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    Home » Few Options for Investors To Access Canadian Secondary Life Markets but a Novel Idea Has Potential

    Few Options for Investors To Access Canadian Secondary Life Markets but a Novel Idea Has Potential

    Features 13 November 2024Greg WintertonBy Greg Winterton
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    Four years ago last month, Canadian politician Rudy Cuzzetto, Member of Provincial Parliament for Mississauga-Lakeshore in Ontario, filed Bill 219, or the Life Settlements and Loans Act, 2020, which was aimed at amending section 115 of the Ontario Insurance Act to allow trafficking in life insurance.

    The bill got a second reading but that, unfortunately for investors that might be interested in such an asset, is as far as it went.

    So, the current state of play in the country is that only those in Quebec are able to sell their life insurance policy, but even so, headwinds prevail; the Canadian Life and Health Insurance Association (CLHIA) requested that Quebec ban the practice back in 2020/21 and even so, some life insurers in Canada forbid the sale of a life insurance policy as part of their terms and conditions.

    So, what other options are there for investors to access longevity risk in Canada?

    Reverse mortgage securitisations are one option. Just recently, at the end of September, CHIP Mortgage Trust sold CAD$175m of senior medium-term notes, which are backed by a portfolio of reverse mortgages from HomeEquity Bank, an originator of reverse mortgages.

    You can also invest in the equity of life insurance companies. Canada has a growing pension risk transfer market which has significant longevity risk exposure, but a range of other exposures mitigate longevity risk, such as mortality risk, operational risk and market risk. Insurance company equity is not a pure-play longevity risk investment (nor are insurance corporate bonds). And, you have only limited choices – Manulife, Sun Life, Canada Life, Industrial Alliance and Empire Life are the only publicly traded life insurers in the country.

    So, reverse mortgages it is. But one idea that could work – in theory – is lending against life insurance policies that are donated to charities.

    Donating one’s life insurance policy to a charity is legal in Canada. And those that transfer the ownership receive an immediate tax benefit for doing so – they receive a donation tax receipt for the actuarial Fair Market Value of the policy, and any accumulated dividends or interest, less any outstanding policy loans, which they can offset against their future annual tax bill for five years. Either the donor or the charity have to continue to pay the premiums to keep the policy in force, of course.

    Which leaves the charity with an illiquid asset that will pay out at a future date. But the charity has no control over that payout. And they can’t sell it, so to monetise it, they would need go down the classic securitisation route.

    “The charity would create a special purpose vehicle which would issue bonds,” said Daniel Kahan, Founder at LifePoint Foundation for People with Special Needs.

    “And the investors would buy bonds just like they do with any other securitised asset.”

    But what of the longevity risk and the j-curve nature of the return stream for a portfolio of life settlements?

    “The SPV would obviously need some kind of liquidity facility or reserve account so that the bondholders could receive the interest payments due in the early stage of the lifespan of the pool. But investment banks have plenty of experience in structuring these types of products and sophisticated investors have plenty of experience in working with them. This is not something that would be a barrier to getting this done,” said Kahan.

    Going down the SPV route is not the only benefit to investors.

    “Larger charities tend to be better capitalised and have access to more funding options than smaller ones, but there are still liquidity risks, of course. If the worst were to happen, then holding the assets in an SPV insulates the bondholders from any kind of balance sheet risk,” said Kahan.

    Unlike the reverse mortgage market, however, should such a market emerge, a wide range of investors could participate. Reverse mortgages are long-term assets; if a 55-year-old Canadian takes out a reverse mortgage, with an average life expectancy of 81.6 years, the loan won’t mature for another 25 years or so. Credit hedge funds can’t onboard that kind of duration, and even private credit investors might need to roll it across a couple of different funds before the SPV reaches maturity.

    But life insurance policy securitisations could support credit hedge funds’ duration requirements depending on the life expectancies of the policies backing the pool.

    “The charity would obtain life expectancy reports, just like buyers do in the life settlement market in the US,” said Kahan.

    “And the policies with the shorter LEs would be the ones that make it into the pool – the longer ones would go into the next pool as their expected maturity date gets closer,” said Kahan.

    Indeed, there is no reason why the bonds could not be tradeable between credit investors, just as regular RMBS products are.

    But what is the likelihood of this actually happening? Are there enough policies held by charities to support a securitisation? Or are investors looking for longevity exposure going to need to be ok with reverse mortgages being the only option?

    “There are those of us in Canada who are trying to get this off the ground – it is pretty clear, unfortunately, that there will not be a similar market to the US life settlement market in Canada any time soon,” said Kahan.

    “But there is no reason that the securitisation model can’t work. Some of the larger charities will likely have enough policies to get this off the ground. And there is a societal benefit to this as well – the proceeds from selling the bonds can be deployed to support the charity’s mission sooner, as opposed to waiting for the policy to mature. The process and the structures are established. It is a case of continuing to talk to charities, structurers and investors to keep the conversation moving forward.”

    Neither Mr. Cuzzetto nor CLHIA responded to a request for comment for this article.

    2024 - November Life Settlements Longevity Risk Secondary Life Markets Volume 3 Issue 11 - November 2024
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