Extract from a Life Settlement Report article posted on September 18, 2008

An article in the Life Settlements Report explains that a leading life expectancy underwriter decided to lengthen its mortality tables without warning and surprised market participants who scrambled to keep deals alive.
‘It is definitely causing deals not to be done, some providers are standing by deals. Some are not.’  One life settlement broker was quoted as saying.

Minneapolis-based 21st Services announced during two heavily attended webinars on Sept. 10 and 11 that the changes to its mortality tables would take effect Sept. 16, giving brokers, providers and funders little time to react.

Life expectancy estimates provided by 21st and its competitors are used to help project the length of time an insured is expected to live and thus how a policy should be priced. Underwriters base the life expectancy estimate on a policyholder’s medical records. The number of year a policyholder is expected to love is used to project how much must be paid in premiums before the policy pays out to investors.

Although the impact of the 21st decision is causing pain in the short term, market participants predict that it will help in the long run because it will give investors more confidence in the settlement markets. As the estimates provided by the various life expectancy underwriters come within a closer range, some of the investors’ uncertainty will be alleviated, markets observers said.

‘I am heartened that there’s more convergence in terms of LE’s’ said Emmanuel Modu, managing director and global head of structured finance for insurance rating firm A.M Best. ‘I think it will help the industry because a lot of investors were concerned about the widely divergent life expectancies.

Steve Walker, chief operating officer and founder of 21st Services, said the company revised its mortality charts based in part on new information in the 2008 Valuation Basic Table (VBT), released in February by the Society of Actuaries to help insurers price policies. The changes to the 21st’s charts were also based on its own experience and advice from actuarial consultants inside and outside the company. Walker said.

‘We know that this causes upheaval’ Walker said. ‘We don’t take this lightly’

But he said that this was the only responsible step his company could take give then new information.

‘It will broaden the market’ in the long run, Walker said. ‘If the investors have more faith in it, investor will put more money in it. It will help securitization. That’s the holy grail’

A presentation that Walker gave to investors shows that 21st increased some life expectancy estimates by as much as 35%. Competitors who have analyzed the new 21st charts see average increases in mortality ratings of 20% to 25%

Michael Abraham asks – The question is will this move actually expand the market?

I think one important point is that any fund that carries policies that it now needs to review and where it requires to extend the LE’s should in my opinion do it smoothly overtime or yet again one set of investors will be punished with a reduced share value when in fact the fund might well then find that those new LE’s are overstated /were too conservative) and result in a massive growth in the fund share value because of it benefiting the later investors unfairly in my view.

This is not the first such change and the feeling of this commentator is that what may happen is that more people with perfectly good policies will be unable to sell them. Is the methodology in general flawed? Well my view is that the tables used and the opinions provided will be significantly more accurate on the lives of the ‘healthy wealthy’s’ who are they? Well they are the ones who have access to sophisticated medical treatment and secure and privileged lifestyles. Those who read this blog will know that the writer does not favour this type of policy, but believes in the ‘real policies’ from the less wealthy strata of society where policy values are lower (giving more policies in a portfolio) and lifestyles are less comfortable. The added opportunity in such policies is that many were sold without underwriting and often have a low premium percentage.

One of the institutional funds benefitting from this approach is The Traded Policy Fund, see www.managing-partners.com.

Published on 18 Sep 2008 at 01:00 am