How does the Investment Contract (IC) work?

You are buying an interest in the maturity proceeds of a US life insurance policy of a US senior citizen who is typically in their 80s and has an independently determined life expectancy. You also pay fees to establish and maintain this interest.

What is the main risk?

The IC is based on the performance of a US life insurance policy. The main risks are that the life insurance policy does not mature or that it does and the US life insurer does not pay out on the life cover. Exchange rate movements can also affect the value of your investment.

Why would the insurer not pay a claim?

Once the maturity is established, the insurer will check that the policy was in force at maturity, was properly established and was properly transferred before paying. These checks and the maintenance of the policy are the primary focus of the Collegiate Life management and service contracts with experienced professionals. There is also a risk that the insurer is unable to pay. However the market is regulated (with ring-fenced insurance funds) and the US states provide further guarantees of payouts, depending upon the maturity value of the policy. Collegiate Life also ensures that all policies are issued by investment grade life Insurers.

What happens if there is no maturity?

Collegiate Life will try to establish a market value for the reference policy to use to determine the Contract Maturity Amount. If there is no reasonable market for any reason, Collegiate Life will seek an expert opinion on this market value. Where possible the reference policy will be placed into the issue of new Investment Contracts. The placement process avoids many of the transaction costs associated with the transfer of life settlements.

How does the IC compare to direct investment in life policies?

Investment Contracts spread the maturity risk of life policies by applying fees to ICs with early maturities that can subsidise the ongoing cost of life policies backing other ICs. This creates a more even return over the life of an IC. By making the IC expected return lower than the expected return of the life settlement, ample assets are provisioned to support the payment of Contract Maturity Amounts. ICs allow smaller investments to be made that would not otherwise be available.

Why haven’t I seen these opportunities before?

Although the life settlement market is a multi-billion dollar market in the US, it is relatively small in terms of investment markets. It is also a very specialised market that requires expertise and experience to properly price, trade and manage funds. We have this experience and expertise.

Who can borrow against life settlements?

As the life settlement market has evolved, borrowing facilities and insurance for longevity risk have been developed. Both of these typically rely on minimum portfolio sizes to give the providers confidence in the stability of returns on the pool of policies. Since policies are usually held in a special purpose vehicle, it is common for lenders to rely only on the policy assets for security. We have seen lending ratios of 6:1 recently and even higher before the credit crunch.

Should I hedge the longevity risk?

Insurance of longevity risks transfers the primary concern of investors to the insurer. They typically demand much of the excess return for taking this risk. The Collegiate IC aims to take away most of the longevity risk associated with a life policy but maintain much of the excess return.

Why is a Collegiate Investment Contract different