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"The Valuation Game" by Louise Witts
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
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.