Industry Background and History

The Life Settlements industry first emerged in the 1980’s in response to the desire for terminally ill AIDS patients to sell their life insurance policies for something more than the cash surrender value that insurance companies offered. Speculative investors quickly realized that certain policies were exceedingly valuable given the shortened life span of the insured/seller, and rushed to acquire these promising policy death benefits. In the 1990's the industry matured as investors demanded greater policy supply and elderly senior insureds began selling policies so they could enjoy financial stability in their later years. The market was largely unregulated and prospective returns were hard to estimate given the unsophisticated and often unsubstantiated life expectancy underwriting. Still, the promise of being paid out millions in a short time frame attracted pioneering investors.

After the year 2000, more sophisticated hedge funds, private equity funds and investment funds entered the market realizing the unique, uncorrelated nature of the asset class. Many new investors accurately assessed that if a policy is bought and held until the maturity of the insured, the investment is generally immune from the fluctuating securities markets and the economy in general. The certainty of death, coupled with the proven stability of the United States insurance carriers gave investors comfort that Life Settlements investments were a true uncorrelated asset class. State-of-the-art policy valuation software, death tracking, more sophisticated life expectancy underwriting and comprehensive support services attracted many investors from around the world.

Wall Street-caliber domestic and foreign entities fueled a huge cash infusion and the Life Settlements market boomed - growing from $5 billion in face policy amount in 2006 to almost $13 billion by the end of 2008. Policy purchasing and premium finance reached a fever pitch. The extreme demand for policies attracted the attention of regulatory entities and even some unscrupulous sellers looking to market policies that were originated illegally. Insurance carriers became concerned that so many policies were owned by investment entities, and the concern over risk disclosure, privacy issues and transparency led most states to create comprehensive Life Settlements statutes by 2008.

The crash of the stock market and the liquidity crisis of third quarter 2008 severely impacted the Life Settlements industry. Many hedge funds had purchased policies intending to hold them only for a short period of time, and expecting to resell into the secondary market. This "buy-and-flip" strategy came crashing down when very few well-capitalized purchasers were available to acquire the huge oversupply of policies that flooded the market in 2009. Given the inability for many portfolio owners to access traditional credit facilities to pay required policy premium payments, dozens of portfolio owners were forced to liquidate their positions. Many lending banks became unwitting portfolio owners as they foreclosed on billions of policies as borrowing funds defaulted on debt obligations.

In 2009-2010 the industry slowed substantially. Investors were hesitant because of new regulation, the departure of many investment banks, the extension of mortality tables and the increase in carrier lawsuits directed toward questionable programs. Sales prices of policies dropped dramatically and many portfolios were sold at distressed prices while billions of other policies simply lapsed as owners were unable to meet premium obligations. Many small brokers, support service providers and funds simply left the asset class.