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EEA INVESTORS’ GROUP
M. Colton, S. Burnett, D. Jeffreys, A.Simpson
EEA Life Settlement Fund PCC
PO Box 282
Regency Court, Glategny Esplanade,
St Peter Port, Guernsey, GY1 3RH
26th May 2015
via email: [email protected]
[email protected]
Dear Directors
EEA Life Settlements Fund PCC
th
I wrote to you on 28 February 2015 about several outstanding matters. I have now
reviewed your response dated 18th March 2015 with our members, together with the Notice
to Shareholders issued by the Fund Manager on 6th May 2015. We still have serious
concerns about the ongoing mis-management and mis-representation of our Fund. This is in
spite of the assurances that you gave us at the November 2014 AGM, and the fact that at
that meeting each of you also committed to improving Corporate Governance and Investor
Communications.
I attach an updated summary of our concerns and (in the spirit of a “shareholder information”
session as we discussed at the November AGM plus an earlier email from Simon Shaw 1 ), .
we would therefore like to meet with you as soon as possible to constructively and
confidentially discuss our ongoing concerns and recommendations and the best ways
forward. We understand that Mr Daly is visiting Europe shortly. Since he was unable to
attend the last five General Meetings of the Company can we also meet with him as an
opportunity to discuss relevant questions, especially since many retail investors are no
longer represented by the Financial Advisors or intermediaries whom he usually meets while
here ?
If you now wish to propose selling policies that would further reduce the future net
distributable cash, then (as you said in your response letter dated 18th March) you should
come back to the investors for a new vote to either continue with the “hold all policies to
maturity” investment objective (with updated (and more credible) predictions plus corrected
“Fair Value Through Profit and Loss” (FVTPL) NAV methodology), or adopt a new “run-off
the portfolio within x years” objective by selling policies prior to maturity with a valuation
methodology based on net distributable cash, rather than the flawed and meaningless NAV
methodology of the past. Meanwhile, you should restore the dealing NAV to a corrected
FVTPL basis and make good the position of all the Continuing shareholders who requested
the optional 5% redemption by the November 2014 deadline, as noted in the Attachment.
Yours Sincerely
David Trinkwon
Medley Systems Ltd., Coordinator – EEA Investors’ Group
CC :
1
C. Swale - Grant Thornton, Guernsey via email [email protected]
Email from Simon Shaw to an Investor in August 2013 : “Regular meetings with investors has been a feature
of the product and I believe this will continue, EEAFM and ViaSource have been available to met with
investors quarterly. I expect regular meetings to be offered in the future. ”
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EEA INVESTORS’ GROUP
ATTACHMENT
1) Distributable Cash
The amount of cash available for distribution to investors continues to fall, in spite
of policy maturities.
The table below shows that at 31st December 2011 the Fund held future net distributable
cash 2 of $1,369m, discounted to a dealing NAV of 61-66% as a “true and fair” estimate
of its present value at that time. This was after paying $89.3m of net redemptions and
distributions. The amount dropped because of the increased future premium
commitments following the 2013 Mortality Review and revaluations – eventually to
$1,110m at the end of November 2014, with a 76% dealing NAV. It has since fallen
further to $1,081m at the end of March 2015, but the dealing NAV has fallen much further
to 56% as a result of the (inappropriate) change in valuation methodology that EEA
retrospectively applied from 31st December 2014.
All in $m
Cash Balance
Remaining NDB
Remaining Premiums
Future Net Distributable Cash
Net Redemptions / Distbns to date
Gross Distributable Cash
Accounting NAV
Ratio NAV / Future Cash
Dealing NAV
Ratio NAV / Future Cash
Dec-11
56
1,521
(208.0)
------1,369
89.3
------1,458
Dec-12
66
1,399
(352.0)
------1,113
89.3
------1,202
Dec-13
92
1,272
(240.0)
------1,124
89.3
------1,213
Nov-14
137
1,147
(174.0)
------1,110
103.9
------1,214
905
66%
841
61%
764
69%
798
72%
790
70%
841
75%
n/a
n/a
841
76%
Dec-14
134
1,134
(168.0)
------1,100
103.9
------1,204
Mar-15
133
1,113
(165.0)
------1,081
108.0
------1,189
TBD
n/a
n/a
n/a
615
603
56%
56%
Estimate
Whereas the previous NAVs supposedly represented the “true and fair” present value of
holding all policies to maturity, the latest dealing NAVs reflect the actual net cash that
would supposedly arise if all the polices were to be sold “tomorrow”. As well as being an
inappropriate valuation method for the Fund (as we previously stated) this would mean a
real 44% loss in net distributable cash for the investors. It also understates the dealing
NAV to the permanent detriment of Continuing shareholders who redeem their shares
prior to all the policies maturing, as with the recent 5% redeemers.
EEA regularly reminds us that shareholders voted “overwhelmingly” for the restructure in
October 2013. This was on a basis that all (534) remaining policies ($1,295m NDB) would
be held to maturity, and the predictions that 28% ($363m) would mature within two years,
42% ($544m) within three years and 62% ($803m) within five years.
After eighteen months, only 128 polices have so far matured with a total NDB of $170m
(plus $8m NDB lost due to termination of cover). EEA haven’t announced any changes in
the characteristics or LE estimates of the polices remaining at the time of the restructure
vote and therefore owe investors an explanation as to why the restructuring predictions
will apparently not be met and how they propose to restore the future net distributable
cash benefit to the position that existed at the time of the restructure vote.
2
Excluding future fees, charges, expenses, tail disposals or TOC write-offs. These items are also excluded from
the Company’s NAV calculations.
Tel : 07802 538315
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EEA INVESTORS’ GROUP
2) Portfolio Maturities and Management
The Board MUST explain the reasons for the failure of the portfolio to mature as
expected (especially following the 2013 Review) and how they plan to resolve it.
At the November 2014 AGM the Directors agreed that poor portfolio maturity
performance was their major concern, and that a review was already under way as to the
causes and what actions should be taken to address the problems. They have dodged
every question and rejected every suggestion and offer of help that we have made on
these topics and have refused to consider Baco’s various offers to review and improve
the situation, or to reconcile the differences between our views which we documented in
WP7A and WP7B 3. The steps that EEA have taken so far with Maple Life have not
addressed any of these matters.
More than 85% of remaining insureds are now over 80 years old (38% over 90), and
their annual premium rates will be increasing exponentially. More than $1,000m (90%) of
the remaining NDB is on policies for more than $2m face per life insured, most of them
within the 80+ or 90+ age brackets mentioned above.
3) Maturity Predictions
It is clear that none of EEA’s prediction methods have any credibility or accuracy,
and yet this was a key factor in the restructuring proposal and voting.
We have repeatedly demonstrated (e.g. 4 ) that EEA’s historical maturity predictions have
always been flawed (i.e. actual maturities were always less than 50% of the predicted
NDB, regardless of prediction period).
EEA introduced revised LEs and a 2 x LE prediction model in 2013 which was marginally
better (around 60%) but they have now abandoned the 2 x LE prediction model. Maple
Life now appear to have their own (unpublished and different) forecasts.
In the 6th May 2015 Notice the EEA Fund Manager explains that the twelve month
prediction to March 2015 was $201m, of which $80m was forecast in the Jan – Mar 2015
quarter. (They had also predicted $237m for the 12 months using the 2 x LE method).
They then added that Maple Life had predicted $45m for Jan – Mar 2015. The actual
maturities were $123m for the twelve months and $11m for the Jan-Mar 2015 quarter.
Maturities have never gone to plan, and until EEA properly addresses the issue of the
underlying LE estimates and prediction models, they never will. Maple Life are using the
same flawed LE and policy data as ViaSource and the EEA Fund Manager, and will
therefore come up with equally flawed predictions, regardless of the methods used.
3
4
See EEA Investors’ Group Working Paper 7A and Working Paper 7B
See EEA Investors’ Group Working Paper WP7C
Tel : 07802 538315
Page 3 of 7
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EEA INVESTORS’ GROUP
4) Cash Balances and Liquidity
The Fund has failed to adequately rebuild its cash balance and liquidity position
since 2011.
EEA have never explained why the Board and the Fund Manager allowed the cash
balances at the end of 2011 to fall to $56m (6%) from the previous year’s $218m (15%).
It appears that the Fund was (knowingly) depending on new investor funds to replenish
the cash balances needed to pay premiums and share redemptions.
Until January 2015 we were able to accurately estimate the month-to-month cash
balances, but during February there was an unexplained increase of around $6.5m for
the cash balance of $139.9m. We therefore estimated that the March cash balance
would be approximately $133m but the April EEA Fact sheet and 6th May Notice shows
$128m plus a “$5.4m attributable solely to continuing shareholders”.
We don’t recognize this separate attribution or its relationship to the previously reported
cash balances which were allocated appropriately between Continuing and Run-off
Cells. EEA should clarify the nature and source of this special attribution, and where /
how it was previously reported in the monthly Fact Sheets and cash balances. We note
that the $14.6m and $4.1m redemption payments in October and February respectively
were correctly accounted for within the relevant Cell cash balances and shareholdings.
5) Sale of Policies
Under the restructuring particulars adopted by investors in October 2013, there is
no mandate to sell policies to meet redemption requests from Continuing
shareholders
EEA’s 30th January 2015 Notice said that policy sales might be necessary in the future to
meet redemption requests (from Continuing shareholders) and (eventually) to better
manage the tail of the portfolio. EEA have acknowledged that there is currently no
liquidity issue for meeting premium payments.
EEA removed the previous 23-month maximum redemption postponement provisions
and all shareholders are now bound by the “Available Cash” limits under the relevant
Cell classes and Supplements. Unless the Board gets a new mandate from an
appropriate majority of investors, it is therefore not permitted to sell policies for less than
their estimated future net distributable cash value. This would be detrimental to the
financial interest of all investors across all Cells.
We were therefore surprised to hear from brokers in the US that Maple Life are already
seeking bids for policies on the tertiary market. We understand that this might be just an
exercise to test the validity of the Maple Life valuations, but EEA should confirm that
Maple Life is not allowed to sell our policies to its own clients or associates, and at not
less than the future net distributable cash values currently on the books.
Tel : 07802 538315
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EEA INVESTORS’ GROUP
6) Fund Manager
Given the documented failures of the Fund Manager plus his appointed
Investment Advisor and Marketing Agent (apparently since inception) then we
believe that their contract(s) should have been terminated
The 6th May EEA Notice says that the Contract with the Fund Manager has been
changed to a twelve month notice basis (from six months) in exchange for an estimated
$875k reduction in annual expenses. The Fund Manager should be replaced by a more
independent and competent Manager for the purposes of running off the Fund for the
proper benefit of the investors. This would also then enable the new Manager and the
Board to pursue the current Manager and his Advisors / agents for recompense for their
past mistakes and overpayments.
7) ViaSource
Why are we paying for both Maple Life and ViaSource ?
We understand that in addition to the valuation functions, some of the policy servicing
functions are also now being transferred from ViaSource to Maple Life. If true then it
prompts the question as to why we are still paying for ViaSource as well – has the
Manager served notice on ViaSource to amend or terminate their contract ?
8) Cumulative Premium Costs & Termination of Coverage (TOC)
The cashflow profile is deviating significantly from EEA expectations and the
future premium commitments appear to be materially understated. A disciplined
risk approach is now required to come to terms with it.
It has been clear for some time that the EEA portfolio is experiencing significant oversurvivorship and this is leading to an increasing likelihood of TOC and the requirement to
fund increasingly higher premium rates than was ever expected or currently predicted.
This is confirmed by the fact that in spite of $170m maturities since October 2013,
annual premium costs have only fallen by less than $5m pa rather than the expected
$10m pa.
A common misunderstanding, (actively endorsed by EEAFM FM London), has been that
life settlements are a “no-lose” situation because every policy will pay out eventually.
This ignores the issue of profitability to pay investment returns and in many cases is
simply not true. As we witnessed during 2014, $8m of future net distributable cash was
lost due to TOC. In WP7A we had predicted $2m each for 2014 and 2015 as part of a
total $132m over a 10-15 year run-off period).
Secondly, Financial Advisors and investors did not (and still don’t) understand that the
majority of life settlements are funded on a 'minimum premium' basis resulting in a
premium stream that increases exponentially as the insureds get older (especially above
90 or 95). A natural outcome of this (because there is no investment component in the
policy) is that total cumulative premium requirements to policy maturity almost always
eventually exceed the Net Death Benefit, and often by significant amounts, reducing the
overall profitability of the portfolio.
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EEA INVESTORS’ GROUP
The table below shows that the December 2013 ($240m) future premium commitment
(and our $168m estimate for December 2015) appear to be around half the current rates,
but should actually be increasing as a result of the ageing and premium increase effects.
y/e remaining Gr. NDB (Face $m)
Premium Payments (414m)
2006-07
50
2007-08
221
2008-09
686
2H2009
1,105
2010
1,486
2011
1,521
2012
1,399
2013
1,272
2014
1,134
1.0
5.5
19
39
57
72
76
73
72
Average Premium Rate
4.0%
4.1%
4.2%
4.3%
4.4%
4.8%
5.2%
5.5%
6.0%
Future Premium Commitments
Net Difference year-on-year
Gross Difference year-on-year
Percentage of y/e NDB
y/e Average Remaining LE (mths)
y/e Average Remaining Age (yrs)
7.5
7.5
9
15%
n/a
n/a
31
23
29
14%
n/a
n/a
115
85
104
17%
n/a
n/a
183 [238]
68
106
17%
n/a
n/a
222
39
96
15%
20.50
84.10
208
(14)
58
14%
20.30
83.50
352
144
220
25%
38.20
84.65
240
(112)
(39)
19%
42.68
85.56
168
(72)
0
15%
40.97
86.33
Est. Future Premium Rate pa
n/a
n/a
n/a
n/a
4.4%
4.0%
4.0%
2.7%
2.2%
All data extracted from EEA Annual Reports and Financial Statements, Maturity Schedules, Policy List,
monthly Fact Sheets or quarterly Portfolio Statistics.
* $238m in Jun 2009 Report, $183m in Dec 2009 Report
Estimated
In WP7A we estimated that the future premium commitment at 31st December 2013
should be $670m (not $240m) based on the premium rate escalation factors together
with the extended LE and maturity performance that we predicted. This is corroborated
by the above table which suggests that the EEA commitment projection should have
been nearer to $500m, plus an additional £170m due to our extended LE predictions.
The two risks described above that were perhaps originally deemed tail events are now
much more apparent and significant and the Fund has moved into a very dangerous, but
predictable, “Fat Tail” stage. EEA comment that this has all been taken care of by writing
down the NAV on these policies over time is mis-leading. The real issue is why the
Investment Advisor didn’t sell these non-maturing policies or cease paying their
premiums long before the cover ended in order to optimise the net distributable cash for
investors. It’s also not clear how these premium and TOC risks or effects are adequately
allowed for in EEA’s published premium commitments and valuation methods. They are
not mentioned in the Scheme Particulars or Annual Reports.
9) Continuing Shareholders
EEA is short-changing the redemptions for Continuing shareholders, and must
give proper publicity to the redemption options.
It appears that holders of at least 28% of Continuing shares requested their 5%
redemption last November. We note that they received $4.1m for their shares rather than
the $5.5m that they would have received if the valuation method had not been
inappropriately changed for 31st December 2014.
In accordance with the Scheme Particulars in effect at (and dated) 31st December 2014
they should have been paid at the FVTPL NAV and include all those who submitted valid
requests by the November deadline. If EEA wanted to limit the payments to $4m then
they should have simply redeemed (say) 4% of shares at the “correct” NAV, leaving the
other 1% of shares in the Cells for future redemption. As it is, the investors concerned
have been permanently deprived of $1.5m by the retrospective adoption of an
inappropriate valuation method.
Tel : 07802 538315
Page 6 of 7
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EEA INVESTORS’ GROUP
EEA should immediately correct this situation by making appropriate supplementary
payments to all the investors concerned and/or restoring the appropriate number of
shares to their holder accounts.
EEA’s next Letter to Shareholders should also remind (Continuing) shareholders of the
need to submit valid requests by 25th September 2015 if they wish to redeem some or all
of their holdings after the lock-up period. EEA should not try to hide the information in the
hope that investors will forget, or miss the deadline. EEA should also specifically request
that all intermediaries who receive the Letter should pass the information on to their
clients where applicable, and should also consider placing appropriate announcements
or articles in the global media in order to ensure that investors are properly informed.
10) Safeguarding of Documents and Communications
Please ensure that all files and records are preserved and safeguarded with a view
to potential civil litigation, internal investigation, audit and/or regulatory or
criminal investigation into possible liability and culpability for breach of duty, mismanagement, misrepresentation or fraud.
The matters in respect of which litigation or investigations can be anticipated include (but
are not limited to) the valuation process for all 926 policies since inception; the
estimation of life expectancies; the calculation and award of valuation-based payments;
portfolio maturities and management; maturity predictions; liquidity issues; theteatment
of redemptions and redemption requests during 2011; cumulative premium costs; the
preparation, drafting and approval of all communications with investors and the media;
all communications, correspondence and meetings with distributors and auditors;
preparation and conduct of Directors’ and general meetings; the restructuring of the
Fund; the calculation and payment of redemptions to continuing and run-off
shareholders. To this end, we hereby put the Fund's Directors on notice to:
(i) Identify and secure all relevant or potentially relevant files, documents, data,
correspondence and communications, wherever located, whether in tangible or
electronic form, kept by or under the control of the Directors, the Fund, the Fund
Manager, ViaSource and their parent or associated companies;
(ii) Issue an immediate 'document hold' instruction to all personnel of the above
companies to refrain from deleting, removing , destroying or concealing any
documents, records or communications, both tangible and electronically-stored,
including in personal computers, home computers that access the office networks,
mobile phones, hand held devices, hard drives, archival systems and back-up
media;
(iii) Suspend any routine document or electronic data destruction policy;
(iv) Engage a specialist 'E-Discovery' vendor to ensure execution of and compliance with
this request.
We will hold the Directors personally liable for any shortcomings.
[ END OF ATTACHMENT ]
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