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To call Jean-Michel Paul the grim reaper of fund managers might be a slight exaggeration, but it’s not that far from the truth, either. Paul, who runs the Lorenzo Tonti hedge fund for Axis Capital Management, makes money by calculating when people are going to die.
“If you think about it, death has always been an asset,” he says. “Insurance companies give you a return based on death.”
His fund, which was made available for investment at the end of last month, is a portfolio of life assurance policies bought from wealthy, elderly Americans – typically 80 to 85 years old – who would have otherwise let their plans lapse. His fund buys the policy for an agreed price, continues to pay the premiums and then cashes it in when the person dies.
“I know it sounds morbid but it’s actually a very ethical [investment],” he insists. “Maybe these people would like some extra money. Remember: they’d ordinarily just let [the policy] die and lose out completely.”
Behind the $100m fund, lies a lot of complicated logistics and good, old-fashioned number crunching. The fund’s source of prospective policyholders usually comes from insurance brokers who have in turn found these policyholders through financial advisers.
“A lot of old people stop paying the premiums [of their life assurance policies] at the time when they’re becoming valuable,” says the Brussels-born fund manager. “It’s an industry secret but it seems that a lot – maybe as high as 80 per cent – of life assurance policies are lapsing.”
Once the fund identifies a target policyholder – it aims for an average policy value of about $1m – it commissions a specialist underwriting company to do quantitative research on how much longer that person has to live.
The company examines a number of different factors – where they live, whether they’re a smoker, whether they’ve had health problems in the past or if there are medical problems in their family. The company also talks to the person’s doctor.
“There’s a lot of demographics at play,” says Paul, who earned his PhD in finance from Berkeley.
Then Paul and his team check how much the policy is worth to the fund.
“We have modelling software that calculates the probability of death for every month of every year until and above the projected life expectancy. And based on that, we find a net present value, just like for any other fixed income instrument, for the fund,” says Paul.
Next he explores potential ways to make the assurance contract more valuable.
“For instance, in some cases, the benefit offers coverage until the person reaches age 90, but for an additional $100 a month, it could offer coverage until the person reaches 100. We’re trying to maximise the return,” he says.
Throughout the process, Paul is trying to strike a balance between those who will die sooner, and those who will die later. “Nobody in the world knows better how you feel today than you, but we’re trying to come up with as exact a science as possible to figure it out,” he adds.
If the contract fits the bill, Paul makes a discounted cash offer to the policyholder and his fund assumes responsibility for payments. “Think about the reasons you typically have life assurance – to take care of your children and to make sure that your house is paid off. But when the kids are raised and [the] mortgage is paid, it has no purpose . . . some people would rather have the money.”
The fund, which is mostly – though not exclusively – for institutional investors and aims to make a return of 12 per cent a year, also outsources its method of keeping track of who’s alive and who’s not. “We have a company that calls the person every three months or so to check on them,” says Paul. “Sometimes it evolves into a really friendly relationship and [the company] sends flowers on their birthday.”
Currently, the fund is only targeting American policyholders, but Paul predicts that it will expand. “This is going to be a major change in the industry,” he says. “And I predict that in five years time, it will become a standard retirement option for many middle-class Europeans to use life assurance as a valuable asset.”
After all, he says, it’s a low-risk concept. “It’s just like John Maynard Keynes said: ‘In the long run, we are all dead.’” Words to live by.