Investment in Life Settlements
A life settlement contract is a contract between the owner of a life insurance policy and a third-party who obtains the ownership and beneficiary rights of the underlying life insurance policy. During 2010, the Company formed Tiger Capital LLC (“Tiger”) with a subsidiary of National General Holdings Corp. ("NGHC") for the purpose of acquiring life settlement contracts. In 2011, the Company formed AMT Capital Alpha, LLC (“AMT Alpha”) with a subsidiary of NGHC and AMT Capital Holdings, S.A. (“AMTCH”) with ACP Re, Ltd., an entity controlled by the Michael Karfunkel 2005 Grantor Retained Annuity Trust, for the purpose of acquiring additional life settlement contracts. On March 28, 2013, ACP Re, Ltd. sold its interest in AMTCH to NGHC. In addition, during the fourth quarter, the Company formed AMT Capital Holdings II, S.A. ("AMTCH II") with a subsidiary of NGHC for the purpose of acquiring life settlement contracts. The Company has a fifty percent ownership interest in each of Tiger, AMT Alpha, AMTCH and AMTCH II (collectively, the “LSC entities”). The LSC entities may also acquire premium finance loans made in connection with the borrowers’ purchase of life insurance policies that are secured by the policies, which are in default at the time of purchase. The LSC entities acquire the underlying policies through the borrowers’ voluntary surrender of the policy in satisfaction of the loan or foreclosure. A third party serves as the administrator of the Tiger and AMTCH II life settlement contract portfolios, for which it receives an administrative fee. The third party administrator is eligible to receive a percentage of profits after certain time and performance thresholds have been met. The Company provides certain actuarial and finance functions related to the LSC entities. Additionally, in conjunction with the Company’s 15.4% ownership percentage of NGHC, the Company ultimately receives 57.7% of the profits and losses of the LSC Entities. As such, in accordance with ASC 810-10, Consolidation, the Company has been deemed the primary beneficiary and, therefore, consolidate the LSC entities.
The Company accounts for investments in life settlements in accordance with ASC 325-30, Investments in Insurance Contracts, which states that an investor shall elect to account for its investments in life settlement contracts by using either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. The Company has elected to account for these policies using the fair value method. The Company determines fair value based upon its estimate of the discounted cash flow related to policies (net of the reserves for improvements in mortality, the possibility that the high net worth individuals represented in its portfolio may have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health impairments, the possibility that the issuer of the policy or a third party will contest the payment of the death benefit payable to the Company, and the future expenses related to the administration of the portfolio), which incorporates current life expectancy assumptions, premium payments, the credit exposure to the insurance company that issued the life settlement contracts and the rate of return that a buyer would require on the contracts as no comparable market pricing is available.
Total capital contributions of $70,780 and $40,062 were made to the LSC entities during the years ended December 31, 2013 and 2012, respectively, for which the Company contributed approximately $35,380 and $20,100 in those same periods. The LSC entities used the contributed capital to pay premiums and purchase policies. The Company’s investments in life settlements and premium finance loans were approximately $233,024 and $193,927 as of December 31, 2013 and 2012, respectively, and are included in Prepaid expenses and other assets on the Consolidated Balance Sheet. The Company recorded a gain on investment in life settlement contracts net of profit commission for the years ended December 31, 2013, 2012 and 2011 of approximately $3,800, $13,822 and $46,892, respectively, related to the life settlement contracts.
In addition to the 271 and 256 policies disclosed in the table below as of December 31, 2013 and 2012, respectively, Tiger owned 2 and 13 premium finance loans as of December 31, 2013 and 2012, respectively, which were secured by life insurance policies and were carried at a value of $0 as of December 31, 2013 and 2012. As of December 31, 2013, the face value amounts, of the related 271 life insurance policies and 2 premium finance loans were approximately $1,762,409 and $0, respectively. The premium finance loans are in default and Tiger is enforcing its rights in the collateral. Upon the voluntary surrender of the underlying life insurance policy in satisfaction of the loan or foreclosure, Tiger will become the owner of and beneficiary under the underlying life insurance policy and will have the option to continue to make premium payments on the policy or allow the policy to lapse. If a policyholder wishes to cure his or her default and repay the loan, Tiger will be repaid the total amount due under the premium finance loans, including all premium payments made by Tiger to maintain the policy in force since its acquisition of the loan.
The following tables describe the Company’s investment in life settlements as of December 31, 2013 and 2012:
|
| | | | | | | | | | | |
(Amounts in thousands, except Life Settlement Contracts) Expected Maturity Term in Years | | Number of Life Settlement Contracts | | Fair Value (1) | | Face Value |
As of December 31, 2013 | | |
| | |
| | |
|
0 – 1 | | — |
| | $ | — |
| | $ | — |
|
1 – 2 | | — |
| | — |
| | — |
|
2 – 3 | | 1 |
| | 2,726 |
| | 5,000 |
|
3 – 4 | | 13 |
| | 53,767 |
| | 103,000 |
|
4 – 5 | | 2 |
| | 5,622 |
| | 13,000 |
|
Thereafter | | 255 |
| | 170,909 |
| | 1,641,409 |
|
Total | | 271 |
| | $ | 233,024 |
| | $ | 1,762,409 |
|
As of December 31, 2012 | | |
| | |
| | |
|
0 – 1 | | — |
| | $ | — |
| | $ | — |
|
1 – 2 | | 6 |
| | 27,511 |
| | 58,000 |
|
2 – 3 | | 4 |
| | 13,678 |
| | 25,000 |
|
3 – 4 | | 1 |
| | 4,775 |
| | 10,000 |
|
4 – 5 | | 2 |
| | 6,004 |
| | 20,000 |
|
Thereafter | | 243 |
| | 141,959 |
| | 1,559,909 |
|
Total | | 256 |
| | $ | 193,927 |
| | $ | 1,672,909 |
|
(1) The Company determined the fair value as of December 31, 2013 based on 191 policies out of 271 policies, as the Company assigned no value to 80 of the policies as of December 31, 2013. The Company determined the fair value as of December 31, 2012 based on 173 policies out of 256 policies, as the Company assigned no value to 83 of the policies as of December 31, 2012. The Company estimates the fair value of a life insurance policy using a cash flow model with an appropriate discount rate. In some cases, the cash flow model calculates the value of an individual policy to be negative, and therefore the fair value of the policy is zero as no liability exists when a negative value is calculated. The Company is not contractually bound to pay the premium on its life settlement contracts and, therefore, would not pay a willing buyer to assume title of these contracts. Additionally, certain of the Company’s acquired polices were structured to have low premium payments at inception of the policy term, which later escalate greatly towards the tail end of the policy term. At the current time, the Company has chosen to continue to make premium payments on these types of policies before the premium amounts escalate. The Company expenses all premiums paid, even on policies with zero fair value. Once the premium payments escalate, the Company may allow the policies to lapse. In the event that death benefits are realized in the time frame between initial acquisition and premium escalation, it is a benefit to cash flow.
For these contracts where the Company determined the fair value to be negative and therefore assigned a fair value of zero, the table below details the amount of premiums paid and the death benefits received for the years ended December 31, 2013 and 2012:
|
| | | | | | | |
| 2013 | | 2012 |
Number of policies with a negative value from discounted cash flow model | 80 |
| | 83 |
|
Premiums paid for the year ended | $ | 9,371 |
| | $ | 7,109 |
|
Death benefit received | $ | 3,012 |
| | $ | 5,036 |
|
Premiums to be paid by the LSC entities for each of the five succeeding fiscal years to keep the life insurance policies in force as of December 31, 2013, are as follows:
|
| | | | | | | | | | | | |
(Amounts in Thousands) | | Premiums Due on Life Settlement Contracts | | Premiums Due on Premium Finance Loans | | Total |
2014 | | $ | 34,296 |
| | $ | 267 |
| | $ | 34,563 |
|
2015 | | 37,565 |
| | 295 |
| | 37,860 |
|
2016 | | 48,466 |
| | 409 |
| | 48,875 |
|
2017 | | 46,499 |
| | 296 |
| | 46,795 |
|
2018 | | 34,732 |
| | 266 |
| | 34,998 |
|
Thereafter | | 543,433 |
| | 3,187 |
| | 546,620 |
|
| | $ | 744,991 |
| | $ | 4,720 |
| | $ | 749,711 |
|
