Learn the unique history of the secondary market for life insurance (aka, life settlements or viatical settlements). Join Ben Fraser and Anne Buchanan from Preston Capital as they uncover the intricacies of this asset class, including how to underwrite and identify key risks.
Connect with Anne Buchanan on LinkedIn https://www.linkedin.com/in/annebuchanan121/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Introduction and Overview
Ben Fraser: Hello, Future Billionaires! Welcome to another episode of the Invest Like a Billionaire podcast. Had a fun interview today. This is with Anne Buchanan.
Understanding Life Settlements
Ben Fraser: She is Investor Relations at a company called Preston Capital, and they are in a very unique asset class of life settlements. And so this is where they actually buy life insurance policies and become the beneficiary of the death benefit on other people’s policies.
And it’s been an asset class for a long time. There was some negative stigma around it, especially in the 80s for several reasons that she talks about, but it evolved over time into being a pretty institutional asset class, non correlated and very interesting. So we dive into all of it, how they look at longevity risk and different things like that.
So very interesting. Again, we love to highlight just unique asset classes, things that Maybe other people aren’t talking about just so you can learn about what’s out there and what is available to investors like us.
Investment Caveats and Disclaimers
Ben Fraser: And again, I do have to give the caveat as I always do, whenever someone comes on who is raising capital is I have done zero due diligence.
This is purely informational. I brought them onto our show because I’m interested in learning these things. And I hope you do too. But if you do, take that next step or we’ll get more information. Please understand we have done no due diligence. You have to do that on your own.
And go through that whole process to make sure it’s maybe a fit for you, but we have not done any. We’re not promoting them. We have no affiliation. And with that, I’ll let you enjoy the show.
The Invest Like a Billionaire Podcast
Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor And help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.
Free Economic Report
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Interview with Anne Buchanan
Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host, Ben Fraser, and today I’m joined with our special guest, Anne Buchanan.
She is the Head of Capital Formation and Investor Relations at Preston Capital, and we’ve brought her on today to talk about a very unique asset class. So as if you’ve been listening to the show, Invest Like a Billionaire, we love to explore all the unique things that the ultra wealth you’re investing in.
And alternative asset classes are a big core piece of what we focus on. And I was thinking about it over the past two years of doing the show. We actually haven’t had anyone talk about life settlements. And this is something that I’ve not actually had any experience in, but have had just indirect exposure to have heard about it.
It’s a very interesting uncorrelated asset class. And we decided to go straight to the top and bring on an expert in the space. And thanks so much for coming on the show.
Anne Buchanan: Thank you. I do not want to say I’m necessarily an expert, but I’ve now had about a decade’s worth of experience in this space.
It’s quite interesting. There’s misconceptions, but really sophisticated investors gravitate toward this type of asset class. So really excited to dive into it and answer any questions you might have.
Ben Fraser: Yeah. Yeah. Thanks so much for coming on the show. I’m really excited to dive in. And just before we do, give a little bit of your background, how you ended up where you’re at and tell us a little bit about what you do at Preston.
Anne Buchanan: Sure. So probably like many people in the investment world, I started at a very large asset manager that had a broad basket of investments in equities and fixed income, call it very traditional long only. Began my career in April of 2008. So we weathered the great financial crisis and during that time realized that all of these things that people said were non correlated or could provide weathering of a recession and different types of market environments really didn’t hold true in that recession.
It affected institutions, it affected everyday investors. And I was there for approximately seven and eight years. So I really learned more of the backbone of the industry, but always wondered, is there an asset class that could actually hold up when you have pretty dire market events and happened to be introduced to a S at the time, a very small life settlement firm based in Austin, Texas.
That was one of the pioneers in the life settlement space. I came into it not knowing the asset class, not knowing that it was even investable, but I did start to understand the philosophy that the underpinning risk of this asset class is longevity. It’s not the macro economy, it’s not interest rates, it’s not presidential elections.
And I found that fascinating from my traditional long only background that this was a true Nietzsche specialized asset class. So I spent the following six to seven years traveling the world and sharing the strategy of life settlements with investors from everyday ultra high net worth investors to some of the biggest institutional investors in the world.
After that time, I took an opportunity with my current firm, Preston Capital. They have a long track record in this space, they’ve been managing money in this space for quite some time. And I joined approximately a year ago. So I lead their efforts in capital formation and investor relations and am excited that we can share and educate this asset class with a broader audience.
I think that one of the biggest hurdles is just having this asset class become more well known and adopted. So maybe in 10 to 20 years, it won’t seem so nascent and esoteric to the average investor.
Ben Fraser: Cause this is something that large institutions have been investing in for a while.
And it’s form of it has changed over time, which I’m excited to get into, but. One of the things I wanted to just make a point of, because you said, non correlated, uncorrelated assets. And I think, one of the kinds of knocks on public investments, publicly traded investments, whether you’re long only, or even if you’re hedged and you have diversification across different buckets of publicly traded assets.
What’s happened over the course of time is, stocks and bonds and even REITs have all started to have much higher correlations than they used to have. Meaning that if one goes down, the likelihood that the others go down, is higher than it used to be. And one of the big advantages of alternative investments, one of the reasons that we love it, and our, neck of the woods and the real estate side and energy assets and, a lot of other alternative asset classes is you get the, the true on on correlation is difficult to find the public markets because the markets can be very emotional.
It’s very reactive. It’s, it’s, it can be, fear based sometimes. So one. Asset class trends down. So might the others, but with this, there’s really no drivers because when it’s not publicly traded, there’s not a share price that’s going up all the time, but then two it’s a hundred percent based on something that has nothing to do with the economy, right?
And so break down because this is where it gets a little bit. Unique for people. And I think some of the maybe myths or misunderstandings are Ooh, I don’t know, this is something I want to be invested in. Because of the nature of it, but talk about what it is and talk about how it’s evolved from maybe what it was a decade or a couple of decades ago and what kind of changed to The reasons for why these are traded or sold now.
Anne Buchanan: Okay. Great question.
The Evolution of Life Settlements
Anne Buchanan: Many people, when they hear life settlements, their mind. Immediately goes to viatical settlements. That was something that you would see in the 1980s. These were terminally ill people. They were approached by brokers or individuals that really wanted to take advantage of them.
So a dark cloud was overhanging this, call it industry, or just the financial exchange from someone owning a policy and selling it to another individual. That would have to take over those premiums when the original insured passes away. That new owner collects the death benefit. That’s the main gist of what a life settlement is.
But if you go back, let me age myself 30 years in the eighties it was really for you could call it a sad reason. It’s not something that people would necessarily want to invest in. You hear things such as betting on death bonds. It was prevalent at that time. Fortunately, those individuals that were terminally ill triple cocktail came out, people that were HIV positive, many of them still live well until today.
So that phenomenon, or we would call the first wave of life settlements happened many decades ago. So if that’s the perception, you’re not wrong. You just probably haven’t heard what’s happened in the last.
Ben Fraser: So in those scenarios, this is breaking it down again. So someone would have a life insurance policy and obviously how life insurance works. If it’s, whole life you have a named insured, you have a beneficiary. And so what they could do is they created a secondary market where they could sell.
The death benefit and the name to insure is still the same. So the life insurance policy and the premiums being paid are still to insure this person’s life. But then once they pass the death benefit would then be paid to the new beneficiary, which would be the private equity firm or the group that bought the insurance policy at that point.
Is that kind of a simple way to break it down?
Anne Buchanan: That’s right. In 1911, the Supreme Court ruled that a life insurance policy is property. So you can sell your car, you can sell your house, you can donate them. Many people do know about donating life insurance policies to their church or their alma mater, their college, but they don’t realize it’s property.
And as of that ruling in 1911, you have the ability to sell it. Otherwise you’re at the whim of the insurance company. And it’s an illiquid asset. So you’re completely right, Ben. It’s creating liquidity and would, in what would otherwise be an illiquid asset. The trade off, the reason an insured would sell their policy, there’s a myriad of reasons.
If you fast forward to where we are at today, you have very wealthy seniors that are living into their eighties and nineties. They thought they were going to pass away in their seventies, and they were paying premiums along the way. They wake up at age 85, 86, 87, and they realize that they actually feel good.
They feel fine. They have no terminal illness. And there’s this policy hanging out there that they don’t want to continue to pay premiums on. So most of them, almost 90 percent of the individuals, That own these universal life insurance policies that are seniors end up not holding it to a death benefit.
They’ll just lapse it, they’ll walk away with cash surrender value and by selling it to an institution or another investor, the exchange is you get cash upfront. So you’re going to get maybe 10, 20, 30 percent of the death benefit. Upfront in order to release that policy and give that death benefit to the other institution who will continue to pay the premiums and like you said, receive the death benefit in the end.
Ben Fraser: In general. ’cause if it’s a whole life policy, you have a death benefit and you have a cash surrender value. So if you. Lapse the policy, stop paying it, you would get the cash value. But if you sell the policy and you transfer the death benefit and the responsibility of the premiums, you can potentially get more than the cash value, I’m assuming, or else what would be the point, right?
So you’re still selling at a discount to the death benefit, but more than the cash spreader value.
Anne Buchanan: Exactly. So the math is actually quite simple. It’s the execution and. How to do this in a very diversified institutional way that can get a little bit more complex, but you’re right, it would be irrational to sell this policy if you would just walk away with the normal cash render value.
A life settlement by definition needs to be paying someone for their policy. North or above the cash render value, less than the death benefit. So it’s somewhere in between. And all you’re doing is discounting those forward cash flows at a given discount rate. The rate of return that you’re trying to achieve given that stream of cash flows going forward.
Understanding the Risks and Rewards
Ben Fraser: So the biggest risk in this, you said it’s a longevity contingent asset, I like that term. And the biggest risk is people continue to live longer, so it’s, because it’s not a matter of when that payout happens, it’s a matter, or sorry, not a matter of if, but a matter of when, right? And if it continues to get longer longer, that reduces the rate of return, the internal rate of return, because of time.
But I would also imagine, because you are now having the responsibility of paying the premiums, you have to have a pretty conservative approach to Assumptions to maintain paying those premiums because if you stop paying the premiums, then the policy lapses and now you’re not out just the future, death benefit, but all the cash that you’ve put up so far.
So talk a little bit about, what are the things you’re looking for? How are you, how do you approach this? Because, in my view, longevity and, I’m planning on living a lot older than. My grandparents lived and probably older than my parents will live to, which is older than they, their parents live to.
We are seeing a trend towards some pretty big health breakthroughs and how do you quantify that? How do you reduce or mitigate some of that risk?
Anne Buchanan: So there’s a few topics there. One is the general risks of the acid class. And then another is the precision and how does this demographic trend of living longer maybe play into it?
I’ll start backwards. The demographic shift of people living longer especially with the wealth effect, the people that tend to own these large universal life insurance policies tend to be a wealthier cohort than the standard American. All of these things we believe are true. We love medical innovation.
We follow it. We look at everything from the Wigovies of the world, to cures for cancer heart disease, and we think that this is going to be a good thing for mankind and also pose some challenges. The catalyst for why people sell their policies, which increases supply of life settlements, is the fact that they’re living longer.
The longer that people live, you’re going to have this surge of baby boomers. That said, this is great, I actually have lost some weight, I no longer smoke and drink, I’m on a good diet, I’m feeling great, I’m going to outlive my parents. But again, when you wake up in your late 80s and early 90s, the downside of that is, if you want to maintain your lifestyle, again, even if you’re very wealthy, how do you do that?
And you’re looking at different parts of liquidity, maybe you have a second home, maybe you have businesses you could sell, or If you have a financial advisor, you might have someone take a look and say, you have this unneeded life insurance policy. So the fact that people are living longer than ever.
We think it is a net good for many reasons, but we think that in turn is going to increase the amount of policies being sold. But if you back into that.
Ben Fraser: When you’re saying Can I pause you right there real quick? Because
Anne Buchanan: Sure.
Ben Fraser: When you’re saying it might be a net good, is that from The idea that they’re wealthier than they thought they have other assets, other resources.
So this, you don’t really need it. Or is it because, hey, we’re living longer, our financial plan, we might not be hitting it because we plan to, whatever the market didn’t do as well. We didn’t plan to be alive this long, and now we need to find other liquidity. And, with a life insurance policy.
You don’t get the benefit of the death benefit because it gets paid out once you pass. So now I can take some of that cash now at a discount to continue to sustain my lifestyle. Is that more what you’re saying or is it the former?
Anne Buchanan: I’d say it’s a little bit of both. So I would say the wealth effect, the fact that people are living longer than ever we believe is a net good, but even again, even if you’re in that scenario and you are one of the top one, 2 percent of the population, you can invest in qualified purchaser types of assets.
Even in that scenario, like you said, you might say, look, my stock portfolio is down. I want liquidity. I think XYZ real estate, oil and gas, are other interesting opportunities. Where can I tap into that liquidity? If you have this unneeded life insurance policy and your kids are already in their forties, they have their own policy.
Like they do not need this amount of money. It does create a pocket of liquidity. So I actually think that both I would agree with those poses as net net positives to the industry as a whole. And we think it is a good thing for the insureds. Like we’re on the side of the insured.
You might as well tap into it and walk away with some liquidity if you’re going to lapse it anyway.
Ben Fraser: And to that point, if they’re selling it at a later stage of their life, there’s probably a limited runway of, it’s not going to be probably another 50 years. You’re not buying it early on in life.
So there’s probably less risk there because they don’t need it. And so let me just generate some extra liquidity. And maybe I live a little bit longer than expected, but the long tail risk of that maybe is reduced because of the average age that you’re purchasing these ads at.
Anne Buchanan: I would say that when you’re looking at the very senior population, the fact that in our perspective, if you’re 70 and 75, you’re quite young for a life settlement. That should just show you how we really think about age. There are institutional asset managers that target again, what we would call the younger population in their seventies.
which we believe there’s more of a J curve if they live on average longer, or there’s a health breakthrough, a seven year old could easily live to be 95 in the given environment. If you are 85, can you live to 105? What’s a more likely scenario? But we believe in the much more senior population.
So you’re right. On average, the duration is shorter than many other assets. I would also say this is where diversification comes into play. We believe this is about the law of large numbers. AM best, which studies insurance companies and. Give stats on diversification sites that you need at least 300 policies to have ample diversification because we don’t know when any one person is going to necessarily pass away.
Life expectancy is a midway point. It’s if there are a thousand people just like you, age, sex, smoke or non smoker impairments, where you live, wealth effect in that subset, half of the folks would pass away. before the life expectancy and half after. So even though the biggest risk that we believe in this asset class is longevity risk, having precision and accuracy on what is their life expectancy at time of purchase.
We also believe that you need hundreds of policies within a portfolio. To lower the standard deviation and help you have more certainty around what those return expectations could look like versus having five policies. We think you’re rolling the dice. You could have incredible returns or very, unappetizing returns. It could really go in either direction when you have that few policies in a portfolio.
Ben Fraser: Yeah, that makes sense. If you can increase your sample size, increase the number of policies, then the bell curve will hold more true to where you get more of the standard deviation of a large sample set of numbers versus taking outsized risk with smaller.
You might not know the numbers off the top of your head, what has.
The Future of Life Settlements
Ben Fraser: The life expectancy on average increased to or to and from over the past, say, 20, 30 years. And I’m thinking about us mostly, and I’m assuming right by most of us. And then what is the forecast? What are you guys using internally? Here’s where we think from, by 2030 five by 2045.
What are some numbers that you guys just internally benchmark to, or I don’t know if you can share that, but just, what are some just general assumptions of the market on how much longevity and life expectancy have increased in the past and what is it expected to do going forward?
Anne Buchanan: So I’ll give you a general answer, but I would say that we would absolutely bifurcate the general U. S. population and this population. In general, over the past 20, 30 years. Life expectancy increases for a wealthy Western country like the United States on average about 1%. Now there are pockets of the population that when you see suicide or opioids, that mortality has actually gone up.
There are other subsets of the population where it’s gotten a little bit better. So you might see a main article, Time News, in the general population. Life expectancy is increasing. You do need to dig into the numbers to see that men are women’s demographics, all of those things do play a part.
But in general, I would say most institutional investors can and should bake into some type of marginal increase a year, despite anything happening like in absentia of medical breakthroughs or pandemics. If over the past 20 years, everyone’s lived about 1 percent longer. Then what they did the year prior.
I would think that’s a pretty prudent estimation of the population as a whole. If you look at our cohort, one of the biggest things that has, I say, transpired over the past 10 to 20 years is the realization that you shouldn’t estimate these individuals based on the valuation basic table. That’s the standard table that actuaries use to look at the broad U. S. population. It doesn’t take into account. I know I’ve said it a few times, but the wealth effect during COVID individuals that had better access to health care were able to have a, maybe it’s a home health aide instead of being in a nursing home, they were able to get responsiveness if they had any type of symptoms of COVID versus someone that was in the middle of nowhere and was further from a hospital.
Your outcomes and your mortality rate looked different. So when we look at the life settlement cohort, I would just say that we’re, we want to be even more conservative than what the general U. S. population is because they typically have the ability to achieve that. And they have people around them. They have medical innovation.
They have all of these tools. We don’t know what 2030 looks like. It’s a really good question. Is something going to happen to a subset where all of a sudden you see no dementia? Where all of a sudden you see one type of cancer that’s eliminated? All of those things could take place. We diversify in a portfolio that has many different impairments.
Most people have comorbidities. They have more than one. It’s not just one thing that you get at 65, and that’s necessarily the reason you pass away at 95. There’s usually a myriad of reasons. What I would say is we would never pretend that we know exactly what that looks like in 10 to 20 years.
What I can say is what we care about is when we buy the policy, having precision, following that medical health over time. When you own the policy, insureds typically sign HIPAAs. So you can track changes and you can stay ahead of what is coming in case you want to sell it in advance. But it’s a really interesting topic, Ben.
We don’t know what that will look like, but we do see that generally there’s a huge demand from the U. S. and I’d say global population to extend life. So we would not be surprised if in general. We all end up having a longer life expectancy over the decades to come, and we bake that into our expectations.
Ben Fraser: Yeah. And I would imagine too, with the subset of the population we’re going after, which are the wealthier individuals that maybe don’t need this policy anymore because they have a play of assets. They probably also will have the most willingness and capability to go and explore new forms of medical breakthroughs and have the financial resources to maybe take advantage of that.
So there might be a, the more wealthy subset of the population might, expand longevity or expand a lot of expectancy faster than the general population maybe earlier on until. I think it’s more democratized, it’s a more of an aside, more of a funny question, but it’s yeah, I hear some of these I don’t know what you would call them, long range forecasters and people in the medical profession, one guy follows their Peter Diamandis and I think Ray Kurzweil and they’re actually predicting at a certain point we hit this, I forget what he calls it, but something exit velocity or velocity is in there, but the idea is you hit a threshold to where at a certain point they can figure out how to put your consciousness in the cloud and then you basically live forever, but maybe your body dies.
And so that, triggers it to a weird esoteric thought, but, at a certain point, I wonder if, I’m not a believer that ever happens, but,
Anne Buchanan: That’s a very interesting point. I don’t think those are currently baked into insurance contracts or if your mind is uploaded, but it’s a fair question today, isn’t it?
The interesting thing is most of these policies are going to be settled, all of these have already been sold. So you don’t really see as much universal life insurance being sold today. But there is a ton of universal life insurance that is still sitting on the personal balance sheets of insureds across America.
So it’s a really good point that you bring up in the next five to 10 years. Are you going to start seeing that included in contracts? And how would that change the shape of This type of financial transaction. I follow Peter as well. I’ve spoken at conferences alongside him and I think what they’re doing is he’s fascinating and you just wonder what is the domino effect or other repercussions that we’re not looking at?
I think what we would say is if life settlements are a hedge in your portfolio. And we’re a small portion of a portfolio. And at the end of the day, we all live for 250 years. And the biggest issue is this portion of the portfolio does not fare as well. I think there are many other things.
You’d probably be considering before looking at the advantage. So to me, like there’s many other things. That’s why we believe in diversification, not only across the portfolio of life settlements, but across all different asset classes. But yes, if that comes to pass in the next few years, the world will look quite different for all of us.
And it might not be as interesting an asset class but until that happens, we think that there is, that there’s good actuarial science and understanding and we continue to see attractive assets.
Ben Fraser: Totally. No, and I think it’s more just seeing how the industry is thinking about that, right?
Because these are things that are being worked on. We’ve seen pretty big jumps in life expectancy over the past hundred years, as a larger. Timeframes, but to your point, it, it seems as a pretty liquid market and if you have to continue to extend, pay out of the premiums, you can sell maybe other port persons, the portfolio, and if you have a large enough sample of or large enough assets in your portfolio, you can manage through that.
Um. This is a little bit outside of my wheelhouse, but is there any I feel like when we talked before, you said there was like some changes in the tax code or things that also shifted the perspective on, it’s not as compelling as it used to be to hold this asset, until I passed versus selling it now.
Maybe jog my memory if there was some kind of change in the tax code or if not then we can move on.
Anne Buchanan: No, sure. If you go back to the nineties, the estate tax exemption was much lower than it is today. Versus the past 10 years. So many people in the, call it the late nineties or early two thousands.
They bought these policies for estate tax planning. If you had a farm, if you owned a business, and you didn’t want your kids to have to sell the business, sell the farm, if you bought this universal life insurance policy and overpaid early on, that policy would then invest in stocks and bonds, grow over time, so when you hit retirement, effectively that account is debited down.
You pass away and the death benefit is transferred to your kids. But if you wake up and as a married couple, the estate tax exemption is significantly higher than it was when you originally bought the policy. You don’t need that because you won’t have that estate tax gouging of your assets.
Now we don’t know where regulation is going to go. If that estate tax exemption could certainly go higher and it could go lower. But I would say broadly it has. It’s increased overall over the past 20 years. And that is another catalyst of why people just call it offloading these assets. They just don’t need them.
So we’ll see what the future holds, but as of today, I’d say that’s a meaningful driver of supply that we see out there.
Ben Fraser: Interesting. So yeah, there could be changes in supply if the estate tax rules change, not in the favor of selling it. But, again, having hedges in different portions of the portfolio, makes sense.
How do you find a marketplace for these or how do you go and find these individual policies to buy? That’s a whole good thing. Yeah.
Anne Buchanan: Good question. So if I go take out an insurance policy myself, that’s called the primary market. That’s primary insurance. If I want to sell it for the first time as the insured, that is the highly regulated secondary market.
So this is a state by state regulated transaction, which is good. This is what lacked in the 1980s. There was no one to protect the insured from Commissions, all of that transfer of money in the value chain. That could erode value over time. It’s now regulated in more than 40 states in the United States.
There are institutions that buy these. So if you watch CNN or Fox News late at night, there are firms that will advertise like cash now. And you can call them up and sell it directly to them. I’d say that’s one way that people will look to sell their policy. Many people that I would say that we have bought policies from, you mentioned this before, you probably have an intermediary.
If you are, again, call it the top 1 percent of the U. S. population, you likely have a CPA. An insurance agent, a wealth advisor, you typically have someone helping manage portions of that or the entirety of your portfolio. And that individual is a fiduciary. If they really look through everything you have, they could be the one that says, look, we should look out and see where we could sell this.
And there are life settlement brokers that can represent you and say, we’re going to look at your file. And we’re going to bid this out to 10 different firms that are looking to buy this policy so we can get you the top price possible. So that’s the secondary market. Either you’re calling someone directly or you have someone on your behalf help you shop your policy for the highest bid.
The next market is called the tertiary market. That is when an institution has already acquired that policy from someone and now it’s selling it to another institution. That is an unregulated market. So that is Apollo selling it to Berkshire Hathaway. That is, back in the day, I think UBS and Credit Suisse, Deutsche Bank, you had all of these large institutions.
If they sold it to another institution, That is a tertiary transaction. So I’d say those are the ways that you can source policies as an institutional manager, you might buy from individuals. You might only buy from other institutions. So there’s different markets and there are pros and cons of both markets, depending on the competitive nature of the environment at different points in time.
Ben Fraser: Interesting. So say I have a whole life policy that I took out a while ago. I’m in my late thirties, so I’m not hopefully close to dying anytime soon. Could I sell my policy or is that not even within the realm? You said young people were like 70 years old. That’s a little far from that.
Anne Buchanan: The arbitrage is when your original life expectancy curve, when you took out that policy and they look at blood tests, how do you exercise, smoke, drink, they do that overall assessment to decide how much premium you have to pay. When the curve shifts. From the original underwriting, that’s where there’s the arbitrage because the insurance company can’t come back to you and say, actually, Ben, we’re going to re underwrite you.
We now think that you’re healthier. You’re going to pay more. They can’t do that based on your health. However, a third party at time of acquisition could see that shift or change. So the reason I bring that up is. If you have a significantly different health change today from when you took out the policy, some investors out there might see value.
It depends on how much duration risk they want to take on. Maybe you have something that you have caught or you have acquired it from a disease standpoint that there’s some asset manager that says, look, we think if you have that, your life expectancy is probably X, Y, Z. We would actually buy that from a 35 year old.
I would say that is not that is not every institutional asset manager’s perspective, but you’d have to have probably a very significant change in health when you took it out. And the difference is once you get into like your seventies, eighties, nineties. That’s where you see the biggest differences.
Ben Fraser: Okay. And a significant negative change, right? Because if it’s a positive change, then the value of it probably goes down. So I got a fitness tracker a couple of weeks ago, so hopefully I’m moving in the other direction.
Anne Buchanan: Good. Hopefully we never get a phone call that you need to sell as a policy anytime soon.
Investing in Life Settlements: What to Consider
Ben Fraser: The last question is, what are the things to think about as someone that is, investing with? A sponsor, a manager in this space, what are the things you need to be thinking about, is this person, is this group and company experienced? And what’s the difference in strategy?
And, how do you go about and what are the big questions that someone should be thinking about or asking if they’re looking at investing in this space?
Anne Buchanan: So you brought up one that’s very important. I would ask about their experience. There are a myriad of risks, just like any asset class, whether that’s.
litigation, regulation, insurance carrier specific. So although we believe longevity risk is by far the most meaningful and it has likely the greatest outcome in your portfolio, you need someone that’s experienced in all of these risks. Have they gone through it? How long have they been investing? I would say that I would be asking about their precision and underwriting.
Do they have anyone with medical capabilities looking at the policies that you acquire? I would ask, how do you source policies? Do you source from individuals and or do you source from institutions? What’s your competitive edge? I would also want to understand, are they generating returns? By buying a pool of policies and holding on to them to maturity.
So are there returns actually derived from the realizations of death benefits or do they trade? Meaning they do need someone on the other side. Is it more of a trading mechanism and they’re generating value that way. So again. Asking, is most of your returns coming from realized or unrealized gains? I think that could give you profound answers about that type of institution.
The number of people that they have on staff, how much of it is outsourced, all of these things are just, I’d say a few things that I would look at. And I would finally say the structure of the portfolio. There are some firms that have this. In more of an evergreen or open ended structure, and there are some firms that manage this in more of that traditional closed end private credit drawdown structure, there are going to be pros and cons to both.
But I would want to understand the tax implications, how you value policies, specifically if it’s in an open ended structure to make sure that I have the most comfort around. The liquidity risks of those different types of entities. So those are a few things I would look at.
Ben Fraser: And thanks so much.
This is really fun and great insights into this.
Conclusion and Contact Information
Ben Fraser: It’s a very unique asset class. So what’s the best way for folks to learn more about what you guys are doing if they’re interested?
Anne Buchanan: Sure. I think you might be able to put up our information after this but my firm is called Preston Capital.
Our website is https://www.prestoncap.com/. I would say that if you’re interested in learning more. You got, you go on our website, my email address should be on there so you could reach out. We’re going to have a series of just purely educational webinars coming up this year, just like this, Ben, where we’re just talking about what is the asset class? How does it work? What are the risks? So if anyone is interested in learning more from just an edification standpoint. We would be happy to provide that to them.
Ben Fraser: Awesome. All right. And thanks so much for coming on. It was really fun.
Anne Buchanan: Thank you so much, Ben. Take care.
