Investment in Life Insurance Policies

6 Months Ended

Jun. 30, 2020

Investments, All Other Investments [Abstract]

Investment in Life Insurance PoliciesThe Company’s investments in life insurance policies include unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies, net of premiums paid, are recorded in gain (loss) on life insurance policies, net in our consolidated statements of operations. Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from reports obtained from widely accepted life expectancy providers (other than insured lives covered under small face amount policies — those with $1.0 million in face value benefits or less — which utilize either a single fully underwritten, or simplified report based on self-reported medical interview), assumptions relating to cost-of-insurance (premium) rates and other assumptions. The discount rate we apply incorporates current information about the discount rates observed in the life insurance secondary market through competitive bidding observations (which have recently declined for us as a result of our decreased purchase activity) and other means, fixed income market interest rates, the estimated credit exposure to the insurance companies that issued the life insurance policies and management’s estimate of the operational risk yield premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. Management has significant discretion regarding the combination of these and other factors when determining the discount rate. As a result of management’s analysis, a discount rate of 8.25% was applied to our portfolio as of both June 30, 2020 and December 31, 2019.

Portfolio Information

Our portfolio of life insurance policies, owned by our subsidiaries as of June 30, 2020, is summarized below:

Life Insurance Portfolio Summary


Total life insurance portfolio face value of policy benefits (in thousands)	$	1,960,826
Average face value per policy (in thousands)	$	1,779
Average face value per insured life (in thousands)	$	1,915
Weighted average age of insured (years)		82.7
Weighted average life expectancy estimate (years)		6.9
Total number of policies		1,102
Number of unique lives		1,024
Demographics		74% Male; 26% Female
Number of smokers		45
Largest policy as % of total portfolio face value		0.7	%
Average policy as % of total portfolio face value		0.1	%
Average annual premium as % of face value		3.6	%

A summary of our policies organized according to their estimated life expectancy dates, grouped by year, as of the reporting date, is as follows (dollars in thousands):


	As of June 30, 2020								As of December 31, 2019
Years Ending December 31,	Number of Policies	Estimated Fair Value		Face Value		Number of Policies	Estimated Fair Value		Face Value
Six months ending December 31, 2020	4	$	3,810	$	3,875	8	$	5,869	$	6,342
2021	30	37,965		45,090		55	62,061		79,879
2022	88	92,509		133,994		90	89,074		138,723
2023	106	102,952		177,842		128	123,352		222,369
2024	120	125,323		234,937		109	103,111		217,053
2025	114	82,722		189,756		113	74,223		171,961
Thereafter	640	349,425		1,175,332		648	338,349		1,184,646
Totals	1,102	$	794,706	$	1,960,826	1,151	$	796,039	$	2,020,973

We recognized life insurance benefits of $39.9 million and $23.0 million during the three months ended June 30, 2020 and 2019, respectively, related to policies with a carrying value of $12.8 million and $5.3 million, respectively, and as a result recorded realized gains of $27.1 million and $17.7 million, respectively. We recognized life insurance benefits of $65.4 million and $53.5 million during the six months ended June 30, 2020 and 2019, respectively, related to policies with a carrying value of $18.8 million and $14.0 million, respectively, and as a result recorded realized gains of $46.6 million and $39.4 million, respectively.

A reconciliation of gain (loss) on life insurance policies is as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Change in estimated probabilistic cash flows⁽¹⁾	$	15,349	$	17,122	$	33,200	$	34,253
Unrealized gain on acquisitions⁽²⁾	—		1,844		—		6,303
Premiums and other annual fees	(17,626)		(16,004)		(34,825)		(31,836)

Face value of matured policies	39,889		22,998		65,391		53,457
Fair value of matured policies	(22,824)		(6,030)		(34,533)		(20,751)
Gain on life insurance policies, net	$	14,788	$	19,930	$	29,233	$	41,426

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(1)Change in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically attributable to changes in life expectancy, discount rate changes or policy maturity events.

(2)Gain resulting from fair value in excess of the purchase price for life insurance policies acquired during the reporting period. There were no policy acquisitions during the three or six months ended June 30, 2020.

Estimated premium payments and servicing fees required to maintain our current portfolio of life insurance policies in force for the next five years, assuming no mortalities, are as follows (in thousands):


Years Ending December 31,	Premiums		Servicing		Total
Six months ending December 31, 2020	$	31,589	$	823	$	32,412
2021	82,102		1,647		83,749
2022	94,621		1,647		96,268
2023	106,489		1,647		108,136
2024	115,715		1,647		117,362
2025	128,495		1,647		130,142
	$	559,011	$	9,058	$	568,069

Management anticipates funding the majority of the premium payments and servicing fees estimated above from cash flows realized from life insurance policy benefits, and to the extent necessary, with additional borrowing capacity created as the premiums and servicing costs of pledged life insurance policies become due, under the LNV Credit Facility and the net proceeds from our offering of L Bonds as described in Note 10. Management anticipates funding premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits from our portfolio of life insurance policies and net proceeds from our offering of L Bonds. The proceeds of these capital sources may also be used for: additional allocations to Beneficient; policy premiums and servicing costs of additional life insurance policies; working capital; and financing expenditures including paying principal, interest and dividends.

- Definition

The entire disclosure for life settlement contracts including the accounting policy for life settlement contracts and the classification of cash receipts and cash disbursements in the statement of cash flows and, as applicable, for (1) life settlement contracts accounted for under the investment method based on the remaining life expectancy for each of the first five succeeding years from the date of the statement of financial position and thereafter, as well as in the aggregate: (a) the number of life settlement contracts, (b) the carrying value of the life settlement contracts, and (c) the face value (death benefits) of the life insurance policies underlying the contracts, (d) the life insurance premiums anticipated to be paid for each of the five succeeding fiscal years to keep the life settlement contracts in force as of the date of the most recent statement of financial position presented, (e) the nature of the information that causes the Entity to change its expectations on the timing of the realization of proceeds from the investments in life settlement contracts and the related effect on the timing of the realization of proceeds from the life settlement contracts and for (2) life settlement contracts accounted for under the fair value method, disclosure would include, based on remaining life expectancy for each of the first five succeeding years from the date of the statement of financial position and thereafter, as well as in the aggregate: (a) the number of life settlement contracts, (b) the carrying value of the life settlement contracts, (c) the face value (death benefits) of the life insurance policies underlying the contracts, (d) the reasons for changes in the Entity's expectation of the timing of the realization of the investments in life settlement contracts, and (e) (i) the gains or losses recognized during the period on investments sold during the period and (ii) the unrealized gains or losses recognized during the period on investments that are still held at the date of the statement of financial position.

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