| Banks are beginning to acknowledge the elephant in | | | | portfolios at a time when most other investment asset |
| the room, that many of their loan portfolios are too | | | | categories are increasingly operating in parallel. |
| heavily weighted with real estate as collateral. | | | | Banks have taken notice. An asset that diversifies an |
| Nationwide property sales slowdowns, a decline (sharp | | | | investment portfolio also diversifies a loan portfolio. A |
| decline in some markets) in real estate values, and the | | | | life settlement is essentially a contractual obligation of |
| recent subprime mortgage meltdown have led more | | | | the life insurance company to pay a predefined |
| and more banks to look for other asset categories to | | | | amount in the future. Naturally, the big question is, |
| diversify their loan portfolios. | | | | when? Holding life settlements from many different |
| Enter investors who want to leverage portfolios of life | | | | individuals mitigates the risk of "when" (just like the |
| settlements. Life settlements are discounted cash | | | | insurance company that sells thousands of policies, not |
| settlements paid by investors to life insurance | | | | knowing exactly when any individual will pass away). |
| policyholders. In exchange, investors later receive the | | | | The more life settlements an investor holds, the more |
| full amount of the life insurance policy upon the passing | | | | predictable the portfolio's rate of return will be. |
| of the insured; a win-win transaction. Policyholders, who | | | | In the past two years, aggressive investors have |
| choose to sell their policy, receive cash now to | | | | pursued financing to leverage their life settlement |
| enhance the quality of their remaining days. Investors | | | | holdings, for two good reasons: 1) to increase their |
| receive an excellent return on investment, historically a | | | | return on equity, and 2) increasing their holdings further |
| double-digit return. | | | | mitigates life expectancy risks, and improves the |
| Along with that, investors also receive something quite | | | | predictability of their rate of return. |
| rare in today's increasingly interconnected investment | | | | Banks, just like investors, are becoming attracted to |
| world; returns that are uncorrelated to market, | | | | the uncorrelated nature of risks associated with life |
| economic, and geo-political forces. According to a | | | | settlements. Risk to principal is low, and the likelihood of |
| review of the Life Settlements Fund Limited (Series I) | | | | a profitable outcome is quite reasonable. Payouts are |
| in April 2006, "Life settlements...are not correlated to | | | | backed by insurance companies with strong reserves. |
| any traded market - whether stock, bond, currency or | | | | Combine the recent real estates shocks, and now we |
| commodity markets - nor to political or economic | | | | have an environment where more and more loan |
| upheaval. Once invested the only variable affecting a | | | | committees are prepared to entertain an, until now, |
| Fund's return is the life expectancy of the policies held." | | | | uncommon collateralization for financing. It does not fit |
| The July 30, 2007 cover story of Business Week, | | | | into any pre-existing lending "box". But the need to |
| Profiting From Mortality states "Moreover, [life | | | | diversify their banks' loan portfolios, the quest for |
| settlements are] 'uncorrelated assets,' meaning their | | | | secure loans, and the desire for new high net worth |
| performance isn't tied to what's happening in other | | | | clients, have, however reluctantly, forced banks to look |
| markets. After all, death rates don't rise or fall based | | | | outside the box. This author's agency has participated |
| on what's happening to commodities, say. Uncorrelated | | | | in negotiations for investors in Texas, Arizona, Illinois, |
| assets like these are highly prized in an increasingly | | | | and Nebraska to arrange such financing with |
| connected global financial system." Life settlements | | | | commercial banks. |
| bring a true measure of diversification to investment | | | | |