Probability Adjusted Liabilities – Quantifying the Unknown using the Mosten Investment v Manulife

April 2019

Once in a while when valuing businesses, we run into a situation that often requires an in-depth subjective touch; We have to predict or quantify the liability inherent in the business. We are going to briefly touch upon this concept using some facts from Mosten Investment LP v. The Manufacturers Life Insurance Company matter. Please note that this is a high level discussion to quantify liabilities but this, particular, matter could also be analyzed from a breach of contract quantification report. We will avoid any legal principles discussion here, given that we have no legal expertise.

The future should not be viewed as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution Mr. Howard Marks.


The above case involves the following facts:

  • In 2010 Mosten Investment LP purchased the universal life insurance contracts that “allowed” policyholders to make unlimited deposits, from Dr. de Bruin, by way of an assignment. Manulife recorded the assignment and acknowledged the change of ownership to Mosten on February 22, 2010. Mosten cancelled the accidental death benefit on Dr. de Bruin’s life, reduced the sum insured on his life to $101,000 and later further reduced it to $25,000. Mosten added Michael Hawkins as an insured life in a sum insured amount of $100,000. The death benefit selected by Mosten was “Sum Insured + Fund Value (last death)”.
  • An illustration of a tax sheltered program was prepared for the policy by representatives under date of October 22, 1997, and acknowledged received by Dr. de Bruin on October 24, 1997, some three weeks before the policy was issued. This illustration assumed a sum insured of $1,000,000 and $12,000 in annual deposits from the 1st through the 29th years of the policy when Dr. de Bruin would be age 65. Based upon a level guaranteed cost of insurance of $3,510.00 per year and an assumed 8% return on excess of annual premiums deposited over the annual cost of insurance into the Fund Value, it projected a Fund Value of $1,198,193 at age 65 and $22,123,092 by age 100.
  • Apart for one period in 2012-2013, the balance in the Carrier Fund was zero until November 2016. During 2016, Mosten began to inquire whether payments could be made directly into the Carrier Fund, including a proposed payment of $1,000,000. Manulife declined to accept such payments, advising that the Carrier Fund was not intended to accept payments that had no prospect of being transferred back into the policy.

From a valuation perspective, we have valued numerous entities with on-going legal or litigation disputes, some for many years, but the unknown has not stopped us from attempting to quantify the liability, using probabilities.

Without writing too in-depth so that our competitors can learn from us, historically, we have gathered information using legal counsel and legal experts, modelling various scenarios with exposures. We then attempt to predict how they play out in each scenario using guidance from management, independent research and legal counsel’s thoughts. We begin to assign probabilities based on our insights, experience, industry research, and other factors. We then stress test it based on worst case scenario versus the likely scenario, integrating mental models from a variety of fields to arrive at our estimate of probability adjusted liability. While there is no one right answer, there are range of answers that are closer to reality than others.

As an example of mental models, we try to examine probabilities using various thought processes such as a net benefit test, among others. This liability quantification from a breach of contract quantification could form the basis for a discussion for settlement purposes.

Contact Minerva Valuations at 647-695-0830 or 312-815-5166 for more breach of contract quantifications or complex business valuations.

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