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TLS defended after Lifemark debacle

Traded life settlement provider Mosaic Caribe and distributor PDL International have defended the TLS market in the midst of the Lifemark debacle and FSA concern about the products.

US-based Mosaic Caribe and its UK distributor, PDL International, say that contrary to popular views, the TLS market can offer non-correlated, secure returns for investors seeking long-term capital growth.

But investment IFAs and even other life settlement providers have expressed fears about marketing TLS to retail investors.

Traded life settlements, also known as “death bonds”, are life policies that were taken out by Americans and then sold onto the TLS market.
Subsequent premiums must be paid by the new owner or the policies can lapse. If paid to maturity, the policies often del-iver big payouts and providers claim they are highly secure investments as the insurers tend to be at least A-rated. But IFAs have been put off by problems with Lifemark, in which Key- data placed 23,000 UK investors. Lifemark’s TLS portfolios may collapse as it has little cash to meet premium payments.

Regulators shut Keydata down when it emerged that it had failed to secure tax compliance for products sold as Isas. It later emerged that £103m of clients’ savings in Keydata investment vehicle SLS Capital had been misappropriated.

The liquidity problems at Lifemark have done little to instill confidence in TLS. But PDL International, which is owned by TIS Group, says the problems were caused by Keydata.

TIS group chief executive officer Chris Radford says: “With Keydata, there was a misappropriation of funds that has yet to be solved and they placed it within an Isa and it was not compliant.

“People have latched on to life settlements when the actual story was fundamentally about misappropriated assets.”

He says that where Keydata used a fund structure, Mosaic and PDL are launching a portfolio service aimed at IFAs in the UK that will allow them to handpick TLS portfolios for their clients.

Clients will have to pay premiums covering the insured’s entire life expectancy into escrow accounts, plus an extra 12 months and an additional 3 per cent of the value of the policy for contingency. If the original policyholder lives much longer than expected, then investors will face additional premium payments.

However, SL Investment Management chief executive Jeremy Brettell, whose firm provides TLS funds to institutions, believes that life settlements should not be sold to retail investors.

Brettell says: “The issue for me with life settlements and the way they are currently structured is that there is no consistent valuation basis used by the market.”

He says that often a portfolio of TLS can be skewed with more TLS running on until after the predicted life expectancies.Brettell adds: “The FSA is, in principle, against the marketing of traded life settlements to retail investors.”

In February, in a speech at the European Life Settlement Association, FSA head of investment policy Peter Smith said he had “significant concerns” about transparency in the industry. This led to the ELSA issuing a code of practice last week.

Senior analyst with Hargreaves Lansdown Meera Patel says: “These policies are not liquid so investors who want their money back during difficult periods may have to wait longer than they should and they may get back far less than their original investment.

“While in principal, it might be a good idea for the policyholder who needs access to their money, these policies only pay them less than their final values. There is, of course, the moral aspect of doing this as the fund is basically betting on the pol-icyholder dying.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. All life insurance is basically a bet with the insurance company about the timing of the death of the policyholder. That is how premiums are calculated using the risk assumed by the insurance company based on the infromation provided by the proposer.

    Not all TLS funds are the same. The Cascade fund is based on ownership of individual policies and therefore represents a higher risk of loss due to lack of spread of risk.

    Other funds based on portfolios of policies offer far better liquidity and the opportunity to invest in an asset class that shows positive returns.

    The policies are selected for purchase and the amount of return is know at the outset as that is the sum assured. The amount of profit to the fund is dependent upon the number of premiums that need to be covered before the maturity happens. If the policies are re-valued regularly then the the net asset value within the fund can be established with reasonable accuracy.

    As funds get established, liquidity will improve as it is provided by the regular maturity of policies.

    Liquidity can also be protected with large investors by agreeing with them before the unvestment is made that they will cover any loss if policies need to be sold to meet their redemption. I guess this is fairly similar to MVR in other investment products. It means that the remaining investors are protected from the fund suffering illiquidity.

    The trading of US life settlements is at a similar stage to the vesting of pension funds before Open Market Options were widely advertised. It is becoming more widespread as people are made aware that their polcies actually have some value, rather than simply letting them lapse or surrendering back to the companies.

    From this point of view, it is highly moral that we provide policyholders with much better value if they no longer require their policy.

  2. how does Mosaic declare how much they have paid for the policy in the first place and the amount they take upfront.

  3. All life settlement providers purchase policies through brokers and/or a purchasing medium. The product provider, in this case Mosaic Caribe, buys policies on behalf of investors. Included in the purchase price is the acquisition cost of the policy, all future premium payments up to LE+12, and a 3% safety reserve in case policies live longer than LE+12. This 3% safety reserve is continuously topped up at each maturity.

    Just as with any other securities (equities, bonds, commodities etc) you would not be able to find how much say ICAP or Tullet Prebon take from broking securities between banks nor will you find out how much investment banks take as a spread from their clients – the same logic works here.

    The attraction of the life settlement asset class is that you know your purchase price is considerably less than the guaranteed face amount at maturity. Obviously you do not know when that will be but that is the risk/investment you are making i.e. studies show on average 50% of lives mature earlier than predicted and 50% later. The mean return is 6% – 9% on the Cascade Portfolio, I believe, so attractive and reasonable!

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