Q&A with Jose Garcia

I went into the finance industry right out of school where I worked for a hedge fund. When I moved to Washington, D.C. I found a small obscure company doing life settlements that intrigued me. I thought this was an asset class, which for someone with a quantitative background like me, would be interesting. And it was, seventeen years later and I’m still in it. Basically, this is what I’ve been doing my entire professional life.

The life settlement market is a secondary market for life insurance. It’s an opportunity for seniors to resell their life insurance for a percentage of the death benefit. Most people don’t understand that they have the ability to settle their life insurance policy. Instead, they often think of life insurance as a way to address at death, the financial burden of estate taxes, real estate debt, income loss, key man risk, etc. Some people get to retirement and realize that they don’t need these policies anymore and they ask themselves “Why should they continue to pay these heavy premiums where they can use that money elsewhere?”.

The life settlement industry gives these seniors an opportunity to resell their policies for a discount of the death benefit. Life settlements, in many respects, is similar to traditional life insurance in that it can share some of the same characteristics. With traditional life insurance, insured's provide medical information to the insurance company. An analysis of medical records is performed as well as a financial background check. Based on the results, the insurance company will assign a risk level to the insured that will set the premiums for each policy. The basic economics to life insurance is that insurance companies collect ‘X’ amount of premiums during the life of the insured and promise to pay the death benefit when the insured passes away. For insurance companies, premiums received is income, and a policy’s death benefit is the liability.

For life settlements, the inverse is true. Premium, are an expense rather than income, and the policy’s future death benefit is the asset is receiving the death benefit. For us, we expect to collect the death benefit at maturity and need to pay the premiums in the meantime. The two industries operate under the same underwriting guidelines, mortality assumptions and similar valuation models. Life settlements are simply a new package of an existing asset class.

It starts like a life insurance transaction, by going through medical and financial underwriting. It is then sent to a number of the buyers/providers in the asset class. They provide the broker with an offer and it moves into a closing process, which looks similar to a real estate transaction. Then there’s the release of ownership and beneficiary rights and after, you go through an escrow process and wait for the insurance to change ownership of the policy. Once approved, the proceeds are released to the seller of the life insurance policy and the policy becomes an investment contract.

One of the main challenges the industry faces is the mortality projections. New Mortality Tables are issued on an ongoing basis and the industry needs to stay on the forefront of any changes since mortality is the dominant performance driver to life settlements.

Another issue we come up against is the ethics of it all. People say we “deal in death”. But, we also provide a very important option to seniors around the US who now won’t lose decades of premium payments. If a senior citizen has paid $100,000 in premiums, we can get $30,000-40,000 back. So for the critics, I often ask them to think of it from a senior’s perspective.

On the demand side, we have a lot of new investors in the industry. Returns are beginning to go down because of that and that’s because people are looking at alternatives to traditional assets. The industry has become more evolved and standardized. Institutional investors can now trade these assets with each other providing a higher liquidity profile —that’s where the industry is heading right now.

Our target investors tend to be pension funds and family offices. They are experienced investors who understand the risk and have the sophistication to perform the proper due diligence as well as having the right time horizon for the investment. This asset class is for investors with a long term 7-10 year investment horizon. Pension funds also understand mortality as it plays an important role in pension fund valuation as well, so they tend to be well suited for this asset class. Family offices tend to be interested investors as they understand the risk and are sophisticated enough to be able to analyze the complexities of the asset class and its investment horizon.

We are starting to take advantage of the saturation of the market and doing some trading and portfolio turnover to magnify the returns for our investors. We see an attractive market for the next few years and keep a watch on the life settlement market rate to determine any future changes to the fund’s strategy.