In the Chairman's letter to shareholders dated 3 July 2013, he referred to a
mortality review and to updated estimates of longevity from third party
specialists. (These specialists are also referred to as "Life Expectancy
Providers".) The mortality review considered the pace of maturities of the
Fund’s underlying investments in life policies (the “Policies”). The life
expectancy estimates reflected specialist opinion on unrealised Policies.
Interpretation of results
The Board, in consultation with ViaSource Funding Group LLC ("ViaSource"), the
Fund's investment adviser, has carefully assessed the results from the review
and the updated life expectancy estimates. This was an involved process, not
only in terms of interpreting the facts, but also in making subjective
assessments. Calculating the life expectancy of older, medically impaired
lives is not an exact science. There have been considerable changes in the
period since 2011, in the market generally and within the Fund. None of these
changes could have been foreseen with any certainty. Particular points
requiring judgement were as follows.
Expectancy Providers are generally perceived as being particularly
conservative given the current state of the market;
the majority of the Policies, the insured lives have yet to reach their
original life expectancy, and so there is less experience to draw upon of
lives at later durations; and
experience in respect of the Fund’s portfolio has shown actual maturity
amounts to be below expected amounts, but it is not certain that this trend
There was, in the Board’s view, however, a reasonable degree of consistency
between the results of both the mortality review and the updated estimates
such that it would be appropriate to make certain changes to the Fund's
As set out in the Fund’s current Offering Memorandum, the estimated life of a
policy has been determined by averaging est imates from
two specialist firms and then adding a period of 12 months. It
was considered that 12 months was a reasonable additional period over which to
expect the majority of Policies to mature. The results of the mortality review
and the updated life expectancies indicate an increase to the original life
expectancies in respect of the Policies.
About half of all Policies are expected to mature within the updated life
expectancies of the insureds, with the rest expected to mature over a
subsequent period of a similar duration, although some may live considerably
In view of the above, the Board has determined that it is appropriate to make
the following changes to the valuation policy with immediate effect.
life expectancy estimates obtained in 2013 will be used to replace those
obtained originally for each policy.
additional period will be changed from 12 months (i.e. estimated life of a
policy is life expectancy plus 12 months) to the life expectancy of the
relevant policy (i.e. estimated life of a policy is life expectancy plus life
expectancy). For example: a policy with life expectancy of 15 months currently
has 12 months added to produce an estimated remaining life of 27 months. The
assumption for this policy would change to 15 months multiplied by 2, to give
an estimated remaining life of 30 months.
The valuation of the Fund's Policies is particularly sensitive to the
estimates of life expectancy, as can be seen in the Longevity risk section of
the 2011 annual report and financial statements. The changes set out above,
therefore, result in a reduction to the net asset value of the Fund of around
10% relative to the value immediately prior to the suspension of dealings.
As regards future potential changes in life expectancy estimates, the Board
intends to establish a programme of assessment, such that every policy is
reviewed over the course of rolling two year periods.
Security of Policies
As mentioned in earlier communications, the Fund maintains a reserve to cover
continued premium payment, and the Policies are held safely in custody by the