Originating Life Insurance Assets
We generally purchase life insurance assets directly from policy owners who
purchased their life insurance in the primary market. Historically, we have
purchased life insurance policies in the secondary market through a network
of specialized brokers who assist consumers and financial professionals in accessing
the secondary market. We maintain membership affiliations and representation
within key industry groups, such as the Life Insurance Settlement Association,
where our President, Michael Freedman, serves on the board. We typically attend
and sponsor trade events where we maintain contacts and visibility among professionals
who submit life insurance policies for our potential purchase.
A key strategic initiative of ours has been to expand our origination capabilities
by marketing directly to consumers and financial professionals. Most recently,
we focused these marketing efforts towards financial professionals, namely financial
advisors and life insurance agents, through our “Appointed Agent Program.”
Our Appointed Agent Program is designed to empower financial professionals to
bring the life insurance secondary market’s value proposition to their
respective markets. Our Appointed Agent Program emphasizes education, training,
regulatory compliance, and marketing support. In the fourth quarter of 2015,
we deployed a new marketing effort focused on recruiting life insurance professionals
to source life insurance policies directly to us through our Appointed Agent
Program. Additionally, we continue to train financial advisors who sell our
investment products to become Appointed Agents and market our services within
their respective markets. While these efforts are new and still in development,
the initial results and early outcomes from our Appointed Agent Program marketing
efforts are encouraging and, as a result, we intend to further focus and allocate
resources to grow and develop that program.
Underwriting and Purchasing Life Insurance Assets
We focus on purchasing high quality life insurance assets through our origination
practices and underwriting procedures. Our origination practices and underwriting
procedures strive to meet published guidelines and methodologies for rated securitizations
of life insurance portfolios. At the same time, we are looking for innovative
value-added tools, services, and methodologies to improve both the accuracy
and efficiency with which we acquire life insurance assets.
Our underwriting procedures consist of a careful review and analysis of available
materials and information related to a life insurance policy and the insured.
The goal of our underwriting procedures is to make an informed purchasing decision.
We typically purchase life insurance policies from insureds who are 65 years
or older and whose life expectancies are less than 120 months (10 years). The
life expectancies we use are estimates, stated in months, which indicate the
50% probability of an individual’s mortality (meaning actuarial analysis
predicts half of the individuals with similar age, sex, and medical conditions
will experience mortality before that number of months, and half will experience
mortality after that number of months). Life expectancies are based on actuarial
tables that predict statistical probability of individual mortality.
We obtain life expectancies from independent third-party medical-actuarial underwriting
firms, unless the life insurance policy benefit has a face value of $1,000,000
or less (which we generally refer to as a “small face policy”).
When we obtain life expectancies from independent third-party medical-actuarial
firms, we receive a medical underwriter’s report summarizing the health
of the insured based on a review of the insured’s historical medical records.
For all life insurance policies we purchase, other than small face policies,
we average two life expectancies from two independent medical-actuarial underwriting
firms to form the life expectancy we use to price and value our life insurance
assets. In some cases, we may obtain more than two life expectancy estimates.
In those cases, we average the two life expectancy estimates that we believe
are the most reliable of those we have received, based on our own analyses and
conclusions. In this regard, the two life expectancy estimates we ultimately
choose to average may not always be the most conservative. For small face policies,
we use modified procedures to estimate a life expectancy that may, or may not,
use life expectancies from independent third-party medical-actuarial underwriting
firms. If in the future we believe our business model will benefit from changes
in our underwriting process and if such revisions are permitted under our borrowing
covenants, we may change our underwriting processes and policies.
We continually seek to improve the process by which we originate our life insurance
assets. To this end, we have refined our underwriting procedures in order to
more efficiently price small face policies. In 2015, we have reached several
milestones, most notably, the time in which it takes to complete a preliminary
underwriting. Historically, the preliminary underwriting process to evaluate
and price a life insurance policy could take six weeks or more. This lengthy
timeline, as well as additional timelines necessary for a complicated closing
process, creates barriers for market development and growth. Through our efforts,
however, we have been able to reduce the elapsed time to complete a preliminary
underwriting from weeks to days and streamline our entire purchasing process,
reducing timelines further, from months to weeks.
Finally, we continue to refine and improve our actuarial underwriting. We believe
we can continue to improve our service offerings by adopting a multivariate
analysis approach to our life expectancy underwriting—in particular for
small face policies. Multivariate analysis refers to a technique used to analyze
data that arises from more than one variable. The goal of our multivariate underwriting
is to augment traditional life expectancy underwriting by either filling gaps,
or including new information, shown to be relevant to life expectancy. An example
of this approach would be to account for socio-economic factors, such as income
levels, in the calculation of life expectancies, which as The Brookings Institute
has recently published, has a bearing upon life expectancies. Another example
of this approach would be to apply advanced medical testing technologies to
our life expectancy calculations, such as genomic testing, that have shown to
statistically predict mortality among individuals. These efforts are ongoing
and take time to develop and implement. Nevertheless, over time, we believe
they hold promise to improve the value of the services we offer.
Value Proposition – Life Insurance as an Alternative Asset
We realize profits from the life insurance assets we own by earning a spread
between the investment cost of our life insurance assets and the face value
of the policy benefits we receive. Accordingly, if we originate and purchase
life insurance assets in the secondary market, and make all the attendant premium
payments to maintain those assets in order to receive the policy benefits, the
most significant risk factors (among others that we discuss in the “Risk
Factors” section of this report) in the performance of those assets are:
(i) the predictability of mortality, or longevity risk; and (ii) the creditworthiness
of the issuing life insurance company, or credit risk. We believe the value
proposition of our investments in the alternative asset of life insurance is
our ability to obtain superior risk-adjusted returns.