One of the Life Expectancy providers, 21st Services, has just announced a substantial adjustment of its methodology resulting in an extensive lengthening of its Life Expectancy (LE) estimates. In the most important category (male, non-smoker), the LEs will lengthen by more than 20%. The result for investors of course is that life settlements policies that were bought based solely or partly on opinions from 21st Services will be worth substantially less if the same rate of return is targeted by investors.
For investors, the take-away lessons are still the same:
- We believe there is too little transparency regarding data or methodology in the announcement from 21st Services. A black box that did not perform to expectations is being replaced by a new black box.
- The ground has been laid for more changes. 21st Services recognizes that there is distortion in the market. The presence of large blocks of premium financed policies has been a factor in the problems that LE providers have faced. That is now being addressed by “tertiary market LEs”. The bifurcation of the market into “standard” and “tertiary market” LEs could add valuable granularity – but again, with the black box approach we do not believe this will be the case.
- 21st Services has used a lot of experience data to redefine its underwriting. Institutional investors have some time ago already starting using larger and more granular databases for their work. As an investor it has become more critical than ever to understand the data.
- With 21st Services changing its methodology, is this the point in time when more transparent underwriting approaches (Fasano, EMSI) will become more main-stream again?
- Finally, is this a case of shutting the stable door after the horse has bolted? The effect of the preferred cases that we highlighted in 2007 is wearing off. 21st Services admits so much when it says it is seeing signs of the universe of lives reverting back to more normal life settlements.
- We believe the shift by 21st Services is another step in the race for the ‘conservative highground’. As one prominent CEO of an LE provider company once said at a conference in Holland: ‘Give an LE that is too long, and you won’t be sued. Give one that is too short, and you will be sued.’