EY Life Settlements Survey 2013

Transcription

1 EY Life Settlements Survey 2013 Survey results March 2014

2 Introduction EY has completed its fourth annual survey of companies involved in the life settlement industry, with the aim of benchmarking and feeding back the participating companies underlying assumptions, methodology and results as of December This document summarizes the results used for valuation purposes. The participants in 2013 are different to the participants in 2012, although there are some common to both years. The participating company names have been removed to maintain anonymity and numbers assigned in graphs are randomly selected i.e. company 1 in graph 1 is not the same as company 1 in graph 2. The results of this survey will only be communicated to participants and not shared more widely. Where percentages appear within this survey these relate to numbers of participants, and not face value (or equivalent). Some company-by-company graphs have a different number of participants in them. This is a result of participants only answering parts of the survey. This survey represents a summary of information provided to EY. EY cannot be held responsible for the accuracy of the information provided. For subsequent EY life settlement surveys we reserve the right to use aggregate results from the 2013 survey for the sole purpose of demonstrating year-on-year industry trends. Page 2 EY Life Settlements Survey 2013

3 About the participants Base information This survey contains the results of the analysis performed on the responses provided by the 13 participants. 71% of participants policies were purchased before October 2008, with the remainder of policies being purchased after October 2008 Portfolio make up 18% of participants policies have a sum assured of less than $1m, 79% have a sum assured between $1m and $10m and the remaining 3% have a sum assured greater than $10m. A full breakdown can be seen below: 100% 80% 60% 40% 20% 0% Figure 1: Participants' division of sum assured per policy <$1m $1m - $10m >$10m 77% of the participants individual policies are traditional life settlements, 23% are premium financed. 90% of participants policies are single life. The percentage of joint life policies has reduced from 17% in 2012 to 10% in % 90% Single Life Policies Joint Life Policies Figure 2: % of Single vs Joint Life policies 23% 77% Traditional life settlement policies Premium financed policies Figure 3: % of LS vs Premium Financed policies Page 3 EY Life Settlements Survey 2013

4 Survey Results Page 4 EY Life Settlements Survey 2013

5 Premium Optimization 83% of participants optimize their premiums. Figure 4 shows the breakdown of the frequency with which firms optimize premiums. All participants use a minimum premium methodology to set the optimized premium, with most using a buffer. Three respondents use a flat buffer of between $1, Four use a buffer of 1-2 months of COI charges. Participants tend to refresh the optimized premiums using annual statement details or in force illustrations run through either a propriety or servicer valuation tool. Lapsation If the value of a single policy is projected to be negative, 78% of respondents stated that they would lapse the policy which is an increase from 50% last year If the liquidity level fall below the targeted level only 22% of respondents would lapse the policy. If the net asset value to premium ratio falls below the targeted level, the respondents stated that they would not lapse the policies. Only one respondent said they don t have a standardized approach to lapsation. Sensitivity testing 77% of participants perform sensitivity testing which is a decrease from 90% in The rationale for the stress testing is as follows: Disclosure 86% Investor statements 71% New business/investment 40% Regulatory purposes 50% Internal purposes 100% Participants disclose the following sensitivities: Insureds living longer/shorter than LE predicts 80% Discount rate 70% Premium stress 56% LE systematic mis-estimation 50% Liquidity 33% 46.2% 53.8% Monthly Annually Figure 4: Frequency of premium optimisation EY insights Premium Optimization techniques have changed little over the past years. Given the low percentage of grace notices received this suggests that there may possibly be margins in the premiums that could be released improving liquidity. The percentage of respondents optimizing premiums more frequently than annually has dropped slightly from 2012 (67% down to 46%). However all those respondents optimize monthly which is an increase since last year, when most respondents optimized quarterly. This may be for more regular internal reporting and as a result of more respondents having internal tools to complete the calculations. It appears as if the market has reached a standardized approach to lapsation. The sensitivities giving the biggest change in NAV are a 1 year increase and decrease in LEs. These both move the NAV by around 20% on average Page 5 EY Life Settlements Survey 2013

6 Portfolio valuation Participants valuation methods All but one respondent uses in house specialists in valuing their assets. 69% or respondents use at least one other method in addition. For external valuation purposes 90% of participants have the same fund and accounting value 69% allow for expenses in the valuation of their assets. Of these, 63% allow for them on a per policy basis, 37% allow for them as a percentage of fund. A breakdown of the frequency of the portfolio revaluation is shown in Figure 5 Fund value movement over the last three years Participants have seen the following change in accounting fund value over the last three years: 50% have increased 33% have decreased 17% have remained broadly unchanged The majority of participants identified aligning to perceived market values as the primary driver of the decrease in the value of their portfolio. This is a change from last year where mortality re-rating was the considered the primary driver. The same answer was given by the majority of participants for the primary driver of the increase in value in their portfolio Portfolio reporting 53% of participants portfolios are funded by equity, 31% by private capital, 8% by retail investors and 8% by institutional investors. 8% 39% Daily Monthly Quarterly 54% Figure 5: Frequency of portfolio revaluation For accounting purposes 50% of participants report under IFRS and 50% report under USGAAP. 46% of participants believe there has been an increase in regulatory security over the last year, 31% think there has been no change and 23% think it has decreased. 62% expect regulation to increase in the coming year, with the remainder thinking there will be no change. 85% of participants portfolios are held to maturity while 15% are actively traded. EY Insights While the percentage of portfolios funded by private capital has dropped from 55% to 31%, we are still seeing a shift away from equity into different types of funding. This is in line with what we are seeing in the industry The proportion of actively traded policies has reduced from 25% in 2012 to 15% in This is somewhat surprising as we feel that there has been a general move towards managing portfolios more actively. For external valuation purposes the majority of participants have the same accounting value and fund value. This is in line with our expectations. Page 6 EY Life Settlements Survey 2013

7 LE information Underwriter information Participants underwriters are largely consistent. 21st is just the most widely used underwriter with 42% of participants quotes. The main 3 providers, AVS, Fasano and 21st Services have become even more dominant, making up 93% of all participants quotes. A full breakdown of the underwriters can be seen in figure 6. Participant s average LE 85% of participants have an average LE of greater than 60 months and 15% have an average LE of between 24 and 60. Updating LEs 62% of participants have LEs which have been updated in the last 12 months, 15% have LEs less than 6 months old, 8% have obtained LEs between the last 12 to 24 months and 15% have LEs greater than 24 months old The majority of participants update LEs annually, with some updating every 2 or 3 years. A small number of respondents update LEs on an ad hoc basis as they feel it s appropriate to do so. 64% of participants are successful in updating between 80% and 100% of their LEs when seeking updates Figure 7 shows a breakdown of alternative methods used to update LEs: 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 6: Proportion of underwriters used 9% 9% 18% Extrapolate 64% Figure 7: Alternative methods of updating LEs Use existing LEs Use own tables to estimate Other ISC EMSI Fasano AVS 21st Use industry wide database to estimate LEs EY insights The split and use of underwriters has remained similar to that seen in However the share of the 3 main underwriters, 21st Services, AVS and Fasano has increased from 80% to 93%. We thought that more people may have moved away from 21st following the extension to LEs that they made early in Where updated LEs are not received, the majority of participants are using extrapolation instead. We consider this to be a simplistic approach particularly when compared to methods that can use industry data to estimate them. Page 7 EY Life Settlements Survey 2013

8 Mortality information Mortality Table 100% of respondents use the VBT 08 mortality table as the base shape of the mortality curve. In 2012 a small number were still using VBT 01. Mortality curve derivation When deriving mortality curves, 83% of participants use LEs and the remaining 17% use mortality factors The distribution of methods used for deriving the mortality curves with LEs is shown in Figure 8. If two quotes are significantly different 63% of respondents will make an adjustment. Mortality improvements 62% of participants use mortality improvements in their future projections For participants making mortality improvements, a range of between 0.5% and 1% per annum is used for males and between 0.25% and 1% per annum for females, by all but one respondent. One participant uses improvements of 3% per annum. 30% 70% Blend Single quote Figure 8: Method of deriving mortality curve Miscellaneous other 31% of participants model mortality stochastically. 23% of participants have purchased an industry mortality database 50% of participants use external mortality information to assist in their adjustment of mortality assumptions. EY Insights When deriving the mortality curve, the most common methodology used by participants is to use a blend of two LE quotes received. These LE quotes are then used to scale the shape of the underlying mortality curve. We are surprised that almost a third of participants are just using one LE. Given the variation in LEs normally received a blending methodology spreads the risk of the LE being inaccurate. If the LE quotes are significantly different 63% of participants make an adjustment, which is an increase from 50% in The methods of adjustment are unchanged; obtain a third LE or weight towards the longer LE. We expected the number of participants purchasing and using an industry database to have increased since last year, but it is largely unchanged. Where this data is purchased it is being used in some cases to generate proprietary mortality curves. As the life settlements market is maturing the amount of mortality data available is increasing allowing credible analysis to happen. Hence we would expect the use to increase in future years. There is a wide spread in A/E experience among participants. We were expecting experience to be less than 100% for all, but 33% of participants reported an A/E of greater than 100%. Page 8 EY Life Settlements Survey 2013

9 Discount rate Current discount rates Figure 9 shows the discount rates currently used by participants: Market observed 30% 25% 20% 25% 33% Implied IRR on your own book 15% 10% 5% Figure 9: Discount rates used 8% 8% 25% Prices on actual sales from your portfolio Bids received on your portfolio Movement in discount rates Only one of the participants has increased the discount rate during 2013 Discount rate calculation Figure 10 shows the methods used by participants to calculate their initial discount rate Broker / agent / provider estimate Figure 10: Method of discount calculation EY Insights The majority of participants are using a discount rate in the same range as 2012; 11% to 20%. There are extreme outliers at either end of the range though at 6% and 30%. There have been very limited changes in discount rates in 2013 especially when compared to of the participants increased discount rates in 2012, only one participant (who hadn t increased rates in 2012) increased rates in This may be as a result of a lack of market data over 2013 on which to base new discount rates. 46% of the participants have different discount rates for different policies. This rationale for this is either to reflect a difference in purchase price or specific policy features which may impact marketability. The lack of any participants who generate their discount rates from first principles is surprising. While this is not a straightforward exercise it is important in being able to quantify the risks that exist in the portfolio. Page 9 EY Life Settlements Survey 2013

10 EY Life Settlements team Christopher Raham Principal, IAAS Mobile: Office: Fax: Gareth Mee Senior Manager, Actuarial UK Tel +44 (0) Mobile +44 (0) Fax +44 (0) Natalie Gleed Manager, IAAS Mobile: Office: Page 10 EY Life Settlements Survey 2013

11 Important information The information in this pack should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Accordingly Ernst & Young LLP accepts no responsibility for loss arising from any action taken or not taken by anyone using this pack. If you require any further information or explanations, or specific advice, please contact us and we will be happy to discuss matters further..

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