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Life settlements fund provider predicts sector will grow to USD160bn

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Policy Selection, manager of the Assured Fund life settlement investment product, predicts that the US traded life settlements market will grow in value to USD160bn by 2016, boosted by dem

Policy Selection, manager of the Assured Fund life settlement investment product, predicts that the US traded life settlements market will grow in value to USD160bn by 2016, boosted by demand from institutional and retail funds seeking stable returns in a turbulent market.

The firm, which currently has USD379m million in assets under management, says it expects ‘very significant growth’ in the market as equities and other asset classes become increasingly volatile. Policy Selection was established in 2003 to specialise in the US senior life settlement market.

‘There is currently around USD10trn of individual life insurance in force in the US market, the biggest in the world,’ says Policy Selection finance director Andrew Walters. ‘Since the market’s emergence from the viatical industry of the 1990s, it has grown dramatically.

‘Now, with increasing nervousness surrounding traditional asset classes, backed by tighter regulation and a more scientific approach to investing in these policies, we believe major pensions, institutional and big bank investment funds will see low-risk life settlement funds such as Assured as a natural fit delivering definable returns.’

A traded life settlements is a life insurance policy sold on the second-hand market, where insured individuals can expect to receive more than the surrender value of the policy but less than the death benefit.

The buyer will acquire the beneficial interest in the policy and will be responsible for the maintenance of premium payments, receiving the full death benefit on the death of the insured individual. Typically the returns are between 8 and 11 per cent.

The policies traded are generally those taken out by people who are now retired. On the sale of the policy their life expectancy is assessed by a medical underwriter. Assessing the life expectancy of people aged 70 or more is challenging, as unlike assessing insurance risk for younger individuals, it is not just the presence of a medical condition that needs to be identified but the degree of severity compared with the base line level in the population.

The medical underwriter will assess their particular life based on their medical history and lifestyle deriving a rating score, known as a mortality loading. By comparing the individual’s score to 1,000 other lives with a similar score, the underwriter will produce a probability distribution for the individual’s mortality.

The fixed death benefit value is unwound over the life expectancy of the portfolio and is reflected in the share price of the fund.

According to Policy Selection, life settlements are not correlated to traditional markets. Unlike many other alternative assets, the return is definable and is not dependent on consumer appetite, which will be constricted by the credit crunch, Walters argues.

‘The volatility of a return – the difference between the death benefit and the cost paid for the policy and ongoing premiums – is substantial when considering one policy, but becomes more certain when considering a portfolio of policies,’ he says.

‘Structures like the Assured Fund are extremely attractive to pension fund investors, for example, as they hold a large diversified portfolio of policies in order to produce a smooth return. Assured Fund has more than 200 exposures, which minimises the usual risk associated with life expectancy forecasting.

‘For those in the pensions industry looking for more predictable returns than can be gained from equities, the concept of returns based on mortality would be familiar. The industry is concerned with how long an individual will live – whereas the life settlement industry is interested in when an individual will pass away.’

Walters adds: ‘Predicting mortality is now far more scientific – the publication of the latest Valuation Basic Mortality Table, for example, goes far further than previous tables in categorising individuals and analysing their mortality.

‘The life settlement industry is now looking to adopt the changes as highlighted in this latest methodology in order to refine its pricing and valuation modelling – and the result should be that funds like Assured become even more attractive as the science is ever more refined.’

The Assured Fund, which is currently being marketed to UK independent financial advisers and institutional investors, currently contains 237 policies, up from 119 at the end of March 2007. The average face value of individual policies within the portfolio is USD2.8m, and the fund is currently valued at USD384m. The fund charges a management fee ranging from 0.75 to 2.25 per cent, depending on the share class.

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