An alternative strategy independent of traditional asset classes and offering the predictability you are looking for
Life insurance is not necessarily a regular investment, even for investors accustomed to adopting different perspectives. In today's environment, institutional investors are turning more to this strategy, as it guarantees low volatility independent of the equity and bond markets. The entry of new institutional investors into the market leads to greater complexity and increased liquidity.
The Covid-19 pandemic has profoundly disrupted the investment landscape around the world. Institutions, family offices and financial advisers looking for low volatility, independent investments and double-digit returns should consider life insurance.
The origin of life insurance
The history of life insurance goes back a long way. In 1911, the Supreme Court of the United States ruled that a life insurance policy was in fact personal property. This decision implied that the holder could sell this contract to a third party.
The transaction at the heart of the process
- In summary, investing in life insurance involves purchasing life insurance contracts from policyholders looking for a final payout that is greater than the cash value of the contract (if any).
- In addition to the cost of purchasing the contract, the fund pays all future premiums and becomes the beneficiary of the death benefit.
- Return on investment occurs when the insurance contract expires and the fund receives the death benefit, typically at an internal rate of return (IRR) ranging from 12% to 18%.
Benefits for policyholders:
In the past, if a person was no longer able to fund their insurance or if their circumstances had changed and they no longer needed it, they had few options. It was possible to let the insurance expire, thus losing all previous payments, or to resell it to the insurer for a fraction of what it would have been worth at maturity.
Now, with a well-established secondary market for policies, policyholders can receive a realistic sum in return for their contract, and derive a social benefit for themselves and their families.
Profits go to policyholders, not insurance companies
Current observations in the industry
- The market has been evolving steadily for 15 years.
- More and more institutional investors are interested, and the competition continues to increase.
- There is now an active tertiary market for contract negotiation. The tertiary market is now more extensive than the secondary market, and increasingly competitive.
- Conning Analytics predicts an average annual gross market potential of approximately $ 182 billion for life insurance by 2024.
The life insurance market is now fully regulated in 42 states.
- The traditional long lock-in periods are being replaced by shorter-term investment periods.
Life insurance valuation factors
There are several factors that determine how much an investment fund should pay for life insurance. For example:
- Death benefit (nominal value of the contract)
- Monthly or annual premium
- The age of the insured
- The insured's state of health
The other factor that can influence the profitability of a life insurance investment is the company with which it is purchased. The initial expense can be significantly reduced by avoiding tertiary market brokers. The brokerage landscape is highly competitive. Writing through competing investment firms inevitably results in an increase in the price of life insurance contracts.
The importance of taking out the contract
Institutional investors in the life insurance market generally only buy policies in groups, on specific tranches. This practice is explained by their size and the amount of capital available for investment. Within these groups, some contracts are interesting, others are less relevant. In this environment, the smaller manager can benefit considerably from their ability to purchase contracts directly from the policyholder. He can thus select contracts more carefully and avoid grouped policies.
Rate of return and duration of investments
An investment in life insurance can generally result in an internal rate of return (IRR) of 12% to 18%. In the past, the most important factor for profitability was the collection of the death benefit, which meant that most investment funds bought the more expensive contracts, for which only a few years remained according to the analysis of the 'life expectancy. In the beginning, the strategy was effective as the market was relatively new and competition for contracts was low.
Today, however, the emergence of larger institutional funds has intensified the competition, making these insurance policies even more expensive. Developments in the tertiary market mean that managers in the secondary market can generate considerable added value from the buyback and resale of contracts. Thus, the value depends less and less on the final death benefit. Most importantly, the funds can reduce the investor's lock-in period, allowing greater flexibility in investments.
Diversification within life insurance funds
The rate of return is based on the death rate; That is, when the insured age during the period calculated by the actuarial formulas. For this reason, life insurance funds typically buy and hold large groups of contracts, which is equivalent to following the principles of diversification used for many investment portfolios such as mutual funds. Holding 150 to 200 contracts seems optimal, as large consolidations come with a better chance of seeing mortality rates meet expectations and of securing death lump sum payments. The classic result is a reduction in volatility and an increase in cash flow, which can be an attractive goal when uncertainty plagues many other investment strategies.
Life insurance transactions typically involve policyholders with health problems and a life expectancy ranging from 3 to 15 years. Acquiring such contracts can cost hundreds of thousands of dollars. The relatively high investment price correlates with a high probability of receiving the death benefit before additional premium payments cancel out the potential return on investment.
Besides holding large groups of contracts, the other possibility for a life insurance fund is to diversify its portfolio by investing in healthy insured contracts. The purchase price of these contracts is lower because they have a statistically lower risk of dying before the maturity date and investors pay premiums on the contracts for longer. However, in these situations, the death benefit is not the only source of profitability. As the age of these policyholders advances and their life expectancy shortens, the contracts become more attractive to other life insurance investors and can be resold at a net gain.
This approach, which was once a niche strategy and industry, is now institutionalized to the benefit of investors and policyholders. Life insurance offers low volatility and potential double-digit profitability. In this period when the strong fluctuation of stocks and the low profitability of bonds seem destined to last, life insurance is an attractive asset for investors looking for new investments.
HedgeACT was launched in 2014 with the goal of making it easy for financial advisors to add independent, alpha-generating private investment alternatives to their existing portfolio models.
- Griffin Asset Management LLC is a non-SEC financial reporting advisor
- Search for exceptional and hard to find managers
- Uncorrelated with and between the equity and bond markets.
- Objective: generate constant and positive profitability, with limited negative volatility
For more information on our strategies: James Gallagher, CAIA, Managing Director (firstname.lastname@example.org, +1 773 416 2686)