Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

 

	Large accelerated filer o	Accelerated filer x
	Non-accelerated filer o	Smaller reporting company o

 

 

 

 

 

 

 

 

Item		Page No.
Part I
	Special Note Regarding Forward-Looking Statements
1.	Description of Business
1A.	Risk Factors
1B.	Unresolved Staff Comments
2.	Description of Properties
3.	Legal Proceedings
4.	Submission of Matters to a Vote of Security Holders
Part II
5.	Market for Our Common Stock, Related Shareholder Matters
	and Our Purchases of Equity Securities
6.	Selected Financial Data
7.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations
7A.	Quantitative and Qualitative Disclosures about Market Risk
8.	Financial Statements and Supplementary Data
9.	Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosures
9A.	Controls and Procedures
9B.	Other Information
Part III
10.	Directors, Executive Officers and Corporate Governance
11.	Executive Compensation
12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Shareholder Matters
13.	Certain Relationships and Related Transactions, and Director Independence
14.	Principal Accountant Fees and Services
Part IV
15.	Exhibits and Financial Statement Schedules
	Signatures
	Table of Contents to Consolidated Financial Statements and Notes
	Exhibit Index

 

 

PART I

 

Special Note Regarding Forward-Looking Statements

 

Certain statements in this annual report on Form 10-K concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, estimates as to size, growth in or projected revenues from the life settlement market, developments in industry regulations and the application of such regulations, and our strategies, plans and objectives, together with other statements that are not historical facts, are “forward-looking statements” as that term is defined under the federal securities laws. All of these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Forward-looking statements involve a number of risks, uncertainties, and other factors, which could cause actual results to differ materially from those stated in such statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this annual report on Form 10-K, particularly in the sections entitled “Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or reflect the occurrence of unanticipated events.

 

Item 1. Description of Business

 

Life Partners

 

General. Life Partners Holdings, Inc. ("we” or “Life Partners”) is a financial services company and the parent company of Life Partners, Inc. (“LPI”). LPI is the oldest and one of the most active companies in the United States engaged in the secondary market for life insurance known generally as “life settlements.” These financial transactions involve the purchase of life insurance policies at a discount to their face value for investment purposes.

 

The Secondary Market for Life Insurance Policies. LPI was incorporated in 1991 and has conducted business under the registered service mark “Life Partners” since 1992. Our operating revenues are derived from fees for facilitating life settlement transactions. Life settlement transactions involve the sale of an existing life insurance policy to another party. By selling the policy, the policyholder receives an immediate cash payment to use as he or she wishes. The purchaser takes an ownership interest in the policy at a discount to its face value and receives the death benefit under the policy when the insured dies.

 

We are a financial services company, providing purchasing services for life settlements to our client base. We do this by matching life settlors with purchasers. We facilitate these transactions by identifying, examining, and purchasing the policies as agent for the purchasers. In order to meet market demand and maximize our value to our clients, we have made significant investment in proprietary software and processes that enable us to facilitate a higher volume of transactions while maintaining our quality controls. Since our inception, we have facilitated over 50,000 purchaser transactions involving over 5,700 policies totaling over $1 billion in face value. We believe our experience, infrastructure and intellectual capital gives us a unique market position and will enable us to maintain sustainable growth within the life settlement market.

 

We match life settlors with purchasers. We act as agent for settlement purchasers, for whom we identify and qualify policies. We locate potential life settlors through a network of brokers, insurance, financial and estate planning professionals, through personal referrals and through Internet and print media advertising. Brokers are typically compensated based on a percentage of the face value of the policy sold, which is paid upon the closing of a settlement. Estate planning professionals and financial planners typically operate on a fee-for-service basis, which is paid directly by their client. We have long-term relationships with most of the country's life settlement brokers and believe that these brokers adhere to applicable regulatory requirements when conducting their business. In the fiscal year ended February 29, 2008, broker referrals accounted for 99% of the total face value of policies transacted, compared to 94% in fiscal 2007. Policies presented from four brokers constituted 81% of the total face value of all completed transactions presented by brokers during fiscal 2008. This compares to a concentration of 73% of the total face value of all completed transactions from only two brokers in fiscal 2007. We believe this reduction in concentration as well as the addition of a number of new brokers indicates a reduction in concentration of market share among brokers.

 

We categorize our purchasers of life settlements as institutional or retail. Institutional purchasers are typically investment funds designed to acquire and hold life settlements. These funds are often affiliated with large investment firms. We have acted as the funds’ purchasing agent. We may sponsor funds ourselves. Institutional purchasers are a growing part of our purchaser base reflecting the increasing acceptance of life settlements within the financial community. Most of our earlier purchasers were high net worth individuals, which we refer to as retail purchasers. Our retail purchasers generally come to us through a network of financial planners, whom we call licensees. We develop this network through referrals and have long-standing relationships with most of the financial planners. Although these financial planners can be compensated through fee-based consultations paid by the purchaser, we compensate most of the financial planners based on the amount invested. The compensation of financial planners is paid in cash generally upon the closing date of the transaction.

 

To purchase a life settlement, a prospective retail purchaser typically submits a purchaser application containing personal information such as the purchaser’s name and address as well as affirmative representations establishing the purchaser as financially sophisticated. A purchaser will also submit an agency agreement and special power of attorney, which appoints us as a limited agent of the purchaser to act on his or her behalf in purchasing a life settlement. Unless specifically waived by a purchaser, the agency agreement limits our authority to policies issued by an insurance carrier having an A.M. Best rating of B+ or better and to policies beyond their contestable period (generally two years or older). While in the past most insureds have had a life expectancy of 60 months or less, we have expanded this market to include insureds with life expectancies of up to 10 years or more depending on the purchasing parameters of each client. As we identify and qualify policies fitting generally within the purchasing parameters of our clients, we distribute insurance and current medical status information on these policies (with the insured’s name and other identifying information redacted) throughout our financial planner network. We also make available to each financial planner standard disclosures discussing the nature and risks of making a life settlement purchase. Purchasers can then, in consultation with their financial planner or other professionals, select one or more policies, specify the portion of the policy or policies to be purchased and submit a reservation form either electronically or by fax. To diversify their positions, retail purchasers generally buy fractional interests in one or more policies and not an entire policy, while institutional purchasers tend to purchase entire policies. At the same time, purchasers mail or wire the acquisition price to the escrow agent and mail or fax a policy funding agreement to us. The policy funding agreement identifies the policy or policies to be purchased, the acquisition price, the administrative services provided, and the escrow arrangements for receipt and disbursement of funds. In essence, we act upon the instructions of the purchasers as their purchasing agent.

 

For the protection of the seller’s ownership interest and the purchaser’s monetary interest, all transactions are closed through an independent escrow agent. The escrow agent will close a purchase when it receives from purchasers executed policy funding agreements and the acquisition price for a policy, verifies that the policy is in full force and effect and that no security interest has attached to the policy, and receives a transfer of policy ownership form acknowledged by the insurance company. The escrow agent then pays the seller the offer price (net of fees and costs). We send confirmation of the transaction to the purchaser as well as a copy of the assignment documents.

 

After closing the transaction, we generally hold title to the policy as nominee for the purchaser. Responsibility for policy premium costs passes to the purchaser, who typically funds the premium costs through deposits with the escrow agent. We strictly maintain the confidentiality of a life settlor’s personal information in accordance with regulations promulgated by the Texas Department of Insurance. A purchaser will receive evidence of the transfer of ownership of the policy (which identifies the insured), but will not receive contact information for the insured, which is available only to licensed life settlement companies like Life Partners. We monitor the insured’s health status and notify the escrow agent upon the insured’s death. We also notify purchasers in instances in which the premium escrow account has been exhausted so that the purchaser can replenish the account to keep the policy from lapsing.

 

We pioneered the foregoing transaction design and, since our formation, we have participated in the purchase of life settlement transactions totaling over $1 billion in face value.

 

The Life Settlement Market and Competition. Life settlements provide a secondary market for existing life insurance policies that the owner no longer needs or wants and that insure a person whose life expectancy can be reasonably estimated. Over the past few years, the market for life settlements has grown substantially from both the demand and the supply sides of the transaction with an increase in the average face amount of policies presented for sale. The larger amount of capital required to meet the higher acquisition costs of the average life settlement has led us to develop relationships with institutional purchasers in addition to expanding our base of retail clients and increasing the minimum investment amount. We have devoted substantial marketing and client development resources to attracting both individual and institutional purchasers domestically and abroad, both directly and through their advisors. The number of retail purchasers and the amount of their average investment have increased substantially providing us with a significant market advantage by enabling us to reach the diversification goals of our clients as well as giving us greater flexibility in purchasing policies. We have also experienced success in attracting institutional clients and believe that we shall continue to attract institutional clients as we devote more time and resources into cultivating relationships with them.

 

One disincentive for domestic institutional investment had been the accounting treatment applied to the purchase of life insurance policies, which generally required that settlements be recorded at the cash surrender values of such policies instead of their purchase prices. This treatment often resulted in substantial write-downs for financial reporting purposes. However, a 2006 change by the Financial Accounting Standards Board in the preferred method of accounting for life settlement contracts held for investment significantly changes the prior accounting treatment. FASB Staff Position No. 85-4-1 Accounting for Life Settlement Contracts by Third-Party Investors (FSP FTB 85-4-1) states that an investor may elect to account for its investments in life settlement contracts based on the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force are capitalized. FSP FTB 85-4-1 replaces FASB Technical Bulletin 85-4, which essentially required that a purchaser record the excess of the purchase price over the cash surrender value as expense when purchasing policies. We believe the adoption of this more favorable accounting treatment has spurred institutional investment, especially in the domestic market. This accounting change has also had a positive effect on policies that we own, and we expect to increase the amount of policies that we purchase for our own investment.

 

We believe that the total face value of life settlement transactions completed during 2008 was about $7 billion in face amount, which gives us a market share of approximately six percent, which is double our market share of approximately three percent last year. This estimate is only an approximation, since precise market data is not available publicly and thus our competition is difficult to quantify. We are the only publicly held company operating exclusively in this market. Some competitors file publicly available transaction activity with state insurance commissions. Not every company may report its transactions, however, and the accuracy of the information relies on the veracity of the filings made by each company. In 2007, Conning Research & Consulting, Inc. in its report entitled “Life Settlement Market: Increasing Capital and Investor Demand 2007” estimated the face value of policies purchased in 2007 to be approximately $7.02 billion. Conning had estimated the 2006 market to be from $5 billion to $6 billion. Our estimate of 2007 market activity is based in part on the 2007 Conning report data as well as on reported transactions and known transaction volumes with allowance for unreported data and multiple reports of the same transaction.

 

While the overall life settlement market has grown in size and the number of market participants appears to have grown, we believe the market has become more fractured among market participants. In earlier years, the market appeared to be dominated by one competitor, which had up to 40% of the market. Due to regulatory problems, this competitor’s position declined to the benefit of us and other competitors. We believe that our four largest industry competitors currently have about 40% of the market, but that none of them have more than 15%. The remaining 60% of the market is divided among approximately 30 other market participants. Unlike some of our competitors, which may have more restrictive purchasing parameters or a single provider of investment capital, we have developed markets for all types of life expectancies in order to accommodate the investment goals of our clients as well as the individual circumstances of the policies presented to us. We believe this diversified capital business model makes us more competitive in the market and provides us with greater flexibility. We also believe that this model provides a stronger platform for our sustainable growth as a company. Markets are segmented by length of life expectancy and policy face value. The amount of competition in these markets varies according to the demand for such policies.

 

We believe the life settlement market in general will continue to increase substantially during the next year due to a number of factors. First, market demand from purchasers remains strong for these transactions. The competition for policies has increased, indicating that there is an increased awareness among the financial markets in general of the value of life settlements as an investment vehicle. Continued general economic uncertainty has led many purchasers to seek alternative investment strategies that diversify their portfolios and avoid economically sensitive investments. Life settlements provide diversification and produce returns that are not correlated to stock and bond market fluctuations or increasing commodity prices. We believe that interest from both retail and institutional purchasers will continue to grow steadily throughout the next fiscal year.

 

A second contributing factor to the increase in the life settlement market is the greater supply of higher face value policies. We believe there is a growing awareness of the secondary market for insurance policies among potential sellers, especially for those with higher face value policies. This growing awareness has resulted in an expansion of the supply of eligible policies, especially policies with higher face values. We believe much of our increased business is due to the greater supply of higher face value policies, and we believe this trend will continue. We expect to increase our market share by growing our client base and utilizing our substantial intellectual capital and infrastructure to provide superior value to both policyholders and our clients. Among our core competencies is the ability to process and close transactions quickly and more efficiently than our competitors. We believe our ability to deploy our assets into the market in this manner will enable us to continue to increase our market share.

 

Although a life settlement transaction places no burden on an insurance company other than to honor its contract, life settlements are disfavored by insurance companies because they adversely affect their profitability by keeping policies in force that would otherwise have lapsed. According to a December 2006 article in the New York Times, insurance companies in 2005 reduced their financial exposure by $1.1 trillion when 19.8 million policyholders stopped paying premiums, citing data from the Insurance Information Institute*. Thus, the windfall profits earned by life insurance companies from policies that lapse are readily apparent.

 

Data from the American Council of Life Insurers shows that the voluntary termination rates for individual policies has dropped steadily from 6.6% in 2002 to 4.9% in 2006. Because the decline in the lapse rate coincides with the increasing number of reported life settlement transactions, we believe this indicates that more policyholders are choosing to sell their policies in life settlement transactions rather than voluntarily terminating these policies. We also believe this corroborates predictions that the life settlement market will continue to grow in size as these transactions become more familiar to policyholders.

 

Access to capital, the insurance industry’s addition of pre-death cash benefits, law enforcement pressure on companies operating illegally, and increasing government regulation have contributed to a stabilization in the number and sophistication of life settlement companies, both those purchasing for their own accounts and those, like us, who act as agents for our clients. We estimate the number of life settlement companies actively purchasing for their own account or as agents for purchasers has grown to approximately 35 and the number of brokers to be approximately 40 with the majority of policies being presented by fewer than five brokers. While we believe we are one of the larger life settlement companies (based on face value of policies settled), competition within the life settlement market is active among the few companies in this sector and we will continue to experience competition for qualified policies to purchase. This competition will have an effect on the prices we pay for policies, the amount of brokerage and referral fees we pay, and the prices we set for the acquisition of policies. We believe the overall market for life settlements will increase as more seniors become aware of their option to liquidate an unwanted policy through a life settlement. In light of our experience in the market and our estimates concerning competition and supply and demand for policies, we believe our total business volume for life settlements will be approximately $600 million in face value for fiscal 2009, which is a 45% increase over our total business volume of $415 million in fiscal 2008. This estimate is projected, in part, on the total face value of settlements we have already experienced during this fiscal year as well as the 174% increase in total business volume between fiscal 2007 and fiscal 2008.

 

* Duhigg, Charles, “Late in Life, Finding a Bonanza in Life Insurance,” New York Times, December 17, 2006

 

The following table shows the number of life settlement contracts we have transacted, the aggregate face values and purchase prices of those contracts, and the revenues we derived, for our last three fiscal years:

		2006			2007			2008
Number of settlements
Face value of policies		$	87,275,000		$	151,397,000		$	415,293,000
Average revenue per settlement		$	77,543		$	135,433		$	356,891
Total net revenues derived (1)		$	8,485,000		$	12,231.000		$	36,823,000

 

(1)

The revenues derived are exclusive of brokerage and referral fees.

 

Industry Regulation and Taxation

 

General. When the life settlement market was first established, it was sparsely regulated. Due in part to abuses within the industry, which were well-publicized, the federal government and various states moved to regulate the market in the mid-1990’s. These regulations generally took two forms. One sought to apply consumer protection-type regulations to the market. This application was designed to protect policyholders and purchasers. Another sought to apply securities regulations to the market, which was designed to protect purchasers. Various states have also used their insurance regulations to attack instances of insurance fraud within the industry.

 

Consumer Protection Licensing. The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC). At least 35 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way. These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive.

 

Licensing. Many states require the licensing of life settlement brokers and providers, mandate disclosures to sellers or purchasers or both, require periodic reporting requirements, and set forth prohibited business practices. We are licensed as a viatical and life settlement company by the Texas Department of Insurance. Under the Texas requirements, we must file our transaction documents with the state for approval, make certain disclosures to insureds and sellers, offer a 15-day right of rescission to the seller, file certain annual reports with the state, and abstain from unfair business practices. Because all of our transactions are completed in Texas, the Department of Insurance has jurisdiction to investigate complaints from any insured or seller, irrespective of the state in which that insured or seller lives. Consequently, we believe Texas has exclusive regulatory authority and offers protection to all insureds or policyholders (including those living in states that have no licensing requirement). Other states may assert regulatory jurisdiction, however, and to moderate the risk of adverse legal outcomes, we have begun licensing in certain states that are important to our business model and where exemptions from licensing requirements might be questionable. We currently also hold a life settlement license in the following states: Maryland, North Carolina, Oklahoma, Pennsylvania and Tennessee. In addition, we also have license applications pending in New Jersey, Ohio Connecticut and Virginia. Many important states have clearly identified exemptions from insurance licensing requirements, which permit our doing business without significant regulatory effects. Information about us is available through the Texas Department of Insurance or on its website at: https://apps.tdi.state.tx.us/pcci/pcci_show_profile.jsp?tdiNum=8967842&companyName=Life%20Partners,%20Inc.&sysTypeCode=PA

 

Securities Regulations. Some states and the Securities and Exchange Commission have attempted to treat life settlements as securities under federal or state securities laws. We have structured our settlements to reduce the risk that they would be treated as securities under state or federal law, and, to date, no state or federal regulatory body or private litigant has successfully asserted that our settlements are securities. We have faced such claims, however, most recently from state securities regulators in Utah and Colorado. See Item 3. Legal Proceedings below. These proceedings reflect the somewhat unsettled legal foundations of the life settlement industry. We have vigorously contested these proceedings not so much because of the financial impact of avoiding these particular states, which would not have a material adverse effect on our business, but to protect our business model from the more widespread encroachment of regulatory treatments that we believe are unfair or improper.

 

We believe that a combination of consumer protection-type laws and existing insurance regulations provide an appropriate framework for regulation of the industry. As a practical matter, the widespread application of securities laws would burden us and other life settlement companies in marketing settlements with little or no benefit to purchasers. Each of our purchasers has represented themselves to be financially sophisticated, high net worth individuals or institutions, which have little need for the protections afforded by the securities laws. At this point, due to the manner in which we structure our settlements and the availability, in some instances, of exceptions and exemptions under securities laws, such laws have not limited our business model to a significant extent. But we cannot give assurance that our business would not be materially and adversely impacted by securities-based regulation.

 

Insurance Regulation. As a life settlement company, we facilitate the transfer of ownership in life insurance policies, but do not participate in the issuance of policies. As such, we are not required to be licensed as an insurance company or insurance broker. We do deal, however, with insurance companies and professionals in our business and are indirectly affected by the regulations covering them. The insurance industry is highly regulated, and these regulations affect us in numerous ways. We must understand the regulations as they apply to policy terms and provisions and the entitlement to, and collectibility of, policy benefits. We rely upon the protections against fraudulent conduct that these regulations offer and we rely upon the licensing of companies and individuals with whom we do business.

 

Employees

 

As of February 29, 2008, we had 40 direct employees, none of whom are represented by a labor union, as well as almost 3,000 licensees who act as independent contractors and refer clients to us for the purchase of life settlements. We continuously review benefits and other matters of interest to our employees and consider our employee relations to be satisfactory.

 

More about Life Partners

 

Our executive offices are located at 204 Woodhew, Waco, Texas 76712 and our telephone number is 254-751-7797. Our corporate information website is www.lphi.com. We make available without charge our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports shortly after we file these reports with the SEC. Our informational website for insureds and policyholders is www.lifepartnersinc.com.

 

Item 1A. Risk Factors

 

In addition to other information in this annual report on Form 10-K and in the documents we are incorporating by reference, the following risk factors should be carefully considered in evaluating us and our business. Such factors significantly affect or could significantly affect our business, operating results or financial condition. This annual report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this annual report on Form 10-K.

 

We Depend on Growth in the Life Settlement Market

 

Growth of the life settlement market and our expansion within the market may be affected by a variety of factors, including:

	·	The inability to locate sufficient numbers of life settlors;
	·	The inability to convince potential sellers of the benefits of life settlements;
	·	The inability to attract sufficient qualified purchasers;
	·	Competition from other life settlement companies;
	·	The occurrence of illegal or abusive business practices resulting in negative publicity about the market; and
	·	The adoption of overly burdensome governmental regulation.

 

In addition, the life settlement market may evolve in ways we have not anticipated and we may be unable to respond in a timely or cost-effective manner. If the life settlement market fails to grow as quickly as or in the directions we have anticipated, our business, financial condition and results of operations would be materially adversely affected as it relates to our large-scale growth.

 

Our Success Depends on Maintaining Relationships Within Our Referral Networks

 

We rely primarily upon brokers to refer potential sellers of policies to us and upon financial professionals, known as licensees, to refer retail purchasers to us. These relationships are essential to our operations and we must maintain these relationships to be successful. We do not have fixed contractual arrangements with the brokers or financial planners, and they are free to do business with our competitors. In addition, the pool of brokers and referring financial planners is relatively small, which can increase our reliance on our existing relationships and impair attempts to reduce brokerage fees. During fiscal 2008, four brokers accounted for 81% of the total face amount of policies we purchased. Our network of licensees is much broader, but no less important. Our ability to build and maintain relationships with our licensees will depend upon our closing rates, the value we bring to our retail clients and the level of compensation we pay to the referring professional. The compensation paid to the referring professional will affect the offer price to the seller and the compensation we receive. We must balance these interests successfully to build our referring network and attain greater profitability.

 

Our Purchasers Depend on Our Ability to Predict Life Expectancies and Set Appropriate Prices; If Our Investment Returns Are Not Competitive, We May Lose Purchasers

 

A purchaser’s investment return from a life settlement depends on three factors: the difference between the policy face amount and purchaser’s cost basis (consisting of the acquisition cost and premiums paid to maintain the policy), the length of the holding period, and the demise of the insured. We price settlements based on the policy face amount, the anticipated life expectancy of an insured and policy maintenance costs. Life expectancies are generally estimated from standard medical and actuarial data based on the historical experiences of similarly situated persons. The data is necessarily based on averages involving mortality and morbidity statistics. The outcome of a single settlement may vary significantly from the statistical average. It is impossible to predict any one insured’s life expectancy exactly. To mitigate the risk that an insured will outlive his or her predicted life expectancy, we price life settlements to yield competitive returns even if this life expectancy prediction is exceeded. In addition, life settlement purchasers must be able to bear a non-liquid investment for an indeterminate period.

 

If we underestimate the average life expectancies and price our transactions too high, our purchasers will not realize the returns they seek, demand may fall, and purchasers may invest their funds elsewhere. In addition, amounts escrowed for premiums may be insufficient to keep the policy in force and it is the responsibility of the purchasers to pay these additional premiums. If we overestimate the average life expectancies, the settlement prices we offer will fall below market levels, supply will decrease, and sellers may engage in business with our competitors or pursue other alternatives. Our ability to accurately predict life expectancies and price accordingly is affected by a number of factors, including:

 

·

The accuracy of our life expectancy estimations, which must sufficiently account for factors including an insured’s age, medical condition, life habits (such as smoking), and geographic location;

 

·

Our ability to anticipate and adjust for trends, such as advances in medical treatments, that affect life expectancy data; and

 

·

Our ability to balance competing interests when pricing settlements, such as the amounts paid to life settlors, the acquisition costs paid by purchasers, and the compensation paid to ourselves and our referral networks.

 

To foster the integrity of our pricing systems, we use both in-house and outside experts, including medical doctors and published actuarial data. We cannot assure you that, despite our experience in settlement pricing, we will not err by underestimating or overestimating average life expectancies or miscalculating reserve amounts for future premiums. If we do so, we could lose purchasers or policy sellers, and those losses could have a material adverse effect on our business, financial condition, and results of operations.

 

Government Regulation Could Negatively Impact Our Business

 

We are licensed and regulated by the Texas Department of Insurance as a viatical and life settlement company and hold licenses as a life settlement provider in other states as well. State laws requiring the licensing of life settlement providers govern many aspects of our conduct, operations, advertising and disclosures. The laws may vary from state to state, however, and our activities and those of brokers with whom we do business can be affected by changes in these laws or different interpretations of these laws. In addition, some states and the Securities and Exchange Commission treat life settlements as securities under state and federal securities laws. Because of legal precedent relating to our settlements and the possible availability of exceptions or exemptions under the securities laws, we do not believe that the application of securities laws will have a material adverse effect on our operations, but cannot assure you that securities regulators or private individuals will not attempt to apply the securities laws to our settlements or that such attempts would not have a material adverse effect on our business. Further, changes in laws or governmental regulation could affect our brokers or clients, which could have a material adverse effect on our business.

 

We Are Operating in Evolving Markets that May Be Volatile

 

We are operating in the life settlement market, which is a relatively new market within the financial services sector. Although it has grown exponentially in the past few years, how and to what extent it will continue to develop is uncertain. Because we are the only substantial publicly reporting company in this industry, measuring the market is difficult. In 2007, Conning Research & Consulting, Inc. estimated the life settlement market to be approximately $7.02 billion in face value in 2007. Based on our market experience and industry analysis, we believe this estimate is reasonable. As more insureds become aware of life settlements as a financial planning option, we expect the size of the market to grow substantially. While we have demonstrated our ability to originate, underwrite and place life settlements with our retail purchasers, any dramatic growth will depend heavily upon the entry of institutional purchasers and the increase in presentations of policies with face values in excess of $5 million. Whether we can maintain markets for such policies will depend on our ability to attract more institutional and accredited investors and convince these purchasers that we can originate sufficient numbers of qualified policies for purchase and that our policy analysis and pricing practices are sound. Until we attract a sufficient number of institutional clients to provide for consistent and predictable demand in addition to the demand from our retail clients, our financial performance during any period may be materially affected by the entry or departure of one or more of our institutional clients from the market.

 

While we are among the most experienced and largest companies within these markets, our prospects must be considered in light of the risks, expenses and difficulties encountered by those attempting to operate in evolving markets. We cannot assure you that we will be successful in addressing the risks we face. The failure to do so could have a material adverse effect on our business, financial condition, and results of future operations.

 

Our Chairman and Chief Executive Officer Beneficially Owns 51% of Our Common Stock and, as a Result, Can Exercise Significant Influence over Our Company

 

Mr. Brian D. Pardo, our Chairman and Chief Executive Officer, is defined under SEC regulations as the beneficial owner of approximately 51% of our common stock, largely as the result of exercising voting power by proxy over shares held by The Pardo Family Trust. He will be able to control most matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions. His voting control affects indirectly the process for nominating directors, since theoretically he could nominate and elect directors without board involvement. This concentration of ownership may also have the effect of delaying or preventing a change in control of Life Partners, which in turn could have a material adverse effect on the market price of our common sto