June 19, 2009
Volume I, Issue 7
Inside this issue:
Longevity Markets
Commentary 1
What’s It Worth 2
Trade Data 3
Yield to LE 6
Credit Watch 7 Trade Report
Longevity Market 8 Longevity Markets Commentary
Spreads
Editor & Publisher
Brian C. Dorr
Contributing Editors
Anne K. Zand
Carline B. Gele
Managing Editor and
Writer
David C. Dorr
LIFE-EXCHANGE trade
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Copyright @2009 Life-Exchange, Inc. All rights reserved.
The first day of summer is only
seven days away and the end of Q2 09 upon
us. Although summer traditionally has been
a slower time for financial markets in general
and life settlement markets in particular, this
year life settlements have barely slowed from
the pace of Q1 09. This pace bodes well for
September 1 when the markets really come
to life.
A couple of days ago we saw one
of the most positive developments for our
market that we’ve seen in some time; the
ratings upgrade of Hartford and Lincoln
from negative outlook to stable by S&P.
This is a good sign and hopefully the first of
more to come. Carrier solvency is crucial to
maintaining a healthy primary and secondary
market. Even with the upgrade of these two
major insurers to stable there is much more
that needs to be done to improve the indus-
try’s future. We encourage our monthly
readers to monitor our Credit Watch sec-
tion for important upgrades and down-
grades.
Volume for the month of May
has been steady in the secondary market
with buyer’s demand improving but not yet
matching supply. There has been a large
increase in tertiary inventory on offer how-
ever supply outweighs market demand by at
least 2 to 1 and since the yields are barely
moving it will take time to soak up this sup-
ply. Tertiary traffic increases have been due
to an increase in redemptions by investors in
life settlement funds and funds looking to
free up cash flow. Premium financed poli-
cies still remain difficult to move and at least
two portfolios we’ve been tracking since
2008 are imploding with better than 25% of
their policies being lapsed. Alarmingly we are
still seeing several policies that were “self
financed” two years ago. Life agents have
been making an enormous mistake advising
clients that simply because they are above 70
that a secondary market exists for their policy.
We are seeing millions in face value being
offered at the market and unfortunately they
are not only below the current market yields
of approximately 14.3%, they are negative
yielding (meaning that the seller would have
to pay the buyer to take the policy off their
hands). This is why agents should always
model the potential settlement value for cli-
ents before writing those contracts.
With these issues in mind, it is
timely that in this month’s edition we intro-
duce the first in an ongoing series of articles
on valuing life settlement policies and portfo-
lios by Larry Warnock, FSA, President of
Value Life Corporation. Over the years we
have seen many mistakes made in pricing
policies. This is an area of our market that
like any other will continue to evolve. Our
mission here is to include current insights by
market leaders in this evolving field.
Last but not least I want to thank all
our readers for the great feedback you send
us. Last month a reader disagreed with my
assessment of TALF funds potentially being
used in life settlements. Unfortunately the
financial institution he works at does not per-
mit me to disseminate or include his com-
ments but nonetheless I want to acknowledge
him and say that we will not always be right
and we are always open to receiving opinions
from the other side regarding anything we
comment on.

First in a Series of Articles by R. Larry Warnock, FSA, MAAA
The Importance of History
The universal question asked by
investors in senior universal life
insurance policies is “What’s It
Worth?”. This concern about value
applies whether the policy is an
owned asset or debt collateral.
Many important considerations have
a bearing on the assessment of the
value of a senior life insurance pol-
icy to an investor. In seeking esti-
mates of value, an investor (or
someone performing calculations
and risk-assessment on behalf of the
investor) must deal with many com-
plex issues. The list of key risk fac-
tors prominent in the analysis always
includes:
1. Life Expectancies and Mortality
Curves,
2. Premiums Payable on the Life
Insurance Policies, and
3. Investor Yield Expectations
(Cost of Capital)
Although practitioners use many
variations on the theme, the basic
valuation algorithm followed by
most actuarial and investment pro-
fessionals and valuation software is
simply this: Current value equals the
present value of expected future death bene-
fits less the present value of expected future
premium payments, based on an underlying
mortality curve, the timing of future cash
flows, and the cost of capital, where cash
flows are normally projected monthly.
The monthly premium payments
included in the valuation calculation
represent the product of two com-
ponents:
1. The underlying schedule of pre-
Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
Page 2
What’s It Worth?
miums payable only if the insured sur- the value of single policies and portfolios of
vives to the payment time, and policies?”
2. The probability of survival to the Query #2: Fund B acquired a portfolio
payment time. of policies over several years, and used a well
-known industry software package to deter-
This article is limited to the first pre-
mine optimized monthly premiums to ma-
mium component.
turity, measured at the time of original pric-
Schedules of predicted future premi- ing. Although Fund B has not been paying
ums, as used for valuation purposes, premiums in strict accordance with its origi-
generally represent “minimum” or nal pricing schedule, should it continue to use
“optimized” premiums. In basic con- the original pricing schedule for portfolio
cept, this means that the smallest pre- valuation purposes?
mium that will maintain the policy in
To simplify the response to query #
force is predicted at each point in time,
2, assume that the entire portfolio
and that no excess premium to build
comprised policies where optimized
account value and cash surrender value
premiums actually could be calculated
is ever anticipated to be paid (with the
(more later on situations where this is
exception of comfort margins set by
not the case). Depending on avail-
the investors). Premiums payable on a
ability of data, there are several possi-
monthly mode are normally the most
ble approaches to predicting future
efficient for optimizing value and are
premiums:
therefore most commonly used for
valuation purposes. Best Approach: Ideally, the most
accurate possible valuation would
Query #1: Fund A manages its portfolio
obtain a recent illustration and the
by paying semi-annual premiums, with an
optimized monthly premiums
added “comfort margin” against inadvertent
(beginning with the current valuation
lapse. Should Fund A use that schedule in
date) would be re-calculated, similar
its valuations?
to an original pricing exercise. The
If the valuation is intended to be an rub is that the requirement of obtain-
estimate of market values, then a con- ing new illustrations as frequently as
vincing case can be made that the monthly is not very practical.
portfolio could be valued based on
Better Approach: An alternate way
monthly mode optimized premiums
to go is to obtain a current Verifica-
without margin, even though that is
tion of Coverage (“VOC”), and use
not the way the portfolio is being ad-
the current values as the starting
ministered. Clearly, from the perspec-
point in the re-calculation of opti-
tive of a purchaser of the portfolio, the
mized premiums. But alas, that is
premium payment parameters used by
also less than ideal, and involves ob-
the current owner are not relevant
taining external data, and a lot of time
(although the historical premiums ac-
and expense, so that is not a practical
tually paid prior to the valuation date
way to go for monthly valuations.
may be important), and the more rele-
vant question is “how does the market view
Continued on page 4
 Page 3

Number of Gender Avg Age of Avg Cash Suren- Avg Purchase

State Cases Male Female Insured Total Face Value Avg Face Value der Value Price as % of
Alabama 4 2 2 76 $3,000,000 $750,000 $35,015 18.6%
Alaska 0
Arizona 0
Arkansas 0
California 8 7 1 74 $12,000,000 $1,500,000 $59,027 21.8%
Colorado 0
Connecticut 0
Delaware 0
Dist. of Columbia 4 1 3 79 $22,000,000 $5,500,000 $0 4.3%
Florida 9 5 4 76 $15,000,000 $1,666,666 $48,254 16.1%
Georgia 5 2 3 73 $8,000,000 $1,600,000 $72,588 12.1%
Hawaii 0
Idaho 0
Illinois 4 2 2 75 $6,000,000 $1,500,000 $33,269 11.4%
Indiana 0
Iowa 4 2 2 77 $2,000,000 $500,000 $0 13.5%
Trade Data May 2009

Kansas 0
Kentucky 0
Louisiana 0
Maine 2 2 0 75 $1,000,000 $500,000 $12,690 8.0%
Maryland 1 1 0 78 $5,000,000 $500,000 $0 5.2%
Massachusetts 0
Michigan 0
Minnesota 4 2 2 78 $20,000,000 $5,000,000 $28,620 4.0%
Mississippi 0
Missouri 5 3 2 74 $4,000,000 $800,000 $22,741 16.4%
Montana 0
Nebraska 0
Nevada 0
New Hampshire 1 0 1 76 $1,000,000 $1,000,000 $0 11.0%
New Jersey 3 2 1 74 $4,000,000 $1,333,333 $780,654 14.0%
New Mexico 0
New York 6 4 2 76 $6,000,000 $1,000,000 $60,589 18.3%
North Carolina 0
North Dakota 0
Ohio 0
Oklahoma 0
Oregon 0
Pennsylvania 4 3 1 73 $1,500,000 $375,000 $0 8.0%
Peuerto Rico 0
Rhode Island 0
South Carolina 4 2 2 75 $4,000,000 $1,000,000 $81,096 13.8%
South Dakota 0
Tennessee
Texas 7 5 2 76 $12,000,000 $1,714,285 $33,487 17.6%
Utah 0
Vermont 0
Virginia 0
Washington 2 1 1 73 $1,750,000 $875,000 $26,398 13.1%
West Virginia 0
Wisconsin 0
Wyoming 0

Totals 77 46 31 75.44 $128,250,000 $27,114,284 $1,294,428 12.6%

Note- All gray highlighted rows are non-regulated states. The information contained herein is made available to the public by Life-Exchange,
Inc.

Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766

What’s It Worth? -Cont.
Continued from page 2
Good Approach: There is a practi-
cal method available, but it requires
a valuation system that supports the
approach. The solution for a cur-
rent valuation is to simply use the
illustration (and VOC if relevant)
that were used in the original pricing
calculations as the starting points.
The original account value can be
actuarially “rolled-forward” to the
current valuation date, using mainly
assumptions that were available in
the original pricing calculations.
What additional data is required?
The premium history, i.e., premium
amounts and premium payment
dates, subsequent to the original
pricing up to the current valuation
date. Given the premium history
data, the re-calculation of a new
schedule of optimized premiums is
readily calculable and can be incor-
porated into the portfolio valuation
routine. It is important for investors
to understand how their portfolio
valuation methodology considers the
post-purchase premium history.
Query #3: The answer to query #2
assumed that the entire portfolio comprised
policies where optimized premiums actually
could be calculated. How does the answer
change if optimized premiums cannot be
calculated in every year?
In cases where the illustration data
shows no account values or cash
surrender values for a few years, the
cost of insurance charges and/or the
surrender charge schedule may not
be calculable. In turn, minimum
premiums are also not calculable.
Assume that Fund C has purchased
Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
By R. Larry Warnock, FSA, MAAA
polices based on sales illustrations
such as the following, and that a valua-
tion is being performed at the end of
year 3, and that $675,000 in premium
has been paid since issue (See chart
below).
There is not generally sufficient infor-
mation to calculate an optimized pre-
mium lower than the illustrated premi-
ums for the first three years. Although
there are AVs from which COI rates
may be calculated, the CSV cannot be
calculated if no surrender charge
schedule is available. Further, even if
the surrender charge schedule is avail-
able, the calculated optimized premi-
ums would almost certainly exceed the
illustrated premiums. This is because
the illustrated CSV is shown as zero
for three years, but the actual calcu-
lated value is likely negative. However,
most investors believe that the illus-
trated premiums for the first three
years shown on the carrier’s illustration
can be relied upon as sufficient to
avoid lapse. Beginning with the fourth
year, true monthly optimized premi-
ums can be calculated starting with the
AV of $253,643 and a surrender
charge of $242,550 for the fourth pol-
icy year.
The starting AV of $253,643 is a key
assumption in calculating optimized
Year Premium Mode AV
1 233,250 A 94,257
2 233,250 A 178,247
3 233,250 A 253,643
4 233,250 A 316,774
5 233,250 A 362,685
Page 4
premiums in years four and later.
That starting value is only valid if the illus-
trated premiums were actually paid at the
beginning of each year as illustrated. The
total illustrated premiums over those
three years are $699,750 but the pre-
miums actually paid were only
$675,000. Premium payments were
short by $24,750.
Although there are various ways to
do it, the unpaid premium deficit of
$24,750 should be considered in set-
ting the current value of the policy.
Again, the premium history has a
material importance in valuation.
Query #4: What is the simplest case for
setting optimized premiums?
By far the simplest case for valuation
is one where the illustrated premiums
are in fact the minimum premiums
that can be paid. In most cases, this
is manifested by an increasing pre-
mium pattern over time, either each
year or in blocks of years, where the
illustrated cash surrender values are
zero or trivial in all years. If this type
of carrier-illustration minimum pre-
mium schedule is available, then it is
by far the most reliable calculation of
optimized premiums. However, such
an illustration is not normally readily
available.
Continued on next page
   CSV    Dth Ben
0 5,000,000
0 5,000,000
0 5,000,000
74,224 5,000,000
   132,985    5,000,000
 Page 5

What’s It Worth? -Cont.

By R. Larry Warnock, FSA, MAAA

Continued from page 4 number of illustrations that show level pre-

UPCOMING EVENTS miums to maturity, but show cash surrender
Query #5: What about illustrations with values that are either zero or trivial in all
disappearing values? What is meant here is illustration years. How can we calculate
08.07.2009 an illustration that looks like a standard optimized premiums?
illustration showing positive account values
LISA Broker Summit in These illustration patterns usually
and cash surrender values developing for a
Orlando FL develop from universal life product
period of years. For example, take an illus-
*Tentative Dates designs that have secondary guaran-
tration with issue age 75 with level premium
tees that drive the level of illustrated
to age 100 where positive values develop for
premiums. It is a very complex and
the first fifteen years, then abruptly become
expensive undertaking to get “under
08.28.2009 zero for years sixteen through twenty-five,
the hood” and recalculate premium
although the illustrated premium is level for
schedules on these policies. For all
LISA Industry Service Fo- life.
practical purposes, these are in reality
rum in Orlando FL - A conservative approach to this prob- Term to Age 100 policies that are
*Tentative Dates lem is to just assume the illustration structured within a universal life pol-
premium is the optimized premium icy format. The illustrated premium
and payable in all years. This approach payments (and mode of payment)
is not likely to generate a competitive should be used as the lowest possible
09.24.2009-09.25.2009 valuation. premiums.
LISA Compliance A method that has been sometimes This article dealt with several practical
Conference used in practice is to calculate the opti- real-world issues related to estimating
*Tentative Dates mized premiums as long as possible, in optimized premium payments for
this case for sixteen years, and then to senior universal life insurance poli-
use the illustrated premium thereafter. cies. The importance of proper con-
This approach is inappropriate since sideration in the valuation methodol-
10.26.2009 the illustrated premiums for the end of ogy of premium payment history
the illustration period would only be overlays virtually all these issues.
Fasano 6th Annual Life valid if the illustration premiums for
Settlement Conference in the front end of the illustration were
Coming Next Month: Practical
Washington DC Issues for Using Life Expectan-
actually paid. An alternate approach to
cies in Valuations.
calculating the COI rates “in the tail”
is to utilize the first fifteen years of
11.08.2009-11.10.2009 COI rates, and estimate the last ten
years of COI rates by relation to a
15th Annual Fall Confer- mortality table. Considering that these
ence LISA in NY, NY estimated COI rates are “in the tail”
*Tentative Dates where probability of survival is gener-
ally low, and where discounting will be
for a long period of years, the practical
effect of the estimation error should
11.12.2009-11.14.2009 be acceptable for valuation purposes.
NAILBA 28 in Hollywood Query #6: We have seen an increasing
FL

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

Yield to Life Expectancy

Yields for the month of May have moved little for the last 90 days. We will continue to monitor the yield
curve as capital flows and inventory levels change.

Comparative Yields to Life-Expectancy Chart

May 2009 Comparitive Yields‐to‐life‐expectancy
16

15

14

13 AVS
R
R
I/ Fasano
ld 12
e
i 21st Services
Y
11 ISC
EMSI
10

8
4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6
2 3 4 6 7 8 9 0 2 3 4 5 6 8 9 0 1
1 1 1 1 1 1 1 1 2 2

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 7

Credit Watch Update

June 15, 2009

Below are the latest ratings announcements on US life insurers from S&P

• Outlook on National Life Insurance Co. (VT) and affiliates revised to negative; ratings af-
firmed
• Beneficial Life Insurance Co. ratings lowered to 'BB+' from 'A' and put on credit watch
negative
• Outlook on New York Life revised to negative; 'AAA' ratings affirmed
• Massachusetts Mutual Life Insurance Co. and U.S. insurance affiliates 'AAA' ratings put on
credit watch negative
• Pacific Life Insurance Co.'s $1B surplus notes issue rated 'A'; related ratings affirmed
• IPC Holdings Ltd. and related ratings put on credit watch negative
• First American and Fidelity National downgraded one notch; Old Republic ratings affirmed

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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Copyright @2009 Life-Exchange, Inc │ 2001 Biscayne Boulevard Suite 2102, Miami, Florida 33137 │ (866) 907-9766
 Page 8

Longevity Market Spreads

Spreads are trading within a narrow range, continuing a trend of low volatility and consistent IRR’s.

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
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 5/1/09

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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 LIFE-EXCHANGE TRADE REPORT
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