Pension funds bet on death through life settlements [Pittsburgh Post-Gazette]

May 30--Allegheny and Westmoreland counties are trying to reduce their pension funds' exposure to the volatile stock market through a relatively new type of investment based on life insurance policies.

The two governments' modest investments in life settlements -- buying and selling the rights to the death benefits paid by life insurance policies covering wealthy individuals -- is not common in the pension fund world, where real estate, hedge funds, private equity and other alternative investments have been mainstays for years.

Interest in the emerging market was sparked by the stock market's slide in late 2008 and early 2009. The collapse unnerved jittery investors, prompting them to look for investments that moved independently of Wall Street.

"The volatility of the stock market is the biggest contributor to people wanting to look at us," said William Corry, managing partner of Corry Capital Advisors.

The Westmoreland County Employees' Retirement System voted in August 2008 to invest in a portfolio of policies organized by the New York firm, eventually giving Corry Capital $8.9 million.

In December 2008, in the midst of an historic collapse on Wall Street, the Retirement Board of Allegheny County approved investing $5 million with Corry Capital. Allegheny County did not turn the money over to Corry Capital until August because the pension fund's attorney and Wilshire Consulting, the fund's investment adviser, wanted to revise the investment agreement Corry Capital proposed.

Wilshire's David Lindberg told the pension fund's attorney in an April 21, 2009, e-mail that it took his staff "more than 10 hours to summarize all the issues that were unfavorable" in the proposed agreement. Mr. Corry said the differences between his agreements with Westmoreland and Allegheny are minor.

Both pension funds took modest stakes. Allegheny County's investment with Corry Capital was valued at $5.7 million on March 31, less than 1 percent of the $661 million pension fund. The investment produced returns of 2.9 percent in the first quarter and 12.1 percent in the last six months, according to Wilshire.

"So far, the experience has been good," said County Controller Mark Flaherty, one of seven members on the county's pension board. "I think it's a good way to diversify the funds."

Westmoreland County's stake with Corry Capital is valued at $10.6 million, or 3.4 percent of the $306 million fund's assets. It produced a first quarter return of 1.8 percent and earned 10.4 percent over the last year.

"It's sort of a hedge against the ups and downs of stock and bond markets," said Westmoreland County Controller Carmen Pedicone, secretary of the county's pension fund.

Beaver County's pension fund invested in life insurance policies five years ago. The fund's investment in the Attilanus Fund was valued at $11.3 million, or 5.2 percent of the $218 million pension fund, at the end of last year. It has generated returns of less than 4 percent, about half of what the pension fund was hoping for, said County Controller David A. Rossi, a director of the Beaver County Employees' Retirement System.

Mr. Rossi, who took office after the investment had been made, said the pension fund was asked to invest more in Attilanus but declined.

"We felt we had enough exposure," he said. "You have to look at all the factors when you get into these kinds of things."

Life settlements got their start when AIDS patients sold the rights to the death benefits from their life insurance policies in order to raise cash for medical treatment. When drugs extended the lives of AIDS patients, investors who owned the patients' life insurance policies had to wait longer to collect. That reduced the return on their investment.

Since then, life settlements investors have focused on purchasing policies from wealthy individuals who no longer need their death benefits.

For investors who buy and hold the policies, returns are greater if people covered by the policies die sooner than the actuarial tables the policies are based on predict. However, healthier lifestyles and medical advancements have increased life expectancies, tempering the interest of some investors.

"They have not been widely embraced by pension managers," said Steve Boger, whose Palatine, Ill., consulting firm provides guidance to managers of life settlement portfolios.

"The primary source of return is mortality, which is not the normal source of return or risk ... for a pension manager to assess," Mr. Boger said.

Larry Rubin, an actuary with PricewaterhouseCoopers, believes most pension funds do not have the expertise to analyze life settlements. David Hammerstein of Yanni Partners, Westmoreland County's pension adviser, said his firm did not give a recommendation on whether the fund should invest in investment because it does not evaluate insurance products.

"I don't think most pension advisers have life actuaries on staff. If you're looking to buy one of these, you should hire a life actuary to look at it," Mr. Rubin said.

Neither Allegheny or Westmoreland did.

Mr. Rubin said some pension funds shy away from life settlements because they already face the risk of paying out additional benefits if retirees live longer than expected. Investing in life settlements increases those longevity risks, he said.

"That's why a lot of people don't view these as really good risks for pension funds," Mr. Rubin said.

Corry Capital's strategy is not to buy and hold the policies it purchases. Instead, Mr. Corry buys and sells policies the way other managers trade stocks and bonds.

Through insurance agents, Corry Capital purchases policies of people with an average age of 84 and an average life expectancy of seven years. They have an average death benefit of $4 million. The firm holds the policies for an average of 18 months, then sells them to institutional investors, including European hedge funds, Mr. Corry said. Most of Corry Capital Advisors' returns come from trading profits, not by holding a person's policy until they die.

"You're going to get some death claims here or there, but not many because frankly, we're not holding on to them [the policies]," Mr. Corry said.

After expenses, the strategy produced returns of 16.6 percent last year and 14.8 percent in 2008, Mr. Corry said.

He said the trading strategy also makes it easier for pension funds to get access to their money, a concern of many investors.

Five years ago, Allegheny County's pension fund voted to invest $5 million with Attilanus, the same firm that manages Beaver County's life settlements money. Yanni, the fund's adviser at the time, had recommended against it. The board later decided not to go ahead with the investment.

Mr. Flaherty, the county controller, said Corry Capital's portfolio is more diversified and offers easier access to the money than was available through Attilanus. He also cited the benefits of what investment managers refer to as noncorrelated returns, investments that don't move in tandem with Wall Street.

Although Wilshire was neutral about whether the pension fund should invest with Corry Capital, Mr. Flaherty said the pension fund's directors are responsible for choosing where to invest.

"We're truly liable for decisions we make and are held accountable for that," he said.

Len Boselovic: [email protected] or 412-263-1941.

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