An Approach for Estimating Market Returns for Life Settlements. 5th ELSA Symposium (June 16, 2014) London UK

Transcription

1 An Approach for Estimating Market Returns for Life Settlements 5th ELSA Symposium (June 16, 2014) London UK

2 ..the is: what are the returns which can be reasonably expected from investments in life seklements?

3 Level of projected IRR What is the real return which can be expected from an investment in life settlements? Medical underwriting of the medical underwriters is consistently on clearly distinct levels, and consequently also the respective projected IRR. But obviously there can t be all underwriters right! And what can investors expect as realized returns? Projected IRR*: AVS: Average: 20.9% Median: 16.6% LE used for closing: Standard Mortality [Mt; Y-Axis] vs Age [Yrs; X-Axis] Av LE used for closing [Mt; Y- Axis] vs Age [Yrs; X-Axis] Average: 24.3% Median: 21.0 % 21 st Services: Av LE 21st [Mt; Y- Axis] vs Age [Yrs; X-Axis] Average: 37.4% Median: 30.3% Av LE AVS [Mt; Y- Axis] vs Age [Yrs; X-Axis] *Source: AAP life settlement transaction data; secondary main market, May 2013 to April 2014; all trades where all three LE are available. 3

4 Estimating a real IRR However a realized IRR can be estimated by combining:..probabilistic cash flows which refer to experienced mortality..with actual market prices. The following IRR calculator was used: Used model: probabilistic Underlying data and assumptions: average policy ( dummy trade ) Gender: male Smoking status: non smoker Age: 80.5 years Market life expectancy: 96 months Policy type: Universal life Face amount: USD 2 Mio Premiums: averaged projected premiums of a cohort of actually closed transactions and mirroring the above characteristics 4

5 The realized mortality Calculation of the mortality experience Data base: Fasano Associates Subset: males with age 75 to 85 which were underwritten from 2008 to 2012 Medical underwriting by Fasano: LE months Medical underwriting by Fasano had nothing to do with the analysis itself. It was just used to identify lives similar to that seen in the market. The typical medical underwriting used for such transactions in the past is about 96 months which represents a blended 21 st Services/AVS underwriting. Fasano extracted the actual mortality experienced from this cohort relative to the mortality that would be expected based on the Fasano mortality tables at a mortality rating of 100%. The actual mortality of this cohort turned out to be 145% of the expected mortality (no provision of IBNR). Translated in life expectancy this would be a LE of 114 months. 5

6 Estimation of IRR tpx [yaxis] versus time [xaxis; Months] 30% 25% 20% 15% 10% 5% 0% Age Age Age Age Age Age Av Cash Surrender Value in % of FV [%, primary Y-Axis] Av Transaction Price in % of FV [%, primary Y- Axis] Experienced mortality* IRR Calculator Market price**: 12% of FV * Source: Fasano Associates; mortality curve referring to a defined cohort of male insured which were underwritten between 2008 and **Source: AAP LS transaction data; estimated average transaction price net of CSV of the defined cohort in the main secondary market. 6

7 Estimation of IRR 250, , ,000 Cash In USD per year) 100,000 50,000 Cash Out USD per year) 0-50, Net Cash (probabilis@c, USD per year) - 100,000 Experienced mortality IRR Calculator Market price: 12% of FV Estimated IRR: 13.04% (gross of fees) 7

8 Sensitivity of IRR regarding purchase price Purchase prices influence the return potential. Market prices change, and the purchase price influences the realizable IRR for investors. A purchase price at 21% of FV limits the IRR to 7.97% whereas a purchase price of 3% offers an IRR of 24.47% (all figures gross of fees) % 25.00% 20.00% 15.00% 10.00% 5.00% Projected IRR [y-axis; %] versus transaction price [x-axis; % of face amount] 0.00% 3% 6% 9% 12% 15% 18% 21% 8

9 Different LE lead to different projected IRR Different LE lead to different projected IRR. The shorter the used LE the higher the projected IRR which can be shown to investors. The projected IRR below are calculated against the same prices, so different LE lead to different projected IRR. 50% 40% 30% 20% Projected IRR (LE-114) [yaxis; %] versus transaction price [x-axis; USD] 10% 0% 60, , , , , , , , , , , ,000 Projected IRR (LE - 97) [yaxis; %] versus transaction price [x-axis; USD] 9

10 The influence of fees Fees decrease the IRR to investors. Expected gross IRR at a purchase price of 12% of FV: 13.04% Applied fees: Management fees: 1% of assets p.a. (value of policies + cash) Structure fees (fund structure, audit, servicing, tracking etc.): 0.5% of assets p.a. Performance fees: none Calculation value of assets: Value of policies pool: constant at 12% of face value (maturing policies leave the pool, remaining policies increase in value over time) Cash reserve: USD (estimated liquidity needs for premiums and fees until the pool becomes cash flow positive in month 39). Expected net IRR at a purchase price of 12% of FV: 11.53%. Please be aware that this figure reflects an optimal case (mortality is secure, minimum cash requirements and so forth). 10