversified range of policies to achieve economies of scale and reduce risk, earning a stream of income, as settlements get paid out. It only buys policies which have gone beyond a contestability period, after which US insurers are not allowed to dispute payouts by law.

The number of policies traded grew by 30% last year, as elderly individuals increased in number and sought the best possible deal. 

Returns have been falling fast due to large private equity managers Blackstone and KKR muscling into the market. 

But Carlisle can still offer a 15% return for investors in its Absolute Return Fund II , its latest closed-end fund by taking advantage of the deals it has already struck. It aims to return a sum equivalent to amounts invested within five years. The life of the fund is ten years.

In 2019, Pacific Current Group, an Australian listed group agreed to buy a 16% stake in Carlisle, or 40% of proceeds on sale, for $34.3 million.

Returns of 15% help Absolute Return II to justify a basic 1.5% plus a performance fee of 20% over a 6% hurdle. 

Shane Norman, a business development adviser to asset managers points out that life settlement investment is a hands-on strategy, like venture capital, which involves lengthy due diligence by experienced professionals.

Fee discounts may be available for investments of $10 million or more. If they invest $100 million, investors can have a separately managed account.

Higher mortality from Covid-19 could lift returns, as individuals die earlier. According to Fitch Ratings, the virus is unlikely to harm the creditworthiness of insurers. 

It could affect the liquidity of the life settlement market. Absolute Return II’s own liquidity is protected by a closed-end status, while Carlisle’s older open-ended funds restrict liquidity to 90 days.