Pension fund executives might turn to securitized life-settlement policies for their liability-driven investment strategies, filling the gap in the market for long-duration bonds, experts say.
Currently, life-settlement policies which are pools of life insurance policies sold by the holders at a discount to the policy amount and purchased by investors who hope to collect the full policy amount when the insured dies offer an opportunity for pension executives to invest assets in line with their liabilities. But the prospect of securitizing the policies delayed at least until next year by credit-market woes might make the assets more attractive to pension executives.
Securitization will allow for tradability of life settlements and more choices in the marketplace, and when you securitize these assets it will force people to place rules and standardization in place, said Jay Vadiveloo, head of insurance and financial services at Watson Wyatt Worldwide in Hartford, Conn. As a result of this, well see improved analytics as well. This asset class could use some standardization in practices.
Its clearly not overtrafficked investment space, he said. It has potential for pretty decent returns and is not a highly volatile investment a plus for pension funds and endowments. Pension funds and endowments that use an LDI strategy would see the biggest benefits as these bonds would offer them diversification. This asset class is highly uncorrelated to anything else, thus making it very attractive.
Added David Fishbaum, Chicago-based head of the actuarial unit at Oliver Wyman: This is an interesting class that provides high returns and as an alternate asset class would provide LDI investors with a good return and diversification to their portfolios. He estimated that returns could be 9% a year.
Growth in life settlement policies is skyrocketing. In a report, analysts at Sanford C. Bernstein & Co., New York, wrote this market is expected to grow to $160 billion in 2030, up from $30 billion at the end of 2007.
Pension funds such as the $232.1 billion California Public Employees Retirement System, Sacramento, and C$115.5 billion (US$108 billion) Ontario Teachers Pension Plan own pools of the polices., said Lawrence Simon, chairman and chief executive officer of Life Settlement Solutions, San Diego.
Robert Bertram, executive vice president of investments at Ontario Teachers Pension Plan in Toronto, said the fund doesnt directly invest in life settlements, and if they become securitized, the securities could be used as a potential hedge for the pension plans liabilities.
Clark McKinley, spokesman for CalPERs, confirmed the plan owns $200 million in life settlements but declined further comment.