Alternative Investment Fund for Senior Life Insurance Settlements – Business (600 Level Course)
Alternative Investments Fund, LLC (“The Company”) is seeking to secure funding for the purpose of purchasing life insurance policies. The purpose of this document is to provide potentially interested parties with sufficient information to submit non-binding indications of interest to provide such funding commitments, but does not purport to be all-inclusive or contain all of the information that an interested party may require.
Interested parties should conduct their own independent analysis.
The information contained herein has been provided by the Company, their respective officers, employees, agents or representatives, or derived from publicly available sources. The Company does not make any representation or warranty, express or implied, as to the accuracy or completeness of this document or the information contained herein – and no legal liability is assumed or implied. Any estimates and opinions have been prepared by the Company’s management and involve subjective judgment and analysis.
This document shall not constitute or be construed as an offer to sell or a solicitation of an offer to buy any securities of the Company.
The Company was founded to originate and finance the purchase of life insurance settlements in the secondary market.
A life insurance settlement involves the transfer of ownership and the change of beneficiary of a life insurance policy in exchange for a lump sum cash payment from the purchaser. Life insurance settlements provide individuals who no longer want or need an existing life insurance policy with the opportunity to sell the policy and receive a cash settlement greater than the policy’s cash surrender value (amount insurance company will pay to cash out the policy). In the case of settlements involving term insurance policies, policy owners receive funds that they never expected to receive during their lifetimes. The policy owner may be planning to surrender the policy for any number of reasons including (i) corporate-owned key-man policies may no longer be needed due to the key-man leaving the business or the business being sold, (ii) insurance policies purchased for estate planning objectives are no longer relevant, (iii) the need for life insurance protection no longer exists due to beneficiaries being taken care of by other investments or are financially independent or simply that there are no living heirs, (iv) continuing premium payments is no longer desirable, (v) cash from the settlement can be used to purchase new, more appropriate coverage (i.e., Second to Die or Long Term Care), and (vi) personal financial reasons.
Senior Life Insurance Settlements are distinguishable from Viatical Settlements that were primarily focused on AIDS victims. Many viewed the viatical business negatively because of the perception that unscrupulous parties were preying on very vulnerable individuals.
On the other hand, the Senior Life Insurance Settlement market has been viewed very positively. Typically, the policy size with a Senior Settlement is large and the seller of the policy is affluent and represented by a professional financial advisor. For these reasons, it is generally viewed as business that provides a valuable service – the opportunity to access values previously believed to be inaccessible.
For the investor, the value proposition is driven by a few factors. First, the seller of the policy wants liquidity from the policy during his or her lifetime. Another motivation to sell is to eliminate the premiums that must be paid to keep the policy in force.
In the process of evaluating the purchase of a life insurance policy, the life expectancy of the seller is a key determinant of the return to the investor. For this reason, every seller must have an evaluation of his or her health. Based on the evaluation (medical underwriting), a life expectancy (ex) is established, which determines the price at which the policy is purchased. In cases where the insured survives longer than the projected life span, the rate of return to an investor decreases. On average, these Senior Settlements are priced to produce a yield in excess of 15% per annum.
The quality of the medical underwriting is the critical factor in developing appropriate pricing. Even with perfect underwriting, it is critical for an investor to have a sufficient distribution of lives in the investment pool. The pool should also possess a distribution of medical issues, in order to avoid concentration risk.
For investors, life insurance settlements are unique. The returns have no correlation to the stock market or interest rates. Returns are purely a function of the factors discussed above.
Life insurance settlements began in the United States only in the last decade. They are now emerging as an asset class based on shear volume potential. The total potential size of the life insurance settlement market is estimated to include approximately $108 billion1 of life insurance in force. Most life insurance settlements have life expectancies ranging from 5 to 13 years, although some may be as short as one year.
Demand for the Life Insurance Senior Settlements is already strong and can only grow as knowledge of this financial alternative becomes more mainstream. Currently, there are 23 million1 people in the United States age 65 or older who have life insurance policies in force. Nearly 8% of these policies lapse or are surrendered each year. LIMRA estimates that 97% of all term life insurance products sold in the United States will be lapsed before any death benefits are realized. As more individuals begin to learn that their policies have a value in the secondary marketplace that exceeds the cash surrender value (essentially that there is a better alternative to lapsing or surrendering the policy) – demand is certain to grow.
Because the Life Insurance Senior Settlements are still relatively new and unknown (industry estimates suggest approximately 90% of financial planners and an even larger percentage of consumers are not yet aware of the availability of life insurance settlements), it is fair to assume that this market is poised to experience phenomenal growth over the next several years.
Recently, the option to sell an unwanted life insurance policy, for a broad variety of financial planning reasons in addition to financial need, has dramatically increased the number of people considering this option. As a result, capital resources available to acquire those policies have been overwhelmed, creating a large backlog of policies in the market.
The potential for a Senior Settlement occurs when the health of an insured has deteriorated to the point that the expected value of the future death benefit, which can be realized under a life insurance policy, significantly exceeds the expected value of the future anticipated premium payments. Historically, most policyholders did not realize that their life insurance policies represented “hidden assets” which could be used to better achieve their living goals.
Transactions generally occur, when the life insurance policy owner works with an insurance agent, financial planner, or other financial advisor (“settlement broker”) who makes the owner aware that there are options available other than lapsing or surrendering an unneeded life insurance policy. These settlement brokers find the buyers for the life insurance policy and secure the settlement. It is estimated that of the 192,000 life insurance agents and approximately 34,000 certified financial planners in the United States today, only ten percent have working knowledge of Senior Settlements. Therefore, as the population ages and knowledge of Senior Settlements spreads, the potential exists for substantial future growth.
Senior Settlements are a new and rapidly growing asset class. While Investment Bankers have viewed Senior Settlements as ideal for candidates for securitizations, the recent genesis of this asset class, taken together with the esoteric nature of the risks associated with projected cash flows and the inherit complexities of any securitization, have made the securitization of Senior Settlements mostly a theoretical exercise. As a result, capital allocations to this market have tended to be lumpy at best. The Company intends to source Senior Life Insurance Settlements in the secondary market from Life Insurance Settlements Companies, which have existing relationships with managing general agents and life insurance agents/brokers active in this market.
Although the Company will use third parties to perform many functions associated with the evaluation and purchase of the life insurance policies, it will provide oversight of many functions including the following:
• Insurance Policy Underwriting
• Medical Underwriting
• Purchasing Policies
• Tracking/Servicing Purchased Policies
The management team of the Company has substantial expertise in life insurance, actuarial pricing, accounting, taxation, capital markets, and life insurance settlements.
A sample of 500 Insured lives was used to determine the expected rates of return for investors, and the volatility of the returns. The Insured lives modeled ranged in ages from 65 to 89, with an average age of 75. The net face amount of policies to be purchased was $453.1 million, and the assumed purchase price was $115.9 million.
Under the “base case” or “assumed case”, the return to investors was determined to be 19.0%. This anticipated rate of return is consistent with current pricing in the Senior Settlement market. In the assumed case scenario, an investor would recover 100% of the amount invested in 7.46 years. The average ex for the group of Insureds, at the time of the assumed purchase, was 8.428 years.
The most significant issue with Senior Settlements is not the return of principal, but instead the duration over which returns will be earned. Therefore, the expected rates of return were calculated using variations in the assumed mortality of the pool of insured lives.
Projected cash flows were calculated assuming future premium payments, death benefits and expenses, using mortality rates that vary from the assumed case. Assuming that the actual mortality in all years is 10% less than the expected, the rate of return would decrease to 17.66%, compared to 19.0% in the assumed case. Conversely, if mortality is 10% higher than the assumed case, the rate of return will increase to 20.28%.
Extreme cases were also tested. Assuming actual mortality is 33% lower than pricing results in the rate of return decreasing to 14.37%, while the break point is 21.01 years. Assuming mortality is 33% higher than anticipated results in a return of 23.11% and a breakeven period of 5.72 years. The rates of return under these assumptions are reflected in the table below:
The extreme mortality variation used a 33% lower mortality rate than assumed and represents two standard deviations in a sample comprised of 500 lives. The probability of the actual mortality rate being less than 33% is therefore approximately 2.5%. Conversely, the probability that mortality would ever exceed 33% above the expected would also equal 2.5%.
As with any insurance transaction, some state Departments of Insurance regulate life insurance settlements. The National Association of Insurance Commissioners (NAIC) adopted model regulation in 1993 when the industry focus was limited to individuals with catastrophic or life threatening illnesses. The Model developed contract, license requirements, and other consumer protections to protect these specific policy sellers. This Model was adopted by only about half the states. As the business has evolved and expanded well beyond the scope of the early regulations, the NAIC and the individual states have modified and expanded statutes and regulations to include a broader definition of the policy seller provide protections to investors in the transactions and formalize the regulatory filing and reporting requirements. Regulatory activity by the NAIC and the states, especially those states that took no action on the original Model, is expected to accelerate as the industry grows.
Steven W. Fickes, F.S.A., M.A.A.A
Steven is an actuary and has been involved in the insurance industry his entire career. Early in his career, he joined Tillinghast, the largest actuarial consulting firm, where he focused on reinsurance, mergers and acquisitions and taxation. He ultimately was made a Principal and headed the firm’s International Reinsurance and Life and Health Insurance Practices.
He later formed his own actuarial practice specializing in innovative, highly structured reinsurance transactions and mergers and acquisitions. His involvement as a consultant on mergers and acquisitions led him to become a partner in a leveraged buyout firm that was involved in the acquisition of 15 insurance companies, with an aggregate value in excess of $1 billion. Steve has also been involved in several successful start-ups including the formation of a life insurance settlements firm.
During 1995, he formed a $100 million private equity fund, which ultimately completed two major acquisitions.
Prior to starting his own firm, Raedel in 2001, Steve was a partner at Deloitte & Touche, where he led the firm’s international actuarial practice. During his tenure at Deloitte he worked with the American Cancer Society in developing a lending program for terminally ill cancer patients collateralized by their life insurance policies.
Since resigning from Deloitte & Touche, Steve has developed an extremely sophisticated insurance information database that has as its subscribers some the largest insurance companies in the US, major investment banks and mutual funds. At the same time, he has pursued various other entrepreneurial opportunities in the insurance sector.
Ransom Jones, C.P.A.
Ransom has over 30 years of experience working in the insurance industry with major multi-national companies in various areas including accounting and income tax consulting, asset/liability management, product development, asset securitization, mergers and acquisitions, financing, general management, consulting for troubled insurance companies and developing strategic direction.
He has worked at American International Group, Citicorp, Goldman, Sachs & Co., and was a partner at KPMG Peat Marwick. He has served as chief financial officer at two publicly traded companies and was president of a group of property and casualty insurance companies.
For two years, Ransom worked with a start-up senior settlements company in developing its business plan and identifying financing opportunities.
During his career, Mr. Jones has been very active in insurance industry affairs. For three years, he served on the NAIC’s Working Group on Emerging Issues which promulgates insurance regulatory accounting standards. He has served on various other NAIC committees. For three years, he was on the Board of Directors of the National Association of Life Companies Over many years, he has been a frequent speaker and author of articles related to the insurance industry.