The suspended EEA Life Settlements fund’s portfolio was overvalued by up to $100m (£65.9m), according to its auditors Ernst & Young.
In the fund’s 2011 annual report, which has only just been published, Ernst & Young disputed the EEA board’s valuation of the portfolio, which consists of US life insurance contracts. The report could scupper plans by the board - led by chairman Mark Colton - to relaunch the fund, which has been suspended since November 2011.
It said that EEA had not updated its estimates for when the contracts would mature since they were purchased, and had understated the discount which would be applied if they tried to sell on the contracts.
Ernst & Young said the overstatement of the portfolio’s value had led to EEA overstating the fund’s profits by as much as $65m.
Dealing in the fund was suspended in November 2011 following a wave of redemption requests prompted by the FSA’s warning that such investments were “toxic” and inappropriate for retail investors.
Ernst & Young said it “disagreed with the directors’ valuation of investments in life policies and considered that the audit evidence available to us with respect to pricing was limited”.
EEA valued the portfolio at $871m on December 31 2011, according to the annual report, but Ernst & Young said this valuation was “subject to the application of significant judgement” due to the life insurance contracts the fund holds being related to terminally ill people, for which “specific statistical and actuarial evidence is limited”.
In his commentary for the annual report Mr Colton said EEA was “considering options for restructuring the fund”, including selling shares to institutional buyers, moving investors into a “run-off” fund or allowing investors to remain in the fund.
The board maintained that the fund had sufficient cash to pay the premiums on the contracts it holds, although Ernst & Young claimed there had not been as many maturities in 2011 as expected.