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Alternative Asset Opportunities, catalyst, CDC, correlation, credit risk, Event Driven, Grim Reaper, intrinsic value, IRR, Leverage, life expectancy, life settlements, mortality tables, NAV discount, policy premiums, SL Investment Management, TLI, Traded Endowment Policies, Traded Life Interests, viatical settlements
Cash/bonds just bore me… Event-driven investing is a far better alternative. It’s low risk, low correlation, and it offers attractive annualized returns. But the safest short term event-driven investing is time & research intensive, and low absolute returns present a risk (‘picking up pennies…‘). Longer term event-driven/catalyst investing usually offers far better absolute returns, but at a price: i) increased market/economic correlation, and ii) no assurance your returns will be positive. I’ve written about this here. My solution: All I want is a low risk & uncorrelated investment which guarantees significant increases in intrinsic value over time. That’s like asking for the sun, moon & stars…but here’s a snap-shot of the ultimate in event-driven investments:
Recognize that? It’s an example of this gentleman’s calling card:
Yeah, the Grim Reaper, our constant companion, as he patiently waits for our own ultimate event. The chart above was the evolving Life Expectancy (LE) curve in the US. Clearly, in the past century, we’ve learned to (on average) delay the Reaper’s gratification. But with little success in extending the bounds of our mortality, and zero success in shifting that 0% survival rate. Death really is even surer than taxes…
But this very predictability brought forth a life insurance industry centuries ago. For a small/regular premium, people could assure themselves of an increasingly valuable financial asset which transforms into a large lump-sum payment upon death. Buying these life insurance policies from the original owner (and insured) is known as a life settlement – it offers an investment that steadily increases in value, is uncorrelated with the market/economy, and has a relatively predictable (& ultimately certain) value realization event.
But…find a perfect investment, and inevitably the promoters & brokers ruin it for everybody. And life settlements proved a real cess-pit: LEs were under-estimated, miscalculated, or simply falsified. Investors/funds over-leveraged themselves, and/or lacked the resources to maintain premium payments (in which case the policies would lapse!). Viatical settlements were all the rage, only for the insured to live another decade or two as new drugs & treatments were developed. Regulations were ignored, legal corners cut, and buyers sometimes discovered title was never perfected. I could go on…but the long gap between purchase & pay-out was a perfect invitation for fraud & misselling. Traded Life Interests/Policies are now, by popular opinion, a pretty dodgy & despised asset class.
Which sounds pretty interesting to me… 😉 When you discover a hated (but cheap) sector/asset class, hold your nose & ask: Is this a value trap…or a value opportunity? ‘Til recently, potential investment opps. appeared to be sub-scale, unreliable, non-transparent, and suffering from poor liquidity and/or leverage. But one investment company attracted – and repulsed me – its leverage & premium obligations could have snuffed it out! But recently it’s marched out of this Valley of Death. Let me introduce:
Alternative Asset Opportunities PCC Ltd. (TLI:LN)
TLI owns a portfolio of US Traded Life Interests (TLIs), all of which are universal/whole-of-life (no viatical) insurance policies. No policies have been purchased since the original portfolio was assembled (in 2004-06). TLI’s managed by SL Investment Management, who specialize in life settlements. Investec Asset Management is a key shareholder with a 21.7% stake. Directors have a negligible 0.3% holding – unfortunately, quite common for investment co’s.
As of the year ending Jun 2012 (FY 12, from here on), TLI holds 109 policies with a $165.6 mio face value & a current $65.4 mio valuation. The insured are 66.3% male – avg. age is 88.7 yrs, implying a remaining LE of 4.9 yrs. The company has $29.2 mio of debt, but (counting cash/investments & some outstanding policy receivables) underlying net debt was actually $14.2 mio. The company’s annual premium obligation is $8.4 mio for FY 13.
The investment thesis here is pretty simple & compelling: At end-FY 12, TLI’s market cap. was only $30 mio. But the company will inevitably collect on $166 mio of policy maturities! Remember it still has to continue funding premium payments, and has $14 mio of underlying net debt outstanding. But we’re still looking at that $30 mio growing into, say, a $100 mio+ in due course! OK, woaahh, we’re getting ahead of ourselves & there’s some fudging of the math there… But you get the general idea! 😉 Let’s work our way through this properly, starting with the FY 12 B/S:
Note GBP is TLI’s functional currency, but since the majority of (unhedged) net assets are actually in US dollars, I’ll mostly stick to tracking figures in USD. NAV’s based on 40 mio shares. The GBP 81.2p NAV compares to a share price of GBP 47.25p at the time, a huge 42% NAV discount! Now, let’s track the B/S evolution since (via outstanding debt), up to end-Oct:
As you see, we’ve got a $14 mio collection of policy receivables, 3 new maturities totaling $3.35 mio, 4 mths of estimated premiums & admin/interest expense, and then we solve for a $0.6 mio increase in cash. Finally, we’ve got $15.6 mio of net placing proceeds. This was the result of a pretty bone-headed placing recently of 32 mio shares (at GBP 32p per share), precipitated by the company’s aversion to debt, and the lending bank’s (AIB, London) intransigence. I shouldn’t be surprised (and I’m sure dealing with the UK branch of an Irish state-owned basket case bank is no fun), but why on earth didn’t the company:
– Call AIB’s bluff: They’ve extended the loan before & underlying net debt’s down to $14 mio by end-Jun. Maturities have exceeded premiums for the past 4 yrs, so clearly the loan would continue to steadily decline.
– Switch the loan to another bank: Underlying net debt was only 22% of the current policies valuation. Investment companies investing in (far riskier) equities can usually obtain a facility amounting to 10-25% of total assets, so it’s difficult to believe this loan couldn’t have been re-financed elsewhere.
– Sell more policies: Some policies were sold earlier in the year for $10.7 mio, over 95% of their corresponding B/S valuation. Fresh sales, even at a larger discount, would have produced far less dilution than a placing at such a high NAV discount.
But what’s done is done… Two saving graces here – at least all investors (not just select institutions) could participate at the discounted placing price on a 4 for 5 basis & net debt’s now eliminated. The B/S should now look something like this:
The TLIs valuation reduces by about $1.3 mio to reflect 3 subsequent policy maturities, increases by $2.8 mio to reflect premiums, and we then solve for an estimated $2.9 mio of LE adjustments. These adjustments have been an ongoing process, but the future impact should begin to diminish as a majority of policies have been re-assessed in the past 2 years. Net equity jumps by $14.1 mio, due to the placing, but NAV drops to GBP 56.0p (or 56.7p at the current FX rate) per share (based on 72 mio shares). With the share price trading at GBP 38.5p, TLI’s now on a 32% NAV discount. It has no net debt, and owns 106 policies with an estimated current valuation of $64.0 mio, 39.4% of their $162.3 mio face value. Average age is now 89.0 yrs, with a remaining LE of 4.6 yrs, and we’ll assume the same male/female ratio. Hmmm…I’m sure you’re dying to look this gift horse in the mouth – let’s tackle any potential concerns (this chart will prove useful):
Leverage: Zero net leverage! And based on the placing, AIB’s agreed to extend a $24.2 mio loan facility until Mar-14.
Liquidity: The no. & face value of maturities is steadily accelerating, and has exceeded premiums paid for the past 4 yrs. Even if we project a totally improbable scenario (zero maturities for next 3 yrs), TLI can still fund the premiums from its current cash & loan facility.
Policy Lapses/Denials: None since inception, and no reason to ever suggest any denials. If a premium was missed, for whatever reason, the insurance co’s have a reminder process in place (and there’s plenty of fund admin. agents & advisers to sue!).
Tax Risk: TLI’s flagged a $4.7 mio risk of potential US taxes on its pre-Sep 2009 maturities. The merits, or potential success, of a possible IRS claim appear doubtful (and amounts to only 7% of current NAV).
Life Expectancy: Current LE of the insured is 4.6 yrs. This is easy to check here. I’ve used the white male/female tables (p. 18-21) in my model (below). As you’ll note, an 89 yr old white male has a remaining 4.2 yrs LE, while a female has 5.0 yrs. This equates to a weighted avg. of 4.5 yrs which (allowing for rounding) is dead-on with TLI’s estimate.
My model predicts 14.3 maturities in the next year. This might seem steep, but the pace of maturities is accelerating from 5.5-6 per yr in FY 09-11, to 8 in FY 12, to 9 in the LTM. But the model also predicts $21.9 mio of maturities in the next yr, which looks achievable vs. the recent FY 12 acceleration to $16.9 mio of maturities. Ultimately, I suspect the impact of any potential delay in maturities would likely be offset by an improved discount rate on valuations.
Valuation: Investors sometimes complain policy valuations are opaque. TLI can’t be accused of that – they use a 12% discount rate, and provide sufficient info. to easily check valuations. Taking the current $64.0 mio valuation, and a current annual $8.4 mio premium, it’s back of the envelope easy to reach a $162.3 mio FV over a 4.6 yr LE, when using a 12% IRR.
Distressed policy sales have been seen in the market with implied 16% IRRs. I don’t consider that IRR level is valid here, or a source of concern: i) zero leverage, and ample liquidity, means TLI has no need for distressed sales, ii) TLI’s valuation methodology was endorsed by the pricing achieved on policy sales earlier this year, and iii) the latest annual report modeled a 16% IRR would knock 14% off NAV – certainly no disaster in light of the current NAV discount & upside potential.
Credit Risk: 66% of TLI’s insurance counter-parties policies have an A.M. Best rating of ‘A+‘, or better, while over 99% have at least an ‘A‘ rating. Exposure’s spread across 29 insurance co’s, with 54% of policies held with AIG (AIG:US), Lincoln National (LNC:US) & Aegon (AEG:US). I’m confident the risk of policy default is remote for a couple of other reasons:
US state insurance regulators offer an excellent line of defence (they have a far better record than bank regulators!). With weak insurance co’s, they’ve tended to be far more interventionist – for example, demanding capital raises and/or seeking & forcing mergers with stronger competitors. And God forbid US pols. would ever allow media reports of widows & orphans going hungry because some insurance company defaulted on its policies..!? With AIG, the whole vampire squid frenzy obscured the fact a bailout was also considered necessary to protect AIG’s insurance subs. (which were in perfectly good shape). This Eric Dinallo article is revealing.
FX Risk: TLI no longer hedges its USD exposure. This should grab US investor attention: Sure, you’ve got to buy TLI in GBP in London (don’t tell me that’s difficult to execute these days!?), but otherwise it’s a USD stock/exposure. For non-US investors, what’s the big deal? Currency diversification’s an important component of portfolio diversification. Considering the US share of world GDP, and its reserve status, USD exposure remains perfectly sensible in your portfolio (even without a positive USD perspective). In reality, FX losses you might experience are sure to be far smaller than the potential stock upside you hope to realize.
Continuation Risk: TLI originally had a fixed life, ending Mar-12, but has switched to an annual continuation vote (most recently, on Nov 14th). Noting the current shareholder base (who mostly appear to be investing on behalf of private client portfolios), the remaining 4.6 yr LE, and the expected ramp-up in maturities & NAV, a vote for a wind-up doesn’t appear likely (or smart). At worst (if necessary), I’d expect the board would insist upon a prudent 2 yr wind-down period – at that pace, and anticipating further maturities, harvesting at least the then current NAV (or better) seems likely.
OK, so let’s move on to the good stuff: Again, the CDC’s latest 2008 mortality tables are key. This allows us to model a male/female death probability rate for each year out to 2025. At that point, I’m giving up on the old codgers & assuming nobody makes it past 102 yrs of age! But let’s also be kind with my Godly powers – with a click of my magic mouse, I’m granting them all an extra 0.8 yrs – which should generously reflect any potential LE improvement since 2008. I’ll also assume TLI’s policies valuation will steadily increase from the current 39% to 100% of face value over the next 13 years. This is a model of the next 6 yrs:
The following 7 yrs are pretty irrelevant, as you can see:
Of course, the model projects NAV, not the share price. What can we expect for that? TLI now has zero net debt, it’s a low risk & uncorrelated investment, and it guarantees significant annual increases in NAV. If those attributes don’t deserve a share price at least equal to NAV, I don’t know what does?! In fact, let’s argue a more aggressive scenario: US junk bond yields were near 6% in Sep, and still trade sub-7%, while 5 yr Treasuries are at 0.66%. Why on earth should investment grade insurance policies (with a remaining 4.6 yr LE) be discounted at a ridiculous 12%..? If TLI (and/or the market) adopts a significantly lower discount rate in due course, we may see the share price trade at a significant premium, and/or a meaningful acceleration in NAV. Let’s model estimated shareholder returns, assuming the NAV discount’s eliminated within 3 yrs:
The front-loading of returns is vastly more pronounced if we assume the NAV discount’s eliminated within 1 year:
Under either scenario, considering discrete annual returns vs. cumulative returns vs. annualized IRRs, there’s an obvious sweet spot around, say, the 4 yr mark. After 2016, returns become increasingly marginal, and a switch to a different investment is probably warranted. With scope for a 34-71% potential return from TLI in the next year, it makes sense to maximize a TLI portfolio allocation up-front & perhaps reduce over time.
Let’s also check in on 2 other scenarios: a) Let’s say LE is off by a full year, which we’ll also model as zero maturities for a year – plug it in, and it reduces the cumulative 4 yr return from 124% to 104% – certainly no show-stopper!, and b) TLI’s ultimate mandate is ‘to return capital to shareholders‘ – which it’s now basically ready to implement as more policies mature. Presuming the share price trades at a discount, a sustained share buyback (they already have buyback authority) will be the ideal way to return capital, enhance NAV further & boost the share price.
This investment really gives me a warm & cozy feeling…and pops a middle finger at the Grim Reaper! Every day, I think happy thoughts about those old dears just waiting ’round to pop their clogs. I like to think if you’re visiting the UES/UWS of NYC (or maybe Florida’s Gold Coast), you might even see some of these golden tickets wandering about – perhaps embarking on their weekly shuffle to church, or temple? If you do, please check up on them for me. Oh, for God’s sake, don’t creep up on them! You coulda killed ’em with the bloody shock..! And every time I hear of a policy maturity, I plan to raise a glass – c’mon, somebody’s just finished up a pretty good run…plus it means another nice bump for TLI’s NAV!
I peg TLI’s NAV & share price at GBP 86.1p in 4 yrs time, for an Upside Potential of 124%. An amazing return for such a low risk/uncorrelated investment… I’ve gradually built my holding before/via/after the placing. My stake clearly signals the conviction level I’ve got in this stock’s unique risk/reward – TLI is now my largest portfolio position, at 11.1%.
- Alternative Asset Opportunities PCC Ltd. (TLI:LN): GBP 38.5p
- Market Cap: GBP 27.7 mio
- Net Debt: Zero
- Current NAV: GBP 56.7p (at current 1.5921 GBP/USD rate)
- Price/Book: 0.68
- Tgt Mkt Cap: GBP 62.0 mio
- Tgt NAV/Share Price: GBP 86.1p (in 4 yrs time)
- Upside Potential: 124%
TLI Nov-12 (xlsx file, for reference)
TLI Nov-12 (xls file, for reference)
Wexboy 
Hi, the half year report is out, and I’m intrigued to see they’ve included some new information – a distribution table of expected realisations. Weirdly, there are none in the next year or so. I appreciate it is an average, but was still a little surprised. What’s your interpretation?
Hi Tom – you mean their IMS? If you scroll down abt half-way through the comments below, you’ll see comments/questions from Papy02 & my reply in the last day or two on that very topic. Cheers
Ah, ok. Thanks for your comments. You know, I still love this investment. BUT, I think you might be a little optimistic about how soon the discount rate investors apply falls.
1) Most investors don’t have multi year buy and hold time frames, odd though that is.
2) This is too small for institutional investors.
3) Many retail investors wouldn’t get it. They don’t understand that the risk/reward is amazing. They see a headline 12% IRR in a world where stock market is up that much this year.
4) Even if you “get it”, many people think they can wait and time it.
I suspect that this will receive more interest once debt is paid down. I wish I had £40mln – 50mln so I could just hoover it all up myself. I love this investment. My only fear is that the managers do something crazy with the cash other than give it straight back. Also, that they pay it back via a dividend as I don’t hold this in an ISA.
Also, trust me, they won’t be able to get a bank facility elsewhere. So they will need to hold enough cash after 2014 to ensure that they can meet all their servicing requirements without recourse to a debt facility. Being ultra conservative, this will require a big cash cushion and might delay returns, bringing down IRR a little. I guess that’s what the 15% discount to NAV margin of safety is for!
Your points are well made, TLI could stay neglected in terms of its discount rate for some time – but as you know, once things get rolling (who knows when/why that happens) then everybody suddenly wants to pile in..!
The upside’s clearly there – obviously the time it takes dictates your IRR. I can easily live with that – the reason the stock’s my largest holding is probably more about its low-risk/correlation characteristics – it’s a great portfolio anchor if the market turns difficult.
But I will make my argument another way – even if you assume no discount rate changes for the moment, TLI is basically a closed-end fixed-income fund – how many of those are investors finding trading at an NAV discount, let alone a decent discount, these days?!
Chevalier d’Aven,
No, I haven’t added any of that position yet – I’m being far too picky, as it keeps creeping up & I have other things I want to buy also… But it remains on my potential buy list.
Yes, IFT is hairy. There may be some technical/legal reasons that justify a higher discount rate, but I don’t disagree assets & book value may look pretty under-stated in due course. [And I’d be interested in buying it on that basis]. But the problem here may be reaching that point…
The average age of IFT’s portfolio is about 10 years younger than TLI’s – that’s a daunting prospect in terms of likely maturities vs. the cost of premiums for years to come. I haven’t done the analysis, but the prior assertions that IFT’s portfolio could move into net cash generation in 2013 or 2014 doesn’t make any sense to me – but you/everybody shd perform their own detailed analysis to examine likely scenario(s). But considering that major risk, and the over-blown expenses & losses of the business, there are potentially significant cash-flow/financing hurdles in the way of realizing value here.
It’s a shame really – if they would just shut down the whole business & run IFT simply as a holding company for the portfolio of policies, I suspect it would actually offer better investment potential.
Cheers,
Wexboy
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The TLI Half-Year report should be with us sometime this week or next (based on previous years).
I’m a bit concerned that the underlying $ NAV has dropped fairly consistently in each of the last 3 monthly reports.
Last Friday’s NAV statement for Jan 31 (55.2p) is a 1.6p drop in underlying (i.e. $) NAV since Oct 31, offset by a forex gain of 0.8p. Underlying (i.e. $) NAV erosion has been averaging (fairly evenly) just under 1% per month over these 3 months.
Inserting zero mortality in your spreadsheet model, for the year to Oct 13, results in a drop of 1p in NAV for the full 12 months.
So the 1.6p drop in underlying (i.e. $) NAV for the 3 months to Jan 31st is more than should happen in 12mo in the case of no maturities, in that model.
Any ideas what is happening? Even if there have been no maturities in the 3 months, there seems to be some other factor (delay or discount to estimated future cash flows?; distressed sales?; or other impairment??) accounting for most of the $NAV erosion. If there *were* maturities in the 3 months, the “some other factor” must have been larger, to offset the positive NAV impact of those maturities.
OK this is only an underlying $NAV decline of 2.9% and short 3mo “sample” period, but if they do give a downgraded maturity profile in the Half Year report, or have made distressed sales (can’t see why they would need to), or some other ongoing impairment, it could hit the share price more significantly?
Reassurance welcome!
I think my sentence above is relevant: ‘…and we then solve for an estimated $2.9 mio of LE adjustments. These adjustments have been an ongoing process, but the future impact should begin to diminish as a majority of policies have been re-assessed in the past 2 years.’
In the absence of maturities, there’s an expense drag – but as you said, it’s only a 1p or so annually. Wht you’re seeing is the ongoing LE/medical review process – hopefully drawing to a close fairly soon. Lk back fr the past yr or two, you’ll see exactly the same thing you described happening with NAV. All good & proper, but perhaps a little pointless in the end, as I still think the discount rate has to begin moving down (& increase valuations) – I mean, consider the rate vs. the rates on Treasuries, junk, etc., and the fact the discount rate has to converge on zero as LE hds twds zero also.
There hv been no maturities in past couple of mths (they report them monthly if they occur), and no reason to think they wd sell any more policies (no debt/cash issues now). The main thing here is to be patient – it’s a small portfolio, so returns can be ‘lumpy’ (look at the no/value of policies in the middle of last yr!).
Think abt it, how often do you have an investment where your main concern realistically is the risk of a lower IRR over time, rather than losing a substantial slice of principal? Not so good if you invested on day 1 in TLI, but anybody climbing aboard recently shd feel pretty spoiled here…
Thanks Wexboy. Great reply. I’m hoping the expectation of LE adjustments is priced in, and that there will be nothing else to frighten the horses in the Half Year report.
Thks, papy02, And don’t forget you’ve already seen the NAV for end-Dec – so the half-yr report will provide some useful colour, but probably no great surprise.
Seems like their webpage does not work anymore http://www.rcm.com/investmenttrusts/investors_tlif.php. Did they change their address?
http://www.allianzglobalinvestors.co.uk/en/InstitutionalClients/InvestmentTrusts/Pages/USTradedLifeInterestsFund.aspx
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Wexboy,
I really enjoy the blog–thanks for all the great work!
Are you familiar with Imperial Holdings (IFT)? It is an American co with similar investments in life insurance policies that faced some controversy and consequently, activist investor Phil Goldstein of Bulldog Investors took over the board and appears to be currently running the show. I recall that they had similarly conservative discount rates assigned to these policies.
The idea has a bit more hair on it but that is discussed on VIC with the relevant background. It’s an event-driven situation that I’ve been meaning to write-up and would be happy to pass along my analysis in the next month or so.
Best, Greg
Thanks, Greg! Yes, I’m familiar with IFT – I like the fact Goldstein is now in there, and it could possibly offer a higher reward. However, risk’s also much much higher – esp. as they will clearly require more funding in due course. It’s not for me – but I found a detailed read of IFT’s 10K to be useful reference for my TLI investment.
I may have commented below on IFT also – otherwise, I know I commented further abt it over on Alpha Vulture:
http://alphavulture.com/2012/11/22/alternative-asset-opportunities-tli-l/#comments
Liquidity has really dried up in the past week =/
Hi again, Wexboy,
I did some (worrying) analysis of the numbers over the weekend (I only just got time to finish it and post). Please someone shoot this down (I must be a born pessimist)!
As we know, the elephant in the room is the mortality-experience to date. There were 31 deaths from July 07 to Jun 12, = 20.3% of the 153 lives insured as of June 30 07. I matched that 20.3% 5yr cumulative-mortality vs 5yr-forward-cumulative-mortalities from the CDC 2008 white-male and white-female tables (as the Male/Female ratio is remaining roughly constant, we need to match M & F separately). I.e. if you just had the mortality info (number of deaths each year), and the fact that M/F ratio has remained constant, what average-age would you estimate this set of policyholders to have been in Jun 07, from the CDC tables.
It turns out this mortality experience is approx that of a cohort 10 yrs (on average) younger!
The question now is whether these policyholders will continue to experience mortality-rates as if they were (on average) 10 yrs younger, or, as per Wexboy’s, and (presumably) TLI’s, assumption, start acting their age and hit a brick wall, with mortalities rising nearer to those for their actual ages, starting next year. The former (“I feel 10yrs younger”) assumption, or anything close to it, destroys the investment-case for TLI (try plugging in that set of mortality figures for the next 13+ years). But I worry whether the latter (a big step up in mortality-rates starting next year) may be a triumph of hope over experience?
I buy TLI’s argument that adverse-selection means folk who knew they only had a short life-expectancy will not have sold their policies, (hence my analysis is over-pessimistic) but am surprised this effect still persists after 6+ years (no significant turn up in mortality-rates pa towards those appropriate for their age so far). Clearly the sample-size here is small, so it’s possible that luck is a primary factor (though TLI comment this unexpected low mortality is an industry wide experience). Either way we seem to be gambling on a step change up in mortality rates soon? Which may happen, but I can’t point to a reason why.
Hoping to be shot down on this.
PS: if anyone wants to check my workings: I used the 20.3% forward 5yr mortality vs the CDC tables and (assuming White-only) I made the average “apparent age” for Males in June 07 to be 73.3 yrs, and for Females 76.9 yrs, for an overall average in June 07 (two thirds M vs one third F) of 74.5 yrs “apparent average age”.
A few points, I suppose:
i) If you assume that kind of adjustment in age, back of envelope that could imply over a third of the current insureds are still alive at 100 years of age – do you really think that’s likely?
ii) I tend not to focus so much on self-selection, adverse-selection, incremental longevity factors etc. – they remind me everybody thinks they live in Lake Woebegon, and they’re all above average… That’s a luxury we all might enjoy when we’re 70, or even 80 – but when you’re hitting 90 & 95, that exceptionalism & your options tend to rapidly diminish in the face of insistent Death, even if you have a pretty nurse bending over every hour to adjust your oxygen tank…
iii) In the past 6 mths (to end-Oct), there have been 7 policies & $17.4 mio in maturities – bang in line/better than what I’ve projected for the next year – considering the v small total sample size here, I think we’d all agree that it’s basically just as valid to focus on this outcome as it is to focus on the last few years.
iv) The return I focus on (above) is primarily restricted to the next few years, and that probably depends more on a compression/elimination of the NAV discount (as we are seeing) than the long term actual path of maturities. A compression of the discount rate (as we’re seeing everywhere else in US assets) may enhance near-medium term returns further. Share repurchases (at an intrinsic value) may offer additional upside.
Hi Wexboy
oops, sorry about previous empty post.
Just wondering what you make of the very interesting “Distribution of Life Expectancy estimates” table in Friday’s IMS.
My thoughts:
1) I plugged these numbers into your spreadsheet (ignoring the caveat about “an estimate not a forecast”;-), in place of your CDC+.8yr derived ones. It reduced medium-term returns slightly – e.g. I get around 86p SP/NAV in Oct 17, (vs you had 90.4p). But I’d also changed the fair/face line to reach 100% much more rapidly – in Oct 2020 rather than Oct 2025 as you had (i.e. reflecting the final maturities in their table), which I need to think about (eg is this more aggressive than TLI’s compound 12% discount rate).
2) Given (1), I struggle to see why TLI’s “No Underwriting” line in their sensitivity analysis is *more* pessismistic from an investor perspective vs their actuarial LE estimates.
3) In the modified spreadsheet, the maturities are less front-end loaded than you had, meaning that if this is how things pan out they will need to rollover the AIB financing (eg spreadsheet shows $22m bank loan in Oct 15). Again, ignoring their caveat that “this is not a cashflow forecast” 😉
4) BTW, the table shows 106 policies vs the 105 in the text – the extra policy is the $300k one that they were recently notified of maturity but haven’t yet recognised. I pulled this policy maturity fwd in the table, but the low value is not material.
I would be interested in your thoughts, and whether you get similar results/ conclusions.
Papy02 – yes, that table’s good to see – presuming they continue to publish it, it’s something we can all begin to rely on. I think some analysis/comparison with a CDC distribution is a good sanity check, but I’ll probably plug this distribution in as a replacement in my table, in due course. I think each shareholder will have to decide if they want to tweak it to add some further longevity.
I don’t have any concerns on the funding front – the ever-reducing LE, and the current v low Debt/Assets ratio, offer a lot of comfort going forward. As I’ve said anyway, they can surely find a better home than AIB for this facility, in due course.
I’m not sure I agree with zero maturities for the next 1.5 years – I understand their logic, their maturities reflect a specific LE, but actual maturities will be distributed around expectancies – so I suspect a decent maturity or two will pop up.
The proof will be in re-creating my analysis, which I’ll get around to eventually, but eye-balling it (& per your comments) this certainly doesn’t seem to suggest any kind of radically different scenario. As I’ve probably said ad nauseam, considering all the circumstances & the environment we’re in, I still think the biggest driver of NAV & share price in next couple of years won’t really be maturities – it will be the discount rate TLI and/or investors assign to policy valuations. I still think there’s scope for a significant reduction in that discount – after all, junk bond yields just hit 5%!
Hi Wex,
I was going through your TLI – Debt Tracking spreadsheet … where do you get the Policy Maturities and Policy Receivables from? is it an estimate?
thanks
Hi Filipe,
Sounds like you are looking at the Bal Sht page, yes? Purpose of the page was to advance from the reported June balance sheet & NAV to end-October. I could probably have done it more simply, but I’ve always found it a useful means of reconciling & estimating TLI’s NAV as it progresses.
Everything is taken from the latest results and/or subsequent press releases, so the only thing I really had to estimate was a policy fair value adjustment of $2.9 mio to reconcile to TLI’s reported NAV of 56p at end-Oct. This plug might seem unusual, but there’s been an ongoing process of policy LE/fair value adjustments – which I suspect is now drawing to a close (as most policies have been re-assessed in the past 2 years).
Cheers,
Wexboy
Hi Wex,
Thanks for the quick reply, I also went through the latest press releases but couldn’t find the Policy Maturities (USD 3.35Mn) and Policy Receivables (USD 14Mn) you plugged into the Debt tracking table (lines 33 and 35 in the balance-sheet spreasheet. Maybe I missed a statement. Soryy to be picky, but I’m going through all the numbers and those two are kind of important =)
tks
Filipe
Filipe – the $14 mio of Receivables & a subsequent $2.8 mio policy maturity are both detailed in TLI’s final results: http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11332405
Two further policy maturities, totaling $0.55 mio, were announced here: http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11366092
Have you considered what would happen if the portfolio is not evenly spread in terms of ages. One of your key assumptions here is that weighted average age is increasing every year by 1 year. I would argue actually that if the portfolio of life settlements is constructed with many let’s say 92 years old and 80 years old. As the 92 year olds dies the weighted age of the portfolio will actually decrease even accounting for the aging. I guess what that means is you will potentially have a much bigger front loaded cash income, and you have to make sure that the management does not do something stupid.
It’s a gd point: The avg. age appears to have risen pretty smoothly over the yrs, despite maturities & sales, suggesting a pretty normal population distribution. And this population was pre-selected – we know sub 70-75 yr old insureds aren’t that interesting to life settlement purchasers, we know a purchaser’s criteria & target return will generally focus them in on a v specific age range, and we know policies were purchased at least 7 yrs ago at this point – all pointing to a tight age distribution arnd current 89 yr avg. The math pretty much dictates it, anyway – to be simplistic: If you’re worried there’s a bunch of sickeningly healthy 79 yr olds in the population that wd imply the same number of 99 yr olds also, an unlikely prospect.
Knowing the distribution around the avg. age wd certainly refine the model, but make little difference I guess in returns over the life of the company – i.e. the older ages compensate fr the younger ages. It might cause returns to become that little bit more front-loaded though, as you say, hopefully we see that make a contribution!
Hi Wexboy. Great analysis, and interesting comments/replies.
I’ve taken a punt-sized position but am hesitating before committing more. Why? :
Typical investment company setup – board are placemen with no operational role. The real power/knowledge/control is with the unaccountable Investment Manager (+ Manager in this case?). As one of the comments above noted, the Investment Manager / Manager /Board are motivated to string this out while maximising funds under management, to continue to maximise their fees as long as possible. (Also to devise other ways to get their hands on the cash – related-party transactions, core assets vs cell, etc).
Your analysis is compelling. But so would have been an analysis at launch, or in 2006 when they completed buying policies. Why will the next n years pan out better than the story to date?
History to date is: raised over £50m from shareholders (incl the recent capital raise), made $32.4m (£20m) gain from maturities, result is a NAV of just over £40m (at 56p/share) and market cap of £33m (at 45.75p/share). Existing shareholders who didn’t add in the recent placing have lost about 44% of their initial investment when measured using NAV (more if measured by share price).
Where did the (£50m+£20m-£40m = £30m) money go? £3.3m to the Investment Manager and Manager, £3.4m loan interest, A large chunk will have been spent on premiums, but should have been (at least) offset by a reduction in discount to face value. Would be interested in a full analysis.
Some of the big mistakes to date have been:
– initial estimates of LE were WAY off. As commented above, difficult to believe this is just bad luck or overall longevity trends for octagenarians.
– £7.4m lost in a failed (now closed) currency hedge (shareholders have atm lost a further couple of % in £ as the ex-rate has moved the other way since the hedge was closed!)
– guesstimate £1.3m face-value lost by recent “distress” selling of policies before maturity.
– Huge dilution in what you (with admirable restraint!) call a bone-headed recent capital-raising. This, and the related loan facility, make no sense whatever from a shareholder or business perspective. You have to wonder therefore what motivated it. What are their plans for that loan facility?
That’s all history and the current shareprice reflects it. But imv you have to allow an incompetence/greed contingency-discount to a logical analysis of likely investment outcome. But I have no ideas how to quantify that. You have to assume we are at the end of the mistakes/ bad news, or at least that future ones will have less impact than those experienced to date.
Comments welcome. I would like to conquer my timidity!
Thanks, papy02. TLI’s a specialized investment company – I think we can assume most shareholders here now are that much more savvy & analytical. Any unusual transactions wd stand out like a sore thumb… The investment objective’s v clear also – return capital to shareholders – any departure from that wd immediately be called out by shareholders (and prob. need to be approved by them anyway).
I don’t analyze past mistakes necessarily, unless I think they’ll tell me something abt a company’s future (risks). The whole industry was a mess for various reasons, but as a result it’s finally offered up a safe & cheap opportunity for us (don’t forget, I’ve been tracking TLI for yrs). I’ve reviewed all accts – I hvn’t done the reconciliation you mention, but I’m confident everything tics & ties if you do the analysis – the decline’s ultimately due to LE adjustments, plus leverage & now dilution. It’s worth mentioning (you don’t imply it, but I’ve seen it elsewhere): Some people consider the co can’t be trusted as it was so colossally wrong on LEs…based on the notion that everybody shd have kicked the bucket by 2012. Wrong! The co never expected that, they actually envisioned 2012 might be an ideal (?!) point to sell all remaining policies. Also worth highlighting my (& other investors’) models are built independently of the company, and the company’s own info & valuations are easy enough to separately verify.
Yes, the placing was bone-headed, but TLI very nearly expired sooner than most its old dears… The board has had a pretty single-minded & admirable focus on reducing & eliminating its debt ever since – so this placing can also be considered a rather inevitable end-point for that process. Of course, this now demands a major change in perspective from the board – we’re now entering true value realization mode. The immediate priority is to get away from AIB – a crippled bank & not to be trusted. The loan facility needs to be switched to another (better) bank – who cares if there’s commitment fees involved.
Presuming that, the company now has zero net debt & can cover abt 3 yrs of premiums (& that’s assuming NO policy maturities)! Quite frankly, the obvious & immediate next step is to say ‘spend a yr of premiums’ on share buyback – before the discount closes further, and the NAV really starts to ratchet up. $8.4 mio could currently retire over 15% of the company’s share capital at a substantial discount. To still have 2 years of premiums covered, plus regular policy maturities, assures financial stability and scope for further buybacks (& then returns of capital if/when the discount to intrinsic value is eliminated).
Many thanks for your detailed reply – very much appreciated. I did buy more in the end (decided I was over-twitchy – influenced by similar runoff situations, most recently CPT, which have been good to me overall, but leave a nasty taste re whose interests are being served first, and apparent ability to just ignore shareholders).
Having just issued a shit-load of new shares at 32p to qualify for the loan-extension, may be too embarrassing for TLI to do share-buybacks above 32p anytime soon? Hope I’m wrong tho.
TLI definitely looks worth taking the risk overall – many thanks for flagging it and for your comprehensive analysis. Would be nice to have an activist investor or two (Laxey or similar) join us in size, to hold feet to fire!
Couple of points of detail: a) As you use the CDC mortality figures (though I couldn’t match vs CDC?) your LE is conservative vs TLI’s central case (I made 6yrs from your “No. Of maturities” line(?) vs TLI’s 4.7yrs), which is goodness. b) Your Fair/Face value ratio increases linearly with time. Compound (exponential) discount-rate, as used by TLI, between same end-points, would push significant NAV value out to later years. But I need to get my head round IRR incl the premium payments (my impression is that your calc is nevertheless conservative on this point as TLI’s 12% discount rate and 39% start ratio would give a much shorter time to 100% maturities?).
Cheers and thanks again.
Good to hear, papy02!
a) If you open the spreadsheet, there are some hidden lines that generate the probabilities you see above – take a look and you shd be able to match up underlying probabilities exactly to CDC white male/female tables. You’ll see I’ve built in a 0.8 yr LE adjustment. This ostensibly reflects the expected increase in LE since 2008, but as a reader or two have pointed out, that improvement’s unlikely to benefit the oldest cohort of the current population – hopefully this provides a little upside, if not I’m happy at this point to have a more conservative LE adjustment.
b) The premium schedule needs work, and a more complex approach to valuing the policies would add valuable improvement to the model. But I agree, the 12% discount rate may prove conservative in due course, and returns are inherently front-loaded particularly if you model a closing/elimination of the discount (which seems eminently reasonable). Therefore, the average holding period here, if things turn out well, could be fairly short – further model refinements are prob. going to be a lot less relevant than each reader/investor’s assumptions on the valuation discount rate & on the share price discount in the next few years.
I’m not sure I agree that the decision to replace the debt on the balance sheet with equity was really that bone-headed or bad. The dilution of NAV/share is a fact, but offset by the gain on the new shares you could and should have bought in the rights offering. There is no transfer of wealth between existing shareholders and a third party!
Sure, you might think that a leveraged capital structure is more optimal than an unleveraged capital structure, but it’s only a transaction that transforms the risk profile of the investment. You don’t lose or gain anything: it’s neutral.
Well, ‘bone-headed’ was a visceral response, as much as anything else..! I was definitely pleased to see the board offer participation rights to all investors – that’s become all too rare these days – and it does offset much of the impact for investors.
However, as papy02 says above (and I think I said elsewhere), the prospect of the board selling shares @ 32p & then buying them back (possibly, shortly thereafter) at far higher prices seems a mite embarrassing… It certainly seems to suggest at least one of those decisions might be less than smart – and I certainly don’t think it would be the decision to buy back shares at an attractive discount..!
Spread is currently 10% is it usually this wide?
Warren – IIRC, yes, it’s generally been on a spread of 5-10%. I don’t think it’s necessarily due to size – there are plenty of smaller stocks that offer better spreads/volume. In the last few years, however, it’s a stock that’s been v neglected by investors (& consequently market-makers) – the wide spread’s the logical result. If you monitor it & use limit orders, it is possible to get better prices (than the offer), but it requires time/patience & you may just miss getting any stock if the price keeps moving against you.
If the v recent volume is maintained/increased & NAV/share price steadily increases, this should eliminate the wide spread – a case of ‘buy the stocks they hate, sell the stocks they love’!
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A very logical and detailed debate and it is refreshing to see as I was very nervous when picking up stock at 34p. Heavy buying in recent days at 42p I see. Might be worth looking at SIGG and CAT for those wanting low correlation to other asset classes and US$ exposure. SPL for a punt too.
Great blog, thanks
Thanks, Tina – and nice stock ideas there also, certainly seem to be in my ball-park 😉 Wasn’t aware of SPL – interesting discount to cash, I must have a closer look. I’ve tracked SIGG for a couple of years now, as I’m always interested in more distressed debt/assets type stocks.
I know CAT, but I confess I’ve always been put off by the potential asymmetric risk of reinsurance. I also think that type of knee-jerk investor reaction may offer a much larger discount on this fund at some point. On the other hand, I may be completely wrong, and the economics & structuring of the fund may present a v different risk/reward – considering the above is an insurance related post, maybe it’s time I find out… Funnily enough, I’m actually doing another insurance writeup now!
Oh, and a little whisper to all readers: I do have another very TLI-type stock up my sleeve (no, it hasn’t been mentioned here, or elsewhere) – but I haven’t decided whether to pull the buy trigger on it yet… 🙂
Wexboy, first, congrats and thank you on your insightful TLI analysis (I am now building a long position with 100p target in 4 years). I can not believe you have “another very TLI-type stock up your sleeve” (“no, it hasn’t been mentioned here, or elsewhere)” Is that true? I am already salivating. What is it I beg? A very grateful value investor fan of your work.
Thanks, Chevalier – sorry fr the delay in replying – good to hear you’re on board. Yes, I do have another TLI type stock, with a bit of a twist (and it’s not IFT or LPHI)! Price has run away from me a bit – but only by abt 10-12%, which tells you how cheap I am… Anyway, underlying intrinsic value has continued to increase, so I’m taking a fresh/closer look.
My main problem is that I’m fairly well invested now, but still have plenty of potential buys – so everything’s a bit of a juggle. Let’s make a deal: I may end up investing/doing a write-up in the next mth or two (hopefully to a good reception). If not & I decide against investing definitively – which may simply be because I already have my large TLI exposure, or have used up funds for other great opp(s) – I will publish the name of the stock, so interested readers can take a look/research for themselves.
Cheers,
Wexboy
Dear Wexboy, did you publish your TLI-like idea finally? Otherwise I am building a IFT position, more hairy for sure, but I looked at the valuations and the off-balance sheet enormous assets (info not easily found). I think IFT offers amazing positive convexity; could be a 5 bagger.
Very interesting idea, thanks!
Would you know where I can find more closed ended funds that are in the same TLI business? Would be interesting to compare.
Your in depth analysis is very impressive.
Many thanks, Liron!
There used to be more, but most have exited the market for various (unpleasant) reasons… There’s a small handful remaining globally, but nothing I’d like to highlight – they fall into ‘sub-scale, unreliable, non-transparent, and suffering from poor liquidity and/or leverage’ category. There are plenty of brokers & unlisted funds available though…I most definitely don’t want to highlight any of them!
One other company did come up (with comments) over here: http://alphavulture.com/2012/11/22/alternative-asset-opportunities-tli-l/ I consider IFT to be pretty unappetizing, but I recommend you read their 10K – I think it flatters TLI, by comparison.
Thanks, that’s helpful!
BTW, I see that in your model you factored in a drop of premium at the same rate of the maturities and I think that there’s an offsetting factor that might need to be accounted for as well.
I think that for life insurance the premium you pay goes up every year to reflect the additional risk of a mortality over the coming 12 months. To be honest I don’t know what would be the right rate to adjust the premiums upwards, but if we assume constant level of premiums until the number of policies go down by half (say 2017), the IRR drops by a couple of percentage points.
Thanks, Liron. Yeah, premiums were difficult to model: With other policies we might expect a inflation mark-up each yr, but with a fixed policy face-value that doesn’t make sense. A premium that gets more & more expensive each year the insured lives, or a premium that the insurance co can jack up at will, surely isn’t attractive to policy buyers either. But there does seem to be some flexibility (prob. within predefined parameters) to change premiums, and this seems to be available to both parties – the investment manager has spoken in the past about managing premiums in the most efficient manner.
I don’t have a more detailed insight into this component, and even if I did, I suspect there’s not enough info to sensibly model it out anyway. I did note the total $8.4 mio FY 13 premium was at a historically high ratio – for example, it’s at the same level as the last FY, despite policy sales & maturities – so this seemed like a pretty high base to begin with in FY 13. Since I’m focused on a probable 4 year investment horizon, and hope to see front-loaded returns in the next year or two, I wasn’t too concerned about being a little off in premiums for the next few years. And (as you’ve done) it’s easy to assess the impact of a different premium trajectory if another shareholder has a specific perspective on this.
I don’t see enough mention of the risk that families of the lives on the policies sue over the policy sale after death. This has happened in the past and the laws in each state vary around the legal complexity of life settlements. Do you have more detailed analysis on these legal risks?
Aah yes, spare a thought for the long suffering & feckless families. So stunned by the shock of the funeral, they need to take Valium…to hide their joy!
Actually, I’m planning an activist campaign here to further enhance shareholder value – by persuading the board to sell the TV rights to NBC. Each episode will introduce a new extended family/bunch of idiots, show their terrible financial situation (only 3 cars, 5 TVs & 7 cell phones per household), and then dangle the prospect of a legal challenge & a policy windfall in front of them – I think we can rely on each family to provide the rest of the drama…
On the other hand, in the real world: These policies will, on average, have been sold 12 years previously when they mature – good luck putting together a winning case on a perfectly normal 12 yr old transaction. With life settlements, there’s a right & a wrong way – look here: http://alphavulture.com/2012/11/22/alternative-asset-opportunities-tli-l/ for an example & comments of how to do it the wrong way. As for TLI, in 8 1/2 yrs the board & investment manager have bought, sold and collected on policies, all without issue or legal challenge/expense/impairment. There’s nothing I see/know of to suggest this record will be tarnished in the future.
Also, remember, these policies are now carried/valued at 39% of face value – that’s a huge margin of safety right there.
How did you decide to use 1.2 years as your LE adjustment factor in your model? This seems suitably conservative considering that 65% of the portfolio has been underwritten post 1/1/2011 (and these underwritings are a very detailed policy-by-policy analysis of detailed medical records).
Hi Paul – you mean 0.8 years, yes? I checked back in the CDC tables over the past 5 & 10 years, male & female, to identify average positive trend in LE. Pretty much all the LE improvement was actually on the male side, so that helped the weighted avg. calc. Suggests an estimated avg. .175 LE increase per year. The table data is now about 4.3 years old, I guess, so that turned into a 0.8 year adjustment above.
Good point on the medical assessment reviews – I agree they’re far more detailed/specific than any general portfolio/cohort review could be, so that’s v encouraging too. Reading the recent commentary it certainly seems like the company’s indicating the constant drag of negative LE adjustments over the past few years is now coming to a close. Couple that with the fact the future trajectory of the discount rate seems inevitably (& positively!) asymmetric, and I certainly feel we’ve now seen the nadir in underlying NAV evolution (oh, and maturities are accelerating, of course!).
One small remark: the improvement of LE’s is based on the LE at birth. Looking at some older CDC tables I actually don’t see a real trend in the development on LE’s for people that are 89 years old.
(LE’s for total US population)
1998: 5.0
2000: 5.3
2004: 5.3
2008: 4.8
Also check figure 1 in this report: http://www.cdc.gov/nchs/data/lifetables/life89_1_3.pdf you see that the probability of dying in the higher age groups has remained in a fairly narrow band in the higher age groups the past century. The difference is mostly made at a younger age.
That is very relevant data – it reconciles with the company’s statement that adjustments to policy LE’s re-underwritten in recent periods have been 0.1-0.2 years. Note the company discloses a weighted average LE of 4.7 years; using CDC mortality tables and modelling male/female deaths separately, results in an LE of about 4.9 years . The company has carried out detailed LE estimates on 65% of its policies, (which would be the larger ones – it is worth emphasizing that these LE estimates are costly because they are done policy-by-policy based on detailed records for the individual insured), their LE estimate should be fairly robust. So I think using the CDC data is itself conservative. Were you to assume a massive 0.5 year increase in LE on the 35% of the portfolio not recently re-underwritten, that would be only 0.2 years across the entire pool.
Thanks, Hielko – v good (& encouraging!) point. I did consider that aspect to some degree, and looked back – the fact the Hispanic population has been disaggregated in the past couple of years complicates historical comparison. Messing around with some assumptions, it would appear that there was some improvement in older white male & female LE, but still relatively minor (in line with what you’re saying). There were a lot of other potential adjustments I contemplated (see my reply to Rick Mason below, also), like wealth or location, but didn’t have the necessary data to support any modelling – and I’m dubious they’d really make much difference at 90+ yrs of age.
In the end, awarding these old folks the average LE improvement in the past 4 years made some sense & can be modeled fairly reliably – but I agree they’re probably the last cohort who are actually likely to benefit, so this adjustment may prove to be conservative & offer some upside…
Paul – considering TLI’s history, the far richer data the company has to work with (than I have here), and the time/money spent on medical assessments, I agree we should now have a high level of confidence in the board/investment manager’s LE assessment.
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Hi thanks for posting this idea, looks interesting.
The average policy value is over $1.5 million, so the individuals are all presumably relatively wealthy. I was concerned about that there might be a significant correlation between wealth and longevity not taken into account in their model, which may be why the actual results are so different from the expected results.
I couldn’t find any data for impact of wealth social class at this age cohort, however a 25 year old with a degree has about 9 additional year life expectancy than one not finished high school and about 6 one that completed high school.
There is mortality tables on a state by state basis, (http://www.cdc.gov/nchs/data/nvsr/nvsr60/nvsr60_09.pdf) with significant variation between them. Florida and California have much higher longevity. I did a rough calc using Florida data (broadly speaking use the current female mortality for the male rate and adjust the female downward).
This adjusted the NAV downwards from 56p to about 45p. I think this is much more reasonable and fits the actual mortality experience much better. I am reluctant to think of it as just bad luck.
By the way there was a small error in your spreadsheet. The female/male split will not remain constant over time. As females live longer they will grow to be a bigger proportion than at current, so adjusting for this will reduce values downwards.
Thks, Rick! Regds the male/female ratio, I wdn’t really consider it an error, more a refinement I didn’t add 😉 Impact’s pretty undetectable & I’d be a little shy here of refinements to the nth degree: Key assumptions are going to be far more important thn the math… Adding the actual spreadsheet above allows people to tweak/revise all assumptions fr themselves.
As regards LE, I prob. lean towards your opinion, so I didn’t over-egg the pudding & point out the current annualized run-rate (from the past 6 mths) is already running at 14 maturities! The problem, of course: We’re dealing with a sample of only 106, so maturities cd run wildly ahead/behind schedule & we cd deduce v little from a statistical perspective.
Yes, wealth’s probably correlated with longevity, but CDC data may actually prove just that – i.e. the rich are already the longer living citizens, on average, and it’s already in the data? We don’t have policy data by state to consider. I suspect once you get to 90+, most/all tangible differentiating factors start to fall by the wayside anyway. And when you hit 93-94, an extra year is like an eternity! Good luck to these old dears if they can actually eke out an extra year, I think TLI will still offer an exceptional return (for the low level of risk/correlation involved). And in the end, continued rate repression in the market may well demand a lower discount rate, which cd prove a nice offset to any potential LE disappointment.
Looks interesting. I think 12% is an entirely reasonable discount rate, given the complete illiquidity in the investment. Indeed, it should arguably more. It’s extremlely comforting to see the board’s policy on returning capital, but can they be legally held to this? It is surely in the Fund’s interest to keep NAV as high as possible, to keep collecting performance fee. I would imagine the investment policy could be changed by the board and (for example), they could go and buy another bunch of these things, which is what we don’t want. Can’t see the discount to NAV ever fully being closed. And the FX risk can’t be ignored. We need the buybacks. Did you try contacting them?
Thks! I think we’ll have to agree to disagree on 12%, or a higher/lower rate… Bt compare it to the measly IRRs many US investors seem happy with these days in certain sectors/assets (as long as they’re convinced co’s will maintain shareholder payouts, no matter what). In fact I’d argue they’re nw happy with negative IRRs – they don’t seem to care about the risk to, or return of, their principal 😉
The investment policy is crystal clear. Considering all the circumstances, I really don’t see the board contemplating seeking a mandate from shareholders to reinvest into fresh policies.
Buybacks? Well, there’s another side-effect of such a silly placing: The board can’t be seen to buy shares at GBP 42.5p+ mere weeks after selling shares @ 32p, now can they? 😉 We’ll just have to wait for the dust to settle a little first… Once TLI experiences a few new maturities, and cash & NAV begins to march higher, a share buyback will start to look like a great idea!
Did you account for the cost of running your business (board fees, etc). At fist glance it looks quite high relative to the small market cap.
All in the model – costs run abt $1.0 mio a year, or 1.6% of Net Equity – quite reasonable in relation to TLI’s peer group (specialist investment companies).
Not to worry, here’s the relevant part of the Investment Policy:
‘It is intended that the proceeds of TLIs which mature are used, after the deduction of expenses:
– first, to reduce and then eliminate bank borrowings under the Company’s credit facility; and
· secondly, to return capital to shareholders as determined by the Board.
Pending the return of capital to shareholders, the cash proceeds of TLIs may be invested in a portfolio that may include US treasury bonds, UK gilts and sterling-denominated corporate bonds with a minimum rating of AA by Standard & Poor’s or an equivalent rating by another rating agency.’
I’d happy to remind the Board, if necessary, that a dividend is (by definition) NOT a return of capital. Buybacks return cash in a tax-efficient manner (particularly as many longer-term investors here are in a loss position), actually enhances NAV for remaining shareholders, and provides (constant) buying pressure on the share price. Dividends offer none of these…
Not too worried about life expectancy – obviously, each portfolio has unique characteristics but, on average, LE’s v predictable. As long as you use independent data properly (nothing better than the latest CDC data!) & make appropriate adjustments to bring the info up to date (LE’s improved 0.1 to 0.2 yrs per year quite consistently in the past 5-10 yrs). Frankly, every LE expectancy disaster I’ve read up on has been actually explained by wishful thinking, misselling, or just plain fraud!
OK:
Sounds interesting…but like you say, there have been problems in this industry in the past, BIG problems…HUGE PROBLEMS…
OK, my question is what is going to happen with all the money that is going to come flooding in? You say they have a mandate to return it to shareholders, perhaps in the form of a share buyback. Do you think they would initiate a dividend?
I would agree with you that a share buy back would be more beneficial to shareholders at this discounted price. HOWEVER, I would also like to see them start up a dividend.
The two risks that I can see:
A). Management does something stupid with the cash coming in.
B). People live incresingly long lives. Although at an average age of 88.5 years, it is hard to see too many of them going too much further…