Investing in Life Settlements

EMS:
Absolutely. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.
SL:
Well, AIR Asset Management is a registered investment advisor. We currently have approximately $700 million in assets under management. We began in 2014 essentially as what we call an asset aggregator, but we established a fund for a strategic partner who had a life settlement fund and we raised money in the United States. And after three years of getting to know the space in life settlements in what we call longevity related assets, we decided to launch our own proprietary strategy in 2017. And we really haven't looked back since. We've had a lot of success and we've grown that proprietary strategy to approximately 600 million in assets since 2017.
EMS:
Great. Steve, so given your focus on investing in life settlements, wanted to hear your high level overview outlook for the space?
SL:
It is a niche, but nonetheless it is an exciting niche. It offers very attractive investment opportunities. The space right now is growing. It continues to grow as more and more people become educated to the benefits of essentially selling their life insurance policies. And when I speak about people, I'm referring mostly to seniors who for various reasons realize that a life insurance policy is an asset and they're able to monetize it by settling it or selling it to a third party. The space has very good two-way flow in terms of supply and demand. New investors continue to enter the space, as well as new supply. So when you look at the supply of insurance policies that are being sold and the new investors that are coming into this space, there has been equilibrium for the last, I would say, five years or so.

So there's been a good balance between supply and demand. In terms of looking at the future, there's nothing to make us really think why it shouldn't continue to grow in the way that we've seen over the last decade. There are very favorable demographic trends in the market. As the boomers continue to age, we will see a class of educated boomers looking to monetize assets, and in doing so, will continue to sell their policies into the marketplace. Additionally, institutions will continue to enter and take advantage of this space because of it's very interesting risk and reward profiles.
EMS:
Great, Steve. And more specifically, I'd like you to touch on some of these great opportunities you see and why they're so great.
SL:
Well, from an investment perspective, the sheer supply of policies coming to the market will provide greater and more diverse portfolio management opportunities for people. I think from the investor side, we see considerable interest across investment classes and non-correlated returns are becoming more and more important. So as more and more people focus on risk and reward, they'll be looking to diversify those portfolios. And in doing such, the attraction or the profile of risk and reward that's generated by life settlements as an asset class and then more importantly by active management of life settlement assets within the asset class, will continue to provide interest and an attractive risk and reward profile.
EMS:
Steve, on the other hand, what are some of the greatest challenges you face and what are you doing to overcome them?
SL:
Like any investment, there are always challenges and there are risks. There's no Christmas gift here, and that's why we talk about balancing risk and reward. The challenges in the life settlement market for asset managers or for investment advisors such as ourselves who manage large portfolios of these insurance policies, can really be reduced to several key risks. And one is really liquidity risk. The underlying assets themselves are what we call level three assets. So to that extent, they're not as liquid as public markets such as a bond or a stock. So there is some illiquidity around it and an asset manager in the space has to be able to manage the underlying liquidity risk of the asset class. And then of course, when it comes to fund liquidity, we also have to be able to manage any liquidity risk that may be tied to redemptions and so on.

So liquidity risk, both at the asset level and at the investor level, is something that you want to be on top of and be able to mitigate effectively. The second risk really is what we call mortality risk. With life settlements, what you're doing is essentially the person who sells their insurance policy is actually transferring the risk to an investor. So what happens is the person that buys the policy assumes the premiums and pays them over time. And then when the person does pass away, you, the investor that is, collects the death benefit. So what you want as an investor in mortality, or what we call the opposite, longevity assets, you want to make sure that your expectations of people's life expectancies are as accurate as possible. So we kind of identify the second risk in this marketplace as mortality risk, which means that the probability that somebody who is the insured will live longer than the actual estimate of their life expectancy. And if that's the case and they live, their life expectancy extends out, the value of the underlying policy will actually decrease because you continue to pay premiums over time, which grow vis-a-vis the death benefit of the policy, which is next. And obviously the inverse of that, if people do pass away ahead of their life expectancy, your realized return could be very, very good. So managing that underlying longevity risk and the life expectancy risk is critical. So a third risk, and one which we really see as a low probability is a sudden major change in medical treatments that can affect longevity. And that is something that we would probably see well in advance of it happening, number one.

Number two, any sort of known advances in medical technology that can expand or lengthen life expectancy for people in the United States is something that we would certainly have some runway and visibility into. So we would be able to manage around those events. And that's why it's such a low probability, but we stay on top of it. We constantly stay on top of advances in medical research and treatments for cancer and so on and so forth. So I would say that those are kind of the three sort of main risks that we sort of think about constantly.
EMS:
Great. Steve, to shift gears a bit, I wanted to touch on ESG and DEI, which are top of mind for the alternative investment industry and wanted to learn more about how AIR is integrating these important topics.
SL:
Well, it's kind of interesting. I mean, from an asset class point of view, life settlements are actually a socially responsible asset class or investment. And the reason why that is, is because we actually provide seniors with a way to monetize an asset that they may never knew they could monetize. And we do this, we buy policies from very wealthy individuals who are over-insured and who won't sell their policies because it doesn't make economic sense. But also, we buy policies from people who need the money to pay for assisted living or to pay for medical expenses or to pay for nursing home care. And to that extent, we fulfill kind of a very important role in helping people ascertain the resources to actually help them better their lives.

Now at Air Asset Management, we're a firm, we're about 20 people and we're committed to a culture that recognizes the valuable of this type of responsible investing and also ESG. So we make sure that for the better performance of our firm, that we have diversity and within our people, and you know, you could see that, it's very, very important for us to have different points of view and to include different people from different types of backgrounds. So that is something that is absolutely very important and woven into our corporate culture. And to that extent, we are signatory to the principles of responsible investing and so on, and we uphold those very stringent principles and we uphold them.
EMS:
Steve, we've covered a lot of ground today and wanted to see if you have any final thoughts you'd like to share with us?
SL:
Yeah, I mean, I would just say, Elana, that from an investment perspective, AIR Asset Management continues to grow. We continue to grow the strategy and we look to probably double our assets to over a billion dollars within two years. We continue to seek out and implement strategies that compliment our main focus on life settlements and to enhance returns and diversify the overall risk of the portfolio. Those are the key things. Having a good sound investment strategy, manage risk as best we can, and generate total return that's relatively non-correlated for our investors.
EMS:
Well, Steve, I want to thank you so much for sharing your perspective with our listeners, and thank you for listening to the EisnerAmper Podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast, when we get down to business.

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