Life settlement product provider SL Investment Management is advising potential investors in life settlement funds to scrutinise providers’ asset valuation methodologies. 

SL believes that some funds have not taken into account significant longevity revisions in the last few years and are using inadequate valuation methodologies.

Such funds are overvalued relative to realisable value and as a result are storing up issues for the future if and when subscriptions are slow and liquidity is required.
 
Currently, there is no standard valuation practice in place, with each individual company using its own methodology. Some simply assume that the policy will mature at, or shortly after the life expectancy of the assured life. This assumption could lead to over inflated valuations of as much as 40 per cent on a sample policy with a six year life expectancy.

SL advises that an actuarial approach to asset valuation is the key to preventing the policy being over-inflated. By adopting a more prudent and informed approach to the anticipated rate of projected maturities, the valuation is brought closer to the realisable value. 
 
Jeremy Brettell, chief executive, says: “Justifiably, investors are attracted to this asset class by the impressive potential returns and lack of market correlation, but they do need to make sure that the Manager has its feet firmly on the ground. We have seen examples in the market where the valuation basis and realisable value have become out-of-step. When this has happened, some investors who subscribed late have paid an inflated price to buy into funds and have since lost a substantial proportion of the value of their original investment. It is imperative to team up with a regulated investment manager with the appropriate internal controls and one that has sufficient experience and actuarial expertise of the asset class to ensure a fair outcome to all.”