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26 October 2018

ITM TwentyFirst LE changes

ITM TwentyFirst (ITM), the Minneapolis based US underwriting firm previously known as 21st Services, announced changes to their underwriting basis last week.

ITM have retrospectively analysed the impact the changes would make to their underwriting performed between 2016 and mid 2018, and estimate the changes result in an average increase in the median Life Expectancy (LE) of 9%.

The impact on individual cases will vary depending upon the age, gender and smoking\health status of the life assured - and, for some health impairments, ITM believe corrections to the credit and debit underwriting model may actually reduce LEs.

Underwriting is unquestionably the most fundamental aspect in assessing the value of a Life Settlement (LS) investment. Pricing sensitivity to variances in LEs is far more pronounced than those resulting from similar movements in the pricing IRR.

This is a dynamic that frequently goes unappreciated by investors, who will often focus on chasing higher purchase IRRs, without questioning the underlying underwriting basis.

From a value perspective, it is more important for investors to assess how the underwriting is performed. In particular, how conflicts of interest between parties on the policy supply side (life settlement brokers and providers), and the underwriting\fund management functions are segregated and managed.

Patrick McAdams, Investment Director at SL said, "We have always taken a whole of market approach to both our origination of LS assets, and sourcing of LEs from multiple underwriting firms.

"A vertically integrated model, where the policy sourcing, underwriting and fund management functions are effectively performed by the same company, creates dangerous conflicts of interest that investors should pay very close attention to. This is a view that's certainly reflected in the conversations we have with institutional investors.

"The changes to ITM's underwriting basis were not totally unexpected by SL. We have used an array of independent and industry leading underwriting firms over the years. With the volume of data we've collated we have an excellent understanding of the strengths and weakness of each underwriter and factor this into our market pricing by carefully blending LEs and adjusting the risk premium within the IRR."

To discuss the changes to ITM's underwriting basis or SL's broader approach to LS pricing, please contact Patrick McAdams Investment Director at SL Investment Management.