the importance of a functioning tertiary market for the life · pdf file ·...

The Importance Of A Functioning Tertiary Market For The Life Settlement Industry And Implications For Investment Decisions

Moritz Roever March 6th, 2012 BVZL Conference, Munich, Germany

Content:

● Market History ● Key Findings from Post 2008 Developments ● Risks and Mitigants ● Policy Holders: Status Quo 2012 ● Market Dynamics Analysis from a Liquidity and Transparency Perspective 2012 ● Secondary vs. Today‘s Tertiary Market ● Current Market Perception ● Actuarial Point of View ● Importance for Investment Decisions ● Considerations for a Functioning Tertiary Market

BVZL Conference Chart 2

Market History (I)


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

• Origin of Life Settlement (SLS) market from relics of viatical settlement market

• Institutional European Investors entering market

• Release of 2001 VBT and introduction of pricing tools

• Tremendous influx of capital, particularly from Germany

• Development of Stranger Originated Life Insurance (STOLI)

• Influx of additional capital

• Growing awareness of SLS among insured persons and brokers

• Premium Finance reaches peak

• Sellers market

• 2008 VBT and revi-sion of LE under-writing causes depreciation of existing portfolios

• Credit crunch

• Oversupply of policies

• Buyers market

Q1 2012

• Significant tertiary supply of policies from distressed sellers

• Return of institutional investors

Was/is it still a market?

? Was/is it still a market?


Market History (II) Su

pply

& D

eman

d IR

R

Mar

ket S

ize*

0

20

40

60

80

0,0

5,0

10,0

15,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SLS Transaction Volume (bn USD) Cumulated In Force SLS (bn USD)

0%

10%

20%

30%

40%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sellers Market Neutral Market Buyers Market Estimated Market IRR

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Policy Demand Policy Supply

0.0

5.0

10.0

15.0

FV (bn USD)

* Market Size data 2000-2010: Conning Research, Life Settlements,

An Asset Class Resets 2011

Key Findings from Post 2008 Developments

● Actuarial models underestimated life expectancies ● Mark to market portfolio valuations let to heavy write-downs ● Premiums had to be paid longer than anticipated ● Liquidity problems let to unforeseen structural selling activities increasing downward price pressure ● Credit crunch compounded foregoing problems ● Many leveraged Life Settlements (SLS) portfolios were forced to be liquidated


● Tertiary market unprepared to attract sufficient investment capital and to deal with the sudden flood of disposable policies after 2008

● Lack of market place and transparency forced sellers to rely on established dynamics and structures of the early secondary market leaving as the only opportunity the sale of policies through a limited network of intermediaries without any real access to funding

● Even high quality policies were perceived as “distressed paper” and traded at high IRRs, causing investment vehicles to underperform even more

● Illiquidity due to the lack of a functioning tertiary market became the “new” unmanageable key risk for SLS investments.

● As a result the downward spiral accelerated holding investors back from returning into an asset class with unchanged fundamental appeal (if managed correctly)

Risks and Mitigants


Risk Risk Factors Mitigants

Longevity Risk

• LEs are difficult to predict • Ultra conservative approach to actuarial data and LE providers

• Failure to accurately predict individual or collective mortality may result in lower than expected investment returns/losses

• In-house longevity risk assessment

Credit Risk • Insurance company’s financial distress

or bankruptcy • No carrier below investment grade • Diversification across carriers • Seniority of life insurance claims within

credit structure

Origination Risk

• Failure to meet applicable regulations: Insufficient disclosure / closing documentation results in voidable transaction

• Extensive due dilligence performed by legal counsel and warranties from providers

Headline Risk

• Negative media reports • Use the best of breed legal advisors • Follow best practices • Educate consumers and investors

Legal Risk • Carriers contest policy because of lack of insurable interest

• Legal opinion is required with transfer of all policies to mitigate contestability risk

Liquidity Risk

• Legal final/redemptions of investment vehicle or cash shortage may force policy holders to sell policies ??? • Lack of functioning tertiary market and illiquidity may result in fire sale scenarios and policy lapses


Policy Holders: Status Quo 2012*

Traditional SLS

Policies 33%

Premium Finance

55%

Beneficial Interest

12%

Total Market

Open Ended Funds 18%

Closed End

Funds 17%

Private Equity 16%

Hedge Funds 24%

Banks 13%

Ins. Carriers

12% Private Equity 22%

Hedge Funds 61%

Banks 17%

Premium Finance Holders

Other 19%

Private Equity 27%

Hedge Funds; 45%

Banks 9%

Beneficial Interest Holders Traditional SLS Policy Holders

What needs to be done?

Stuck? The big

question

* Proprietary Research


Market Dynamics Analysis from a Liquidity and Transparency Perspective 2012

Capital Structure Secondary Market Tertiary Market

Open Ended Funds

Closed End Funds

Private Equity

Hedge Funds

Warehouse Providers

Mezzanine

Banks

The vast majority of today’s market participants has a vested interest in a functioning secondary & especially tertiary market since the likelihood is high that they will have to transact in it in the foreseeable future with high liquidity & transparency needs

Deb

t Eq

uity


Secondary vs. Today‘s Tertiary Market (I)

Diverse investor base including: Open & Closed end Funds Private Equity Funds Hedge Funds Pension Funds Family Offices High Net Worth Investors Investment & Commercial Banks Insurance Carriers

Life Asset Capital Market Participants

Sourcing and Origination Participants

Wide universe of sourcing and origination sources includes:

Insurance Agents Aggregators/Providers Life Settlement Brokers Financial Planners Corporations / Banks Premium Finance Companies Portfolio Holders

● Market intermediaries have created mechanisms that enable life asset risk transfer transactions to the capital markets but questions remain: − How seller/investor-friendly are those mechanisms? − How can the role of an intermediary be re-defined into a positive transaction supporting

capacity? − How would those mechanisms have to look like?

Secondary & Tertiary Markets


Secondary vs. Today‘s Tertiary Market (II)

Conclusion: „A functioning tertiary market is the driver for a functioning secondary market“

Insured Insured Insured

Broker Broker

Provider

Investor

Insured

Secondary Market

Seller

Buyer

Tertiary Market

Seller Seller

Seller

Buyer

Buyer

Buyer

Intermediary

Intermediary

Intermediary

Intermediary ? Structure: „in place“ Liquidity: „low“

Structure: „unknown“ Liquidity: „low“

Inter-Dependencies

Current Market Perception


High Transparency

Secondary Market Tertiary Market

High Regulation

Good Documentation

Distressed Sellers

Poor Documentation

PF & BI Portfolios

Risk

Is this really how it should be and does it reflect market fundamentals?

Estimated IRRs: 15-20% Estimated IRRs: 20-30%


Actuarial Point of View

Shouldn‘t market IRR‘s decrease when policies are traded from the secon-dary to the tertiary market since adverse selection decreases over time?

0

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Portfolio Mortality Curve (based on 77 year old male insured)

Seco

ndar

y M

arke

t

Seco

ndar

y &

Ter

tiary

M

arke

t

Tert

iary

Mar

ket

Holding Period (Years)

Expected Mortality

Adverse Selection

• Quantity indicates importance Level accomplished Level not accomplished

Importance for Investment Decisions


Characteristics Secondary Market Tertiary Market

Regulation

Transparency

Product Availability

Lean Fee Structure

Market Pricing (Δ Bid/Ask)

Settlement Process & Documentation

Centralization

Status Quo “well on it’s way” “in it’s infancy”

Considerations for a Functioning Tertiary Market

The overall objective is to enable market participants to trade, process, and service Life Settlements in a secure and reliable environment in a functioning tertiary market


● Central trading platform guaranteeing broad market access

● Accessible for legitimate institutional investors and sellers only

● Exclusion of unnecessary intermediaries

● Transparency over policy supply and demand

● Insight into current market trends (e.g. pricing)

● Low Bid/Ask Spreads ● Lean and transparent

fee structure ● Standard and

streamlined trading & auction process

● Guarantee of anonymity

● Professional document management

● Data privacy protection ● Pre- and post-

settlement policy services

● Best practice settlement documentation, due diligence checklists etc.

Fair-Market Pricing Transparency & Confidentiality Liquidity

Thank you for your attention


Moritz Roever [email protected]

+352 2648 51 22

the importance of a functioning tertiary market for the life · pdf file ·...

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