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There is a problem in the liability-driven investing (LDI) world. Well, to be fair, there are numerous problems—not least of all being the current fixed-income environment. No, the problem fingered here isn’t unfavorable markets. It’s the relative lack of long-duration bonds appropriate for an LDI portfolio.
One solution is emerging. “A statistically significant portfolio of life settlements”—a financial instrument that groups together life insurance policies to make a (hopefully) diversified portfolio with a fairly predictable payout period—“is ideally suited for an LDI program, offering double-digit, long-duration returns that are well-timed to match liabilities,” says Darryl Glatthorn, Head of Capital Markets for Vida Capital, which invests in life settlement assets. There is the inevitable pushback from various constituencies, of course. Insurance companies, for one, don’t love the idea of financial backers stepping in to continue paying a person’s premiums. Unfounded opposition, Glatthorn believes. “For all the objections raised by insurance carriers citing the speculative use of insurance policies,” he says, “it may surprise some to know that the largest single portfolio of life settlements known to exist is the $18.4 billion portfolio that is owned by AIG.”
Like LDI as a whole, this solution has a problem too: its image. See, you may know “life settlement” as “death bonds.” They are an investment that pays upon death, and the image of a hedge fund honcho buying up Granny’s life insurance policy can be unsettling. Glatthorn admits as much. “There’s no doubt that life settlements will always raise a moral objection from some investors,” he says. However, the lack of available options in volatile markets likely will force investors’ hands, he believes.
So, will fiduciaries be forced to choose between their morals and their funding status? “At a time when ‘risk-free’ returns are at record lows and success is dependent on ‘outside the box’ thinking, life settlements offer incomparable long-duration, noncorrelated returns that pension managers would be well advised to consider,” Glatthorn says. Perhaps this moral issue—and not an investing one—is the next problem with LDI, then.
—Kip McDaniel