Whether Volatility is High or Low, Life Settlement Strategies Perform
Article updated December 31, 2023.
KEY POINTS:
Hunt for diversified returns: Investors are seeking noncorrelation to diversify overall portfolio returns.
Life settlements offer appeal: Life settlement strategies have a history of low correlation to other assets, thanks to their distinctive characteristics.
An expanding market: The life settlement marketplace is growing, providing greater return opportunities.
An experienced partner: AIR Asset Management has a dedicated team and well-resourced platform, driving advantages for our life settlements.
INTRODUCTION
Since the onset of the Covid-19 pandemic, public markets have been punctuated by significant volatility. The subsequent years, including 2022, have been marked by rapid fluctuations, underscoring the unpredictable nature of global economies and financial systems. In response, investors have intensified their search for diversification, seeking out assets that provide a measure of protection against market swings. These assets, which often show lower correlation to the broader market, are increasingly valued for their potential to stabilize and enhance portfolio performance amidst ongoing market turbulence.
WHY LIFE SETTLEMENTS LACK CORRELATION
This asset class offers significant diversification compared to the returns of traditional investments. The primary driver of valuation in life settlements is the mortality of the insured. It is reasonable to say that death is not linked to financial markets. Comparatively, life settlement assets are somewhat akin to zero-coupon bonds, but the timing of principal repayment a less predictable maturity. Mortality is what determines the timing of the principal payout, in the form of a death benefit. Consequently, the asset class has a low correlation to the returns of public stocks, bonds, or other mainstream investment assets.
Efficient Frontier: Life Settlements’ Historical Risk-Adjusted Returns Relative to Other Asset Classes*
10-Year Expectations
To demonstrate the lack of correlation, we’ve compared the AIR Life Settlement Strategy to the U.S. equity markets during the most recent 10 worst performing months of the S&P 500 Index. As the graph below illustrates, the AIR Life Settlement Strategy consistently shows a low correlation to equities during big market fluctuations.
Historically Lower Volatility vs. Traditional Markets**
The chart above pulls the S&P 500 Index’s ten most recent down months as of 11/30/23. It does not represent the index's all-time return. To view the historical monthly returns for the S&P 500 Index, visit Ycharts: S&P 500 Monthly Return. See the disclaimer section for important performance information.
A GROWING MARKETPLACE
Market Demand
We see a healthy and growing market for life settlements, especially as the baby boomer generation enters retirement. The potential for market growth is driven by several key factors, such as funding retirement, paying for health care, or meeting the needs of those who are over-insured. The expanding popularity of life settlement strategies suggests that other investors agree with our assessment that the noncorrelation element of this particular asset is still hard to come by, and it is a valuable tool to offset risks in traditional assets. About $30B of life settlements are in force today, indicating a robust supply of policies for the market.***
Market Supply
In a niche marketplace such as life settlements, sufficient depth and transaction volume is crucial. Looking at recent data across the life insurance industry, there are robust sales of policies in the secondary market, derived from both small-face policies and larger, more traditional life insurance policies. For insureds, the sale of a life insurance policy almost always offers better cash value than when the insured surrenders the policy. On average, a life settlement will pay out over 5x the policy's cash surrender value. In our view, the marketplace constitutes one of the most attractive asset classes with respect to risk and return.4****
EXPERIENCED MANAGEMENT IS KEY IN LIFE SETTLEMENTS
Although the returns of life settlements are minimally correlated by nature, experienced management is a key component to ensuring consistent, superior risk-adjusted returns. This is achieved by a combination of buy-and-hold strategies and opportunistic trading policies in the tertiary market. A main objective of portfolio managers in this space is to construct portfolios across a range of demographic profiles, impairments, policy durations, and issuers. We combine the portfolio construction process with attention to risk management that is supported by research and quantitative assessments of portfolios. By carefully tracking market transactions, managers can assess implied discount rates or internal rates of return (IRR).
AIR ASSET MANAGEMENT AS A LIFE SETTLEMENTS MANAGER
For investors drawn to the low correlation and potential diversification benefits of life settlement strategies, we believe it’s important to partner with the right manager. Life settlements is a niche market, and with sound portfolio construction and risk management, it can offer valuable diversification to investors.
We believe our quality partnerships, robust sourcing opportunities, and implementation expertise make AIR Asset Management well-suited to amplify the inherent attractive characteristics of the advantages of the life settlements asset class.
Quality partnerships. We have broad relationships with the intermediaries who facilitate the initial sale of existing life insurance policies and with the assortment of other tertiary market participants who buy and sell. This important network gives our team robust volume in terms of opportunities, as well as valuable insights on pricing trends and other dynamics for the marketplace of life settlements.
Institutional process. Our tenured investment team brings an institutional process to their investment style. With deep experience in capital markets, investing and the insurance industry, we apply best practices to portfolio management.
Operational structure. We employ rigorous internal standards and due diligence processes that demonstrate exceptional aptitude in portfolio management and operations.
Disclosures:
*This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise and estimate of future performance. Data as of 12/31/23. Source: Bloomberg. Life Settlements return and volatility were calculated by AIR Asset Management using a composite of 11 U.S. life settlement strategies. Notes: Return estimates are total nominal returns. Long-term volatility assumptions were used via factor exposures, historical volatilities and correlations over the past 10 years. The historical volatilities and current factor makeup of each asset class was used to arrive at forward-looking assumptions. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted.
**The chart pulls the S&P 500 Index’s ten most recent down months as of 11/30/23. It does not represent the index's all-time return. To view the historical monthly returns for the S&P 500 Index, visit Ycharts: S&P 500 Monthly Return. To learn more about the AIR Life Settlement Strategy returns, please contact us at info@airassetmanagement.com.
***Source: © 2023 Conning, Inc. (“Conning”)
****Source: Life Insurance Settlement Association, 2022 LISA Member’s Annual Market Data Released
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. No assurance can be given that any investment will achieve its objectives or avoid losses. Unless apparent from context, all statements herein represent AIR Asset Management’s opinion.
This article is provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This website and information are not intended to provide investment, tax, or legal advice.
AIR Asset Management (“AIRAM”) is an investment adviser registered with the SEC. The information contained in this email is for general informational purposes only and should not be construed by any prospective or existing client (or investor) of AIRAM as a solicitation to effect transactions in securities. In addition, the information herein should not be construed by any prospective or existing client (or investor) of AIRAM as personalized investment advice. AIRAM’s personalized investment advice is given only within the context of its contractual agreements with each client. AIRAM’s investment advice may only be rendered after the delivery of its Form ADV-Part 2A/2B and the execution of an agreement by the client and AIRAM.
Any inferences to AIRAM sponsored and managed investment funds referenced herein are solely intended to provide general information on the investment strategies utilized by AIRAM. The information contained herein is not an offer or solicitation with respect to the purchase or sale of any investment fund sponsored and managed by AIRAM. Any investment decision in connection with such investment funds should be based on the information contained in the Confidential Memorandum and governing documents of the applicable investment fund. Such documents are only available to qualified clients or qualified purchasers with whom AIR has established a relationship in accordance with applicable law.
References to indices contained herein are therefore not intended to compare to the actual performance of the strategy, but solely for the purpose of comparison to certain industry segments. Reference to the AIRAM composite and other indices is for comparative purposes only. The composite components are weighted according to a proprietary scorecard of AIRAM; the weightings may change at any time. The AIRAM composite and AIR Life Settlement Strategy may be more diversified than the fund and may not represent an appropriate benchmark. Past performance of an index should not be construed as an indicator of future performance.