Nov. 16 (Bloomberg) -- More than 250 years after two clergymen in Edinburgh came up with the world’s first insurance fund based on predictions of life expectancy, investment manager Jim Roth is trying to profit from the industry’s next evolution.
The co-founder of private equity firm Leapfrog Investments is buying stakes in companies selling micro-insurance, low- premium policies sold to people in emerging markets who previously couldn’t afford to buy them. His first purchase, in December 2009, was All Life Ltd., which sells life cover for people infected with HIV in South Africa.
“This is where insurance was developed,” Roth, 42, said in an interview at his office in the Georgian heart of the Scottish capital. “They were at the frontier of using actuarial tables to sell insurance and we’re in their shadow in some ways moving the frontier forward.”
Investors including JPMorgan Chase & Co. and French reinsurer Scor SE are betting Leapfrog can succeed, committing $135 million to the fund during the global crisis that crippled the more established parts of the financial industry. Roth said last week he expects to complete another purchase within months.
The risk is that, unlike other private equity funds, Leapfrog has no history of investing, improving the companies it buys and selling out at a profit, according to Paolo de Martin, chief financial officer of Paris-based Scor.
Window on Market
“It’s a window on the micro-insurance market, a very difficult market to get into,” De Martin said by telephone from Zurich on Oct. 18. “The biggest challenge Leapfrog has is sourcing the deals. In a few years it will be how do you produce returns for investors? How do you exit these investments?”
The structure of the fund is similar to a traditional private-equity pool, to take fees from investors, add value and then to sell investments after four to seven years.
Leapfrog, whose other co-founder, Andy Kuper, is based in Sydney, has spent $36 million of the money so far, on minority stakes. It invested $7 million in All Life, which was founded in 2004 and prompts clients with HIV to take anti-retroviral drugs and regular blood tests. The company reminds clients by sending them text messages to their mobile phones, Roth said.
The second purchase was Apollo Insurance Ltd. in Kenya, $14 million for an undisclosed holding. The most recent acquisition was Shriram Group for $15 million on Sept. 7, Roth said. The company started in 1974 as a Chit Fund business, a form of saving scheme used in India.
“As a market develops it can still take a very long time to make any money,” Ben Cohen, an insurance analyst at Collins Stewart in London, said by telephone. “The returns don’t necessarily match the growth on paper.”
Roth and Kuper, 35, both South Africans, met while studying doctorates at Cambridge University in the late 1990s. Roth wrote his on developing financial services for a South African township, while Kuper focused his work on the shifting responsibilities of tackling poverty. Roth moved to Edinburgh five years ago because his wife took a job as an academic.
They expect are looking at insurance in the Philippines, Ghana, Nigeria, and South Africa for their next purchase.
Leapfrog, which is registered in Mauritius, started raising money from investors in the weeks before the collapse of Lehman Brothers Holdings Inc. in September 2008.
Scor invested “several million” in 2009, de Martin said, declining to be more specific. JPMorgan confirmed its investment in Leapfrog, though declined to comment further, according to London-based spokesman Brian Marchiony. The U.S. investment bank committed $10 million, Leapfrog said in May 6 statement.
Other backers include the European Investment Bank and U.S. pension fund manager TIAA-CREF, according to Leapfrog’s website.
Back in the 1700s, Robert Wallace and Alexander Webster, two mathematics graduates from the University of Edinburgh, developed a structure for a life insurance plan, taking in money from fellow Scottish churchmen to eventually pay out to their widows and children, according to historian Niall Ferguson, author of “The Ascent of Money.” A copy of the original table for the Scottish Ministers Widows’ Fund remains in the National Archives of Scotland in Edinburgh.
“This is where insurance was developed,” said Roth, his office about a mile from the archives. “We’re now an insurance fund that’s set up in Edinburgh and that is taking insurance into markets where there hasn’t been commercial insurance.”
--With assistance from Lukanyo Mnyanda in Edinburgh. Editors: Dara Doyle, Tim Quinson
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