Munich / Berlin, April 2013

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BVZL International:

Once again, U.S. life settlement investments

return into the public spotlight because of

negative events, headlines or news. Much to

the regret of Bundesverband

Vermögensan-lagen im Zweitmarkt Lebensversicherungen

e. V. (BVZL International), this often entails

media reports lacking objectiveness and

dif-ferentiation leading to major confusion among

investors.

Munich / Berlin, April 2013

Transparency, information and education are

needed. The BVZL Newsletter Editorial Staff

in-terviewed Christian Seidl, Chairman International

and co-head of the U.S. section of BVZL

Interna-tional.

Editorial Staff:

Mr. Seidl – the asset class of U.S. life settlement invest-ments is existing in Germany for more than 10 years now. Isn’t it about time to draw a first balance?

CS:

Indeed much has been going on since the inception of the first U.S. life settlement funds in Germany in the year 2002. The reactions to this back then new asset class in public diverged a lot: Allegedly, investments in U.S. secondary market life in-surance policies were not a serious asset class but an ‘im-moral’ ‘business with the death’ according to critics. On the contrary, supporters referred to them as ‘product innovation of the year’ promising excellent return options – totally inde-pendent from the developments on international financial mar-kets – best option for portfolio diversification. Naturally, this still young asset class had to overcome its ‘childhood diseas-es’ in the first years; but now investments in U.S. life settle-ments have become an established and professional alterna-tive investment option!

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You have just mentioned the discussions about the ethi-cal aspect of U.S. life settlement investments. The refer-ence to ‘betting on death’ seems to appear in the head-lines over and over again. What is your response? CS:

Unfortunately, such headlines still come up! And of course, it won’t be possible to prevent self-appointed experts from showing up with – from a technical point of view – incompre-hensible arguments on this topic as we have just seen in a recent judgment of the Regional Court Frankfurt a. M. (file no. 2-10 O 265/12, 2/10, O 265/12). For instance, if we took this particular judgment also as directive and basis for the activi-ties of insurance companies and pension funds, all providers of annuities and also pension funds would have to be classi-fied as ‘immoral’ since their business models are designed/ calculated in such manner that the total ‘return’ (payments) depends on the death of fellow humans (collective insured). This means, too, that the return for shareholders of such a stock listed insurance company offering annuity insurance products will be higher the earlier the insured policy holders passes away!

Let’s face the truth:

Investment products, the success and failure of which depend on the life expectancy of people, are not an invention of the initiators of U.S. life settlement investment funds! Just have a look at the traditional German annuity insurance and you will notice that such have existed for a long time. Whoever ignores this truth, does not wish to face reality!

Currently there is one undisputed fact, though: The handling of the so-called ‘biometric risks’ is gaining more importance. If our society wishes to find a sustainable solution to the prob-lems in conjunction with the demographic development such as health system and retirement systems, it needs experts who are capable of assessing and managing the biometric risks, namely e.g. the longevity risk. I am absolutely sure that in future, the pricing of insurance and old-age provision prod-ucts or services in the health sector will be linked stronger to the relevant statistic life expectancy forecasts, in particular, in view of the strongly growing target group of the ‘golden agers’. I am firmly convinced that this is the future of the industry!

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Now back to U.S. life settlement investments: Did the pro-viders of such investment products, especially the inves-tors, not have to undergo a partially ‘painful’ learning process?

CS:

That is correct. Without any doubt, in the beginning of any new asset class, unfortunately, also mistakes are made. As many experts have pointed out at an early state, for U.S. life settle-ment investsettle-ments, the quality of the life expectancy forecast is the decisive key. Because the success or prospective return depend always on the precision of this forecast. In retrospect, unfortunately, it turned out that the life expectancy forecasts issued by the specialized life expectancy provider companies in the U.S. showed a tendency of being too optimistic (too short) in the beginning.

The policy maturities on which the funds calculation was based upon did not occur with the expected frequency and the planned volume. At the same time comparatively more insur-ance premiums had to be paid longer than planned.

For this very reason, some U.S. life settlement funds ran into financial difficulties, no distributions were made and the ex-pected returns were not achieved! By means of active fund management – in cooperation with well-informed and patient investors – many funds could be steered into ‘calmer waters’. Some are even back to regular distributions to their investors with a forecast to a finally positive result. However, the original very high expectations will surely not be met, but please keep in mind that investors in other assets had to deal with signifi-cantly bigger losses – also as a result of the financial crisis. One aspect, however, needs to be mentioned in conjunction with the forecast quality of life expectancy assessments: Also thanks to the respective activities of the BVZL International and its members in this regard, the life expectancy provider companies in the U.S. learned their lesson from the past, ac-cordingly, they have substantially improved their processes and forecast quality. A larger data basis for reliable back-testing, a major focus on the latest medical and

socio-demographic knowledge, updating of mortality tables and op-timized actuarial methods and processes allow for significantly more precise and reliable assessments.

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In the beginning years, the topic ‘Taxation of German closed ended U.S. life settlement funds’ played a major role for a long time causing quite a stir and uproar among all players. What is the situation now?

CS:

This problem was one of the reasons why BVZL International was founded! In the formative year after its foundation in May 2004, the BVZL International on behalf of its members was always an advocate that German closed ended U.S. life set-tlement investment funds set up as asset management funds were treated as such by the financial authorities.

A recently published judgment of the Federal Finance Court (BFH, judgment dated 10/11/12, IV R 32/10) brought finally light into this long lasting tax discussion moving the asset class ‘U.S. life settlements’ even more into the focus of inves-tors. “If an investment company purchases ‘used’ life insur-ances on the U.S. American secondary market in order to to collect the insurance amount at maturity (death of the insured person), it does not run a trading business even if the invest-ment volume is high and if an agent is included to purchase the insurance policies,” states the IV Senate of the Federal Finance Court (Supreme Court of the Federal Government for Taxes and Duties).

This judgment confirms, albeit belatedly, the position of BVZL International and its members in public and against the finan-cial authorities.

In the past some parts of the financial authorities did not sup-port these views and valid arguments of our Association, due to which most issuing houses and fund initiators agreed to be considered a trading company succumbing to the pressure after having weighed all potential advantages and disad-vantages, after having checked all possible options of action and after consultation with their investors in order to comply with the laws to continue the funds on this basis in due man-ner. Consequently, the legal situation was clarified and the fund management could continue on this basis in due order. This changed BFH ruling most definitely does not exert any impact on commercially traded inventory funds which have additionally secured their status by a trading structure. Trading

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in connection with trading income is tax-deductible at least up to the amount of the capital contribution made. It remains to be seen how the financial authorities will react in cases where a trading structure was not implemented and, thus, the return to a sole asset management activity would still be possible. The prior legal uncertainty is still not resolved in this regard.

The BVZL calls the public to apply a factual and differen-tiated approach to the asset class ‘Secondary Market for Life Insurance’ in general and to U.S. life settlement in-vestments in particular. Cases of fraud and accusations regarding unserious business practices of some individ-ual market players on top of the complexity of the matter itself do not make it easy for investors and media.

CS:

There is no doubt that it is useful and absolutely necessary to report about dubious business practices of some market play-ers, cases of fraud in the U.S. and the resulting convictions of the defendants and also any resulting potential consequences for German investors. Unserious businessmen must be put out of action. Investors must be informed and educated, in particular through the media. According to BVZL International, this should be done in an objective and highly differentiated manner. The matter of secondary markets for life insurance is simply too complex for a reporting system based upon polem-ics, scaremongering and partial half-truths.

In the past the public did not differentiate sufficiently between the individual, very different asset classes and markets. Prob-lems in the area of U.S. life settlement investments were basi-cally ‘transferred’ to the German and British policy funds or their respective secondary markets, and vice versa. The three secondary markets for life insurance, however, show partially fundamental differences such as the respective asset object (asset) and also the individual fund conceptions they are based upon. In particular, the mechanisms and con-texts of the U.S. life settlement market are complex and not easy to comprehend at first sight.

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Could you give us more details on this issue? CS:

Sure! The due-diligence processes required for the purchase of each single U.S. policy, policy pricing and assessment of quality and reliability of medical estimates require a high de-gree of special know-how and profound market knowledge. There were two cases which caused negative headlines and uproar among the investors in Germany over the past years which had certain characteristics concerning the concept and the respective investment object. We deeply regret that the public did not make a clear distinction – maybe also due to ignorance. Moreover, the entire asset class was put under ‘general suspicion’ of an alleged investment fraud causing many problems and challenges for Association members who were actually not affected.

Which steps can the Association take against the afore-said? Has BVZL International planned concrete measures and actions as to how to prevent such negative events from happening in future?

CS:

Alas, there is no guarantee that such event won’t happen again in future. On a free market, you can never be totally sure that there won’t be any ‘black sheep’ any more in future. The challenge lies in identifying such black sheep and in tak-ing consequent actions.

Since the beginning of the nineties the government has im-plemented and established comprehensive measures for mar-ket regulation and marmar-ket control, especially in the U.S. life settlement market. This was possible also due to the efforts and commitment of BVZL International and its international partner associations such as ILMA, ELSA and LISA. In the meantime almost all U.S. Federal States have implemented complex regulations, licensing and permit obligations also across the state borders. Statistic basics and tools for fair pric-ing and transparency of the purchase process were estab-lished. The times of the Wild West are definitely long gone! The BVZL International and its member companies advocate consumer protection, best practice and quality standards,

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ance worldwide. In general, it is our goal to actively support the asset class of U.S. life settlement investments‘ as the cur-rently most established European industry association in this area.

Here we basically face two challenges: To increase even more the educational work for investors, media and opinion-makers and to regain lost investor trust. To the benefit of all players, we are working on establishing a factual, objective and differ-entiated approach, depiction, discussion and confrontation with the special partial markets and their different specifics and developments.

Personal details:

Upon completed vocational training as bank officer, Christian Seidl (47) enrolled in the University of Regensburg, majoring in business administration, from which he graduated with a master degree in business administration in 1996. After having worked for the audit company Price Waterhouse GmbH as assistant auditor for two years, in 1998 Mr. Seidl switched to the management holding company of the Schoerghuber Cor-porate Group to work as a consultant in the main internal audit unit.

In 2002 Mr. Seidl was appointed Director for Controlling and Business Administration at the Arabella Hotel Holding AG, the management company of the corporate sector ‘Hotels’ of the Schoerghuber Corporate Group.

Mr. Seidl joined Life Bond in 2003 where he first signed re-sponsible for the areas Fund Controlling and Policy Admin-istration before he took over responsibility for the entire activi-ties of the Life Bond Group related to U.S. Life Settlements. Next to his activities for Life Bond, Mr. Seidl has been active for many years on behalf of the Bundesverband Vermögens-anlagen im Zweitmarkt Lebensversicherungen e.V. (BVZL International) and was appointed Chairman International as of 01/01/2011. In this office, Mr. Seidl is a frequently featured speaker at industry conferences and regularly attends expert talks regarding investment options for the asset class U.S. Life Settlements.

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Contact:

Christian Seidl (Chairman International)

Bundesverband Vermögensanlagen im Zweitmarkt Lebensversicherungen e.V. (BVZL) Ridlerstrasse 33 80339 München Phone: +49-089-24 20 37 08 Fax: +49-089-24 20 37 09 E-Mail: [email protected] Website: www.bvzl.de Brief BVZL Portrait:

The member companies of the BVZL International (The German Association for International Secondary Life Insurance Markets – BVZL e.V.) operate worldwide in secondary markets for life insur-ance. Since its foundation in May 2004, the Association, which cur-rently has 31 members, has been providing a single representative voice in commercial legal and political matters. The BVZL maintains a constant dialog with politicians, opinion leaders, the public and other interest groups to actively support the dynamic development of the industry. One of BVZL’s main targets is to establish industry standards with regard to transparency and comparability of the vari-ous investment segments (British, German and U.S. life insurances) and, thus, to steadily improve the basic conditions for successful investment in these versatile asset categories.

Members (in alphabetical order):