GWG Holdings, Inc. | 2013 | FY | 3

( 3 )      Investment in life insurance policies
 
The life insurance policies (Level 3 fair value measurements) are valued based on unobservable inputs that are significant to the overall fair value measurement. Changes in the fair value of these instruments are recorded in gain or loss on life insurance policies in the consolidated statements of operations (net of the cash premiums paid on the policies). The fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions.  Life expectancy reports have been obtained from widely accepted life expectancy providers. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. As a result of management’s analysis, discount rates of 11.69% and 12.08% were applied to the portfolio as of December 31, 2013 and 2012, respectively.
 
A summary of the Company’s life insurance policies accounted for under the fair value method and their estimated maturity dates, based on remaining life expectancy is as follows:
 
   
As of December 31, 2013
    
As of December 31, 2012
  
Years Ending December 31,
  
Number of
Contracts
    
Estimated Fair
Value
    
Face
Value
    
Number of
Contracts
    
Estimated Fair
Value
    
Face
Value
  
2014
    
-
    
$
-
    
$
-
      
-
    
$
-
    
$
-
  
2015
    
4
      
5,065,000
      
6,750,000
      
-
      
-
      
-
  
2016
    
8
      
8,174,000
      
13,750,000
      
2
      
1,163,000
      
2,000,000
  
2017
    
25
      
33,345,000
      
63,916,000
      
13
      
11,608,000
      
22,229,000
  
2018
    
33
      
37,243,000
      
80,318,000
      
17
      
21,155,000
      
53,439,000
  
2019
    
34
      
32,844,000
      
89,295,000
      
31
      
28,252,000
      
75,668,000
  
2020
    
34
      
27,741,000
      
75,644,000
      
35
      
26,947,000
      
84,579,000
  
Thereafter
    
125
      
90,261,000
      
410,975,000
      
113
      
75,192,000
      
334,331,000
  
Totals
    
  263
    
$
234,673,000
    
$
740,648,000
      
 211
    
$
164,317,000
    
$
572,246,000
  
 
The Company recognized death benefits of $16,600,000 and $7,350,000 during 2013 and 2012, respectively, related to policies with a carrying value of $4,564,000 and $1,067,000, respectively.  The Company recorded realized gains of $12,036,000 and $6,283,000 on such policies.
 
Reconciliation of gain on life settlements:
 
   
2013
    
2012
  
Change in fair value
  
$
39,338,000
    
$
27,856,000
  
Premiums and other annual fees
    
(21,860,000
)
    
(16,702,000
)
Policy maturities
    
12,036,000
      
6,283,000
  
Gain on life settlements, net
  
$
29,514,000
    
$
17,437,000
  
 
The estimated expected premium payments to maintain the above life insurance policies in force for the next five years, assuming no mortalities, are as follows:
 
Years Ending December 31,
      
2014
  
$
22,739,000
  
2015
    
25,056,000
  
2016
    
27,508,000
  
2017
    
30,653,000
  
2018
    
33,509,000
  
   
$
139,465,000
  
 
Management anticipates funding the estimated premium payments as noted above with proceeds from the DZ Bank revolving credit facility and through additional debt and equity financing as well as from cash proceeds from maturities of life insurance policies. The proceeds of these capital sources are also intended to be used for the purchase, financing, and maintenance of additional life insurance policies.

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