life settlements: discover your client's unknown asset...empirical investigation of life...
TRANSCRIPT
Life Settlements: Discover Your Client's Unknown Asset MODERATOR
Darwin Bayston, CFA President and CEO Life Insurance Settlement Association
PANELISTS Michael Freedman President GWG Life
Dan Young Vice President, Portfolio Management Vida Capital
Life insurance is a core part of U.S financial landscape • Alleviates financial risks of premature death"• An Investment"
Life Insurance
A Life Settlement is the sale of life insurance policy to a third party: • The seller receives cash payment"• The buyer pays all future premiums"• The buyer receives the death benefit""
Life Settlement
• Accelerated death benefits"• Assignment of the policy as a gift"• Replacement "• Conversion of the policy from a term policy to a permanent policy"• Conversion of the policy to obtain a long-term care health insurance
coverage"• Maintenance of the policy through loans using the policy or its cash
surrender value as collateral"• Maintenance of the policy through a life settlement contract "• The sale of the policy pursuant to a life settlement contract!"
Options for an Unwanted Life Insurance Policy
"• 55% of seniors have lapsed a life policy (ICR Life Insurance Study, 2013)"• 90% of seniors who lapsed a policy would have considered a life
settlement had they know of the possibility (ISI Institute, 2010)"• 79% of clients feel advisors should inform them about a life settlement
(ICR Life Insurance Study, 2012) "• 49% of advisors cite lack of knowledge as reason for not recommending
life settlement to clients (ISI Institute, 2010)""
Need for Awareness
"• Unknown cost of health care in final years"• Seniors fear being broke more than fear death"
Reality - Financial Crisis
Death, 39%Running
out of Money, 61%
Which do you fear more?Age 44-‐75
Source: Allianz Life Insurance
"Billion of policies are lapsed each year "Because Consumers and Advisors Are Unaware""
Lapse Rates
Seniors 65+!• $57 billion of Face Value by lapsing or surrendering
(Universal and Variable Universal Life Policies)!
• $112 billion of Face Value by lapsing or surrendering (Universal, Variable Universal, Term and Whole Life Policies) Source: (LISA/Welcom Funds Study | Feb 23, 2015 5th Annual Institutional Investor Conference)!
Life Insurance Settlement Association
History Established in 1994, the Life Insurance Settlement Association is the oldest and largest trade organization in the life settlement market. "
Goal Educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy.
Life Settlements Securization "A “life se)lement” is the sale or assignment of a life insurance policy on the life of a elderly person (typically health impaired) purchased in the secondary market and owned by a third-‐party for investment purposes. The purchaser (or investor) of the policy becomes the policy owner, assumes the responsibility for paying future premiums, and becomes the beneficiary of the policy enCtled to the death benefits at maturity (death of the insured). Life se)lement securiCzaCon involves the creaCon of pools of life se)lements that are owned by one or more investors
"
The Life Settlement Players "
"
• Investors"
• Providers"
• Life Expectancy Underwriters"
• Settlement Brokers"
• Financial Advisors/producers"
• Insured/policy owner"
• “secondary” versus “tertiary” market"
Why Does the Market Exist? "
"
Seller Benefits:"
• Better economic alternative than lapsing or surrendering policy"
• Average purchase price in settlement market greater than 4X of cash surrender value1"
• Avoidance of policy premiums"• Cost of Insurance (COI)
increases in later years"• Liquidity needed elsewhere:
healthcare, general retirement expenses, etc."
Investor Benefits:"• Mid to high teen unlevered gross
returns2 "• Appealing risk-adjusted profile;
solid returns to stressed scenarios "• Low correlation to other asset
classes"• Ability to re-underwrite assets and
medical condition at time of purchase"
• Investment risks identified and priced at the time of the investment"
• Cash-on-cash multiples 2X+ "• Tax efficient structuring"
1. Empirical Investigation of Life Settlements: The Secondary Market for Life Insurance Policies, Januário and Naik 2014. 2. Market IRR information provided by AAP Partners 3. According to AAP Partners, market average IRR from the past 12 months is 18.23%.
Bene!ts to Seller "
"
Policy Holder ! Male, Age 81!
Policy Face Value! $1,470,000!
2014 Premiums! $71,478!
Cash Surrender Value (CSV)! $53,010!
Settlement Price! $249,050!
Gross Excess Benefit: ! $196,040!
1. Actual policy purchased and currently owned by the Fund with characteristics that meet the Fund’s eligibility criteria. The illustration above is provided for exemplary purposes only. The benefit to insureds can vary widely, and there is no assurance that all life insurance settlements will have similar excess benefits to insureds.
2. Empirical Investigation of Life Settlements: The Secondary Market for Life Insurance Policies, Januário and Naik 2014. 3. Insurance Studies Institute, 2010
o Average price paid by purchasers in the life settlement market exceeds 4x cash surrender value2!
o 40% of Seniors over 65 have allowed a policy to lapse; 90% of those would have considered life settlements had they known about the option3!
Vida Policy Case Study1!
Trend Toward Greater Certainty and Acceptance of Settlements "
" • The implementation of increased regulation by states coupled with a convergence of life
expectancy methodologies of the major medical underwriters has dramatically reduced the “perceived risks” of the life settlement asset class."
• Forty-five (45) states have adopted specific life settlement regulation."• Challenges to the transfer of insurance policies in courts have largely favored the settlement
industry and provided clarity on the timeframe for contesting such policies. The volume of such cases has decreased dramatically over the past year as these issues have been clarified."
• Consumer groups and state governments have recognized the value of the life settlement industry. Insurance companies in several states are now required by law to inform consumers who are lapsing policies about the existence of the secondary market, and states have passed or are considering legislation to allow settlements to help fund long term care requirements for those applying for Medicaid."
• Life Expectancy underwriters have recently extended estimates and converged on a conservative methodology with a high degree of accuracy in actual-to-expected analyses."
Enhanced Regulatory Environment "
"
42 of 50 states now regulate life settlement transactions1
o 6 states require the disclosure of options to policy holders considering lapsing/surrendering!o 12 states are utilizing life settlement proceeds to assist in funding long-term care in association with Medicaid2!
1. Life Insurance Settlement Association, 2014 2. Life Care Funding, Inc. as of March 2014
2000 !5 states regulated!
2014!42 states regulated!
"
"
• Lack of oversight and regulation in many states"• Inaccurate and underestimated life expectancies;
lack of data and experience with seller cohort-highly affluent, 75+ age"
• Uncertain legal rights of policy owners "• Significant amount of STOLI and investment-
driven or manufactured policies"• Negative market perception; presence of bad
actors and experience from early viatical plays "• Risk held by financial institutions"
• Market broadly regulated; over 95% of population covered by regulation and protections.1 Life Settlement providers regulated by State Insurance Commissioner"
• Consumer protection measures strengthened"• Much improved life expectancy models; better data,
models, and understanding of disease cohorts"• STOLI and fraudulent paper increasingly rare;
contestability periods and market participants better able to identify paper"
• Legal rights much more clear; several key decisions favorable to the asset class"
• Risk distributed from financial institutions to investors"• Improving acceptance by institutional community.
Berkshire Hathaway, Apollo, Blackstone, Oaktree, New Zealand Superannuation Fund, and Dow Chemical all have presence in the space"
Pre-2009: Current: Market Conditions: Then and Now
Life Settlement Market "
"
• Life Extension Risk "
• Credit Risk – Managed through choice in carriers "
• Diversification Risk – Medical Impairments, LE Length, Risk Classification…. "
• Risk of Fraud – Managed through comprehensive Anti-Fraud Reviews"
• Litigation Risk""
"
"
Importance of Diversi!cation Increased policy numbers increase confidence around investment outcomes
0%
10%
20%
30%
40%
50%
60%
70%
0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 32.5% 35.0%
10 Policies 50 Policies 100 Policies VLF Portfolio 750 policies
Unleveraged Gross Return
Out
com
e P
roba
bilit
y
Portfolio Construct:
(259 Physical Policies)
1,000 Monte Carlo Simulations on randomly drawn Vida owned policies1
1. 1000 iteration Monte Carlo analysis conducted on randomly selected policies owned by Vida Capital. The illustration above shows gross IRRs, all of which would be reduced by applicable Fund fees and expenses, and is based on a 1000 simulation Monte Carlo analysis of randomly selected Vida-owned policies that may be selected multiple times. The illustration is not intended to estimate the returns of a portfolio to an investor, but to show the change in probabilistic confidence intervals of returns as the number of assets in a portfolio increases. It does not account for future trading activities, and there can be no assurances that the Fund will performance according to the illustration. Inherent in any investment is the potential for loss. Important disclosures regarding calculations of projections and other financial matters and legal notices are located in the Fund’s Private Placement Memorandum.
"
"
VLF Performance MONTHLY PERFORMANCE - GROWTH OF $100
MONTHLY NET FUND PERFORMANCE JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC YTD
2010 - - - 0.99% 0.66% 0.69% 0.68% 0.17% 1.72% 0.23% 1.99% 2.16% 9.64%
2011 0.33% 0.12% 1.44% 1.12% 1.26% 0.63% 0.35% 1.36% 0.81% 1.88% 0.47% 2.05% 12.45%
2012 1.08% -0.13% 0.90% -0.75
% 0.50% 0.54% 0.48% 0.35% 2.44% -0.67% 0.04% 2.64% 7.61%
2013 0.38% 0.26% 0.71% 0.63% 1.04% 1.01% 1.73% 0.84% 1.26% 0.27% 0.46% 2.26% 11.34%
2014 0.80% 0.93% 0.81% 0.60% 2.72% 1.19% 0.74% 0.94% 0.92% -0.18% 0.19% 0.25% 10.34
% 2015 3.25% - - - - - - - - - - - 3.25%
Returns as of 1/31/15 Net of fees and expenses
Jan.
Trailing 12
Months
Annualized
Returns
Annualized
Volatility
Sharpe Rati
o
Correlation
Vida Longevity Fund
3.25% 13.03% 11.37% 2.81% 4.04 1.00
ML AA-Corporate Index
2.69% 7.60% 5.28% 3.37% 1.56 -0.17
ML High Yield Index
0.69% 2.45% 8.30% 6.26% 1.32 0.08
Global Hedge Fund Index
-0.29% -0.62% 0.67% 4.13% 0.16 0.11
S&P 500 Index -3.00% 14.22% 14.05% 12.96% 1.08 0.18
COMPARATIVE STATISTICS1
$80
$100
$120
$140
$160
$180
$200 S&P 500
1. Statistics calculated using monthly returns data. Risk free rate for Sharpe Ratio assumed to be 0.02%. Performance is net of fees and expenses and is representative of an investor who contributed at inception, 4/1/10, did not contribute additional capital, did not withdrawal capital, and pays standard fees. Information is current as of 1/31/15 and based on estimated, unaudited results subject to change. Past performance is not indicative of future results. Important disclosures regarding indexes,
calculations of actual returns , past performance, projections and other financial matters and legal matters are located at the end of this presentation.
Questions? PANELISTS Michael Freedman [email protected] President GWG Life
Dan Young [email protected] Vice President, Portfolio Management Vida Capital