A new income producing asset class based on securitising loans underpinned by US life insurance policies presents investors with considerably reduced risk when compared to securitised life settlement funds, says Andrew Walters, finance director for the Secured Life Fund.
His comments follow recent industry reports highlighting the risks associated with bonds based on securitised traded life policies.
“Securitising consumer loans underpinned by US life insurance policies – the model for SLF – differs enormously from securitising life settlements,” says Walters.
“Securitised life settlement policies have taken something of a bashing of late – but the SLF model is considerably different, offering income seeking investors the opportunity for high rewards balanced by lower risk.
“From a pure mathematics point of view the required cash flows and underlying asset performance can only come from lending to advance stage cancer sufferers where mortality is far more predictable.
“In our view, loans held by SLF are also far less sensitive to life extension risk than life settlement counterparts, since the amount lent is typically 50 per cent of the face value, meaning that there is a sizable collateral buffer in place.”
Secured Life Fund is the only securitisation to use life insurance as loan collateral to specifically targeted US cancer sufferers, who by their very disease state and condition provide a different economic outcome to Secured Life Fund as lender/bond issuer, than in a life settlement transaction.
“Life settlements, by their nature, require accurate life expectancy forecasting. The negative carry associated with insured’s outliving their projected life expectancies and the burden of paying premiums can have devastating consequences on a securitisation often designed to pay periodic income to investors,” says Walters.
Investors into Secured Life Fund – which is now live in the UK – will be able to choose from either five, seven or ten year investment periods, each of which will provide fixed returns paid annually in arrears. Returns range from 7.5 per cent for the five year bond, eight per cent over seven years, rising to nine per cent for the ten year bond.
Income is generated by investing in a combination of cash, cash equivalent assets and principally through the repayment of loans collateralised by US life insurance policies.
The minimum investment is currently EUR250,000, but there are plans to roll out the fund for smaller sum investments via a UK plan manager.
