Actuary as deal maker Aquarius Capital

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					 “Update of the Life Settlement Industry”

  Actuarial Society of New York (ASNY)
              Annual Meeting

           Michael L. Frank – Aquarius Capital

                     New York City
                    November 5, 2007


AQUARIUS CAPITAL
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               Copyright and Disclaimer
The material contained in this presentation has been prepared solely for
informational purposes by Aquarius Capital Solutions Group (Aquarius). The
material is based on sources believed to be reliable and/or from proprietary data
developed by Aquarius, but we do not represent as to its accuracy or its
completeness. The content of this presentation is intended to provide a general
guide to the subject matter. Specialist advice should be sought about your specific
circumstances. This document and its contents are proprietary to Aquarius. Neither
this document nor its contents may be copied or reproduced in any manner without
the express consent of Aquarius. Any requests or questions about this material
should be forwarded to aci-inquires@aquariuscapital.com.




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                       Overview
•   What is a Life Settlement?
•   Why an Interest to Invest in this Market?
•   Economics of Transaction
•   Trends in the Industry
•   Pricing of Policies – Art vs Science
•   Premium Financing – Why is this market growing?
•   Developments in Risk Management




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                         Biography of Speaker
•   20 Years Experience - Life, Accident & Health
•   Specialties – Insurance, Reinsurance & Employee Benefits
•   Services – Actuarial, Brokering/Consulting, Reinsurance, U/Wing, Risk Mgmt
•   Services in Life Settlements – Actuarial Services, Brokering, Intermediary Svcs.
•   Actuarial Credentials: ASA, MAAA, FCA
•   ASNY, Appointed Chairperson for Continuing Education
•   SOA Section Counsels:
        Reinsurance Section - Current
        Entrepreneurial Actuarial Section - Current
        Actuary of the Future Section - Retired
•   Other Credentials
        Licensed life, accident and health broker (23 states)
        Licensed reinsurance intermediary & managing general underwriter
        Licensed life settlement broker
        Listed Arbitrator for Reinsurance Association of America (RAA)
        Associate, American College of Healthcare Executives (ACHE)


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What is a life settlement?




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        A Life Settlement Transaction
•   Insurance policyholder sells his/her insurance
    policy to a life settlement provider.
•   Individual receives cash compensation and may
    use the proceeds to purchase a different
    investment or other financial product.
•   The sale of a life insurance policy that would have
    otherwise been surrendered or lapsed.



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    Parties of a life insurance agreement
•    Insured(s)
•    Policyowner(s)
         This will change in a life settlement
•    Beneficiary(ies) – Revocable or Irrevocable
         This will change in a life settlement
•    Insurance Company
•    Broker/Agent & General Agent

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     Life Insurance Policy = Asset?
•    Asset allocation is never stagnant
•    Changes with the evolving needs of an individual client
•    The life settlement industry allows for the fair market
     value of a life asset by creating a secondary market
         Insurance companies: cash surrender value upon lapse (non-
          forfeiture laws)
         Life Settlements: significantly more than CSV (it would have
          to be otherwise who would do)



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 Who is involved in a life settlement
  transaction?




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                          Food Chain
•    Client
         Insured, Policyholder & Beneficiaries
•    Referring Party(ies) – Broker/General Agent/Other
•    Life Settlement Broker(s)
•    Life Settlement Provider
•    Life Settlement Funder(s)
•    Private Equity/Hedge Funds
•    Reinsurers
•    Medical Underwriting
•    Other Parties
         Premium Finance, Aggregators, Trusted Advisors
•    And so on……
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What happens to the policy once sold?
• Client receives a payment for the policy
    Payment will be greater than policy cash surrender value
    Client free to use money as desired (may have tax consequences)
• Policy ownership and beneficiary are transferred to life
  settlement provider along with any rights associated with
  transfer
    Insured remains unchanged
    Life settlement provider could sell policy later
• Client is no longer responsible for paying premiums
    All premium payments and obligations are the duty of the
     purchaser
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    Information Required for Quote
•      Life Settlement Application Form
•      Broker of Record Letter (not all request this)
•      Medical Records Release Form
•      Authorization for Release of Personal Information
•      Life Insurance Information Release Form
•      Current life insurance illustrations for each policy
             May require multiple versions depending on prospective buyers
•      Medical Records from each insured’s provider(s)
             Most difficult to obtain & requires most work
•      Sample Forms – Visit website www.aquariuslife.com

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    Information Required for Finalizing
              Sale of Policy
•    Closing Document/Agreement
•    Appropriate Releases from Beneficiaries (if irrevocable)
•    Copy of life insurance policy or group certificate
•    Current life insurance illustrations
•    A copy of the driver’s license or government issued photo
     identification card for the selling policy owner (if an individual) and
     each insured person
•    A copy of the social security identification card (or federal tax ID
     number) for the policy owner and each insured person
•    Increasing need for good documentation at closing.


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 Why such an interest in this market?




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                Sample Transaction
            (First Time Life Settlement)
•    Face Amount:        $2.0 million
•    Policy Type:        Universal Life
•    Cash Value:         $210,000 (10.5% of Face)
•    Policyowner Paid:   $440,000 (22.0% of Face)
•    Broker Paid:        $80,000 (4.0% of Face)



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          Reasons for Selling Your Policy

•    The reason a policy was once purchased may no longer
     be valid
         Change in estate planning needs or outlive the intended
          beneficiary(ies)
         Premiums too expensive
         Different financial needs ( i.e. annuity or long-term care)
         Client needs to raise cash (401k is now a 201k)
         Many other reasons
•    Corporations change over time
         Key-man, buy-sell, deferred comp, etc. no longer needed
         Financial problems – No longer need policy

    AQUARIUS CAPITAL
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 Can you handle the truth about life
  settlements? Do you know what
  the truth is?




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    Disclosure – What Individuals Doing
      a Life Settlement Need to Know
•   Life settlement companies can sell your policy later (in many
    cases).
•   Are you comfortable with a disinterested third party collecting
    death benefit?
•   Who is being compensated and how much?
•   Are you getting the right price for your policy?
•   Is your advisor licensed?
•   Is your advisor your advocate?
•   Are your estate planning needs covered?
•   Policy (and policy rights) is not yours anymore (in most cases)!
•   Historically: Not a lot of “boy scouts” in this business

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                       Consumer Advocacy
•   State Regulators - Broker licensing requirements
       Life Broker vs Viatical Settlements
       Certain states require licenses of providers (buyers)
       Still inconsistencies in the market but progress being made
•   9/2007: NYSID Establishes Elder Protection Unit
       Senior Citizens Insurance Resource Center
       Website www.ins.state.ny.us/cseniors.htm
       Toll free number: (800) 342-3736
•   DON’T FORGET ABOUT GOOGLE/WEB!

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    Why are new buyers entering market?
       (“Perceived” Opportunities)
•   PERCEIVED High Returns (20+% ROI)
•   PERCEIVED High Demand
        Plenty of Unwanted Insurance Policies
•   PERCEIVED Low Supply (Room for New Buyers)
        Reputation Risk has reduced supply
•   PERCEIVED Unique Distribution
•   Increased Credibility in Market
        AM Best Debt Rating – October 2004 (Updated 9/2005)

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    Statistics – How Big is the Market?
•   $4 trillion invested in life insurance (ACLI, 2005)
•   Average of $300 billion annual death benefits (ACLI, 2005)
•   36.8 million over age 65 (US Census Bureau, 2006)
       12% of total US population
       Projected 2050: 86.7 million (21% of total population)
       2005 Median Household Income = $26,036
       Poverty Rate = 10.1%
       5.3 million in labor force in 2005 (Projection in 2014 = 8.7 million)
       7.3+ million taking adult education courses
•   Size of Existing Life Settlement Market? UNKNOWN
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          Senior Citizens In The U.S.
                         2005                     2010                    2015


 Age 65+                 36.8                     40.2                    46.8


 Age 75+                 18.2                     19.0                    20.2


Note: Numbers are in millions and provided by the U.S. Census Bureau, May 2006



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            How Big is the NY Market
                 (ACLI, 2005)
•    192 Insurance Cos Licensed in NY
         94 NY Domiciled
•    22,200 Employed in Life Insurance Industry in NY
•    NY Residents - 19.3 million (US Census Bureau, 2006)
         13.1% are over age 65 (2005 estimate)
•    NY Residents - $2 trillion in death benefit coverage
         $25 billion paid in death benefits, maturities, etc.



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    Buyer’s Underwriting Box (Sample)
•   Age Requirement – > 65
•   Minimum Face Amount - >$500k
•   Life Expectancy - Between 2 & 15 years
•   Types of Policies – Permanent & Convertible Term
•   Length Policy Inforce - Beyond Incontestability Period
        e.g., 2 years from policy issue date
•   Funding Level - Amount of Cash Value, Loans
•   Policy Expiration Date
•   Insurance Company Rating (AM Best, S&P)
•   Commission Levels - % Face & % Transaction

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 Who determines how much the policy is
  worth and what the sale price will be?




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                       Art vs Science

•   Why Sell?          Sale Price > Cash Value

•   Why Buy?           Sale Price < Individual Actuarial Value




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                Pricing Considerations
•    The Providers determine policy value based on
         Actuary tables
         Medical underwriting
         Administrative expenses – Commissions, internal costs, etc.
         Funding Source Returns - ROI
•    Purchase price will be based on above as well as:
         Cash surrender value
         Client’s threshold
         Other providers’ offers (bidding process)


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    What Mortality Tables are being used?
•   Types of Tables
     2001 VBT
     1980 CSO

     2001 CSO

     RP2000

     Others – Industry vs Homegrown

•   Ultimate vs Select/Ultimate
•   Smoker/Non-Smoker

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                   Medical Underwriting
•   Individual Based Pricing
       Set individual reserves/pricing
       Medical Underwriters
         •   Develop Life Expectancies (No. Months) or Mortality Table Loads
         •   Based on review of medical information
•   Third Party Underwriters in Market
       AVS, 21st Services, EMSI, Fasano, Many Independents
•   Lloyds Certified?
•   “Perception” in Market of 3rd Party Underwriters
       Historical Perception – understating life expectancy
       Current Perception – overstating life expectancy


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    Sample Loss of Life Expectancy
       Calculations (in Years)

                    Ave. Life   Mortality   Revised Life Reduction in

Individual   Age   Expectancy    Load       Expectancy    Life Years

    1        66       14.1       175%          10.2          3.9

    2        39       35.7       200%          28.4          7.3

    3        47       28.6       250%          19.8          8.8

    4        41       33.9       325%          22.0          11.9

    5        59       18.9       450%           7.9          11.0




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                   Sample Policy Valuation
                    (Illustrative Purposes)
•   Present Value of Future Claims less Future Premium (see next slide)
       Mortality Table = RP 2000
       Discount Rate = 5.5%
       PV Scenarios: For simplicity, excludes admin expenses, profit margin,
        acquisition costs/commissions, taxes, and other facility expenses
•   Sample Policy
       Male
       Policy Issue Age = 84
       Policy Valuation Age = 86
       Face Amount = $5,000,000 (Assumed payable end of year)
       Annual Premium = $500,000 to age 100 (Assumed payable beginning of year)


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Sample Illustation - Age 86 Valuation
      Scenarios (Continued)
 Medical Underwriting      Life      Present Value
      Mortality         Expectancy    Divided by
       Load %           in Months    Face Amount
        75%                83           16.7%
        90%                73           24.4%
        100%               67           28.8%
        110%               63           32.6%
        120%               59           36.1%
        150%               50           44.5%
        200%               40           54.2%
        250%               33           60.9%
        300%               29           65.8%


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                          Actuarial Value
•   Actuarial Value
      Based on individual assessment including medical underwriting
      Impact of “Table Shaving”
      Actuarial Value = PV Benefits less PV Future Premium & Other
       Costs
      Other Costs
           Acquisition Costs – Intermediary/Brokerage Fees (material number)
           Facility Costs
               Provider Costs – Internal Overhead, Underwriting, Bonding Fees, etc.
               Facility/Financing Fees
               Taxes
           Minimum ROI hurdle rates



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          Life Settlement Securitization
•   Type of Policies Permitted/Conditions
•   Service Providers – Medical UWing, Legal Review, Administration
•   Medical Records
•   Policy Tracking/Inforce
•   Diversity
•   Longevity/Risk Mitigation/Liquidity Facility
•   Estimating Portfolio Residual Value
•   Liquidity Risk Mitigation
•   Life Settlement Pricing
•   Acquisition Schedule
•   Policy Optimization
•   Portfolio Liquidation Plan
•   Management Expertise
•   Documentation
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    Portfolio Sale – Buyers Exit Market
•   Litigious situation – Policies in receivership
•   Change in funding sources
•   Change in business plan
      ROIs need to be higher
      Concern of Reputation Risk

•   Did not purchase enough policies (no critical mass)
      Unsuccessful in creating fund for debt rating
      Administrative expenses for maintaining facility is too high

      ROIs not being met



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What is a “reasonable” critical
 mass of policies for a portfolio?




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       Successful Portfolio Transactions
•   Attractive portfolio – High ROI
•   Up to Date Files - Current medical records & policy illustrations
•   Evidence of clean files (copies of cancelled checks, managing “uncle
    joe” risk, etc.)
•   Transferred and transferable policies
•   Reasonable intermediary fees
•   Need for recoupment of original acquisition costs?
•   Available funding
•   Potential policy lapses
•   Identification, isolation and resolution of litigious issues
•   Financing structure of underlying portfolio (e.g., reinsurance?)

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                       Recent Trends
•    Commissions typically paid on % of face amount
         Life insurance agents receive on % of premium
•    Historically: Commissions = 4-6% of face amount
         Multiple brokers being paid on transactions
         Commissions being reduced
         Calculation being based on lesser of % of face amount & % of
          transaction
•    Increasing requirements for disclosure of fees and parties
     paid by buyers
•    Certain policies may requiring a securities license (variable
     products)
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        Recent Trends (Continued)
•   Growth in Premium Finance Market
•   Increase interest in Beneficial Interest Policies
•   Potential Lawsuits? Happens at all levels of “food chain”
•   Usually have multiple brokers being paid commissions on
    transaction
•   Licensing requirements vary by state
•   Use of “Options” to replace old life extension risk
    (reinsurance) transactions.


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               Organizations to Know
•   Life Insurance Settlement Association (LISA)
       Website www.lisassociation.org
       Previously called Viatical and Life Settlements Association of America
        (VLSAA)
•   National Conference of Insurance Legislators (NCOIL)
       Adopted Model Life Settlements Act in 2004
       VLSAA endorsed act in 2000 (See www.ncoil.org to obtain copy of act)
       Anticipated revision expected end of 2007
•   National Association of Insurance Commissioners (NAIC)
       Passed Viatical Settlements Model Act Revision in June 2007
       LISA opposes due to perceived retraction of consumer rights and makes life
        settlement transactions more difficult for consumers.
       LISA also concerned that act has minimum pricing requirements.



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                   Premium Financing Co.
•   PFC: A third party loans individual(s) or corporation(s) money to
    pay for payment of premium
•   Business popular in property & casualty insurance
       Insurance carriers want lump sum premium (e.g., professional liability/E&O
        coverage)
       Insured(s) want to pay over a time period
            Flexible installment payments (e.g., monthly premium)
       PFC changes a fee for this loan
       PFC assumes credit risk
            Mitigated since policy can be cancelled early with refund of portion of advanced
             premium payment
•   Premium Finance Companies growing in life insurance market
•   Results in “policy manufacturing”

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    Non-Recourse Premium Financing in
             Life Insurance
•   Non-recourse – Potentially free coverage for 2 to 4 years
•   Insured borrows money for policy
•   Low or no down payments
•   No or minimal credit check
•   Insured Decision at Loan Repayment Date (Several
    Choices)
       Repay loan w/ interest charges
       Solicit potential life settlements and if favorable bid, then sell
        policy and use money to pay off loan
       Refinance loan to pay off existing loan
       Do not repay loan and policy is taken over by PFC

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    Non-Recourse Premium Financing in
          Life Insurance (cont.)
•   PFC
     Obtain interest on loan if insured pays back
     Obtains policy as collateral if insured does not pay back
      loan
           Functions as a life settlement transaction
           Target senior markets (age 65+)
           PFC becomes policyowner and beneficiary
           Potentially done as a partial transaction (insured keeps portion
            of life insurance benefit as incentive to write policy)


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                        PFC Market Interest
•   Perceived High Returns for Investors
       Unique distribution for insurance policies
       ROI: Arbitrage on insurance company underwriting at policy issue
       Reasons same as life settlement industry
       Potential expense compression for increase returns
•   Regulatory Scrutiny
       Does it meet “Insurable Interest” requirements
       PFC spending significant dollars for product development (e.g.,
        legal opinions)
       Licensing: Separate entity from insurance broker
       Require securities licensing?

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     PFC - Debate of “Insurable Interest”
•   NY Insurance Law Section 3205(b)
       (A) “In the case of persons closely related by blood or by law, a
        substantial interest engendered by love and affection;”
       (B) “In the case of other persons, a lawful and substantial interest
        in the continued life, health, bodily safety of the insured person, as
        distinguished from an interest which would arise only by, or would
        be enhanced in value by, the death, disability, or injury of the
        insured”
•   Section 3205(b)(1) - Appears to permit insured to procure
    and immediately transfer a policy on his own life,
    irrespective of the existence of insurable interest in the
    assignee
•   Challenges: Is the PFC a disinterested third party? Rebating?
    AQUARIUS CAPITAL
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Do buyers of policies know the risk that
 they are taking? Do they have
 strategies for managing downside risk?




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        Life Extension Risk Insurance
•   Lloyds Gowshawk Syndicate (2003 & Prior)
     Most popular life extension risk cover.
     Purchased insurance at Life Expectancy + 2 Years

     After LE+2 Years: Insured gets claim paid and
      reinsurer takes over policy
     Policy Referred to as: Stop Loss, Reinsurance, Life
      Extension Insurance, etc.



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                              Options

•   Today – A move to “Options” as risk management tools
       Reinsurers exploring various options
       Private Equity & Hedge Funds are offering Options
       Life Settlement companies using to cap downside risk
•   Document work
       Structure and design of option you are pricing
       Document what actuarial formulas that you are using




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              Open Discussion



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                    Thank you

        Michael L. Frank, ASA, MAAA, FCA, CHE
                   President & Actuary
                     Aquarius Capital
                  Phone: (914) 933-0063
        E-Mail: michael.frank@aquariuscapital.com
 Websites: www.aquariuscapital.com & www.aquariuslife.com




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