Short Term Line of Credit

Short Term Line of Credit

• Short Term Line of Credit

• Stop Loss Longevity Protection

• Credit Enhancement

$12 Billion (Face Value) closed in 2007

• $12 Billion (Face Value) closed in 2007

• $23 Billion (Face) In Force, Year-end 2007

• ($6 Billion of which is estimated to be

• held by AIG)

$10.1 Trillion Individual Life Insurance In Force*

• $10.1 Trillion Individual Life Insurance In Force*

• 6.3% Annual Lapse/Surrenders*

• Estimated Gross Market Potential of $177 Billion Face Value by 2017**

• Estimated Net Market Potential of $114 Billion Face Value by 2017**

Pre-1970’s mortgage investing was localized in thrift institutions

• Pre-1970’s mortgage investing was localized in thrift institutions

• Securitization opened mortgage market to wide range of institutional investors

• Similar potential for Life Settlements

• Prepayment risk was significant consideration in early MBS transactions. Longevity risk is the primary risk for life settlement transactions.

Longevity Risk

• Longevity Risk

• Wrong Mortality Tables

• Credit Risk needs to be dealt with, but a lesser consideration

Life Expectancy estimates have been inconsistent and often wrong

• Life Expectancy estimates have been inconsistent and often wrong

• A.M. Best Study of 909 life portfolio underwritten by the 3 major Life Expectancy Underwriters

• Average spread of 8 months between longest and second longest L.E. Provider
• Average spread of 24 months between longest and shortest L.E. Provider

Fasano has consistently been the longest of the L.E. Providers

• Fasano has consistently been the longest of the L.E. Providers

• Fasano Actual to Expected accuracy has been established at 96%, suggesting an A/E Ratio of 90% for the second longest, and 79% for the shortest LE Provider

• Yet because of misalignment of interest between the portfolio aggregators and the funders, many portfolios have been assembled based on the shorter, less accurate life expectancy estimates

• Market recently shocked when the shortest of L.E. Providers announced plans to extend life expectancies by 20 to 25%.

• This clearly is a developing market

Portfolio priced at 12.4% based on the shortest L.E. Underwriter would =>

• Portfolio priced at 12.4% based on the shortest L.E. Underwriter would =>

• IRR of 8.3% based on second longest L.E. Underwriter;
• IRR of 6.5% based on longest of L.E. Underwriters

• Source: A.M. Best

First Step is for Life Expectancy Underwriters to get better and for Market to get smarter

• First Step is for Life Expectancy Underwriters to get better and for Market to get smarter

• Encouraging Developments: Recent announcement of shortest of L.E. Underwriters to extend LE’s by 20 to 25%; follow-up announcement of second longest to extend by estimated 5 to 10%

• Investment Banks have promoted synthetic transactions to hedge longevity risk

• More traditional stop loss product is more appealing

Lloyd’s (Goshawk Syndicate) developed L.E. + 2 product in the 1990’s: Would purchase life settled or viaticated policy back if person lived 2 years beyond the 85th percentile. Premium charged of 4% of face value

• Lloyd’s (Goshawk Syndicate) developed L.E. + 2 product in the 1990’s: Would purchase life settled or viaticated policy back if person lived 2 years beyond the 85th percentile. Premium charged of 4% of face value

• Product failed due to:

• Anti-selection (Investor could choose which policies to buy cover for.)
• Poor control of underwriting function
• No life settlement model will work with wrong LE estimate

Joint venture between Fasano Associates, U.S. underwriting firm, and Augur Capital, a German investment manager of life insurance and life settlement assets

• Joint venture between Fasano Associates, U.S. underwriting firm, and Augur Capital, a German investment manager of life insurance and life settlement assets

• Will offer both individual and portfolio extension risk products, priced off of Fasano Life Expectancy estimates

• Preliminary interest strong; current market unsettled

Shape of the Mortality Curve is important for modeling cash flows, although not as important as getting the midpoint life expectancy estimate right

• Shape of the Mortality Curve is important for modeling cash flows, although not as important as getting the midpoint life expectancy estimate right

• Industry has used 2001 VBT and now 2008 VBT Tables: Both based on Life Insurance, not Life Settlement experience.

• VBT 2001 and 2008 exclude impaired lives, assume too long of a select period and don’t adjust for Mortality Rating

More accurate and consistent underwriting

• More accurate and consistent underwriting

• PLUS

• Extension risk products PLUS

• Huge underlying U.S. Life Insurance Market

• Substantial Market for Life Settlement

• Securitizations