Almost a year after the financial crisis began, the capital markets are finally starting to stabilize but the impacts of the crisis continue to have a restrictive impact on capital availability in the settlement marketplace. Like all of you, we will happy to put this year behind us but we are making sure that lessons learned will get carried forward. One constant has stayed the same and is gaining attention from institutional investors worldwide – life settlements are a viable alternative asset class that is not going away and offers key benefits that are strongly desired nowadays. Namely, life settlements offer attractive returns in a non-correlated asset with highly rated receivables.

Many investors learned that assets believed to be non-correlated turned out to have significantly higher correlation to the major markets. As such, increasing attention is being paid by various financial institutions as they are seeking assets that are not correlated to traditional stock and bond markets, and assets with high credit quality – both of which are key characteristics of life settlements.

The restrictive capital environment continues to provide attractive buying opportunities in both the individual case (secondary) market as well as the portfolio (tertiary) market. As is the case with all financial markets, capital supply decreased significantly in the life settlement market and is beginning to improve.

However, throughout the financial turmoil, there have been a number of settlement portfolio owners who experienced capital crunches curtailing their ability to make ongoing premium payments and forcing distressed sale situations. The restrictive capital supply also resulted in many institutional investors holding onto portfolios for longer terms than their planned investment time horizons. As a result, these portfolio owners have been faced with the need to properly service and maintain their life settlement assets without having the infrastructure or expertise in place to do so effectively. In several cases, this has resulted in either over-paying premiums or inadvertently allowing assets to enter grace periods. Some portfolio owners have unknowingly allowed policies to lapse and some likely have unclaimed benefits that they are entitled to receive. Some firms attempted to handle these services internally while others turned to newer, inexperienced and improperly licensed entities. This has translated into real portfolio losses from additional costs and lost revenues.

Further complicating their situation in several cases was the lack of quality origination of the underlying assets as well as sub-standard portfolio composition. In addition to premium optimization and policy servicing, LSS has also been requested by several portfolio owners to assist in the evaluation and transaction of existing assets. During this process, we have uncovered many situations where the quality of the origination was lacking as well as the portfolio construction, resulting in inconsistent and incomplete due diligence to several concentration risks in the underlying portfolio. Ultimately, these all lead to a more difficult time selling the portfolio and a lower price offer from willing buyers.

Two of the most important recommendations that we can offer based on what we’re seeing in the current market are to (1) use a quality originator to ensure that the portfolio is defined and constructed properly; and (2) ensure that you work with an experienced and properly licensed life settlement servicer to ensure that the policies remain in force at the lowest possible cost and that revenues are obtained as efficiently as possible.

Life Settlement Solutions has been very active with institutional buyers and sellers of portfolios and, in order to support these parties, we have recently expanded our world-class life settlement servicing capabilities to portfolio owners outside of our existing network of institutional clients. Previously, these servicing capabilities were reserved exclusively for our institutional clients for whom we originated life settlement portfolios. As servicing is such a critical element in maximizing IRR, this component cannot be overlooked by settlement portfolio owners. By way of example, Life Settlement Solutions recently saved one portfolio owner over $1 million in annual premium payments through the proper application of premium optimization.

For portfolio owners who would like to learn more about these capabilities, please inquire with our firm. This capability is a one-stop-shop for policy servicing, life tracking, and premium optimization and payments. A lapsed policy could mean significant losses. It is important that your servicer has proper state-wide licensing and experience in the insurance and life settlement.

We’ve also seen more activity in recent months in <$2 million FV individual case market and expect that this trend will continue until more new money comes into the market and liquidity facilities return. The current market conditions have enable buyers to increase their IRR requirements n this market segment and increase even further in less active segments like larger face value cases as well as premium financed cases. We expect these conditions to remain until the capital supply increases and the market achieves more balance between buyers and sellers.

The first quarter of 2010 is when we believe we will see substantial upticks in the market, catapulted by the rise in interest to securitize portfolios of life settlements. The elongation and decreased variability of the life expectancy underwriting from the various LE providers has also fostered greater confidence by enabling buyers to account for longevity risk more effectively in their asset evaluations. After the significant changes in 2008, we do not foresee any major life expectancy underwriting changes in the near future.

High quality portfolios are a treasured commodity in today’s buyer’s market and can close quickly if they have had excellent origination and servicing quality throughout the asset’s existence. Rating agencies are focusing more attention on the origination of the life settlement asset and its servicing quality as key aspects of the rating evaluation. Simultaneously, carriers and regulators focus more attention on the insurable interest issue for the underlying life insurance policies. Quality origination is viewed as a strong indicator that the life insurance policies possessed proper insurable interest at time of issue and that these assets are in compliance with carrier and regulatory requirements.

Another trend that has emerged is related to certain investors attempting to securitize asset pools contingent upon their taking ownership. While it is obviously important that portfolios should not be securitized without current, verified ownership of the policies, buyers in today’s market are refusing to tie up funds without the seller’s proven ability to close the pools. Especially in market conditions like we have currently, it is critical that buyers work with experienced and capable firms like Life Settlement Solutions to meet your life settlement acquisition and servicing goals.

In May the IRS issued tax rulings 2009-13 and 14. While the industry has long awaited a more clear definition on the taxation of life settlements, these rulings verified some long standing treatment of gains but also added a few new wrinkles that both policy sellers as well as investors need to address. We believe that the rulings will have a somewhat minor impact on policy sellers as gains are still treated as capital gains, but there is an adjustment that reduces cost basis by the cost of insurance of the policy. This adjust, we believe, will have a much larger impact though on sellers whose policies were financed as the increased amount of taxable gains further offsets any potential gain for the client as they also have loan balances to satisfy. This aspect of the ruling is anti-consumer by treating basis differently depending upon whether a client sells their policy back to the issuing insurance carrier (where no cost of insurance adjustment is made to basis) or an investor in the life settlement market. Statements of concern have been submitted to the Department of Treasury both by the Life Insurance Settlement Association (LISA) and by the American Council of Life Insurers (ACLI).

While many states are enacting regulations that are fair and balanced to consumers and the life settlement market, there are also a few states that have enacted regulations that have driven business out of the state and have significantly harmed their state’s consumer rights. Read on in our legislative and regulatory updates below for more information.

This past February and June we held the first Insurance Linked Investments Awareness Month™ (ILIAM) and the fourth annual Life Settlement Awareness Month (LSAM)®, respectively. Collectively the two month-long educational awareness events garnered more than 2,000 attendees. We are already in the planning stages for the 2010 events and would welcome your input on topics and feedback from previous events.

As always, we appreciate your business and look forward to a prosperous year to come. If you have any questions or suggestions, feel free to contact us at info@lifefirms.com.