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 mfreedman@gwglife.com President GWG Life

Dan Young Dan.Young@vidacapitalinc.com Vice President, Portfolio Management Vida Capital