It’s Lifemark…But Not As Expected
Posted by robin in Financial Articles Thursday March 18, 2010 11:24 am
This is intriguing…
Keydata is a drama with a second act.
Perhaps it will be more captivating than the first.
Act I saw Keydata Investment Services (KIS), a UK-based creator of structured investment products, closed down by the FSA in June 2009.
Keydata investors were among those ripped off when their Luxembourg-based fund was mysteriously liquidated in the mayhem of the financial crisis.
This was no mean feat as the assets in question are not renowned for their liquidity. It’s not everyone who wants to buy a second-hand American life insurance policy and the few that do tend to take their time over the purchase.
As such, £280m went walkies, £100m odd belonging to British Keydata savers.
After some deliberation, the British investor’s safety net – the Financial Services Compensation Scheme – defused a brewing uproar, with outraged from the Daily Mail leading the charge, and agreed to foot the bill.
The finger of blame pointed to a fugitive British businessman, David Elias, holed up in the offshore tax haven of Labuan, Malaysia. Elias is since reported dead - timely, if controversial to the end. A single manservant bore witness to his demise reported the Guardian.
Subsequent reports suggest the missing loot may have found its way to Brazil and bagged 400,000 acres of Amazonian rainforest.
While Elias was the villain of the piece, Keydata’s image was shattered along the way. Botched ISA listings, product errors and marketing literature that was somewhat economical with the actualite all came to light as its business entrails were dragged into public view. It was a sorry end to a business, which a decade ago, once attracted FTSE 100 private equity company 3i Group plc. as a significant investor.
In due course, Keydata’s appointed administrators, PwC, sorted out the mess.
Or, so we thought…
The intermission was rudely brief.
Only six days after Act I ended, the curtain rose on Act II.
On 13 November, the FSCS announced a bail out. HMRC chimed in it would not chase unpaid tax and investors had not lost their ISA allowance.
On 19 November, 2009 the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (CSSF), announced it was placing Lifemark in ‘provisional administration’ for an initial period of three months and appointed KPMG’s Eric Collard to find out what was going on.
So what is Lifemark?
Lifemark is the up and coming star of Act II…and for British savers, its regulator and compensation scheme a much bigger deal.
Act I - featured a £280m fund with £100m odd of British investors’ money.
Act II - features a fund of an estimated £350m, 95% of which is British investors’ money. It also has four times the number of investors, some 23,000.
As of the end of 2008, Lifemark had assets of €461m (£419m) – including €262m life policies plus €100m cash – but subsequently would have received the proceeds of two more tranches in the first half of 2009: Defined Income Plans 7 and 8, which closed on 30 January and 17 April respectively prior to the plug being pulled in June.
At this point it is worth noting the difference between the value of the fund today and what it should one day be worth. The £350m fund owns life insurance policies that should eventually stump up $1.35bn (around £900,000 currently) when the last American life finally pegs out. Therein, it is hoped, lies the investor’s final profit.
Publicity on the subject seems sporadic. Perhaps this is less newsworthy. In Act I the fund assets were stolen and the villain was identified and outed - an easy to understand story with beginning, middle and end.
Act II is less straightforward. The assets exist. It’s just now they evidently aren’t as safe as PwC once pronounced.
Getting into the fund business…
Keydata’s raft of structured product launches backed by life settlements were all invested in Luxembourg domiciled funds, a fact hard to detect in their early marketing literature.
Initially, for the first three Secure Income Bond launches SLS Capital SA, was entrusted with the money. Ultimately a bum choice as we know now.
By the time Secure Income Bond 4 was rolled out, KIS had established its own Luxembourg fund operation to do the job, hence the creation of Lifemark SA in January 2006.
Its purpose was as a special purpose vehicle to issue publicly-listed corporate bonds, which is what investors bought. These in turn would be invested in American life insurance policies. The shareholders are listed as Dutch foundations and KIS CEO Stewart Ford was both a director and understood to control the company.
Against the initial three tranches of money invested via SLS Capital. Lifemark was the recipient of 35 tranches. According to PwC:
Secure Income Bond 4
Secure Income Plans 1-12 and 14
Defined Income Plans 1-8
Income Plans 1-12 and 14
More tranches, more dough.
So it’s a bigger fund. So what? The assets are safe. PwC said so.
They did. But they were left scrambling for answers on 19 November 2009 following an announcement from the CSSF, the Luxembourg regulator. Lifemark was put into ‘provisional administration’. PwC administrator Dan Schwarzmann commented in a press release issued on 20 November 2009, the day after the news broke:
“…I am endeavouring to talk to Lifemark at the earliest opportunity so that I can provide investors with as much clarity as possible.”
Skipped Lifemark income payments also had Shwarzmann guessing 10 days later:
“Over the last few weeks, Lifemark has not been making the income payments due to investors. We have been repeatedly assured by Lifemark that this is due to administrative issues and have advised investors accordingly.”
Given PwC were also auditors to the Lifemark fund, it seems curious to the observer they have been so consistently behind the curve. Does Lux not speak with London?
Subsequently, in 2010, the CSSF suspended the listings of Lifemark securities from 1 February and extended KPMG’s involvement for a further six months, taking us to mid-August 2010.
By 2 March, 2010 the game was up. Lifemark declared default and announced it was working on a restructuring. The new deal is not an income plan but a zero income plan and with no secondary market in which to offload, investors will likely be bound to stay the course. Notices are coming through in batches according to when each issue hits its default date, but, in effect, all Keydata savers counting on income have been left high and dry.
The £350m question
What is the fund worth today?
The answer is of acute interest to legions of investors and will determine what they can expect to get back from this investment and when.
Rachel Irving, FSA enforcement officer, offered an insight when she warned of a problem brewing in a witness statement connected to a legal challenge from Ford over the regulator’s seizure of a computer server belonging to another of his businesses, Fieldglen Ltd. According to a Citywire report Irving noted:
A “predicted liquidity gap and Lifemark’s proposal for dealing with it indicate a real risk of problems at Lifemark.”
The article continued:
“Although Lifemark’s $1.3 billion of life settlement assets are ultimately thought to be sufficient to meet its obligations, the 23,000 investors with £350 million in Lifemark could face delays in payouts in 2012-13.”
The first bonds were due to pay out this spring, and as at the end of 2008, the fund was due to repay €461m to investors between 2011 and 2014.
A report in the Mail later in the month, February 27, was gloomier. They claimed they had learnt a “severe shortfall” is predicted in the fund. Their sources proved credible just three days after predicting investors’ income was expected to stop during the month, it did just that when Lifemark announced default.
In doing so Lifemark revealed it was necessary to “apply the remaining cash available to payments of insurance premium under the existing policies in the portfolio rather than using the cash available to make interest payments under the bonds”.
Marketed with a popular high yield income option, in the cold light of day, the investment logic to these life settlement-backed bonds looks somewhat perverse.
Typical vanilla income funds buy assets that yield some form of income such as dividends, coupons, rent and interest, from which to pay investors. This fund turned that notion on its head. It offered bumper income yields on fund assets that not only yield zippo by way of income they actually cede it ie you have to pay out to keep them viable. Anyone who’s ever bought a life insurance policy knows what happens if premiums go unpaid.
And the expense ratio is..?
Such a promise relies heavily on the sums being right, otherwise expenses drain fund liquidity and solvency issues arise. One estimate has it the fund was shelling out over £5m ($8m) a month in expenses – principally premium payments, policyholder income and commission to intermediaries (subsequently redirected to pay PwC).
Excuse the blizzard of numbers that follows but the point it gets to is a significant one.
Lifemark, reporting in euro, paid out €28m in interest expenses in 2008 and €21m in 2007.
In addition to premium payments, there are other costs. This fund was not short of them. Operating expenses in 2007 and 2008 weighed in at €27.5m and €22.8m respectively. 2008 cost is split between €15m “other operating expenses” and €12.5m “amortization prepaid expenses”, relating to the initial issuance cost of the bonds.
“Expenses had a massive detrimental impact on this fund” says one close to the action who adds a condemnation of the “outrageous” distribution agreements in place.
This then presumably includes the supporting cast, amongst them: investment manager Meditron Asset Management, premium payment administrators, Montage Investment Group, accountants Deloittes, as well as advisers to the fund, Luxembourg registered Tandem Partners SARL. The latter causing the FSA, not to mention investors, further dismay when it found out Stewart Ford had been paid £4.2m via Tandem between 2007 and 2009, and not the £904,500 it had thought.
Then reflect a moment on the currency complexities such a fund presents. Sterling investors buy into a euro denominated fund which invests into dollar assets. Eventual wind up reverses the process. In addition to these , currency deals were done in Canadian dollars, Swiss francs and Swedish krona.
As such, currency fluctuations pose a significant risk to promised investor returns, so you need a hedging operation to neutralise the impact. This is a further cost and, in itself can be risky. (A point made in the 2008 management report along with notice of other risks. This extensive notice did not appear in 2006/2007.) Lifemark included Societe Europeenne de Banque, a Luxembourg-based private bank, in the task.
As at the end of 2008, they had booked an “unrealised” forex loss of €79m on pretty chunky sterling and dollar contracts weighing in at £318.5m and $572m. The position is open ended and remains open. The loss is understood to have narrowed somewhat since though remains significantly in the red. It is weighted towards a recovery in sterling.
Another item of note was a mishap in 2006 when €7.7 million was reported lost in “transferable securities”.
This writer is no accountant but the accounting “equalisation provisions” are baffling to the layperson and, in the circumstances, raise further enquiry.
They are explained as losses in various forms (sales, default, lower market values or loss) which may cause a reduction in the value of the bonds. “Such short falls will be born by the bondholder in inverse order of the priority of payments,” it warns. This sounds like a cost but curiously appears as Income of €43m on the 2008 P&L.
It is glaring now is that investors have no idea what this fund costs. Operating costs at £25m (€27.5m) in 2008 on the projected final value at that time of $964m (approx £641m presently) suggests a fund with annual expenses approaching 4%. Pricey and when more legitimately set against the present £350m fund value…well, ruinous.
Add in your interest payments and soured forex and securities trades and we start to see where the Mail gets its “severe shortfall” from.
Would a UK investor know this? No. Expense ratios routinely available on vanilla collective funds – unit trusts, OEICs etc - go undisclosed when they come wrapped up in the mystique packaging of a ‘structured product’.
Taking Defined Income Plan 5 as our sample, the product brochure provides little detail under the ‘Charges’ section in the small print. The plans are designed to be held for the full term it says, early encashment will prompt a one-off £150 + VAT and crucially “all charges are reflected in the terms offered”. Ie they’re not telling. It also warns its charges may rise for any cost inducing regulatory changes. Er, transparency anyone?
The main problem
In a nutshell, they have got their sums wrong…
Keydata developed a model and it hasn’t worked out.
“Policyholders are not dying fast enough,” was the blunt assessment from FSA enforcement officer, Rachel Irving.
Keydata investors own a bunch of second-hand American life insurance policies. This is a relative novel, fashionable but not uncontroversial “asset class” which has been touted for its virtues in providing investment returns that are non-correlated to conventional financial market investments.
A life settlement fund collects a return on its investment when the Americans on whom they own insurance policies, die. It’s not for everyone: “ghoulish” snorted Private Eye in its recent censure.
The principle risk is the one that has materialised. Your lives assured don’t die fast enough. That costs the fund more premium money and has a detrimental knock-on effect for investor returns. Private Eye warns:
“Americans are living longer than actuarial tables say they should… Just as with toxic sub-prime derivatives, “death bonds” are reliant on computer models reliant on the past when the future may be a very different place. Some see ‘death bonds’ as the next securitisation time bomb.”
In the Lifemark fund at the end of 2008, there were 305 policies with a total life assurance value (ie benefit on death) of $963m and 10 people had died yielding $35m in life assurance proceeds. One close to the scene says the sums were done on the assumption of 30 deaths a year and have only been averaging around 10.
At the end of 2008, that was what was recorded, just 10 deaths, and the payout on one was lingering following a legal challenge from the spouse of the deceased. However, the average age in the portfolio is 82 and unconfirmed reports claim as of November 2009, the number of deaths had increased to 40. It may yet work out, given time.
Investment Manager – Walter Gerasimowicz of Meditron Asset Management – wrote in his 2008 year-end report:
“Investors should be pleased with the performance of the portfolio to date, as the Lifemark portfolio has achieved positive returns in each of the past 30 months.”
Exactly what is meant exactly by “positive returns” is hard to fathom in hindsight given the death rate was lagging badly and threatened future positive returns. It also makes an observer wonder at how management could make the claim of superior performance in the 2008 accounts:
“Lifemark’s approach has lead to the development of proprietary models and protocol which has allowed us to outperform other participants in the industry consistently…”
Particularly, given a paragraph later the management report goes on to inform that steps are being taken to arrange credit for possible liquidity issues as €461m owed to Keydata investors, falls due:
“Lifemark views the expected income from the life settlement portfolio as sufficient to meet all expected obligations. Expected drawdowns of a credit facility may be necessary in years 2011-2014 as a temporary solution while the Lifemark Portfolio seasons. We view those periods where cash is needed to temporarily fund liabilities, as manageable.”
As euphemisms go, “seasons” takes some beating.
Ragin’ regulator
The FSA appear hopping mad and reports indicate any relationship with Stewart Ford has broken down following accusations he tried to mislead investigators. They were left distinctly underwhelmed also by management proposals to plug liquidity shortfalls with new money from investors. Their fury is stoked by impotence and embarrassment - KPMG and HSBC first served warning in 2005 and KIS management have effectively run rings around their jurisdiction.
The FSA’s failure here was acknowledged in a recent speech from departing CEO, Hector Sants. He gave notice that, in future, the regulator will no longer behave like some bored fire officer playing pool in the station canteen while awaiting a call out for the next house blaze. It will instead actively promote fire prevention:
“We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs.”
A good thing too, as the KIS operation effectively sucked offshore more than half a billion quid from British savers. KIS administration and marketing operations were the only activities carried out in its jurisdiction. Everything else is out of the regulators reach.
Money went to Luxembourg, then on to America to buy life insurance policies. The controller of SLS Capital was based in Labuan, Malaysia. The KIS chief executive relocated to Switzerland. Lifemark itself is owned by Dutch foundations and KIS had another operation in the Isle of Man, domiciled in Caymans. One time sales director and polo enthusiast, Mark Owen is reported to be abroad.
The only thing in the FSA’s lap now is 23,000 aggrieved investors, not to mention their advisers, wanting answers. No wonder they’re stroppy.
Meanwhile, life goes on. Advisers are looking at £440 a head to pay for the Act I losses with possibly more to come. PwC are out of pocket millions in fees. In January 2010, Credit Suisse lent KIS UK £3.2m to maintain a pulse after the Lifemark commission tap was switched off. In February, the managing director of their Life Finance Group, that handles life settlement business, left for another firm.
Ex-employees of KIS UK, have regrouped at Arbuthnot Latham and since opened up shop in the structured product market as Gilliat Financial Solutions. The Keydata Income Property Bond is comprehensively bust and the Isle of Man operation, set up in April 2009, is now likely to wind up following reports the £6m fund bought a £3m of worthless SLS Capital units.
Note, if you have investments in Luxembourg, the compensation limit is a modest €20,000. In sterling, that’s around £18,200 at time of writing, against £50,000 in the UK.
As for investors in Keydata’s Lifemark-issued bonds they nervously await clarification from KPMG’s imminent re-structuring plan. Given a fair few are in their senior years themselves, it’s a touch ironic they may now effectively in a mortality race with the very individuals on whom their investment depends.
The last ones standing, win. Ghoulish indeed.
PS
The Lifemark 2008 annual report can be accessed here.
For a small fee, earlier years can be accessed here here.
Northern Ireland’s Neglected Savers
Posted by robin in Financial Articles Wednesday December 2, 2009 3:09 pm
A call out of the blue from Northern Ireland…
“Have you heard of the Presbytarian Mutual Society?”
Um, not a lot.
A year’s worth of distress follows in quick time: an account of another financial institution that got dashed on the rocks of the credit crunch.
The difference here is this one actually went bust and missed the bail out. It merits scant national media attention but resonates loudly in Belfast among the 9,500 who are out of pocket, some of their life savings. Approximately two-thirds of their number is over 60 years old and, after a year of waiting, some have “started to die”.
PMS Ltd was set up as an Industrial and Provident society in 1982. There are around 160 such societies registered as limited liability companies in Northern Ireland and more than 8,000 registered with the FSA.
Such organisations typically serve communities with a “common bond” to one another. They are set up as limited liability companies either as co-operatives or with a view that the business conducted will be to the benefit of the community. In Northern Ireland these include a variety of housing associations and agricultural societies amongst other trades.
FSA guidelines define an Industrial and Provident society as:
“…an organisation conducting an industry, business or trade, either as a co-operative or for the benefit of the community…”
“Co-operative societies are run for the mutual benefit of their members, with any surplus usually being ploughed back into the organisation to provide better services and facilities.”
The FSA is the UK regulating authority for such organisations. Only in the case of PMS it wasn’t. PMS was registered but not regulated by the Northern Ireland’s Department for Enterprise, Trade and Investment (DETI).
A condition of set up is defining the “objects” of the society. In the case of PMS these were:
· To promote thrift among its members by the accumulation of their savings
· To use and manage such savings for the mutual benefit of members
· to create a source of credit for the benefit of its members at a fair and reasonable rate of interest
PMS’s growth over time had accelerated rapidly in recent years. Assets had increased from £50m to £300m in the six years prior to its swift and brutal end. An “unprecedented run on the Society’s cash” led to administrator, Arthur Boyd & Company, being appointed on 17 November 2008. Its stated aim was first, to see if PMS could be rescued or if that was not possible, then organising a wind up of assets in an orderly manner.
The administrator’s last report on 15 June 2009 updated its assessment of the PMS loan book and identified where the holes lie.
Nature of Advance Amount Estimated Recovery
(£m) (£m)
Advances to Congregation 11 11
Advances secured on:
Own homes 9 8
Houses for sale 3 2
Agricultural land 26 22
Other forms of security 4 3
Buy to let properties 24 17
Commercial property 17 10
Building sites & development land 85 34
Total 179 107
The report notes half the advances made between 2005 and 2007 were “to fund commercial property, building sites and development land”. The Northern Ireland property boom saw values double in the three years to June 2007. By June 2009 they were pretty much back where they started having fallen an estimated 40-60%, though the market has been recovering since.
This small credit institution boasted 21 directors, including six addressed as Reverend. Barclays, in contrast, with around £1.5trn in assets gets by with a board of 13. But it appears societies originally required a minimum of 21 members to form in the first place, so perhaps this was the legacy from inception.
My caller maintains savers didn’t know what was going on. The administrator too noted in its June report approaches from “a number of members” who believed themselves depositors rather than investors. Returns received by savers were those akin to a deposit account with interest credited annually. One disappointed saver says:
“We were never told our savings were at risk, in fact we were told the exact opposite; the directors assured us that they would not speculate with our savings.”
Though this was an unregulated entity with the FSA, the UK regulator has since made enquiries and on 9 April broke with protocol for ongoing investigations when it announced on that PMS “was conducting regulated activities without the necessary authorisation or exemption”.
Meanwhile some savers, with all their money tied up, continue to suffer. Calls on the administrator to set up a “hardship fund” could not be realised for legal reasons.
In mid-January 2009, Northern Ireland’s Enterprise Minister Arlene Foster stated it was a UK government problem:
“The Executive has done everything it can within its powers to assist the Presbyterian Mutual Society. It does not have the same options open to it as the UK Government in terms of depositor protection.
“The UK Government must act now to assist the members.”
The UK government didn’t see it that way and lobbed the problem back at Northern Ireland. Northern Ireland secretary Shaun Woodward explained their position in parliamentary questions on 3 June:
“We appreciate the gravity of the situation, but we equally have to recognise that, under the law, those people who put money into the PMS did so not as savers, but as investors, and that the regulation of this body in Northern Ireland is the responsibility of devolved government in Northern Ireland, not of Whitehall.”
Mark Durkan MP pointed out to the Minister the assertion that most with money entrusted to PMS believed themselves savers NOT investors. Tory MPs Ann Winterton and shadow Northern Ireland secretary, Owen Paterson, said the government was to blame for PMS’s downfall. The blanket deposit guarantee scheme issued on 8 October 2008, excluded the unregulated PMS from its protection. Their savers subsequently rushed to withdraw funds and switch to government guaranteed deposits.
Between 27 October and 17 November 2008, when it went into administration, the Society had withdrawal requests of £50m and only £4m in the bank. The government had bailed out Dunfermline why not this Society the MPs wanted to know?
That was a building society regulated by the FSA and its depositors were savers reiterated Woodward, explaining further that:
“…they made an investment in the form of risk capital in the form of withdrawable shares and loans”.
We might also note that Dunfermline was 10 times the problem, with assets of more than £3bn and that Scotland is not wanting for political influence in Westminster.
Mr Woodward cited the FSA’s judgement on the matter that PMS had been “conducting regulated activities without the necessary authorisation or exemption”. The Minister also alluded to “issues about the regulation of bodies such as the PMS and they will need to be addressed,” perhaps this starts with the question: how did DETI and the FSA miss this unregulated bank?
The findings of the UK Accountancy and Actuarial Discipline Board might make revealing reading when published. They launched an investigation in August to look at the actions of directors and the society’s auditor, Moore Stephens.
Further parliamentary questions to Sinn Fein Deputy Leader Martin McGuiness MP on 9 November suggested an increased likelihood of government assistance. This is envisaged along the lines of solutions provided for Dunfermline and Bradford & Bingley, though care is needed not to fall foul of EU state aid rules.
Some form of white knight bank has been mentioned. An FT report in February suggested RBS subsidiary Ulster Bank as a possible buyer. The Belfast Telegraph reported “three financial institutions have shown an interest” in November with Ulster Bank again in the frame.
Meantime the anniversary of this collapse has recently passed and some savers, who put life savings with PMS, are facing a second Christmas of financial hardship. A “delayed” report on PMS from a Ministerial Working Group set up back on 17 June is due to be presented to Gordon Brown by NI Minister Shaun Woodward “within weeks”.
“They were originally due in September but were then pushed back to October…”
It’s now December and still no report.
Administrator Arthur Boyd, meanwhile, is sitting on its hands awaiting possible government assistance before proceeding to wind up PMS’s assets.
My caller fears political heat cools with distance and their plight needs to resonate more loudly in Westminster. Given an urgent call for action was made six months ago and an overdue report is yet to materialise, it seems a fair point.
Government machinery turns slowly on this one, in contrast to similar such problems of late. Presbytarians reportedly place great importance on education and life-long learning. This unfortunate experience provides plenty of both.
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