505 Highway 169 North, Suite 560

Plymouth, Minnesota 55441

505 Highway 169 North

Suite 560

Plymouth, Minnesota

763-225-6682

We have developed very sophisticated modeling capabilities for fund managers representing institutional investors. For fund managers, It is not enough to know that individual policies can be purchased at a certain IRR range or that a portfolio is available at a certain price.  How do premium reserves affect the net IRR to the investor? What is the financial impact of two years premium reserve vs. three years? Generic answers are not good enough. Each portfolio has different characteristics. What is the best way for the fund manager to structure investor distributions and the profit waterfall? What is the financial impact of an 8% hurdle rate vs. 10% hurdle rate? What is the probability of the investor achieving its minimum IRR objective? What is the standard deviation? Sharpe ratio?
 
Fund Simulator is the name of our proprietary software to prepare risk/return stochastic modeling for a proposed fund. Using actual policies that fit the criteria of the client, we model the risk/return characteristics of the fund based on its projected size, fund expenses, premium reserves, investor distributions, and profit waterfall.

Let's say, for example, that a fund manager wants to structure a fund to invest $100 million that will earn 12-15% after all fund expenses. But the fund manager does not want too much volatility in getting to that IRR. The fund needs to be structured to provide at least an 80% probability of achieving a minimum return of 9.5%.  Fund Simulator will model a pool of policies to determine how it meets the investor's objectives.


            # of Monte Carlo Iterations        20,000

            Median IRR                                  14.39%

            Mean IRR                                     14.58%

            IRR Standard Deviation                 2.44%

            Sharpe Ratio                                     4.8

 
Let's take it step further and assume the fund manager wants to consider a ten year, 7% coupon bond structure with a 20% equity strip. How does this affect the IRR and standard deviation for the equity portion?  The investment objectives of the bond investors are completely different. What is the probability of sufficient cash flow from the life insurance portfolio to meet the 7% income distributions? What is the default rate in year 10 when the principal is re-paid to the bond investors? How does increasing the premium reserve impact the default rate on the income distributions compared to the default rate on the principal repayment? What if the bond is sold at a 10% discount?