Alternative Asset Opportunities, CDC, Imperial Holdings, life expectancy, life settlements, mortality tables, TLI, Traded Life Interests, ZIRP
Alternative Asset Opportunities (TLI:LN) recently released their Final Results – I thought readers might appreciate a new post. To some extent, I’m reminded of my original TLI post (wow, almost a full year ago now!) – the insured, those merry little blighters, are still trying their bloody living best to live forever! But Chronos waits for no man, or woman… Here are the policy maturities TLI has enjoyed to date:
7 maturities last year was in line with TLI’s 3 year average, and represents an accelerating mortality rate (as the total number of policies held has been steadily declining). However, proceeds of $5.7 million (mio/m) – just $0.8 mio per policy maturity – was an unexpected disappointment. But we have to chalk it up to bad luck (for us, and for them – the insured!):
Because (as of year-end) the $1.6 mio average face value (FV) of outstanding policies ($159.9 mio FV, 102 policies, 90 individual lives insured) was actually double the average policy maturity last year. And, as you can see above, at least 66% of the insured have policies which exceed $0.8 m. In fact, over 90% of the total portfolio is invested in $1.0 m+ policies. And the company has experienced a very welcome step-up in maturities since – in the first 3 months (of the new fiscal year), there’s already been 4 maturities, for a greater than expected $6.8 m (albeit with assistance from a single $5 m maturity). A pretty good harvest, and now winter’s just around the corner…
There was also a step-change in TLI’s valuation process at year-end. The company’s traditionally relied on 21st Services & AVS, the two major industry providers, for Life Expectancy (LE) estimates. However, the mortality rate (i.e. the ratio of actual to expected deaths) experienced to date has been less than 50% – which clearly suggests assumed LEs were too short (though TLI’s small portfolio/sample size should be noted). Two remedies have been applied. First, another programme of LE/medical assessments has commenced, to cover well over half the face value of the portfolio. As of year-end, over 40% of the portfolio’s now been assessed, and results actually re-confirmed the company’s latest valuation assumptions. Second, LE estimates have been obtained from a third provider (Fasano), who typically provides longer/more conservative LEs. [In fact, they actually provided LEs which were, on average, 24 months longer than the other two providers]. An average of all 3 providers’ LE estimates was incorporated into the assessments/valuations performed to date, and has also been applied to the remainder of the (unassessed) portfolio.
[Management also debated raising their 12% discount rate – but in light of the new assessments & a more conservative LE estimate, a higher rate might prove to be a form of double-counting. The obvious ability & intention to hold policies ’til maturity also suggests 12% is more than adequate. Personally, I note dramatically lower yield alternatives everywhere I look, plus increasing confidence & liquidity in the US market – I find it hard to believe 12%+ discount rates can persist much longer in the life settlement industry (at least for clean policies)].
The net impact was a 12.8% retrospective revision of the end-June NAV, from GBP 55.6p down to GBP 48.5p. [I was surprised to see TLI drop over 5% on the news – the company already flagged this back in July & provided a table indicating a likely 10-15% reduction in NAV]. It also grants the insured, who are now 89.6 years old on average, another 5.1 yrs to enjoy – an improvement on last year’s 4.9 yrs of average LE. [NB: Averages can be misleading – in this instance, it’s encouraging to note the minimum age in the portfolio should now be at least 85 yrs]. With a 64.5%-35.5% male-female ratio, this implies the new average LE assumption is about 9.5 months longer than that implied by the CDC’s 2008 tables. Might not sound like much, but I suspect it’s an eternity when you’re teetering on the edge of life & death at the age of 95!
OK, so what’s all this imply in terms of prospective investor returns?
Well fortunately, management been providing an increasing level of disclosure in the past year (to be commended). One of the most valuable tables provided is this new distribution of policy death benefits by LE band:
In reality, this is not a cash flow forecast – actual maturities will, of course, still be randomly/probabilistically distributed around each LE band. Arguably, a more refined approach might be a marriage of the CDC’s probability distributions (essentially my analytical approach last year) with this maturity table. But frankly, however much I fine-tune my analysis, the key driver’s always going to be estimated & actual LEs in the portfolio. And you can’t forget TLI’s sample size (just 90 lives) is ridiculously small compared to the population(s) the CDC & LE experts work with – so there’s a significant & inescapable level of random LE risk here. [But this works both ways – the table above predicts no maturities for the next year & a half, and three months later we’ve already had 4 early maturities! One can but hope most of the random risk will tend to cancel out]. A simpler analytic approach is obviously called for – based on the distribution above, with some obvious tweaks.
First we need to strip out the subsequent policy maturities (2 male, 2 female), worth $6.8 million. These maturities can’t (likely) come from certain LE bands – but lacking further info, we have to otherwise adjust maturities across the board, as follows:
In the right-most columns, I’ve adjusted the maturity schedule by 3 months (to end-Sep), and re-organized the maturities into discrete yearly buckets for simplicity. [I’ve assumed the two 8+ yr policies mature within a year]. We also need to allow for the fact some policies may expire worthless, usually when the insured reaches their 100th birthday. [Yes, the mind boggles at the legality of an insurance company offering a contract where you potentially pay premiums for a major portion of your life & then the policy benefit simply evaporates..!? That’s quite the 100th birthday gift, eh?] Presumably this is captured in TLI’s valuation process, but it obviously isn’t reflected in the tables above. Here’s a breakdown:
Fortunately, the odds are pretty low: Consulting the CDC (non-Hispanic white male & female) tables, we see 89.9 yr olds have a 4.8% (male) & 7.8% (female) chance of surviving to 100+ yrs. But only 46% of policies suffer expiry risk (49 no extension policies, and assuming a 50% payout for 3 reduced death benefit policies). Therefore, just 2.7% of policies will expire worthless, so we’ll haircut our policy maturities accordingly (across the board). Next, we need to factor in rising premiums – unfortunately, management provides little explanation, so let’s consider recent history:
While premiums paid has remained relatively static in absolute terms, it’s been steadily rising as a % of the average FV of the portfolio. However, there’s no particular pattern to the rate of increase, so let’s assume an average 8.8% increase going forward – which would, for example, peg premiums paid at 5.9% of average FV for the year ending Jun-15. Finally, we need to estimate current NAV:
[Table includes appropriate GBP/USD FX rates from Jun-Sep, expenses are estimated, policy gains are equivalent to the 2.1p & 0.8p TLI already reported, and the policy valuation adjustment’s a reconciling item. NB: At the current FX rate, estimated NAV’s now GBP 47.8p]. Right, let’s plug all this into our new model:
Now, let’s add another perspective – annual returns, cumulative returns & internal rates of return (IRRs):
Don’t forget TLI’s current GBP 39.25p share price is trading at a 17% discount to the end-Sep NAV. I still believe it’s entirely reasonable to expect this NAV discount to be eliminated in due course – as investors anticipate lower discount rates on policy valuations, as the average LE reduces & policy maturities accelerate, and as we see management repurchase shares and/or return capital. Therefore, I’ve shown two scenarios above, which assume discount elimination within 2 & 4 yrs respectively. You’ll note the sweet spot now falls somewhere between 3 & 4 yrs, as prospective annual returns are still well into double digits & IRRs are between 16-18% pa. [Duhhh!? Talk about re-inventing the wheel… TLI’s valuation process is based on a 12% discount rate, plus you earn another 5%+ pa from the NAV discount elimination – so a 16-18% pa IRR is exactly what you’d expect to see!]
We should obviously add a couple of provisos at this point. There’s a feeling of deja vu to this post – we’ve almost come full circle year-on-year, with the share price essentially unchanged, net cash/debt still near zero, and significant upside potential still on offer. If you already hold TLI since last year – as I do (with a current 8.8% portfolio holding) – the returns shown above will be diluted by your longer holding period. But is that really such a tragedy? You’re still going to enjoy an excellent IRR for holding what’s essentially an uncorrelated & investment grade** fixed income investment. [**95% of the life insurers are rated A or better, by A.M. Best – the other 5% is rated A-].
Plus you don’t have any leverage or interest rate risk. OK, admittedly you may have currency risk – TLI’s portfolio is in dollars. But I’ve always been OK with (multi) currency risk (or should I say, diversification) in my portfolio. And if the dollar isn’t your home currency, it’s generally served as a decent portfolio hedge in the risk on/risk off environment of the past few years: For example, when the market’s risk off, your portfolio suffers – but dollar strength usually benefits your TLI holding (& vice versa). Anyway, a share price retracement can often be a great opportunity to add to (or initiate) your position – and also an excellent opportunity for companies with an active share repurchase programme.
Ultimately, your only real risk is longevity – if these golden tickets manage to live a little longer, that obviously ratchets down your IRR. You can certainly model in advance the consequences of some extra months added to the average LE (because months, even weeks, are quite an achievement when you’re closing in on 100 yrs of age!). Or simply wait & see how the dice fall – maybe a little better, maybe a little worse – you know, I can live with that. Hopefully, they can’t…
And we can ideally hope the odds can be tilted a little more in our favour. The NAV/IRR model above is actually somewhat misleading – deliberately so, I wanted to illustrate a common problem investors face: You’ll note annual returns & IRRs begin to suffer after the 3-4 yr sweet spot I highlighted. This reflects zero interest earned on increasing amounts of cash on TLI’s balance sheet – an issue investors experience all too often in the real world, as they cope with the current ZIRP environment & management teams who refuse to return surplus capital. But prospects for TLI shareholders should actually be better than the model suggests – management’s now made a specific commitment to repurchase shares (and/or return capital). An aggressive repurchase programme, coupled with some prudent leverage, can really enhance shareholder returns – while the progressive return of capital could also make TLI a much more attractive longer-term investment (as back-end IRRs improve).
TLI’s $15 million facility with AIB expires at the end of Mar-14 – I still think management should be actively seeking a new lender. I’d consider (say) a 35-40% leverage limit (i.e. net debt vs. portfolio fair value) an attractive proposition for both lender & investors. Next end-March, we should be looking at something like a $60 mio portfolio fair value. Against this, a $21-24 mio loan facility would ensure a substantial margin of safety for a new lender. Additionally, the collateral will steadily appreciate in value, plus it’s a pretty palatable asset to bring on-balance sheet (if that ever proved necessary). With net cash (inc. receipt of $1.8 mio in policy maturities) currently around $1.6 mio, and net debt expected to peak around $16 mio in 2015, the company actually now has ample scope to begin repurchasing shares. Front-loading those share repurchases would offer the most bang for the buck, in terms of NAV enhancement & returns – but on the other hand, we can’t forget those relentless premium demands…
There’s a happy medium here – I’m obviously not suggesting TLI max out its debt capacity up-front! By initiating an active/systematic repurchase programme now – to ultimately result in a full utilization of TLI’s credit facility, by 2015 – management can return capital & enhance NAV, while still preserving financial flexibility. Of course, in this context, any further (unexpected) policy maturities are likely to represent a cash windfall – which can clearly be used for additional share repurchase!
Meanwhile, let’s maintain our bedside vigil & ready a fond ‘Bon Voyage…’
- Alternative Asset Opportunities PCC Ltd. (TLI:LN): GBP 39.25p
- Market Cap: GBP 28.3 mio
- Net Cash: $1.6 mio (inc. $1.8 mio of recent maturities)
- Current NAV: GBP 47.8p (at current 1.5972 GBP/USD rate)
- Price/Book: 0.82
- Tgt Mkt Cap: GBP 50.9 mio
- Tgt NAV/Share Price: GBP 70.7p (in 4 yrs time)
- Upside Potential: 80%
Pingback: 2013 – A Game of Two Halves | Wexboy
Pingback: So, Growth…or Value? | Wexboy
Hi Wexboy, and many thanks – great writeup, and interesting comments/replies.
You comment re TLI estimates: … the new average LE assumption is about 9.5 months longer than that implied by the CDC’s 2008 tables.
I’m concerned that these new TLI estimates may still be way over-optimistic. *Actual* mortality experience to date for TLI is *much* lower than the CDC national averages would imply. I make it around 50% of that predicted by the CDC data, (let alone TLI’s previous expectations!). I looked at the (approx 7yr) period from Sep 30 2006, when policies/lives peaked, to mid-Oct 2013 (so the period included the recent 5 post-yr-end mortalities). The 7yr forward mortality experienced from Sep 30th 2006 (my estimate: 38 mortalities) works out around at 30% of the initial lives insured (which I make 123 after adjusting for later policy-sales and 1 policy addition), whereas the CDC 2008 (white male/female) data predicts 59% for the 7yr forward mortality rate at the average age which was 84 in Sept 2006. (There’s a few assumptions needed to get my TLI numbers, given the limited disclosure, but I don’t think the result can be that far wrong).
As others have commented, given that such summarised data looks statistically significant, maybe there are factors such as geography (Florida?, California?, see Rick Mason’s comments to your 1st TLI writeup), wealth/class, etc that are not being allowed for in the TLI paid-for LE estimates (whose track-record so far is lamentable).
While I’m encouraged by the recent tick-up in mortalities, the above is making me nervous of increasing my holding (I currently have approx 5% of my invested portfolio in TLI). OK, let’s assume mortalities taper up to the CDC (or TLI) forecast line, starting at 50% or 60% of that level. I haven’t done the numbers yet but think it could materially hurt the investment case.
Comments welcome. Also if anyone wants to try and replicate (or challenge) my numbers, I’m happy to share the detail assumptions/guesses. (I discovered a significant error in the last version I calculated (as Papy02) in Mar 12, so am definitely not infallible!).
I think my Oct-16th reply to Assaf may be quite relevant here too.
I suspect we’re all making the same assumption(s) here – that we have a portfolio stuffed with smart, rich East (& West) coasters. Of course, we may all be completely wrong – we might be dealing with a bunch of mid-Westerners who’ve suffered life-long obesity (whoops, another assumption there!), and have drained their bank a/cs fighting their diabetes & heart disease, plus their general decline into ill-health & decrepitude…
Anyway, if we’re actually talking about a particular demographic here, I could buy into the notion that they perhaps they enjoy a more active & healthy lifestyle up to a certain point, say from retirement to age X – which might be evidenced by a marked departure from the LE tables. [If that’s true, it should really put the fear of God into $IFT shareholders, for example – since their portfolio is about 10 years younger, if I recall]. But as the insured get progressively older – 90+, for example – I think their ability to buck the tables will evaporate. Therefore, you may be seeing/soon see a rapid convergence between the tables & the portfolio. Well, that’s my theory…
Think of it another way – let’s say you know a 90 yr-old who’s enjoyed the proverbial ‘never been sick a day in his life’. But now picture he dies tomorrow… Are you really going to say: ‘Wow, I thought he’d live at least an extra year or two’?
I guess you could check if there’s a hint of that kind of convergence in the existing data, but the number of annual deaths may be too small/random to necessarily allow you to draw much of a conclusion.
I do happen to think the board’s in the best position to properly assess LEs & policy valuations, so I think it’s pretty sensible to rely on their assumptions & calculations as the mid-point of range of outcomes. Then again, they may well prove to be wrong all over again… There’s really no way to anticipate that, so I think everybody needs to be able to model this him/herself (& adjust LEs if they see fit).
Assaf Nathan said:
Hi Wexboy – I have a small remark for you, per my background in statistics and mathematics.
You keep repeating that a sample size of 100 is small etc etc, but there is a very famous theorem in statistics called “Law of large numbers” that actually will disagree with you.
When I studied statistics, a large enough sample to reach certainty of over 90-95% was 30 random subjects from the population. you have 100!
A random sample of 30 people from a population of millions will give very accurate results per the entire population, let alone 100.
The real question is are these people random samples… not if the sample size is large enough – because it IS large enough.
I have to say that I think we might all be being a little unfair to TLI. At the end of the day, we are quibbling about things that might make a few percent difference to IRR, but don’t really threaten principal.
This thing could give us 16% IRR over 4 years. Maybe less because deaths or FX don’t go our way. Maybe more because of value creation through buybacks or FX.
Viewed against a fixed income lens, it is an outstanding bond substitute if you are prepared to hold for a long time.
Viewed against an equity lens, it’s pretty d*mn good too. 2 days before the US potentially defaults on its debt, can we really say that we are confident of getting a double digit 4 year IRR from equities?
At the end of the day, investing is about uncertainty. Any time you buy a stock, you don’t really know exactly what’s going to happen.
As a chunk of a well thought out portfolio, I think TLI is a no brainer. It is 20% mine.
Tom – my thoughts exactly, see my reply to Patrick below. But as with all debates, more facts & figures would hopefully help direct and/or settle the argument – so it’s clearly incumbent on the board to provide even more info/disclosure to shareholders (no trade secrets here!?), allowing them to better model & evaluate alternative scenarios as they see fit.
I think this graphic illustrates what I’m driving at:
Considering the tiny number of policy maturities we can expect each year, we’re at the very left-most edge of this graph – so we can expect results to be very noisy vs. our estimated LEs. Which makes it that much more difficult to arrive at any meaningful conclusions, positive or negative. When you mention whether the portfolio is a random sample, are you referring to self-selection (and perhaps the implication these people have access to higher quality healthcare)? Hard to know…
I would definitely discount the personal aspect of self-selection – regardless of the facts, almost everybody thinks they’re an above-average driver & they’ll live much longer! [For some, I guess failure on the first attribute actually leads to failure on the second…] Then we have to consider if these people are wealthier and/or highly educated, for example, do they lead healthier lives & what contribution does that actually make to their LE? Finally, we have to consider whether they have higher-quality healthcare & if that makes a difference? Well, we don’t know – maybe some people actually sold their policies because they were falling back down the wealth ladder, i.e. they still live on Park Ave but it’s in a cardboard box… 😉
When you’re 90, I suspect the cumulative impact of your life will tend to overpower your current choices & healthcare – after all, death is usually a simple consequence of the eventual breakdown & shutdown of the body, whether it’s gradual or it reaches a specific tipping point. But I think a younger portfolio of insureds – see $IFT, for example – may have significantly greater scope to buck the relevant LE estimates.
More generally, it’s a fascinating subject (clearly a fruitful field for researchers, esp. with Baby Boomers now beginning to retire). I believe there are pronounced kinks in the LE curve that can be better identified – low-income/education people may have lower than average LEs, and high-income/education people the opposite perhaps. But I suspect (middle class) affluence might actually shorten LE also – in terms of heart disease, obesity, diabetes etc. America’s LE is ridiculously low in a global context, esp. when you consider the absurd national healthcare spend, but I wouldn’t be surprised if LE plateaued – i.e. unhealthy lifestyles could outweigh other positive LE factors.
OK, enough for now!
Another 1.6m policy maturity revealed in the RNS today. The promising, if likely entirely random, recent increase in the rate of maturities has convinced me, somewhat irrationally perhaps, to add to my small holding at 40p. When markets are making all time highs this is the sort of uncorrelated stock that the cautious can be comfortable buying
Ashton – yes, great news! You know what the policy maturity run-rate looks like now?! [See below]. But it puts NAV at a pro-forma 48p – so TLI’s currently trading on a 19% discount to NAV.
Today I just had a look at this company. A few questions, I hope you could answer:
1. Since the number of policies is quite small and therefore it is rather “tricky” to use general LE-tables, do you have any insight in the (specific) backgrounds of the policies (in addition to age) ?
2. It is a shame they issued more shares, when the share was trading below NAV. Anyway, since they still have a mandate to buy back shares (below NAV), do you know if they already bought some shares ?
3. Further, do you know the original reason to list this company ?. I mean, since the company is quite small, the normal buyers would be retail. But given the potential (perceived !) complexity of the underlying business, I guess retail will not buy it. Institutional, with the capacity (quantity and quality) to analyse this company will not select it, given the small size and the illiquidity attached to it.
4. When a stock is looking cheap, I always look for potential (good) reasons why it is cheap. My guess would be the matter discussed in the previous question or further dilution next year when they have to roll over the debt (again) ? What would your guess be ?
btw: your blog is one of my favorites -> keep up the good work !
I can try and answer these.
1) I have read quite a few documents on this company and the answer is no, not really – although we have the sex.
2) Wexboy is more optimistic than me on the chances of TLI being able to obtain a new facility. Having worked in a commercial bank for ten years, I know that Allied Irish Bank will be desperate to get rid of TLI. Why would you want them as a customer? It’s a tiny, complex facility that will make no money and be a lot of hassle. So I’m convinced TLI will try ad build up a cash buffer so they don’t need the bank facility anymore. When they’ve got sufficient cash on hand (a year’s worth, for example), only then will they do buybacks.
3) Well it was obviously bigger when it listed! And on paper, it’s a good idea – a new asset class, uncorrelated etc etc. The fund manager’s probably hoped to increase the size or launch more funds like it. I can imagine it was sold by private wealth managers and the like to high net worth etc.
4) Uncertainty over reliability of life expectancies. They have just revealed that a whole bunch of policies disappear at the age of 100, which is a brand new risk I don’t think they had mentioned before.
Thanks Pepijn! And good answers/comments from Tom also:
1. I fondly imagine if you visited New York’s UES or UWS, or Florida’s Gold Coast, you could easily bump off…er, bump into some of those golden tickets. But no, I’ve no further insight beyond what’s disclosed – non-Hispanic white male & female CDC tables are probably the most relevant reference info you can utilize.
2. I think I described it as ‘bone-headed’… But when debt’s a problem, most directors show little concern for shareholder dilution – they’ll issue additional equity at whatever price the market will bear. For me, it was a bit of a blessing – it eliminated the main reason (debt) why I previously avoided the company for so long!
I actually think this type of loan facility’s perfect business for any of the private banks. I’d suggest Kleinwort Benson, but I’m guessing they’ve been asked already & weren’t interested (for some reason). But a peer bank might be a good bet. Anyway, at worst, TLI’s stuck with AIB, and AIB’s stuck with TLI… [NB: The company hasn’t bought back shares to date].
3. If I recall, there was huge enthusiasm for life endowment & demutualization funds around that time. So TLI was an interesting spin on the theme. However it was still a novel asset class for investors, so there was a natural limit to the size of the offering. But I think there was strong confidence a follow-on offering could occur in due course, that leverage could be used liberally (most of the portfolio was bought in 2005-06), and that TLI would be a great wealth management product (to some extent, true – look at the shareholder base).
Actually, management is owed some credit – unlike many of the property companies & funds launched in 2005-06, TLI’s still around & in rude health. This is particularly admirable when you consider the company’s situation post-crisis in terms of leverage & its annual premium obligation.
4. I don’t expect further dilution – there should be no problem rolling over the debt, even if it ends up with AIB. You have to remember, post-financial crisis, investors were totally averse to any type of exotic/leveraged investment company like TLI – frankly, the shares are still recovering from that extreme bout of sentiment. The other issues investors are still focusing on are, of course, policy expiry risk & longer LE risk.
Patrick Burns said:
I like this investment theme but don’t like the potential for catastrophic losses if, say, 20% of males and 30% of females reach 100. CDC tables are underestimating lifespans by about two years, so this scenario seems plausible especially in light of the low rate of maturities to date (which affirms that the CDC numbers are way off at least for the population of TLI policies). Who are the boneheads who bought policies that lapse?
Maybe, maybe not… Since June, the company’s had five maturities totaling $8.3 M – which were never supposed to happen! So I guess TLI’s now enjoying a current annual run-rate of $28.5 M in policy maturities!? Isn’t this assumption just as right or wrong as your scenario?
In reality, a 100 odd policies is a v difficult sample size from which to draw robust conclusions. I mean, toss a coin a few dozen times, and see if heads & tails come up 50:50 – they won’t! But toss it a million times & see how close you get… In light of that, and noting their obligations, I’m comfortable with the directors’ supervision/approval of the current policy valuation. [But obviously the more info they provide, the better I can evaluate the likely accuracy of that valuation (again noting the limitations of the sample size)].
Realistically, under most scenarios, what we’re really debating here is the likely IRR we can expect on a TLI investment. Everybody would do well to pause & think about that – because most of the time, your biggest investment worry isn’t actually your return…it’s the bloody return of your capital!
Daniel Victor said:
The other risk here is that the company has a dollar-denominated payments stream – and the USA continues to print money at an accelerating pace in order to meet its increasing obligations.It is possible to hedge a dollar-denominated payments stream,but that is trickier here because you don’t know exactly when the company will get the money and its shares are illiquid.So effectively you are stuck with that risk long-term.
Yes, I highlighted that above – to expand a little further:
I’m actually not the greatest fan of the dollar – everybody knows the US can’t help itself, it will always be the main monetary & fiscal stimulus engine to kick-start the global economy. And this isn’t a new phenomenon, it’s been that way for many decades now – so the abject debasement of the dollar over those same decades is no surprise. So if you have a well-diversified global equity portfolio, I expect its performance is actually aided by & compensates for a weak dollar.
Anyway, currencies are mean-reverting much of the time – so despite high short-term FX volatility, in the medium term the scale of your equity gains/losses is likely to far exceed any related currency gains/losses.
“There really have not been many corporate liquidations over the past decade but, historically, when liquidations were announced, 20% discount rates were not uncommon.” stahl sep 13
that alone kills your thesis, but leaving aside the discount rate:
1. the increasing premiums on fewer policies is worrying
2. the LE distrib table = no return of capital for at least 3 years
3. CDC table is 6 years old.
Here’s the relevant link: http://www.horizonkinetics.com/articles.asp?pageID=5
It’s a little ambiguous – the 20% discount rate being referred to may be from a decade ago now? In my experience, and I’ve reviewed a lot of liquidations/wind-downs in the past few years, that type of discount rate is pretty rare unless investors expect a particularly difficult & uncertain liquidation.
1. Not sure why? Increasing premiums are built into the company’s (& my) valuation.
2. See my comments above, we actually now appear to have a $28.5 mio annual run-rate for policy maturities!
3. I’ve no idea why the last CDC tables are from 2008 – they seem to have produced some version of the tables annually prior to 2008. But industry experts don’t get paid to simply look up 5 yr-old tables – shareholders can obviously expect they’re receiving the most accurate & up-to-date LE estimates & policy valuations.
Assaf Nathan said:
Thanks for your excellent post.
One small note nonetheless, the chances for a 90yr old man/woman to reach 100 is indeed ~4.5%/7.5% as you noted, but chances increase significantly with age.
You assumed the average age to the policies that has expiry risk to be 90 but it may be much higher than that. If avg age of the insured under these policies is 95 for instance we are looking at chances around 30% more.
Yes agreed, the odds do progressively increase with age – unfortunately, we don’t have sufficient data to determine if there’s a higher average age on these ‘expiry’ policies. However: i) I don’t know of any structural reason which suggests these policies might have a higher average age, and ii) almost half the policies have expiry risk – so if the avg. age for those policies was 95 yrs, one might expect the other half of the portfolio to have an average age of around 84 yrs. But the actual minimum age in the portfolio should now be at least 85. I also take comfort in the fact I can approximately discount back to the company’s latest policy valuation (which is presumably built up policy by policy).
But as I said, working with averages can be deceptive – both positively & negatively! There’s been a significant improvement in the info disclosed by the company in the past year, but clearly far more disclosure is required on this specific topic & risk. Frankly, I’d also like to see a decent/in-depth explanation of how/why a policy clause like this even exists, how common is it, and what was the original rationale/benefit in selecting policies of this type.