RGA University 2

Financial Underwriting: Case Studies

Mike Hesse

September 14, 2018

Vice President, Chief Underwriter

Financial UnderwritingCase Studies

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Agenda

Estate Planning

Older Age

Business Valuation

Key Person

Does the Sale Make Sense?

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Estate PlanningWealth Transfer, Preservation, and Other Needs

Purpose: Indemnify heirs for expenses expected / estimated to be incurred at death of an insured

Guideline: Net worth with projection• Growth rate 5-7%

• Duration up to 75% life expectancy / 20 years

Disappearing estate taxes: high-level exemption federal; eliminate state Other costs: legal, admin, settlement costs average 6-8% Reduced survivor benefits: Social Security, pension, annuities Increased life expectancy: medical and long-term-care costs high last 2 years of life Inherited wealth Charitable legacy

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Wealth Transfer: G2 and G3

Generation skipping trusts• Varying levels of planning

• No consistent underwriting philosophy within US market

Wealth transfer from G1 to G2/G3 is gifting premium to GST • G2/G3 nominal personal wealth

• Surrogate insurance?

Low COI at younger age• Premiums purchase large coverage amounts

• Investment large risks not adequately covered by premium collected

• Reputational risk

Push to premium finance juveniles

Wealth Transfer or Surrogate Insurance?

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Estate Planning

Purpose: six generation 2 lives – ages 20-40 Financial background: Gen 1- two brothers - sold family business in 2010 for $450M

• Family office and dynasty trust established

• Approximately $40M of total wealth transferred Gen 2

• Inheritance via GRAT each Gen 2 - family A - 2 children 25%, family B - 4 children 12.5%

• Insurance to cover proportionate share of estate interest for Gen 2

• Premium financed - $2M per PI budgeted

Estate tax: project 6% / 20 years x full expected inherited amount - held in family trust Underwriting challenges: Gen 2 – uninsurable - family A: 1 of 2, family B: 1 of 4 Implications: dramatically different amounts of insurance on Gen 2

Wealth Transfer and Preservation

What questions do you have?

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Estate Planning

Purpose: cover multiple needs - applying for $1.5M of permanent coverage• Current $250K in force - rated table 2/150% due to rheumatoid arthritis

• May replace with 1035 exchange - $85K cash value - with favorable offer

Financial background:• Income: earned $20K, unearned $60K; net worth $1.5M, debt $0

• Sources of income: Social Security, pension, annuities, qualified investments

• Premium: 10-pay - $50K

• Supplemental riders: waiver of premium, LTC, chronic illness, critical illness

• Pension / Social Security survivor benefits will reduce by 50% at spouse’s death - no life insurance in force

Plan for Other Expenses – Female, 62, Retired - Husband Uninsurable

• What questions do you have?• What financial documentation would you require?

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Older Age Financial Underwriting

Affordability – can the client afford the premium?

Adult children as owner of the policy – when does this make sense?

Does the client fully understand the need for their existing and applied-for coverage?

Ultimate goal should be estate preservation, not wealth creation.

Managing Risks

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Older Age Financial Underwriting

Excessive amounts of life insurance coverage

Unusual owner or beneficiary

Lack of insurable interest / need

Recent elderly immigrants with little to no verifiable U.S. assets

Premium exceeding 20-25% of income

Premium financing

Material misrepresentation of any type

Red Flags

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M/88

Face amount $1M Attorney, AI $167,000, unearned income $650,000, net worth $24M Annual premium $57,000 Admits to no inforce on application but ISR notes inforce $7.75M Owner is child living at different address Beneficiary is spouse History of selling policy 2013 as he was advised he was over insured. He used the money to purchase real estate.

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F/82

Retired, unearned income of $700,000, net worth of $15M

Owner is a residuary trust, trustee is a CPA in FL; client resides in WI

Single premium of $1.3M, death benefit of $2M

No inforce coverage

Medically table 2 - history of pacemaker due to tachy-bradyand third-degree heart block

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M/87

Face amount of $550,000

Retired, income of $40,000; net worth of $3M: $200,000 cash, $400,000 stocks & bonds, $170,000 IRA, $2.3M of non-qualified annuities

No insurance inforce

Initial premium $250,000, then $50K per year thereafter

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F/81

Face amount of $115,000

Owner and beneficiary is a charity

Over the past 17 years, has donated $19,785 to the charity

Agent is the proposed insured’s son

GUG 30 seconds, clock hour slightly off

Severe osteoporosis, no falls

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Business Valuation

Ownership percentage - controlling interest? Value of business - how was FMV determined?

• Multiple of: revenue, EBITDA, discounted cash flow

• Premium for goodwill?

• Comps?

Business structure: sole proprietor, S-Corp, C-Corp; private vs. public Industry: competition, capital needs, profit margins Life cycle of business: start-up, growth, IPO, mature Business financials: balance sheet, income statement, cash flow statement Business tax returns: limitations - minimize taxes, assets at cost vs. market value

Amount Willing Buyer Will Pay

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Key Person

Who is key person? • Founder• Source of revenue • Special skills, experience-• Relationships: customer, investor, lender • Goodwill value

Economic loss• Lost revenue, loans callable, high replacement cost

Guidelines used for key person• 5-10 times total compensation - is compensation ‘market value?’• Percentage of debt - 75% - overlap with key person replacement cost - don’t stack• Percentage capital invested by outside investor or private equity firm

What is Economic Loss?

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Key Person

Application: Income of $20K, net worth of $3M• Household income of $170K• Annual premiums of $111K-• Illustration: 10-pay $92.2K/k - $700K IUL base + $2.8M ART

BFS: 2015 - sales of $1.3M, net income of $312K 2016 - $2.4M/$658K• Wife is 100% owner - FMV of $3M ($1M business insurance recently issued)• PI is principal of construction business - runs day-to-day operations

2015- 1120/K1 - business tax return• Sales of $1.3M, margin is $1.2M• Wages are $210K, depreciation is $183K, • General business expenses/deductions of $400K; business income is $312K

Personal tax returns not submitted

Family Construction Business - Male 49 $3.5M Key Person

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Key Person

Application: Salary of $110K, personal net worth of $1M

Company website: 30 years biotech research, established small business, R&D company, multiple NIH grants, 40 peer-reviewed publications, holds several patents

Third-party financials: margin 2016 $227K, 2017 $693K, book value $67K

Pro Forma: 2018- revenue $2.3M, net cash flow $484K

Negotiating: $2M credit line, $1M equity investment of 20% - FMV is $5M

Customer pipeline: Market $100M+, 3-year/$1.8-3.2M development contract, 14 years/$10M funding-develop proprietary tech to produce nanomaterials for medical device applications

President of Tech Company - Male 50 - $5M Key Person - Private Equity Funding

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Key Person

Application: Salary of $359K, personal net worth is $43M

Purpose: Charitable endowment fund – PI is high-profile individual – face amount charity

Third-party financials: Confirms personal net worth - related cases $15M each - hedge fund principals - personal net worth $1B+- principal funders of charity

Funding: Premium financing

Three individuals being covered now: Will consider similar coverage on other lives as part of funding strategy

Charitable Foundation- Male 37 $15M Key Person- Indexed UL

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