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Life settlements “bear no resemblance to sub-prime disasters”

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Alarmist calls by some US commentators that the securitisation of life settlements could turn into the next sub-prime disaster were universally rejected at a recent major industry conference in Washington DC.

Assured Fund – the UK’s biggest provider of US senior citizen life settlement policies – reports that the conference concluded overwhelmingly that the market infrastructure did not exist for the securitisation of life settlements.

A recent article in the New York Times flagged up the life settlement industry as the next “big thing” on Wall Street, bringing the dynamics of the asset class to the fore for many potential investors who previously were unaware of its existence.

Securitisation is the process of bundling up policies either in a closed ended fund or by way of private placement and issuing bonds to the market which should reflect the underlying performance of the assets. For greater market penetration the bonds would be rated.

Assured Fund finance director Andrew Walters says: “The potential Achilles heel of a securitisation is the liquidity pressure that will result from marrying the asset and the investment product.

“To maintain the assets there is a continual cash outflow by way of premium payments and at the same time there is a continual cash outflow by way of coupon on the bond and, ultimately, the repayment of expected repayment of capital. The cash inflows will come initially from the subscription for the bonds and then from the various life offices as the insureds pass away.

“But, particularly during the early ‘ramping’ phase, where there are insufficient policies maturing, the product will come under liquidity pressure. This pressure is relieved with a variable funding note, i.e. a liquidity line which then introduces a credit market risk into the product.

“For example, if the market value of the policies should fall then there may be a breach of the loan to value. This is a complex asset class, and in our view, unrealistic calls for a securitisation of life settlements does not take into account the complexities involved in such a move.”

Walters says the asset class is less correlated to the credit market than most any other assets. Once a life settlement has been purchased the return is set, provided the life expectancy of the insured is accurate.

The conference was organised by life settlement underwriters Fasano Associates.

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