Life settlements as an investment might have many of the prized characteristics that investors love about property. A well-managed life settlements exposure can provide stable consistent returns over a long period of time. Returns are also uncorrelated to equity and bond markets and serve as a portfolio stabiliser.
There are many similarities and differences between the two asset classes:
Economic conditions affect real estate, but not life settlements
Real estate prices and rental yields are closely linked to the overall economic conditions, and hence might not provide true uncorrelated investment returns.
Life settlements are resold life insurance policies and can be thought of as financing extended to an individual backed by that person’s life insurance policy. The “financing” to the individual is paid back at the maturity of policy when the insurance company pays out the death benefit. Since returns in life settlement are primarily driven by the realisation of death benefits, there is no direct linkage to movements in interest rates, inflation, monetary liquidity, or other economic factors.
Real estate not as liquid as life settlements
Life settlements are as liquid as real estate, if not more. The Laureola fund imposes a soft lock-up of three years (i.e. exit upon payment of a redemption charge) as a reflection of the time-based nature of life settlements. The timing of policy maturity is what generates the expected consistent returns from life settlements and hence the soft lock-up. After three years, the investor can exit any month without charge. The settlement timeline is no worse than the settlement period of a real estate exit.
The hidden costs of real estate
Real estate investments can incur many hidden costs – transaction costs when buying or selling property can be as high as 10% of the value of the property. If a property is let out, there might also be ongoing costs of property management. The Laureola fund only charges redemption fees if an investor needs to redeem in the first three years. The cost of managing the fund is capped at the stated management fee of the fund.
Property investment needs leverage, thus risk
To fairly compare property and life settlements as investments, one must first equalise the leverage used. While property as an asset class is stable, most investments in property are leveraged. The higher leverage, the riskier property becomes. For example, a 20% down payment implies 5x leverage. A price collapse of 20% would wipe out all equity in the property. Once leverage is removed from real estate and the high ongoing costs deducted, one might find that the returns are more modest in the 5-7% range.
By comparison, life settlements has generated 7-11% pa returns historically (in hedged AUD terms) unleveraged. Investors looking for income can find sustainable returns from life settlements without the costs and leverage of being a property investor.
Alex Lee CFA
Director, Investor Relations – Australia and New Zealand
Laureola Advisors Inc.
Email: alee@laureolaadvisors.com