Life settlements are resold insurance policies and can be understood as financing to individuals backed by that person’s life insurance policy

From

Alex Lee

“Be like water … If you put water into a cup, it becomes the cup.” – Bruce Lee . While Bruce Lee is a strange source for fixed income strategies, his advice is apt for our low interest rates environment. Paraphrasing – “when rates are low, become the bank.” How so?

Interest rates will continue to stay low. Quantitative easing (“QE”) persists in most parts of the world as governments and their central banks effectively create more money to fight the pandemic and to stimulate economies on life support. In Australia, the flood of stimulus money and RBA’s Cash Target Rate cut to 0.1 percent will also keep the cost of funding low for banks. Banks make money by lending money at a higher rate than the interest they pay on their deposits. Banks will always seek to minimise interest paid as an expense item. Our current environment and the natural inclination of minimising interest paid will keep rates low.

Instead of hoping for larger proportion of loan returns to be shared as an interest paid expense item, investors can look to metaphorically step into the position of the bank and be a lender to earn the interest that banks earn on their loan books. This is done by investing in funds that engage in the type of financing that banks might supply. For example, there are funds which finance SMEs with working capital loans secured by the businesses’ assets, or finance construction loans secured by property.

The obvious risk with the suggestion above is the ability for an investor to effectively access the opportunities and to then manage the assets. Working with a trustworthy and experienced manager is key to mitigating the risks of such a strategy.

We believe Laureola is one such manager with a specialisation in life settlements. Life settlements are resold insurance policies and can be understood as financing to individuals backed by that person’s life insurance policy. Target net returns on a Laureola managed portfolio are 8-12% p.a. and historical monthly returns were positive in 87 months out of 89 months of operations.

Notable investors in the life settlements market include American International Group (AIG) and Warren Buffett’s Berkshire Hathaway.

By Alex Lee, CFA, Director, Investor Relations – Australia and New Zealand

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