Asia-Pacific’s first life settlement swap

The $15.2 billion ($11 billion) New Zealand Superannuation Fund has ploughed $80 million into the Asia-Pacific region’s first life settlements swap, in a deal organised by Credit Suisse’s Sydney-based fixed interest investment banking team.

NZ Super purchased through Credit Suisse a long-duration swap intended to mimic the long-term ownership of a pool of underlying life insurance policies, which have been bought on the American life settlements market.

“How it works is that we pay synthetic premiums on the in-force policies and receive a benefit on each policy maturity,” an NZ Super spokesperson said.

“The anticipated IRR is commercially sensitive, however to make any investment we have to be convinced that it will contribute to our overall performance expectation of beating NZ T-Bills by 2.5 per cent or more over rolling 20-year periods.”

Unveiling the life settlements investment (but not the counterparty) in its 2008/09 annual report last month, the NZ Super Guardians offered a careful explanation to the New Zealand public.

“Life settlements are where an insured person transfers the payout benefit of their life insurance policy to a third party, in order to realise a significantly greater than usual surrender value for the policy than from the original insurer. The third party maintains the premiums and receives the payout when the insured person dies. The investment improves the diversification of the Fund as the returns from life settlements are uncorrelated with returns from financial markets. The Guardians do not own individual policies. Rather, the Fund’s exposure is a contract underpinned by a
pool of policies.”

“It remains the case that the returns from the portfolio are directly linked to deaths. The portfolio consists entirely of policies belonging to insured people in the United States where life settlements regulation has been tightened due to ethical concerns relating to privacy, transparency of documentation and manipulation of the insured people. The Guardians are very conscious of these concerns and the investment sourcing process has a number of safeguards accordingly. These include ensuring that each insured person has their own advisor; that the insured’s spouse and all beneficiaries named in the policy sign the transfer document and that the investment manager has a
“closing call” with the insured to ensure they have understood the transaction before it is finalised.”

The NZ Super spokesperson said the life settlements investment had not attracted any attention from the country’s tabloid press as yet, unlike in Australia where investors such as the Victorian Funds Management Corporation
have been castigated for buying into “death funds”.