Andrew Walters tells Tomas Hirst why the new Secured Life fund is an attractive investment proposition.
Q. How did the collapse of Keydata affect the response to the launch of the Secured Life fund?
A. The collapse of Keydata was a key moment for life settlement funds. We saw that in the amount of money Keydata took in so we understood there was a demand for this type of product. At the time we had experience running a traditional life settlement fund but we couldn’t work out how they were getting their product to work.
What Keydata showed, and what the growth in structured products shows, is that there is an appetite for these products, particularly at a time of low interest rates and fears over equity bubbles and a double-dip. What investors are looking for is a product that delivers a steady return for a fixed period and is non-correlated to the market.
The key to producing a regular income for people is for the product to throw regular cash flows. In the early stages this is particularly acute as you’re trying to ramp up your
portfolio and you don’t yet have enough maturities to generate that cash flow. But also life settlements themselves as an asset class are not truly suited to that type of product, and that principally was where Keydata went wrong.
We have come across a product that we believe will fulfil the liquidity requirements of a bond that is meant to deliver an annual income and that product is collateralised loans to insured people. Unlike life settlements you are not taking ownership of the policy, you are simply making a loan and therefore there is an interest rate being accrued. Second, most importantly, the policies are held by people in the terminal stages of cancer who typically have 11 months to live.
They have employed what little cash they had in experimental treatments and have probably lost their jobs so are in need of cash. We are saying we are willing to lend them money collateralised against their insurance policy, which then pay out upon their death. The speed of cash events in these products allows us to pay an annual coupon. (Q&A continues below)
Q. How does this model ensure that some of the liquidity problems that have been associated with life settlement funds are avoided?
A. The actuarial work is done in three stages. Initially the insured person calls into the office in America and is put through to an oncology nurse. The oncology nurse can empathise with them and can get the facts on their illnesses and the treatments that they are undergoing. Second, their medical records are sent to a specialist doctor to assess their life expectancy before third, the whole case file is sent out to Fasano, an independent medical underwriter, for an overview to ensure that the case meets our criteria.
For the model to work we need around 25m policies at any one time. The loans are relatively small, $100,000 [£62,000], so should anyone go longer than anticipated it should not materially affect our ability to pay the coupon.
Not only have we gone through these underwriting stages, but we also give ourselves a 20% buffer on life expectancy. That is because there is no recourse to other assets held by the insured, so if we get our calculations wrong and we are paying out more in premiums or the interest on the loan grew larger than the amount we would get back from the life office, we cannot go for any other assets of the estate.
Q. Was it difficult to launch this type of product or has the appeal of alternative investments increased in this climate?
A. Deutsche Bank have agreed to act as administrator and bond registrar for our product. It took a long time to convince them that this model worked and it was worth risking their reputation teaming up with us. The likes of Keydata have caused ripples throughout the industry and a lot of brokers are looking for product providers to show they are being more responsible in terms of what they are putting into the market.
To some extent the broker does not have the coalface experience to know what is going on in many of these products. So it is the responsibility of the provider to be ethical about the way they market their products to ensure that they are not spinning them along. A lot of brokers are still scared of life settlement funds and structured products because of their experience of Keydata.
We have seen growing interest from pension funds and institutions that have sought out bonds to stabilise their balance sheets, and have been encouraged by regulators to do so. With quantitative easing suppressing interest rates and driving the cost of government debt up, these institutions are being forced to look at new products that can ensure a stable level of income. Pension funds are looking for safe assets to gain income as the gap between their liabilities and their funding is expanding because of the low interest rates on other products.
Q. What is the income investors should expect to get from this product?
A. The five-year bond pays 7.5%, the seven-year bond pays 8% and the 10-year bond pays 9%.
The model has been checked by an independent actuary and his opinion is that the product will deliver its coupon when expected and the capital at maturity. We have said should there be a shortfall in any one year then it can be made up in the following year.
As investment manager we have said that our principle remuneration will occur right at the end of term so that we stand last in the queue and have to be confident that this product will deliver.
Q. Do you still encounter ethical objections to these types of vehicles or have they become more broadly accepted by the investment community?
A. The first reaction can still be that you are scamming disadvantaged people who are in desperate need.
When you explain to them that these people are in desperate need but have no other means of raising finance as banks won’t lend to them if they can’t see any way of recouping their money. We are saying to them that they are holding an asset that they perhaps didn’t realise had value and we will carry on the premium payments against this assets. At the end of term we will recover our loan from the face value of the policy and the excess we will return to the estate.
A lot of our supply of these policies come by recommendation from charitable societies who refer their callers to us if they are in need of finance.
Q. What is the minimum investment?
A. It is listed in Ireland and has a €250,000 [£214,000] minimum investment.