University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Senior Market Advisor Magazine

(March 2002)

“If life settlements are good enough for Warren Buffet, shouldn‘t they be good enough for everyone

else?Last October, GenRe, the global reinsurance and

risk managment arm of Buffett´s Berkshire Hathaway Inc., arranged a financing facility

upwards of´$ 400 million for ... a life settlements funder in Minnetonka, Minnesota.“

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Economist(May 17th, 2003)

“After savings accounts and government bonds, life insurance may be the most respectable of investments...A secondary market in life insurance policies is growing rapidly in the US. Firms buy policies, mainly from olderPeople, at discounts to their face value. They pay all subsequent premiums and collect the proceeds on theDeath of the insured or the maturity of the policy. Such life settlement firms bought $2 billion-worth of policies

last year.... “

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Viatical Life Lettlements

The Secondary Insurance Life Insurance Market

Prof. Dr. Dipl. Math. Jörg Finsinger

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Defining the Terms

• A viatical settlement is the sale of a life insurance policy, by a terminally ill person for a discounted percentage of its face value to a third party.

• A life settlement is the sale of a life insurance policy, by a senior citizen for a discounted percentage of its face value to a third party.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Provider and Broker

• A viatical or life settlement provider is a company that buys the life insurance usually in trust for third parties.

• A viatical or life settlement broker arranges the transaction between the seller of the life insurance and the buyer.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The Purchase

• The terminally ill person sells its policy because she no longer needs it, or she lacks the funds to pay for the premiums.

• A broker finds her a provider who will purchase the life insurance policy.

• The price paid depends on the life expectancy of the policy owner.

• The life expectancy is evaluated by doctors and independent specialists such as American Viatical Services.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The Purchase Agreement

• The owner of the life insurance policy

transfers ownership, and irrevocable beneficiary rights to the buyer.

• The seller save the future premiums.

• The investor becomes the new owner and beneficiary of the life insurance.

• Some providers assume responsibility to pay the premiums.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

History of Viatical Settlements

• The market started in 1989 in response to the aids epidemic.

• 1980 nearly no transactions

• 1989 first documented transaction (R. Worley)

• 1991 $ 50 million of viaticals had been sold

• 1995 $ 500 million

• 1998 $ 1 billion

• 2001 $ 4 billion(National Viatical Association, 1999)

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Regulation

• The NAIC (National Association of Insurance Commissioners) issued model regulation as a guide for state regulators.

• The state insurance departments are responsible for regulation in each state.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Main Content of Regulation

• Brokers must often be licensed.

• Regulation of the minimum percentage of the face value the consumer gets.

• In some states viatical settlements are classified as securities.

• Certain regulations meant to protect viators are having adverse effects on the market and therefore on the viators themselves: there is much overregulation.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Who is investing?

• Since the market is matured and regulation and laws are in place to make it a safe one the major investment houses are investing (Warren Buffett‘s Berkshire Hathaway invested s through Gen RE about $800,000,000. early this year).

• There is a beginning of a market in Europe.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The Products on the Market

• The viatical settlements are categorized in classes depending of the life expectancy. (e.g. two year life expectancy product).

• Investment in some programs guarantees the investment.

• In other programs re-insurance guarantees a maturity date most often life expectany plus 2. This implies a guaranteed minimum return.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The Risks

• The default risk of reinsurance remains though.

• New medications may extend the life span, returns may fall but the minimum return is guaranteed by reinsurer.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The Risks

• The uninsured version shows much higher returns.

• New medications may extend the life span, returns may fall but the capital is safe as long as the insurers do not default or the state compensation schemes pay the face values.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Expected Return and Guaranteed Return on Reinsured Viatical Settlements

Life Policy with ... Maturity (reinsur.)

Guaranteed Minimum

Return p.a.

Return p.a. at Average Maturity

2 years 5,10 % 14,18 %

3 years 6,19 % 16,64 %

4 years 6,75 % 20,89 %

5 years 6,36 % 25,02 %

6 years 6,05 % 31,67 %

By Mag. F. Diboky based on historical data: no costs taken into account.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Cashflows from a Portfolio of Viatical Settlements

(Example)

• Amount invested: 100.000.000 $

• i.e. approx. 150 Life Insurance Policies

• Maturity between 2 and 6 years

• Reinsurance included

By Mag. F. Diboky based on historical data.

Year Exp. Cashflow

0 - 100.000.000 $

1 39.621.609 $

2 45.459.588 $

3 38.767.998 $

4 21.221.414 $

5 2.896.057 $

6 583.333 $

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Cashflows from a Portfolio of Viatical Settlements

(Example) cont.

Internal Rate of Return (exp.):

25,83 %

Cashflow equalscapital invested after 2,5 years.By F. Diboky

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Cashflows from a Portfolio of Viatical Settlements(Worst Case Scenario)

• Amount invested: 100.000.000 $

• i.e. approx. 150 Life Insurance Policies

• Maturity between 2 and 6 years

• Reinsurance cover

Year Exp. Cashflow

0 - 100.000.000 $

1 0 $

2 0 $

3 0 $

4 12.200.000 $

5 20.250.000 $

6 29.600.000 $

7 38.500.000 $

8 48.000.000 $

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Cashflows from a Portfolio of Viatical Settlements

(Worst Case Scenario) cont.

Internal Rate

of Return:

6,22 %

Cashflow equals amount invested in 7 years.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

The „Fair“ Value of a Life Insurance Policy

To determine the „fair“ value of a life insurance policy and to compare it with its market value, information about the medical status of the policy seller as well as information about the survival rates of various diseases is needed.

The main sources are:• Information on the insured from providers of viatical

settlements and qualified physicians.• Medical data about the course of diseases from

hospitals, cancer registries etc.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Information about Survival Rates of

Terminally Ill Patients

Information on almost 4 million terminally ill cases is included in the databases at our disposal. We are working on a data base on medical progess.

The databases contain additional information such as sex, year of diagnosis age (at diagnosis) and ethnic group.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Tracking Lists

• Historical tracking data is available showing amongst other things that qualified physicians overestimate life expectancies by large margins.

• Most cases include biographical data, e.g. sex, age (at diagnosis), smoker/non-smoker.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Disclosure

• Statistical data presented reflect past results and there is no guarantee that the performance will be repeated or achieved in the future.

• Results are more meaningful for larger mixed portfolios than small ones or individual policies.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Research ProjectMajor Issues

• Current Practices in the market are described and analysed.

• Current regulations are comprehensively overviewed.• The formation of prices in this market is analysed,

mathematical models of calculations are developed.• Valuations methods are designed starting from diverse

knowledge in medicine on distribution functions regarding the survival time.

• Socioeconomic factors of the viator are taken into account in as much as the available data permits such research.

• Valuation models were programmed and a software was developed is being continually updated which supports the purchase decision of viatical policies as well as optimal portfolio composition.

University of Vienna Prof. Dr. Finsinger Chair Of Financial Services

Scientific Staff• Prof. Dr. Jörg Finsinger

Mag. Franz Diboky • Cooperation with several other researchers,

mathematicians, medical doctors and bioligists (experts for new medical treatments)

Chair of Financial ServicesUniversity of Vienna

Bruenner StrasseA-1210 Vienna

Phone: cell+43-676-4088422 or 43-1-427738262 Fax: +43-1-4277-38264