What is True Financial “Performance” in the Life Settlement Industry

Most players in the life settlement industry present a performance track record based on number of dollars spent, number of policies purchased, number of maturities experienced, or total death benefit represented by these policies.  Few, if any, present the actual financial returns experienced by owners of these policies over time. The only meaningful measure of financial return is the cash IRR generated from a portfolio of policies over a period of time long enough, and with a number of policies large enough, to be statistically significant.  CMG’s track record includes the results of two portfolios assembled between 2005 and 2009 (so are “aged” between 6 and 10 years) and a third assembled between 2010 and 2014 (so is aged between 3 and 5 years).  Within these portfolios, as one would expect, there have been a number of early maturities that obviously generate above average or target IRRs.  For example, our 2005-2009 portfolios have experienced 139 maturities (approximately 25% of the portfolios) generating over $558 million in death benefits and an IRR of 16.6% when the target return of the portfolios was 11%.  Of the remaining 416 unmatured policies, 190 remain within the original LE used when purchasing the policy and 213 are beyond the original LE used when purchasing the policy.

Our analytical tools were developed while assembling the 2005 – 2009 portfolios and were used when assembling the 2010-2014 portfolio.  One of the tests that CMG utilizes is a sensitivity test that compares policies purchased today to those acquired for the 2005-2009 portfolios – policies are selected today only if the test indicates that they are superior to those prior policies.  In that regard, it appears that our tests are validated – the highest IRR on any matured policy within the 2005-2009 portfolios was 86.1%.  The 2010-2014 portfolio already has experienced 25 maturities with a higher IRR and, indeed, has experienced 66 total maturities generating over $285 million of net death benefit and an average IRR of 170%.

CMG believes that it is one of the few if not the only originator/provider within the industry that makes available data similar to that discussed above (real as opposed to hypothetical) on all policies that it has acquired for its investors.  When selecting an originator/provider to acquire policies, investors should first ask to see that originator/provider’s actual results – not how many polices they have purchased or how much money they have raised or spent.  Next, are those results verified by an independent third party, as are CMG’s?

Assuming that a prospective originator/provider could provide that data, investors should discount “strong” financial performance based on only a few early-to-mature policies or on a portfolio that has not had time to “age” or “season.”  Policies that mature “early” almost always show exceptional returns standing on their own.  Only after years have passed and a number of policies mature beyond projected life expectancy (i.e. “late”) in that portfolio does one begin to see overall average returns that are representative of the potential return of the portfolio as a whole.

Because the average life expectancy of a portfolio of polices is typically beyond five years, the performance results of the overall experience of the originator of those policies only becomes meaningful after years have passed beyond that average life expectancy (after the policies have seasoned).  CMG Life Services Inc. has established a track record based on 10 years’ experience of buying policies for investment, including policies that matured early, nearly “ on time”, and beyond LE.  Our results are summarized under “Our Industry Leading Performance.” Read More…

On the former point, experience with “late” maturing policies is extremely important.  Policies selected by CMG are expected to deliver positive IRRs well beyond LE or they will not be acquired.  For example, one policy that matured during 2014 matured 50 months late (original LE of 57 months) but still delivered an IRR of 5.36%.

Finally, we at CMG believe that “performance” of a life settlement portfolio must take into account more than an actuarially-based “A-to-E” (“actual to expected”) ratio.  Actuaries are trained to manage the risks to the creator of life insurance products, the insurer, through analyzing the LE of the insured.  Life expectancy is in turn based on LE tables that are created by the insurance industry to support the actuarial premise of managing this risk.  These tables are not designed to estimate the actual time of death of an insured for the life settlement marketplace, but to assure that actual death does not go beyond the LE selected. Actuarial modeling is required to be used for life settlements by default because there is no other near-reliable LE database available.  When actuaries consider “performance” of a life settlement portfolio, they follow a standardized performance model that measures “actuarial performance” and not “financial performance.”  Essentially, actuarial performance is based on a “body count” of policy maturities and assumes that if a policy does not mature “on time” (prior to or before LE), it is non-performing. This type of analysis does not account for the underlying metrics of a policy, which under CMG’s model, is designed to deliver a positive IRR well beyond LE.  The actuarial model is not designed to consider dollars invested or received, the cost of carrying the policy to maturity, or the timing of receipt of the death benefit. CMG’s financial model, on the other hand, delivers real “dollar-in-dollar out” numbers reflecting actually IRR to the client on a policy-by-policy basis.