Ignorance of TLPs is remiss, say panel

Traded life policies (TLPs) constitute a substantial new asset class that needs to be recognised as such by investors, particularly given the present lack of understanding of them by the industry and the general public. Germany is currently the biggest European consumer, but the UK and other European countries remain largely ignorant of the value they offer. This was a key conclusion made by a recent roundtable debate on TLPs hosted by Managing Partners Limited (MPL).

TLPs are whole-of-life policies issued in the US and sold before their maturity dates at a deep discount from their expected maturity values to allow policyholders to draw down from them during their lifetimes. TLPs' popularity as an asset class has emerged as investors have sought secure alternatives to the traditional asset classes during the recent financial market instability.

Stellar opportunity

In view of the present volatility in equity and property markets, Jeremy Leach, managing director of MPL, believes that "2008 offers a stellar opportunity to TLP fund managers because investors have lost faith in equities, but interest rates on deposits are so low. Investors need to consider an asset class that delivers 8-10% returns year in, year out."

Two IFAs at the debate, Corinthian Financial Services managing director Gary McClelland and Oury Clark financial services partner David Chinn, confirmed that their clients had been pleased with the results from increased exposure to TLPs.

Chinn said: "We started investing in TLP funds about three years ago, but it was toe-in-the-water stuff. But since we became discretionary managers last year, we have used TLPs much more. Provided we can look to secure an 8% growth rate and not lose capital, then clients are very happy with that."

McLelland concurred: "We have a duty of care to our clients to protect their assets and deliver solid returns without shooting the lights out. And in that, we have been living the dream for the last two years we have run TLP funds - they do work."

Nigel Newlyn, director of Argent Personal Finance Managers, explained that as most of their clients' assets were in their pension pots, they prefer a cautious, long-term approach: "By taking a certain amount of risk, we expect to outperform cash by 2% per annum. If we achieve more than that, it is a bonus for the client.

"We constantly look for alternative classes of investment that provide an anchor to the portfolio. TLPs are an anchor asset class as far as we are concerned, as they deliver greater returns than cash. And as long as we can underpin the portfolio with this kind of asset class, we are free to do something more exciting with other parts of the portfolio," he added.

Illuminating information

Bristol Business School Professor Merlin Stone's report on TLPs, published in October 2007, shows that the underlying TLP market in the US grew from $50m in 1990 to $20bn in 2006. And with trillions of dollars of life cover currently lapsing each year, the US TLP market is expected to grow to $161bn by 2030. Policyholders' realisation that they could achieve a better price for their policies on the second-hand market than if they surrendered them to insurance companies accounts for a large percentage of this growth.

The TLP market came to the fore during the height of the 1980s Aids epidemic as people needed cash to pay for their care. Initially, TLPs were mostly viatical settlements - TLPs on lives assured that were considered in terminal decline or with terminal illness, and with a life expectancy of three years or less.

However, many of the Aids-related policies were proved a bad investment when drugs were released that could extend Aids patients' life expectancies, and viaticals were subsequently deemed a high-risk investment.

As TLPs are only bought by those over 65 with a reduced life expectancy, they are perceived as much less risky than viaticals. However, there is still some risk involved, predominantly because TLPs depend on getting accurate mortality estimates for the assured.

Mortality estimates are prepared by comparing an individual's medical conditions and their degree of severity with the baseline level in the population. Medical underwriters assess the individual's medical history and lifestyle scores against 1,000 other lives with similar scores, and produce a probability distribution for their mortality.

Although this is an area that still needs refining and must be updated in view of changing mortality trends, obtaining more than one estimate can help to limit risk levels by ensuring a greater degree of accuracy.

Advantages

The panel blamed the general lack of understanding of TLPs - apart from the negative perception of their being about 'coffin-chasing' - on their tendency to be confused with Traded Endowment Policies (TEPs), the better-known UK/European version. However, TLPs were seen by the panel as considerably more transparent than TEPs, as longevity issues are clearly the main risk for TLPs. McClelland stated that they represented an attractive alternative to the disappointing performance of with-profits funds.

The panel agreed that TLPs deserve to be better known and understood. However, it may just take time for people to recognise their value. "New funds coming into the market take time to build up a diversified portfolio, which is a critical factor in the delivery of steady returns," concluded Newlyn.

"As with any fund, one acquires confidence in a specific fund manager or team."

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