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03 September 2012

"The Valuation Game" By Louise Witts; Senior Actuary

SL has consistently flagged the issues raised by the valuation methodologies used by a small group of life settlement fund providers.  SL believes that some funds have not taken into account significant longevity revisions in the last few years and are using inadequate and out-moded valuation processes. 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.

Currently, there is no standard valuation practice in place, with each individual company able to use its own methodology.  And here lies the sticking point.  Companies are not required to disclose or explain their methodologies.  Until such a time when investors can see what methodology is being used, and can understand the key differences between a small number of accepted methodologies, the risks of unrealistic expectations and unfair comparisons will remain. 

SL believes that an actuarial approach to asset valuation is the key to preventing policy values being over-inflated. By adopting a more 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 become out-of-step. In an open-ended fund, those 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 a lot lower than they expected. 

SL's valuations are conservative; routinely taking account of future mortality improvements recommended by the Society of Actuaries and obtaining revised LE assessments periodically, incorporating 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 lack of market correlation, but they do need to make sure that the Manager has its feet firmly on the ground and its eye to all new information emerging on the asset class.