Achieving risk diversificiation
London, 11 November 2015
What is a Life Settlement?
“A life settlement is the sale of an unwanted or unneeded life insurance policy from the original policy owner to a third party, for more than the cash surrender value, but less than the face value. The purchaser becomes the new owner and beneficiary of the life insurance policy and is responsible for the payment of premiums.”1
The secondary market for US life insurance policies exists because policyholders who want to exit their life insurance were traditionally limited to:
Terminating premium payments and letting policies lapse, thus losing the value of premiums paid, or
Surrendering the insurance policy to the insurance company for a (low) surrender value, thus losing the value of past premiums paid.
The secondary market allows third parties to buy policies, thereby offering original policyholders a substantially better price. From 2006-2009, policy owners who sold their policies received $6.2 billion compared to a total surrender value $0.6 billion 2.
Reasons for wanting to exit a life insurance policy range from estate change, mortgage repayment, lifestyle change to other cash needs.
1 Life Insurance Settlement Association (LISA) 2 U.S. Governmental Accounting Office
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Who Should Invest in Life Settlements?
Investors with a conservative investment strategy, where capital preservation is a key consideration.
Long-term investors, as liquidity in the asset class is limited.
Investors seeking private absolute return investments with dependable yield,
low correlation to financial markets and low volatility.
Investors seeking USD exposure.
2
Why Invest in Life Settlements?
Compelling Risk-Adjusted Returns Our aim is to deliver 8% in USD net of fees, over a ten year investment period.
Risk Diversification Longevity is the main risk factor in life insurance portfolios and it is fundamentally uncorrelated to most financial risk factors.
Low Volatility A well-diversified life insurance portfolio offers stable returns. Volatility since inception has been approximately 2.7%.
Capital Preservation An investment with a hold to maturity strategy has a limited downside, since mortality is inevitable.
Alignment of Interests Principals of Resscapital AB are substantial fund investors.
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Market Size and Development Secondary market transaction volumes in the US In 2014, the estimated size of outstanding stock of in-force life settlements was approx. USD 50 billion in face value. 1
Currently, the life settlements market is regulated in 42 states and legislation favours the right of the consumers/policy holders to sell their policies in the secondary market3 .
Face value USD billion
In 2012, individuals owned over $11.2 trillion of face value of life insurance polices in the United States.2
14 12 10 8 6 4 2 0
With baby boom generation reaching retirement age, the supply of policies to the life settlement market is expected to grow.
Sources: 1.
Conning Research
2.
American Council of Life Insurers (ACLI) Fact Book 2013
3.
Life Insurance Settlement Association (LISA)
In addition, existing life settlement portfolios trade in the multi-billion tertiary market with players such as Apollo, Blackstone, Berkshire Hathaway Insurance, Fortress, Kohlberg & Co. and TPG. These larger players are rarely active in the secondary market since deployment of capital is limited.
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Policy Cash Flows
Illustrative Example
When the insured dies, the pre-determined amount (the ’death benefit’) is paid out to the new policy holder (blue). The date of the death benefit and the number of premium payments are unknown.
Cashflow
The policy is purchased by the new policy holder (e.g., Ress) who continues to pay premiums to the insurance company (red).
The economic value of a life insurance policy increases as the insured person ages (grey). Policy net cash flow = policy death benefit paid out – premium payments - cost of purchasing the policy.
0
1
2
3
4
…
D
Year Cost
Prem ium s
Economic value
Death benefit
D= Demise of the insured person (i.e., when the policy pays out)
5
Origination Process
Policy Owner
Broker/Agent
Provider
Policy Buyer
The original policy owner decides to sell the policy in the secondary life settlements market to optimise his/her returns.
Life settlements brokers are intermediaries who represent the original policy owners looking to sell their policy. Brokers usually pay medical underwriters to assess life expectancies.
Life settlements providers are regulated on a state level and represent the buyer in a life settlement transaction. We source policies through four independent providers.
If a policy meets our criteria, it will go through a due diligence process, including a legal review and independent medical underwriting. We have looked at over 6000 policies and bought approx. 3%.
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Ress Capital - Key Advantages
Quantitative edge
We have developed proprietary pricing models and premium optimisation algorithms. These tools give the Fund a significant quantitative advantage in bidding and portfolio construction. We have reviewed over 6000 policies since inception.
Buying single policies
We select only the most attractive policies. Our automated portfolio management system allows large numbers of policies to be analysed.
Independent medical underwriting
We never buy a policy without an independent life expectancy report from our preferred medical underwriter, Young Med Solutions.
Ownership and alignment of interest
We are owned by successful financial services entrepreneurs, including three major Swedish family offices. Key principals are also major Fund investors.
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Key Advantages - Independent Medical Underwriting
Correct life expectancy estimation is a key success factor and therefore the Fund always requests an independent life expectancy report. The company’s proprietary underwriting methodology consists of:
A physician-based approach instead of an actuarial underwriting approach
Separate mortality curves generated for each case, specific to that individual’s facts and circumstances, in stark contrast to methodologies utilised by mainstream medical underwriters
Recognition of age-disease interactions, as some conditions are aggressive at younger ages, but might be moderate at older ages.
Our proprietary life expectancy estimates tend to be more conservative than mainstream underwriters used by many of our competitors.
Internal actual to estimate (A/E) analysis of Young Med Solutions’ underwriting track record indicates A/E ratio close to 100%.
A complementary external review performed by a Big Four accounting/actuarial firm also confirmed results of our internal review.
As a result we only buy approx. 3% of reviewed policies.
Careful review of effects of co-dependant impairments
Our main independent medical underwriter is Young Med Solutions, LLC. The company was founded by Jeffrey L. Young, M.D., M.A. to develop the best system for assessing life expectancy in the life settlement industry. Dr Young has been involved in medical underwriting since 2002.
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Key Advantages – Reduce Longevity Risk Longevity is the key risk with investing in life settlements (i.e., that life expectancies are too short). We mitigate this risk as follows:
Ress Portfolio - Longevity Sensitivity
Independent medical underwriting
Experience having reviewed > 6,000 polices
Focus on relatively healthy individuals with long life expectancies
Select policies with low premiums, i.e. polices with limited tail risk
Our portfolio is diversified across different age groups, carrier ratings, life expectancies, medical impairments, geography, etc.
Gross Portfolio IRR
35%
-3
25% 15% 5% -5% 0
3
6
9
12
Deviation from expected life expectancies (years)
Key Portfolio Statistics
> 185 life insurance policies
Total face value: > USD 365 million
Average annual premiums: 2.4% of face value
Average life expectancy: 11.8 years (at purchase)
Average age: 77.4 years
Average gross purchase IRR ~13%
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Past Performance – “J-Curve Effect”
Net fund performance in USD 7%
4.82%
5%
Why did the early performance suffer? 5.23%
1.85%
3% 1% -1% -3%
-2.54%
-5% -7%
-6.18% 2011
60
2012
2013
2014
YTD
Issues
Solutions
AUM was small and fixed costs were disproportionately high
AUM has grown considerably since
Investment factor was too low
Deploying capital faster through increased number of providers Credit facility was put in place allowing reduction of premium reserve
AUM since inception (MUSD)
50 40 No policy paid out until 2013
30 20
Since then number of maturities has been in line with expectations
10 0 2011-04-29
2015-08-31
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Performance Outlook – Several Potential Tailwinds
Conservative and disciplined policy buying has created a well-diversified life insurance portfolio
Actual number of policies paying out now exceeds estimates
Fund is now moving up the J-curve with increasing number of policies expected to pay out in coming years
Portfolio is expected to be cash-flow positive going forward
Continued increase in AUM could further reduce fixed cost drag
Actual vs Expected (USD)
9
9
8
8
7
7
6 5 4
Expected Actual
3 2 1
0 2011-05-31
Millions USD
Number of maturities
Actual vs Expected
6 5
Expected
4
Actual
3 2 1
2015-08-31
0 2011-05-31
2015-08-31
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Risk Factors
Longevity Risk - Actual life maturity is longer than life expectancy estimate
Portfolio consists of a large number of policies which reduces such variance.
Fund relies on proprietary medical risk analysis and underwriting. Additional medical underwriters also provide life expectancy estimates.
Policies are only bought from US insurance companies with a minimum rating of A-. No single insurance company accounts for more than 15% of portfolio.
There are no known cases where policyholders have lost death benefits, assuming policy is not contested. *
Custodian bank and escrow agent handle all money transfers including premium payments.
Tracking agent notifies custodian bank that policy benefits are due to be paid out.
Valuation Risk – Fund valuation is not in line with market prices
Fund applies mark-to-market adjustments.
Fund’s net asset value (NAV) is independently reviewed and value of life insurance portfolio is validated semi-annually.
Premium & Legal Risk – Insurer increasing premiums or challenging policy
Only policies beyond suicide and contestability period are bought and a legal review always takes place.
Historically, the regulator have rarely allowed insurers to increase premiums. Exposure to many different insurers mitigates the risk of increasing premiums.
Credit Risk - Insurance companies unable to pay out on policies upon death
Administration Risk - Premiums are not paid on time or benefits not collected on time
Source: * AM Best
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Management Team
Jonas Mürtenson, Managing Director, has an international finance background and has lived in Switzerland, Belgium and the UK. He worked in fund management in Belgium and then moved to London and worked at Schroders, Bear Stearns and Merrill Lynch selling and structuring derivative products to European institutional investors. Prior to founding Ress Capital in 2003, Jonas was Head of Derivative Sales at Hypovereinsbank in London. Jonas holds a M.Sc. from the Gothenburg School of Economics in Sweden. Andreas Ametrin, Portfolio Manager, was previously Partner and Team Leader for Quantitative Research at a major multi-strategy hedge fund in London where he analysed and developed trading strategies and risk management tools. Andreas also worked for a number of years with risk management and trading systems at SunGard. Andreas holds a M.Sc. in Industrial Engineering and Management from the LinkÜping Institute of Technology in Sweden. Anton Pozine, Risk Manager, came in contact with life settlements while writing a Master’s thesis on premium modeling and optimization for life insurance policies. Since 2011, he held various positions including junior portfolio manager both in Sweden and Luxembourg. Anton holds a M.Sc. in Industrial Engineering and Management from the Linkoping Institute of Technology in Sweden.
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Board and Advisory Board
Niklas Midby, Chairman of Resscapital AB, has a background in finance. Niklas begun his career in London with the Boston Consulting Group and then held various senior positions in corporate finance and private equity. Returning to Sweden, Niklas joined OM (now Nasdaq OMX) with overall responsibility for all exchanges and clearing houses. Since 2003 he manages his own investment company and serves on several boards, including as Chairman of Skandiabanken AB. Niklas holds a B.Sc. from the Stockholm School of Economics. Erik Mitteregger, Non-Executive Director of Resscapital AB, has a background within equity research and investment management at Alfred Berg. In 1995 he co-founded Brummer & Partners and built what is today one of Europe’s leading managers of alternative investment funds. Today, he serves on company boards, including the listed companies Kinnevik and Tele 2. Erik holds an B.Sc. from the Stockholm School of Economics. Mikael Holmberg, Chairman of Ress Capital Fund Management S.A. He has worked within the Kinnevik Group since 1983, including as CFO of Investment AB Kinnevik. As head of the European part of the single family office of Cristina Stenbeck, Mikael is presently based in Luxembourg. Mikael has studied Economics at the University of Lund. Claes-Johan Geijer, Non-Executive Director of Ress Capital Fund Management S.A., has worked in managerial positions in various international industrial companies and then became Managing Director of Swedbank in Luxembourg. In 2001 he became Managing Director of Banque Carnegie Luxembourg and also served as Group Head of Private Banking. Since 2012 he serves on several boards. He holds a B.Sc. from the Stockholm School of Economics.
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Fund Facts - Ress Life Investments AS (Feeder)
Target return
Approximately 8% net of fees, over a ten year investment period
Alternative Investment Fund Manager
Resscapital AB, authorised and regulated by the Swedish Financial Services Authority.
Fees
No additional management fees, but the feeder will pay for its custodian, auditor and administration agent.
Custodian
Auditor
Administration
Redemption*
Listing
Nykredit Bank
Deloitte
Citco Denmark
Monthly redemptions with 5% redemption fee. No redemption fee after seven months’ notice period.
The company is expected to be listed at Nasdaq Copenhagen during 2015.
*If, on any given date, payment on redemption requests represents more than 5% of the total shares in issue , the board may defer redemptions exceeding such percentage for such period as considered necessary to sell assets in order to be able to meet the substantial redemption requests.
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Fund Facts- Ress Uncorrelated Assets Fund
Vehicle
Target size
Minimum Investment Alternative Investment Fund Manager Medical Underwriter
Providers Custodian and Administration Agent
Paying Agent and Escrow Agent NAV Verification
Legal & Tax Advisors
Open-ended mutual investment fund, organised under the laws of Luxembourg
USD 300 million
The equivalent amount in USD of EUR 125,000
Resscapital AB, authorised and regulated by the Swedish Financial Services Authority
Young Med Solutions combined with other medical underwriters
Four independent providers are used to source policies
Caceis Bank, Luxembourg
Wells Fargo Bank N.A., USA
Deloitte SA, Luxembourg Salon Marrow Dyckman Newman & Broudy LLP (USA), Arendt & Medernach (Luxembourg), Ernst & Young (Tax)
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Fund Terms
Target return
Approximately 8% net of fees, over a ten year investment period
Leverage
A limited loan facility for short-term cash management purposes is in place
Fixed fees
Management fee: 1.5% per annum
Performance fee
15% of the Fund’s performance above a 6% hurdle (no catch-up). Payable only out of realised portfolio cash flows and once high watermark is exceeded.
Subscription
Monthly subscriptions
Redemption*
Quarterly redemptions with six months’ notice period
NAV-verification
NAV is calculated monthly and is independently verified by Deloitte twice a year.
*If, on any given date, payment on redemption requests represents more than 5% of the total Units in issue in the Sub-Fund, the Management Company may defer redemptions exceeding such percentage for such period as considered necessary to sell part of the Sub-Fund's assets in order to be able to meet the substantial redemption requests.
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Contacts
Resscapital AB Floragatan 2, PO Box 55916, 102 16 Stockholm, Sweden Authorised and regulated as an Alternative Investment Fund Manager (AIFM) by Finansinspektionen (the Swedish Financial Services Authority)
www.resscapital.com jonas.martenson@resscapital.com +46 70 663 0845 andreas.ametrin@resscapital.com +46 73 970 7850 This proposal (the “Proposal”) is provided on a strictly confidential basis by Resscapital AB (“Resscapital”). Accordingly, it may neither be reproduced in whole or in part nor may any of its contents be divulged to any third party without the prior written consent of Resscapital. This Proposal does not constitute or form part of either an invitation, offer or recommendation to any person to provide credit, underwriting or placement facilities. The information contained in the Proposal is based on present circumstances, market conditions and beliefs. Neither Resscapital nor any of their respective directors, officers, employees or advisers or any other person makes any promise, guarantee, representation or warranty (express or implied) to any person as to the fairness, accuracy or completeness of this Proposal, or of any other information, materials or opinions, whether written or oral, that have been, or may be, prepared or furnished by Resscapital, including, without limitation, economic and financial projections and risk evaluation. No responsibility or liability whatsoever (in negligence or otherwise) is accepted by any person for any errors, mis-statements or omissions in this Proposal or any other such information or materials. Without prejudice to the foregoing, neither Resscapital, nor any of their respective directors, officers, employees or advisers nor any other person shall be liable for any loss or damage (whether direct, indirect or consequential) suffered by any person as a result of relying on any statement in or omission from this Proposal. Nothing in this Proposal should be construed as legal, financial, accounting, tax or other advice. No person has been authorised to give any information or to make any representation not contained in this Proposal and, if given or made, any such information or representation may not be relied upon as having been authorised by Resscapital.
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Appendix – Portfolio Overview
Insurance Company Rating (AM Best)
Face Value Distribution
Key Policy Facts
30%
20%
Number of policies 185 policies
A++
Total face value USD 365 million
A+ 10%
A
Average policy size Approx. USD 1.9 million
A-
0% 250k-500k >500k-1M
>1M-2M
>2M-3M
>3M-5M
Average purchase price Approx. 12% of face value
>5M-10M >10M-15M
Face value
Total number of states 31
10 Largest States
Top 5 Insurance Companies
Total number of insurers 49
15%
Portfolio value Approx. USD 56.5 million
10%
Investment factor >98% 5%
Premiums USD 4.8 million (next 12 months)
0% John Hancock
AXA Equitable
Lincoln National
Protective Life
Transamerica
CA
FL
NY
TX
CT
IL
NJ
AZ
UT
OK
Facility USD 5 million
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Appendix – Portfolio Overview
(continued)
Insured Age Distribution
Life Expectancy
40%
40%
30%
30%
20%
20%
10%
10%
0% 65-69
70-74
75-79
80-84
85-89
Key Insured Facts
Number of lives 177 Number of joint policies 10 Average age at purchase 77.4 years
0%
2-3
Age
4-5
6-7
8-9
10-11
12-15
16-
Life Expectancy (years)
Top 10 Main Impairements 50%
Cardiac
40%
Gastro Intestinal
30%
Musculoskeletal
20%
Genito-Urinary
10%
Dermatologic Cond.
Top impairment category Endocrine
Top sub-impairment Dyslipidemia (endocrine) Number of maturities 8
0% <100 100-150 150-200 200-250 250-300 300-350 350-400
Hematology
Gender split 68% male - 32% female
Mortality Rating (% of Normal Life)
Endocrine/Metabolic
Average life expectancy 11.8 years
400-
Mortality Multiplier
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Appendix - Enhanced Regulatory Environment
State Insurance Commissioners in 42 states regulate life settlement transactions and over 95% of US population are covered by regulations and protections1. Legislation favours the right of policy holders to sell their policies in the secondary market. Legislation strengthens consumer protection and includes standard contract terms, disclosure to sellers of fees paid to intermediaries, acceptance from beneficiaries etc. Regulation is also promoted by the Life Insurance Settlement Association (LISA) and the Institutional Life Markets Association (ILMA) Secondary life insurance market is regulated in all states, except those marked in grey and green.
1 Life Insurance Settlement Association (LISA)
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