Skip to content
09 January 2017

"The Valuation Game"

By Fred Bell; Actuarial Analyst, SL Investment Management

SL has consistently flagged the issues that can arise through the valuation methodologies used by some Life Settlement Fund Managers. Amongst other potential issues, SL believes that some funds have not taken into account significant longevity revisions in recent times and are using valuation methodologies that are both inadequate and antiquated. Such funds are overvalued relative to their market value, and as a result could be storing up trouble for the future if policy sales become required to maintain liquidity.

The industry is currently devoid of a valuation standard. There are no recognised trading platforms for life settlements, like there are for stocks and shares, that would provide a valuation reference to market; each individual company is able to use its own methodology, and therein lies the problem. Companies are not required to disclose or explain their methodologies. Until such a time that investors can see the methodology being employed and can understand the key differences between accepted methodologies, the risks of unrealistic expectations and unfair comparisons will remain.

SL believes that an actuarial approach to asset valuation is key to preventing policy values being over-inflated. By adopting a prudent and informed approach to the anticipated rate of projected maturities, the valuation is brought closer to a realistic value.

We have seen examples in the market where the valuation basis and the market value have diverged significantly. In an open-ended fund, investors who have subscribed later may have paid an inflated price to buy into funds. Where the valuation basis has remained unrealistic in the light of new information, such as longevity revisions, investors can subsequently find the returns they achieve are well below their expectations.

SL's valuations are conservative. We routinely take account of future mortality improvements recommended by the US Society of Actuaries, as well as the new mortality tables they publish. SL will also periodically update life expectancy assessments and incorporate these into the valuations as part of its on-going commitment to transparency and good governance.

Justifiably, investors will continue to be attracted to this asset class by the impressive returns on offer and a lack of traditional market correlation, but they do need to make sure that the Manager has its feet firmly on the ground and its eyes open to all new information emerging on the asset class.