May 18, 2009
Volume I, Issue 6
Inside this issue:
Longevity Markets
Commentary 1
Yield to LE 4
Purchase Parame- 5
ters
IRS Clarifications 7
Longevity Market 9 Trade Report
Spreads
Editor & Publisher
Brian C. Dorr
Contributing Editors
Anne K. Zand
Carline B. Gele
Managing Editor and
Writer
David C. Dorr
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Longevity Markets Commentary
Since we published last month’s
Trade Report there have been some impor-
tant developments in the life settlement sec-
tor and chief among them is the new guid-
ance from the IRS regarding the tax implica-
tions when conducting a life settlement
transaction. The recent ruling changed what
was previously believed to be a pretty cut
and dry understanding of the tax conse-
quences of a life settlement. It is also of
particular importance to foreign investors
and offshore based investment vehicles. To
delve further into this issue we have in-
cluded a reprint of an O’Melveny & Meyers
interpretation of the ruling on pg 7. Those
interested in learning more about this issue
can contact us for further information and
resources.
The week before last was the 15th
LISA life settlement conference in New
York and while membership to the associa-
tion was down significantly from last year
the industry is showing that it is still strong
and here to stay. Several market players that
have been relatively quiet in their purchasing
over the last six months appear to now be
loaded up with new capital and in the very
first stages of deploying it in the month of
May. These groups include Peachtree, Ma-
ple Financial, and Senior Settlements. All of
these providers have been participants in the
life settlement market for some time and it is
not surprising to see capital flow to firms
that have longer histories.
Following our discussion of the
AIG securitization from last month we have
observed recently that a few hedge funds
and private equity funds that have partici-
pated with the Treasury’s TALF program are
looking very closely at life settlements. This
could prove to be an exciting development
for our market, albeit with longer term ramifi-
cations. For those not familiar with TALF
here is an explanation below.
The Fed explained the reasoning behind
the TALF as follows:
“New issuance of ABS declined
precipitously in September and came to a halt
in October. At the same time, interest rate
spreads on AAA-rated tranches of ABS
soared to levels well outside the range of his-
torical experience, reflecting unusually high
risk premiums. The ABS markets historically
have funded a substantial share of consumer
credit and SBA-guaranteed small business
loans. Continued disruption of these markets
could significantly limit the availability of
credit to households and small businesses and
thereby contribute to further weakening of
U.S. economic activity. The TALF is designed
to increase credit availability and support eco-
nomic activity by facilitating renewed issuance
of consumer and small business ABS at more
normal interest rate spreads.”
If pools of life settlements can be
securitized and sold or pledged as collateral to
the government under TALF, TARP or a new
program not yet available it is certain that life
settlements will experience a boom unprece-
dented even from years past.
Continued on next page

Longevity Markets Commentary Cont.
Continued from page 1
If this happens IRR’s will
plummet by better than 300bps
from current levels (14.18%) in
short order. This would cause sell
side volume to explode but not for
the reason that most people would
think. On the surface it is logical to
conclude that considerably higher
settlements would induce more pol-
icy owners to sell and while this is
true and will certainly be a contribu-
tor to higher volume the real con-
tributor will be that more policies
will qualify. Of policies currently
submitted to the market we estimate
that roughly one in seven will pro-
duce a price at current IRR’s that
will exceed the CSV. In Q4 ‘08 with
IRR’s almost approaching the 20’s
less than one in ten policies submit-
ted would price. TALF funding
would have the reverse effect mak-
ing it possible for perhaps one in
five or one in four policies to price
because of the low IRR created by a
new low cost of capital funding
source. This could lead to a 60% or
greater increase in industry volume
instantly. While this may seem like a
dream come true to life settlement
participants, particularly the seniors
who are in desperate need of cash
more than ever to shore up their
finances, it will be at the expense of
every US tax payer. This potentially
cannibalistic approach will likely
have longer term repercussions that
may not bode well for the life settle-
ment market.
A topic that we are moni-
toring for almost every issue of our
trade report is credit quality and its
impacts on our market. Most of our
commentary has centered on the
Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
credit ratings of US based life insurers
and how it may signal potential sol-
vency issues that could impact life
settlements as an investment. We’ve
also begun to touch on credit ratings
and their impacts on IRR. We’ve been
suggesting for some time now the
need to model volatile changes in in-
terest rates for portfolios. In last
month’s issue we cited the bubble in
long term treasuries that is beginning
to burst and the impacts that it could
have on our market. This month we
continue that theme.
David Walker, formerly the
comptroller of the Treasury wrote an
op-ed in the Financial Times on May
12, 2009 titled “America’s triple A
rating is at risk”. In the article he
cites the growing off balance sheet
liabilities of the US Government
which are continuing to balloon at
alarming rates. Currently those un-
funded obligations, primarily for Social
Security and Medicare, are over $45
trillion. According to Walker, Social
Security is going to start negative cash
flowing in less than 10 years. Both
Moody’s and S&P have signaled that
they are carefully watching the US’s
credit rating and if we’ve learned any-
thing from the financial crisis over the
last 24 months, it’s that credit down-
grades are a lagging rather than leading
indicator. In our April Trade Report
we highlighted the bubble that had
occurred in long term US Treasuries.
Just since that issue we have seen a
continued steeping of the US Govern-
ment debt yield curve. Obviously if
the US gets downgraded from its AAA
status, which it has held since 1917,
borrowing costs are going to go up – a
lot.
Even as this publication goes
to press Moody’s just downgraded
Page 2
Japan’s currency credit rating two
notches from AAA to Aa2. The full
announcement can be read here
http://www.reuters.com/article/
newsOne/
idUSTRE54H2RW20090518. If this
just happened to a country that has a
high savings rate and over $1 trillion
in foreign currency reserves what do
you think the implications are for the
United States?
How will this impact life
settlement investments? It will raise
IRR’s back up and make credit facili-
ties expensive and in many cases un-
available. It will also coincide with a
decline in the US Dollar as investors
look for alternative safe havens. Re-
member, life settlements involve a
one way long term directional bet
going long the US Dollar. Some may
argue that higher interest rates in the
US Dollar will actually attract traders
and investors back into our currency
but this overlooks the greater funda-
mentals. Many novice FOREX trad-
ers believe that trading currencies is
simply a matter of buying the higher
interest debt of one developed coun-
try and selling the lower yielding debt
of another developed country. An
example of this would be buying US
Dollars and selling Japanese Yen.
This is also known as a carry trade
because of the interest rate arbitrage
earned by simply holding the two
currencies. While this is a profitable
trade while currency pairs remain
within a tight trading range, or even
better when the higher interest cur-
rency is trending upwards (usually
due to others jumping in on the same
trade) it can turn disastrous when
caught on the wrong side.
Continued on next page

Longevity Markets Commentary Cont.
Continued from page 2
UPCOMING EVENTS
But even those caught on the
08.07.2009 wrong side quickly forget their lesson
and view it simply as a short term cor-
rection. What these novices have usu-
LISA Broker Summit in
ally never contemplated is whether or
Orlando FL
not it is possible for a “developed”
*Tentative Dates nation’s currency to simultaneously
offer a very high interest rate and con-
tinue to devalue over a period of years,
08.28.2009 rather than months vs. other curren-
cies from both developed nations and
LISA Industry Service Fo- developing ones.
rum in Orlando FL -
*Tentative Dates Lemons to Lemonade
Ok so all of this looks pretty
daunting but this presents a huge op-
09.24.2009-09.25.2009
portunity to emphasize the need for
hedging longevity risk and there is no
LISA Compliance better means to accomplish this than
Conference through free market mechanisms. A
*Tentative Dates liquid market for taking positions in
longevity risk would help govern-
ments, pension funds, and insurers to
transfer this risk in a way that is cur-
10.26.2009
rently not available. This could help
preserve Social Security (at least for a
Fasano 6th Annual Life
few more years) and help carriers’ bet-
Settlement Conference in
ter handle their asset-liability manage-
Washington DC ment (ALM). We will be hearing a lot
more about ALM over the next couple
of years. For those readers not famil-
iar with ALM below is an explanation
11.08.2009-11.10.2009
from Swiss Re
“Asset-liability management (ALM)
15th Annual Fall Confer-
ence LISA in NY, NY for insurers examines the history, issues, and
prospects for ALM at life and non-life insur-
*Tentative Dates
ers. Developed in the 1970s in response to a
sharp rise in the level and volatility of interest
rates, ALM has evolved into a set of tech-
11.12.2009-11.14.2009 niques that enable financial institutions to
manage a host of risks, of which interest rate
NAILBA 28 in Hollywood uncertainty is just one.”
FL Although ALM was devel-
Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
Page 3
oped in the insurance industry it has
important applications throughout
the financial universe. It is timely to
revisit the various uses for ALM es-
pecially since we are potentially enter-
ing another period of volatility in
interest rates. Also ALM modeling is
useful if not critical in modeling life
settlement securitizations or note
offerings collateralized by life settle-
ments. We’ve seen note offerings
with maturities in the 3-10yr range
when the average life expectancy is
well above 10 years. This poor mis-
match inevitably causes problems and
could easily be solved with note issu-
ances that better reflect the maturity
and/or duration of a portfolio.
While ALM originally fo-
cused primarily on interest rate risk
we believe that longevity risk will
continue to grow as a greater compo-
nent for carriers and reinsurers when
measuring risk and looking at ways to
be more competitive. Most carriers
and reinsurers are currently not well
balanced when it comes to longevity
risk. Typically they are over weighted
in either their life books or their an-
nuity books and even those few with
a relatively even mix still have signifi-
cant imbalances because of the vari-
ances in the products they sell. A
proper series of indexes and the right
trading product will one day be the
solution. JP Morgan, Credit Suisse
and Goldman Sachs have made early
inroads into products and indexes
that will make this goal achievable,
however, there is still much develop-
ment needed to really find the right
fit. In future articles we will cover the
challenges related to creating the right
index or product.
1. Wikipedia, TALF
2. Swiss Re, sigma No. 6/2000
 Page 4

Yield to Life Expectancy

Yields for the month of April are stabilizing and haven't changed since last month. We will continue to moni-
tor the yield curve as additional capital comes in to the market to see how and when the relative yields will be affected.

Comparative Yields to Life-Expectancy Chart

April 2009 Comparitive Yields‐to‐life‐expectancy
16

15

14

13 AVS
Yield/IRR

Fasano
12
21st Services
11 ISC
EMSI
10

8
24
36
48
60
72
84
96
108
120
132
144
156
168
180
192
204
216

If there are any additional life expectancy providers you would like to see added, please contact at the number
below.

Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
 Page 5

Purchase Parameters
For this month we wanted to show what today’s life settlement market looks like. In the past we have shown
actual trades. For this Issue we polled 21 of the most active buyers in the industry to see what they are buying. Below is
the criteria collected based on information as of May 1st, 2009.

Insured Age
25
20
15
10
5
0
Age 60+ Age 65+ Age 70+ Age 75+

# of Buyers

Face Value Issue Date
25 25

20 20

15 15

10 10

5 5

0 0
$100K $250K $500K $1M $2.5M $5M $10M+ 24 months 30 months  36 months

# of Buyers # of Buyers

The twenty one groups who provided data are segregated as follows: two investment banks, seventeen pro-
viders, and two hedge funds. All information provided is based on current buying criteria as of May 1st, 2009.

Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
 Page 6

Purchase Parameters Continued

Life Expectancy Certificates  Policy Types
Accepted 25
25
20
20
15
15
10
10
5 5

0 0
AVS 21st FASANO EMSI ISC AUS Whole Term UL SUL VUL

# of Buyers # of Buyers

Life Expectancy Range
25

20

15

10

0
36mo 48mo 60mo 100mo 120mo 140mo 150mo 160mo 170mo 180mo 200mo+

# of Buyers

The twenty one groups who provided data are segregated as follows: two investment banks, seventeen pro-
viders, and two hedge funds. All information provided is based on current buying criteria as of May 1st, 2009.

Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766

Life Settlements — IRS Finally Clarifies Open Tax Issues
K. Peter Ritter, O’Melveny & Myers LLP
On May 1, 2009, the Inter-
nal Revenue Service issued two
Revenue Rulings that constitute the
official position of the IRS on cer-
tain key tax issues in the life settle-
ment arena. Uncertainty in this area
had plagued taxpayers and tax prac-
titioners for years. The guidance is
therefore welcomed.
Revenue Ruling 2009-13
In the first ruling, Revenue
Ruling 2009-13, the IRS provides
guidance to original holders of life
insurance policies who surrender or
sell their policies. Where an original
holder of a life insurance policy sur-
renders that policy, the ruling con-
firms that the holder’s taxable profit
is reduced by the full amount of any
premiums paid, without any reduc-
tion for the cost of insurance. The
ruling also concludes that any such
profit is ordinary (and not capital
gain).
Where instead the original
holder sells the policy to a third-
party, however, the IRS confirms
its somewhat controversial position
(set forth in prior Private Letter
Rulings) that the holder’s basis is not
equal to the full amount of premi-
ums paid, but instead must be re-
duced by the portion of the premi-
ums paid expended for the provi-
sion of insurance (i.e., the cost of
insurance). If the policy being sold is
a pure term policy (with no cash
surrender value), essentially all pre-
miums paid are presumed to be the
cost of insurance for this purpose.
The IRS does finally confirm, how-
Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
Luc Moritz, O’Melveny & Myers LLP
ever, that a portion of any gain can be
capital in nature upon such a sale. In
particular, the component of any gain
that is represented by “inside build up”
on the policy (i.e., cash surrender value
less aggregate premiums paid) is ordi-
nary income, while any gain in excess
of the “inside build up” is capital gain.
Because term policies do not ordinarily
have an “inside build up” component,
gains from the sale of term policies
should qualify as capital gain in their
entirety.
Importantly, the holdings of
Revenue Ruling 2009-13 applicable to
sales of policies will not be applied
adversely with respect to sales of poli-
cies occurring before August 26, 2009.
Therefore, it appears that policy hold-
ers selling policies prior to that date
may not be required to reduce their
basis by the cost of insurance.
This ruling resolves one open
point for participants in premium fi-
nance programs. In particular, if a par-
ticipant were to surrender his or her
policy in full satisfaction of a non-
recourse loan under such a program,
such participant may not get full tax
basis for premiums paid, thereby in-
creasing (phantom) gain in such sce-
nario.
Interestingly, there is now a
confirmed disparity in tax treatment
between policy surrenders and policy
sales. Upon a surrender, a taxpayer will
in essence receive a full basis offset for
premiums paid, but will be taxed at
ordinary income rates. Upon a sale,
however, he or she will not have a full
basis offset, but may be taxed at capital
gain rates (in part). Depending on the
Page 7
facts, a taxpayer may have a better tax
result upon either a sale or surrender.
Revenue Ruling 2009-14
Revenue Ruling 2009-14, on
the other hand, clarifies to some de-
gree the tax treatment to life settle-
ment providers with respect to poli-
cies they hold that mature or are sold.
If a policy matures while held by a
secondary market purchaser, the rul-
ing confirms that any profit (death
benefit in excess of original cost plus
subsequent premiums paid) consti-
tutes ordinary income. If the secon-
dary market purchaser instead sells
the policy (in a tertiary sale), the rul-
ing states that the seller gets full basis
for (and therefore its taxable gain, if
any, is reduced by the full amount of)
any premiums paid (without reduc-
tion for any cost of insurance) and
that any gain on the sale that is not
attributable to “inside build up” is
capital. Finally, the IRS states that any
death proceeds received by a non-US
secondary market purchaser (e.g., a
Cayman fund classified as a corpora-
tion for US tax purposes) that is not
engaged in a US trade or business
constitutes US source income subject
to a 30% US federal income (and
withholding) tax (subject to reduction
under an applicable income tax
treaty). No guidance is provided as to
whether the non-US secondary mar-
ket purchaser would be subject to US
tax if it had instead sold the policies
in a tertiary sale.
Continued on next page
 Page 8

Life Settlements — IRS Finally Clarifies Open Tax Issues

K. Peter Ritter, O’Melveny & Myers LLP
Luc Moritz, O’Melveny & Myers LLP

Continued from page 7 added to the purchaser's basis in such

policy. Accordingly, uncertainty re-
.Interestingly, the facts of
mains with respect to this issue.
Revenue Ruling 2009-14 are limited
to pure term policies without any The two Revenue Rulings
cash value. It is unclear whether the provide helpful, albeit incom-
conclusions summarized above plete, guidance in this area. Several
would differ if instead policies with open tax issues remain, however, and
cash value were involved. In addi- hopefully further guidance from the
tion, while Revenue Ruling 2009-14 IRS will be forthcoming.
provides guidance regarding the
amount, character, and source of
income to life settlement providers,
the ruling unfortunately does not
address at all the important question
of whether non-deductible interest
expense incurred by a secondary
market purchaser to purchase or
carry a policy in this case can be

Life Settlement Trading

Life-Exchange is the largest and only independent trading platform for the secondary and
tertiary life insurance markets. If you are looking for a more efficient way to acquire or
exit out of life settlement positions please give our firm a call to learn more about the ad-
vantages of using Life-Exchange.

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 Page 9

Longevity Market Spreads

With credit markets continuing to stabilize we still see the life settlement market moving in tandem with the
corporate bond market. This is good news for the life settlement industry, and highlighted by the fact that the month
of April saw no major upsets in the capital markets.

This chart shows the relationship between 10yr life settlements* and a comparative index of 10yr investment
grade corporate bonds. There is a natural correlation between the two since all life insurance contracts have an inherent
credit risk in them similar to corporate bonds. A life insurance contract is an obligation for a company to pay a claim
in the event of a death and should that carrier become insolvent then there is a risk that they may not be able to meet
that claim.

10yr Investment Grade Corporate Bond Yields

20

18

16

14

12

10

0
4/1/08 5/1/08 6/1/08 7/1/08 8/1/08 9/1/08 10/1/08 11/1/08 12/1/08 1/1/09 2/1/09 3/1/09 4/1/09

10yr LS 10yr IG Corp 10yr IG Corp/10yr LS

*We use an equally weighted average of 10yr life expectancies with 150% mortality impairment at the 50th percentile
from AVS, Fasano, EMSI, 21st Services, and ISC.

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