LPHI

Life Partners Holdings Inc

Life Partners Holdings, Inc. 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 specialty financial services company, providing purchasing services for life settlements to our client base. We facilitate these transactions by identifying, examining, and purchasing the policies as agent for the purchasers. 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 84,000 purchaser transactions involving over 6,000 policies totaling over $1.8 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 act as a purchasing agent for life settlement purchasers. In performing these services, we identify, qualify and purchase policies on behalf of our clients which match their buying parameters and return expectations. Because we must work within these parameters, we must make offers which are competitive from the seller’s point of view, but still fit within the buying parameters of our clients. This success-based compensation formula insures that we bring value to both parties to the transaction and that both buyer and seller are satisfied. We locate potential policy owners 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. Broker referrals accounted for 99% of our total business as measured by policy face value in each of fiscal 2009 and 2008. In fiscal 2009, three brokers made referrals whose policy face value represented over 10% of our total business. Referrals from these brokers accounted for 44% of e total business. In fiscal 2008, we had three brokers with 10% or more of our total business and they accounted for 69% of our total business. 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 have sponsored funds ourselves and may do so in the future. Institutional purchasers continue to be a large part of our purchaser base reflecting the increasing acceptance of life settlements within the financial community. Institutional purchasers accounted for 8% and 6% of our total revenues in fiscal 2009 and fiscal 2008, respectively.

Most of our earlier purchasers were, and continue to be, 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 an insured’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 $1.8 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 has 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. Since 2006, however, generally accepted accounting methods have permitted purchasers to account for their 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. 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 estimate that the total face value of life settlement transactions for the entire industry during calendar year 2008 was approximately $9 to 10 billion, which gives us a market share of approximately 8%, compared with an estimated 6% last year. This market share is higher than in previous periods. 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. Our estimate of 2008 market activity is based 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. We believe that two of our largest industry competitors currently have about 35% of the total market share which is evenly divided between the two. The remaining 65% of the market is divided among approximately 30 other market participants, only five of which have between 5 to 10% of the total market share. 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, increasing commodity prices or the currently uncertain credit market. 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.

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 5.1% in 2007. 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.