Investment in Life Insurance Policies

9 Months Ended

Sep. 30, 2021

Investments, All Other Investments [Abstract]

The Company’s investments in life insurance policies are valued based on 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 condensed consolidated statements of operations.

The fair value of our life insurance policies is determined as the net present value of the life insurance portfolio’s future expected cash flows (policy benefits received and required premium payments) that incorporates life expectancy estimates obtained when the policy was purchased and current discount rate assumptions. We refer to our valuation methodology as the Longest Life Expectancy methodology. This methodology utilizes a portfolio mortality multiplier (“PMM”) that allows us to “fit” projections to actual results, which provides a basis to forecast future performance more accurately. During the second quarter of 2021, we recalculated the PMM in accordance with our valuation methodology, which requires an analysis any time (1) the six-month moving average of the difference between the actual portfolio performance and projected performance deviates by more than one standard deviation from the mean, and (2) such deviation continues as of the end of any calendar quarter after persisting for three consecutive months. The PMM recalculation resulted in a $16.4 million downward adjustment to the value of the life insurance portfolio during the quarter ended June 30, 2021, as reflected in the year-to-date reconciliation of gain (loss) on life insurance policies table below.

The life expectancies used in our valuation were obtained at the time of policy purchase and are 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). Our valuation methodology also incorporates assumptions relating to cost-of-insurance (premium) rates and other assumptions, including a discount rate.

The discount rate we apply is primarily based on information about the discount rates observed in recent portfolio purchase transactions in the life insurance tertiary market. The discount rate also incorporates 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. In prior periods, the discount rate also incorporated information about the discount rates observed in the life insurance secondary market through the Company’s internal competitive bidding to purchase policies. However, the Company discontinued the use of this input as of December 31, 2020, as it is no longer actively purchasing policies in the life insurance secondary market. The determination of the discount rate used in the valuation of the Company’s life insurance policies requires management judgment and incorporates information that is reasonably available to management as of the date of the valuation. As a result of management’s analysis, a discount rate of 8.25% was applied to our portfolio as of both September 30, 2021 and December 31, 2020.

Portfolio Information

Our portfolio of life insurance policies, owned by GWG Holdings’ subsidiaries as of September 30, 2021, is summarized below:

Life Insurance Portfolio Summary


Total life insurance portfolio face value of policy benefits (in thousands)	$	1,801,306
Average face value per insured life (in thousands)	$	1,984
Average life expectancy estimate (years)*		6.4
Total number of policies		984
Number of unique lives		908
Demographics		74% Male; 26% Female
Number of smokers		36
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		4.1	%

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(*) Averages presented in the table are weighted averages by face amount of policy benefits.

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 September 30, 2021					As of December 31, 2020
Years Ending December 31,	Number of Policies	Estimated Fair Value		Face Value		Number of Policies	Estimated Fair Value		Face Value
Three months ending December 31, 2021	2	$	3,226	$	3,250	15	$	19,429	$	22,298
2022	21	23,530		27,611		62	66,657		88,698
2023	79	100,355		141,376		106	113,926		178,983
2024	112	127,746		207,890		119	130,280		229,815
2025	113	110,159		217,082		111	85,842		187,042
2026	105	80,135		171,025		115	100,280		237,632
Thereafter	552	316,409		1,033,072		530	275,497		956,247
Totals	984	$	761,560	$	1,801,306	1,058	$	791,911	$	1,900,715

We recognized life insurance benefits of $43.2 million and $39.8 million during the three months ended September 30, 2021 and 2020, respectively, related to policies with a carrying value of $12.3 million and $13.5 million, respectively, and as a result recorded realized gains of $30.9 million and $26.3 million, respectively. We recognized life insurance benefits of $104.7 million and $105.2 million during the nine months ended September 30, 2021 and 2020, respectively, related to policies with a carrying value of $31.0 million and $32.3 million, respectively, and as a result recorded realized gains of $73.7 million and $72.9 million, respectively. The aforementioned carrying value, which represents the aggregate cost basis in the policies that matured during the period, is considered a return of investment within the investing section of the condensed consolidated statements of cash flows. Changes in fair value of policies and the other components of the net gain on life insurance policies, as detailed below, are included in the operating section of the condensed consolidated statements of cash flows.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Change in estimated probabilistic cash flows(1)	$	13,120	$	14,723	$	40,230	$	47,923
Premiums and other annual fees	(19,267)		(18,235)		(56,388)		(53,060)
Change in life expectancy evaluation	—		—		2,337		—
Change in PMM	—		—		(16,386)		—
Face value of matured policies	43,217		39,803		104,662		105,194
Fair value of matured policies	(21,586)		(22,169)		(56,532)		(56,702)
Gain on life insurance policies, net	$	15,484	$	14,122	$	17,923	$	43,355

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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.

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
Three months ending December 31, 2021	$	13,847	$	457	$	14,304
2022	81,839		1,828		83,667
2023	93,037		1,828		94,865
2024	101,998		1,828		103,826
2025	113,722		1,828		115,550
2026	125,911		1,828		127,739
	$	530,354	$	9,597	$	539,951

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 9. 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 GWG Holdings’ offering of L Bonds. The proceeds of these capital sources may also be used for: the purchase, 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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