Valuation, Underwriting and Integrity of Life Settlements

Episode 3, with Victor Heggelman, CFO
I’m Victor, I’m the CFO here at Carlisle Management. I got into life settlements when I was an auditor at KPMG, where I met Jose and Tim, who were running a fund then that I was auditing. So my background is an auditor. When Carlisle started here in Luxembourg, I joined in 2009 to do the internal external reporting, reviewing of the valuations, the external administrator and guiding through the audit process.

What are the valuation and underwriting methods generally adopted by the industry?
Life settlements are generally valued using a probabilistic discounted cash flow model, whereby the main inputs are life expectancy, net debt benefit of the of the policies and the expected discount rate currently in the market. To get a valuation that is as close to the market value as possible in the absence of a transparent open traded market.

How does one ensure the integrity of the valuation process?
We have processes that we go through during the acquisition of the policies, or the variables that are used in the valuation are checked and vouched against the external documentation that we get, for example, from medical underwriters, from the insurance carriers to make sure the data that we use in valuing the policy is consistent and agrees to the underlying documentation. The data is then sent to our valuation agent, which is an external party, Lewis and Ellis. And Lewis and Ellis uses their own valuation models, which use a probabilistic valuation technique to value the policies using the table of actuaries.

Lewis and Ellis reports that value back to us, which I review to make sure it’s consistent with our expectations, and that is then processed as the valuation for that specific month. Then to verify the integrity of the data and the valuation procedures done by Lewis and Ellis, we have KPMG, our external auditor, review the valuation on a quarterly basis as well, to make sure that the valuation techniques used by Lewis and Ellis are the same as in prior quarters and are consistently applied.

How have valuation and underwriting methods evolved over the last 15+ years?
The evolution of the asset class, I think is from a valuation standpoint, the valuation has been more competitive and more professionalized. When I started doing the audits of life settlements, there was nothing written in the accounting principles on how to value life settlements or what type of valuation models that should be used and the valuation models used in the market back then were very diverse, and everybody thought that they had the best model. Some just use discounted cash flow model models, not on a probabilistic method. So that gives you a wide array of values. And I think in the last years that valuation methodology has been more standardized, whereby all market participants are using similar valuation models, whereby sometimes the inputs and the variables that they use are more specified to their risk appetite.