Managing Partners Limited warns that new data showing improved mortality rates could cause significant problems for some Traded Life Policy fund managers who have targeted policies with longer life expectancies, not implemented an adequate actuarial valuation method that smoothes in the impact of an improvement in life expectancies or provide for the increase in premium required.
 
The fund manager is urging investors with these funds to contact their fund manager to find out what impact improved life expectancy figures will have on performance and also what measures they had in place to counter the effects of this.

Traded life policies (TLPs) are US-issued whole of life policies sold before their maturity date to allow the original owners to enjoy some of the benefits during their own lifetimes. TLPs can be used to deliver steady, incremental returns that are uncorrelated to other financial asset classes.
 
Recently published Valuation Basic Tables (VBT – the US Population Mortality Data) for the fourth quarter 2008 revealed an improved mortality rate. Shortly after the publication of 2008 VBT, 21st Services, a leading life expectancy underwriter, announced that they were adjusting their own life expectancies out by an average of 25%, and since this the majority of life expectancy underwriters have followed suit.

Jeremy Leach, Managing Director, MPL said: “It may well be that life expectancies on a number of Traded Life Policies are now too conservative, particularly for smaller face value ones as opposed to those with a higher face value (or “Healthy Wealthy”)  that have historically dominated the market. In December 2008, we took the decision to extend all life expectancies in our Traded Policies Fund by 25% and to smooth in the impact of this adjustment towards the estimated maturity date of each policy.
 

“Over the past five years we have maintained a cautious approach to valuing policies. Our Traded Policies Fund uses an actuarial valuation method to value its portfolio on a monthly basis, and as part of this process it automatically extends the life expectancies towards VBT every month. There is also an inbuilt sensitivity for improved mortality that has been employed in expectation of the increases that occur each time VBT is published (every seven years). 

“We believe that some funds investing in traded life policies have not had these systems in place and will suffer as a result of the improved life expectancy figures.”

The systems in place at MPL effectively mean that the portfolio in the Traded Policies Fund is ultimately valued on its own claims experience and it never releases all of the profits contained within a policy prior to its maturity date. It also means that a considerable proportion of the life expectancy extensions that have taken place on the longer policies in its Traded Policy Fund portfolio have been adjusted for improved mortality over time, which will mean that the impact of the 25% extension is less. 

Jeremy Leach said: “As a result of these changes to the portfolio of policies in our Traded Policies Fund and our ability to buy policies at improved internal rates of return, there will be no adverse change to the net asset value of the fund.  In review of our estimate for the performance of the portfolio in 2009,we confidently expect to maintain our stated goal of producing returns of between 8% and 9% net of charges.*
 
MPL says that it has taken great  care to ensure that the spread of policies in its  fund optimises its long term potential for capital growth by maintaining an average life expectancy within a prudent corridor with the ethos that long life expectancies carry too much longevity risk (i.e. on the standard actuarial model a ten year life expectancy may run for twenty years before maturity occurs and the additional premium risk and potential inaccuracy of life expectancy make them extremely difficult to value accurately), whilst extremely short life expectancy can be just too optimistic making improved mortality highly likely.

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