Now that some time has passed, we would like to discuss how the life settlements mortality estimates impacted our portfolio. You can review our past post where we discuss the impact of the updated mortality tables on the market.
We view the mortality table updates as a valuable improvement to the industry overall. However, time will tell as to their accuracy. In the first 6 month period, post update, our GIS General Fund is showing that returns are in line with the target. So far so good. The changes made to the tables were material. To ignore them could not be justified. In most cases, it lengthened the life expectancy of our very elderly lives. The large drop in the Share Price in June 2019 is the result of having all policies in the Fund re-underwritten. This was to take into account the underwriters’ table changes.
Normally, the Fund has re-underwritten portions of the portfolio on a rolling basis. This is due to the buy and hold investment strategy of the Fund. As we operate a regulated and listed investment vehicle, we have the added requirement of having to conform with the US GAAP Accounting Standards around a market value valuation.
It is important to remember that the Fund’s objective is to buy and hold policies to maturity. We do not intend to trade policies as part of the fund’s strategy and as such the new valuations show an unrealised write down for existing investors that will be recouped over the coming years.
What Does This Mean For New Investors Coming Into GIS General Fund Now?
For new investors, the update on mortality estimates creates a buying opportunity. For instance, investors will get exposure to this aged portfolio at a lower price point. Further, they will benefit from targeted or better returns in the coming years.
Some Key Benefits:
- The average age of the policy holder is 89*
- 53% of the original portfolio is yet to mature. There is plenty of opportunity for reaping the returns on these remaining policies.
- The write-down represents the best buying opportunity in the fund to date.
- Assets are valued using the most up to date information and there is more security in acquiring new policies based on better underwriting.
- Above all, our performance fee is only based on actual realised return not based on artificial valuation assumptions.
(*weighted average as at 31st December 2019)
What Is The Real Impact Of These Updates?
The impact of the updates would depend on your chosen strategy. As previously accepted our Fund has a hold to maturity strategy. For this strategy, continually updating underwriting when there is no significant change in the assumptions suppresses the value. So, no policy is given the opportunity to move along its mortality curve. The LE point of the curve is the 50% mark i.e. 50% of deaths should occur before the LE and 50% after. With continually refreshed LE’s all insureds die in the 1st half of the curve – from a practical perspective what this means is the policy is undervalued at maturity.
A Balance Sheet is a snapshot of the financial position at a point in time. So, to value the policies at what they would sell at in the market at that point in time is not unreasonable. However, for a Hold to Maturity Fund, the sale value of a policy at any point between purchase and collection of the death benefit is irrelevant. Clearly the Fund doesn’t intend to sell. The changes in the current value used for reporting purposes do not impact the benefit amounts payable under the insurance contracts held by the fund.
So, when there are no significant changes in the underwriter’s methodology the impact of regularly updating LE’s is clear. It increases volatility on an investment that is supposed to be relatively stable, as well as suppressing returns. However, if there has been a significant change, fresh underwriting is the only accurate way to update for the changes. A significant change could be an update in underwriters’ life tables or a material change in the insured’s health.
Life Settlements Mortality Estimates For A Trading Strategy
If a fund has a trading strategy it completely makes sense that LE’s would be updated regularly. There is no doubt that if you plan to sell a policy you will have to provide a prospective buyer probably 2 LE’s less then 18mths old. This would provide an indicative bid based on these current LE’s. From there they would do detailed due diligence on the policy. This may lead to them finding more or less value, leading to the increasing or decreasing their bid. From a buyer’s perspective the updated life tables and resulting LE’s represents the best buying opportunity that the industry has seen for some time.
Comparing The Impact On Other Portfolios
The willingness of the investment manager to be transparent about their processes is crucial. It is simple enough to say adjustments have been made or they don’t need to adjust, but the proof is in the pudding. When comparing mangers and their portfolios it is important to consider HOW these adjustments have been made if at all. You need to ask the right questions.
Has the manager commissioned new reports on the entire portfolio? Have they estimated the adjustment based on some sort of internal factoring? Have they used an actuary to estimate the impact on their portfolio? As an investor, it is crucial for you to know and to be comfortable with the manager’s justification for their approach. For example, before we commissioned new underwriting reports we asked a reputable independent actuarial firm to calculate the likely impact on our fund. They indicated a drop of around 8%, the actual change on updating with new LE’s was a drop of 27%. Sometimes portfolios can seem too good to be true, be wary of those with no or small adjustments.
The only way to understand the actual impact is to commission 100% underwriting on your entire portfolio. Although some managers may shy away from re-underwriting an entire portfolio. Possibly, due to associate costs and as they reticent to put through a significant drop in value that will impact their performance figures. Investors, be wary of 2019 performance figures that look to good to be true.
Conclusion
We believe that the asset class is worthy enough not to be faked. We have performed a portfolio-wide re-underwriting for the GIS General Fund Portfolio as we believe this is the best way to quantify the impact of the changes.
If put through, the updates give investors more comfort in the accuracy of valuation and the likely returns to be generated. Further, it gives investors greater confidence in the asset class itself. We encourage investors in understanding the impact of underwriting changes across the industry.
Disclaimer: This information is intended for qualifying investors only. It was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding, investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.
