The GRS Group’s longevity risk and life settlement and senior life
settlement ("SLS" or "LS") related capabilities are currently housed within three affiliated
companies: Risk Strategies, LLC (“RS”),
Transparent Analytic Technologies, LLC (“TAT”),
and Longevity Risk Solutions, LLC (“LRS”). In the
life settlement markets, RS
has developed life settlement related
solutions as well as structured and evaluated various LS related investments. The LS
models and technologies were developed
at TAT. In 2010, LRS entered into a "MGA like alliance" with a reinsurance carrier wherein LRS underwrites life related risk (i.e. mortality and longevity) in a variety of target markets including life settlements. In addition to the alliance with the reinsurance carrier, LRS and RS also interfaces with longevity risk-takers in the market.
The GRS Group has also been asked to evaluate a number of life settlement related investments including several unrated LS asset backed securities (e.g. a life settlement bond). To date, none of the investments has met with the investor's requirements. In addition, the GRS Group has been asked to comment on the general LS investment environment.
Set forth below is an overview the GRS Group's:
- Activities in the LS market
- LS models and methodologies deployed
2005 to 2010 Activity Overview
- Since 2005, GRS Group and its predecessor companies have been involved with several of
the national recognized statistical rating organizations (“NSROs”) in the longevity risk and life settlement asset backed security (“ABS”) rating
space.
- Between 2004 and 2006, a small number of life
settlements ABS were privately rated by A.M. Best. Following the private placement of these
securities, a predecessor to the GRS Group was approached to use knowledge of longevity risk
inherent in life settlement assets to recommend a longevity risk solution for
an already issued rated life settlement ABS.
- Since 2008, GRS Group has worked with DBRS, a Canada
based NSRO, in seeking ratings for life settlement ABS on behalf of
clients. GRS Group has been retained by 4 clients to assist in
obtaining a rating for life settlement ABS. We
structured and pre-priced longevity risk hedges and obtained actual pricing on
the transactions from risk-taking counterparties for two life settlement ABS. Due to sponsor
management related issues, qualitative issues associated with the pool
of policies or the client’s lack of control and
inability to secure a pool, no client has obtained a rating.
- In 2010 GRS Group was retained by a client to assist it
in addressing mortality/longevity risk in a new ABS structure similar to a
“life insurance-life annuity/ SPIA” combination (but utilizing mortality/longevity risk hedging as an alternative to the SPIA) in order to enable the
client to obtain an S&P rating on the new ABS structure. The firm was able to locate a longevity risk-taker for the client.
- During 2009 and 2010, GRS Group assisted potential
investors and investor related stakeholders (e.g. placement parties) with
interest in investing in unrated life settlement ABS by evaluating the
structures and terms of the life settlement ABS and providing an opinion as to
the quality and suitability of the offerings for investors. The firm reviewed 4
such unrated securitizations and, in each case, concluded that they were poorly
structured and would default under stressed scenarios. Based on the firm’s recommendations, the
investor clients declined to pursue investments in the unrated ABS offerings.
- In mid-2010, GRS Group was approached by a client to
design policy and pool criteria and structured a life settlement residual value
solution to enable a premium finance program to be capitalized. In the course
of designing the residual value solution, the firm was able to locate
counterparties interested in providing capital to support the execution of the
solution for the premium finance program as well as the residual value take-off
counterparty for policies at the end of the loan program. The firm also developed a policy evaluation
system for pre-clearing acceptable policies for the premium finance program.
- During the last quarter of 2010, the firm was asked to:
- develop a model
for evaluating and pricing portfolios of life contingent structured settlements
and develop purchase criteria to enable subsequent mortality hedging;
- structure longevity hedged portfolios of life
settlements and evaluate associated combined portfolio / investment.
- Because of the frequency at which the firm is asked to
review pools of life settlements on behalf of clients, it has developed
methodologies for evaluating policies and pools of policies in which the
current life settlement industry’s “buy box” is inadequate for matching up with
the objectives set by prospective purchasers of life settlement assets.
- Due to the frequency with which life settlement ABS were defaulting during
simulations under various stress scenarios, the firm utilized prior
asset-liability matching and reserve management methodologies and adapted them
to help clients address inefficiencies associated with reserve management. In
2010 this adaptation process resulted in the development of a combined
rule-based model with applicability to life settlement ABS, fund structures,
and managed portfolios. In a recent
application of the rule-based model to a life settlement ABS under given stress
scenarios and as well as unstressed longevity assumptions, resulted in zero payment
defaults out of 10,000 scenarios.
- In
a move designed to bolster its life settlement capabilities and knowledge base
in the life insurance markets, in June 2010, the firm hired a professional with
direct experience buying, selling and managing a portfolio life settlements
with a face value of $500 million.
LS Models and Technologies
In the course of the various engagements on behalf of its clients, several proprietary models and technologies have been developed
by the GRS Group to meet the needs and objectives of its clients. Consistent with the firm’s approach to the
development of a componentized approach to creating solutions, these models and
technology systems/platforms have been built to enable the development and
execution of solutions in a rapid fashion.
These systems and models have been developed principally in TAT either
for use by RS in pursuit of its clients’ objectives or to support a life settlement fund currently under development.
The characteristics and capabilities of these models and
technology systems/platforms include:
- The ability to provide portfolio-level analysis
or fund- or issuer-level analysis using various stress scenarios mortality tables
as follows:
- determine the probability of an LS pool or a
fund or issuer failing a measure of ruin (e.g. exceeding reserves, insolvency,
interest and/or principal payment default, financial covenant default, among
others);
- ascertain the level of “lumpiness” (i.e.
proportionate exposure) to specified factors within the LS pool; and
- predict the level of net cash flow expected to
be generated from an LS pool under best/worst case scenarios using various mortality and stress scenarios.
- The capacity to produce policy-level analysis
and generate customized and customizable longevity risk related reports for
selecting LS policies using various stress scenarios / mortality tables to
determine the following:
- the amount of time from the date of purchase to
the date when the total cost of the policy exceeds the face value (i.e. time
period to loss);
- the probability of reaching or exceeding the
time period to loss (or minimum IRR);
- The future cost profile and cash flow streams
associated with a particular policy optimization and/or management strategy; and
- the spectrum of possible IRRs and the return
expected on the policy.
Utilizing
the systems/platforms, RS and TAT are able to:
- Evaluate and select policies.
- Provide evaluations of investment structures
(such as investments in portfolios, asset funds and securitizations).
- Rapidly structure and evaluate longevity risk
hedges as well as investments such as ABS, collateralized debt obligations,
fund structures, and independently managed LS portfolios (i.e. investments in
life settlement investment funds).
- Monitor actual LP pool and ABS performance as to
enable early alerts and to reforecast future performance
- Determine:
- The amount of the return expected by the
investor;
- The probability of principal repayment and the
expected return;
- The level of longevity risk for a specified LS
Pool and the impact of such risk on a particular LS portfolio structure or ABS,
including senior, mezzanine and equity securities; and
- The suitability of asset-liability matching and cash and reserve
management methodologies.
