On March 11, 2013, pursuant to a Transfer Agreement, we acquired NIBs related Policies with an aggregate original face amount equal to $129,038,933, for $5,999,000, $3,000,000 of which was paid in cash and $2,999,000 of which was paid by the issuance of a Secured Promissory Note due on or before December 31, 2013, along with a Pledge Agreement under which 50% of our interest in the NIBs was pledged (the NIBs Collateral) as security for payment of the Secured Promissory Note. Each Seller under the Transfer Agreement represented and warranted, as of the effective date of such Transfer Agreement, among other customary representations and warranties, that each was the sole beneficial and legal owner of the NIBs; that none was aware of any document that would preclude each such Seller from consummating the sale of the NIBs each was selling; that each owned the NIBs being sold, free and clear of any liens or other encumbrances of any kind; and that each portfolio of Policies was valid, in-force and in good standing and had not lapsed, nor were any in any grace period. The Transfer Agreement also provides
that if we fail to pay the Secured Promissory Note when due, that we may reconvey the NIBs Collateral to each Seller under the Transfer Agreement, as full payment under the Secured Promissory Note, excluding only accrued interest at 4.0% per annum; and that regardless of such reconveyance, we can reacquire the NIBs Collateral on or before April 11, 2014, by paying the balance due under the Secured Promissory Note. The Pledge Agreement also provides that there is no recourse against us in the event of the sale of the NIBs Collateral after default, with the Seller only having recourse against the NIBs Collateral. The Transfer Agreement, the Secured Promissory Note and the Pledge Agreement otherwise contain customary representations and warranties and provisions regarding due authorization, default, governing law, completeness and amendments provisions, among others. Copies of the Transfer Agreement, the Secured Promissory Note and the Pledge Agreement are filed as Exhibits to our 8-K Current Report dated March 29, 2013, and filed with the SEC on April 5, 2013. See Part IV, Item 15. Also see footnote 5 of our audited financial statements that accompany this Annual Report for a table containing additional information about the Policies underlying these NIBs. Although paid by the policy holder, the estimated premiums to be paid on the underlying policies for each of the five succeeding fiscal years to keep the Policies in force as of March 31, 2013, are as follows:
These premiums will reduce the net insurance benefits payable under the Policies, along with other costs and expenses and repayments under the MPIC, if any, as outlined above. Certain policies contain a return of premium provision, which will increase the net insured benefit as premium payments are made.
It is anticipated that we will purchase the NIBs and hold them until maturity. Through the combination of the Senior Loans, MPICs and debt or equity financing by us, management believes we should be well positioned to hold the NIBs until maturity. However, we will continuously analyze the Senior Loan amounts, MPIC payments, NIBs and underlying Policies to determine, in conjunction with the Lux Sarls, whether any such assets should be liquidated. Further, in the event of any events of default under the Senior Loans or MPICs, we will be prepared to sell the affected assets, in conjunction with the Lux Sarls, if necessary or advisable. There is an active secondary market for Policies that we can access if it is determined that any of the Policies or NIBs should be liquidated. However, prices in the secondary market are relatively volatile, and our goal is to avoid the early sale of NIBs or Policies so that we can realize maximum net amount on maturity of the Policies. Through strategic alliances with well known Policies servicers and market participants, we believe we have direct lines of communications with the potential participants active in the life settlement secondary market; however, no assurance can be given that if we are required to sell any of our NIBs or other insurance related products prior to maturity, that we will be able to do so without incurring a loss.
We have not had any recent public announcement of any new product or service.
decline from 2012 and beyond due to lingering distress in the credit and investment markets and investor concerns regarding liquidity requirements of life settlements. Regardless, we believe that the supply of policies should steadily increase due to the aging population and increased awareness of the life settlement market as an alternative to allowing a policy to lapse for little or no value. Participants in the life secondary market include major insurance companies and many funds.
The Senior Loans typically have a term of approximately five years and can be drawn upon during such term. The Senior Loan can be prepaid subject to certain pre-payment penalties. We intend to attempt to renegotiate the Senior Loans or have alternate financing available, prior to the end of the Senior Loans terms. The Senior Lender has confirmed to us that it is committed to the issuance of Senior Loans, and that it will have the capacity to meet our demands for financing related to NIBs, although no written agreement in this regard has been provided.
The Senior Lender has been granted a full banking license, and as such it is registered with and supervised by the appropriate regulatory body. The Senior Lender is not rated.
consultant (see the heading Dependence on One or a Few Major Providers below), which is engaged in the business of structuring pooled life insurance purchases, sales and financing in Luxemburg, Ireland and Germany.
We do not purchase life insurance policies or life settlement products directly from any insured, accordingly, we are not required to have any special licenses to conduct our current and intended business operations; however, see the heading Effect of Existing or Probable Governmental Regulations on the Business directly below for additional information on the effect of existing or probable government regulations on our business.
We are also an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not an emerging growth company, like those applicable to a smaller reporting company, including, but not limited to, a scaled down description of our business in SEC filings; no requirements to include risk factors in Exchange Act filings; no requirement to include certain selected financial data and supplementary financial information in SEC filings; not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that we file under the Exchange Act; and exemptions from the requirements of holding an annual nonbinding advisory vote on executive compensation and seeking nonbinding stockholder approval of any golden parachute payments not previously approved. We are also only required to file audited financial statements for the previous two fiscal years when filing registration statements, together with reviewed financial statements of any applicable subsequent quarter.
We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We can remain an emerging growth company for up to five years. We would cease to be an emerging growth company prior to such time if we have total annual gross revenues of $1 billion or more and when we become a large accelerated filer, have a public float of $700 million or more or we issue more than $1 billion of non-convertible debt over a three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Except for the limitations excluded by the JOBS Act discussed under the preceding heading Emerging Growth Company, we are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members appointment, compensation and oversight of the work of public companies auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act like we are to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A (where proxies are solicited) or 14C (where consents in writing to the action have already been received or anticipated to be received) of Regulation 14, as applicable; and preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders.
We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
We had no research and development costs during our last two fiscal years ended March 31, 2013, and 2012.
We have three full-time employees, Randall F. Pearson, our President; Glenn S. Dickman, our Secretary; and Lisa L. Fuller, our general legal counsel.
You may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all of the reports or registration statements that we have filed electronically with the SEC at its Internet site at www.sec.gov. Please call the SEC at 1-202-551-8090 for further information on this or other Public Reference Rooms. Our SEC reports and registration statements are also available from commercial document retrieval services, such as CCH Washington Service Bureau, whose telephone number is 1-800-955-0219.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide risk factors; however, we have included risk factors that are applicable to our Company.
You should carefully consider each of the following risks and uncertainties associated with our Company or the purchase or ownership of our common stock, as well as all of the other information contained in this Annual Report, including our financial statements.
Generally
The occurrence of any of the risks or uncertainties described below could significantly and adversely affect our business, prospects, financial condition and operating results. The following are representative of those risks.
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. ANY PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD CAREFULLY READ THIS ANNUAL REPORT AND CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS. EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK.
Risk Factors relating to Our Company
We are newly formed, and our auditors have added a going concern qualification to their Independent Auditors Report issued for our financial statements.
Our Independent Auditors Report dated July 16, 2013, expresses a going concern reservation in connection with our audited financial statements for the period from inception or January 31, 2013, to the period ended March 31, 2013. Note (11) of our audited financial statements states that the Company had an accumulated deficit of $104,651 and a working capital deficit of $2,550,106. In addition, the Company is a development stage entity and has not generated any revenues and has negative cash flows from inception through March 31, 2013. These factors raise substantial doubt about the Companys ability to continue as a going concern. See the caption Financial Statements and Exhibits of Item 5.01 below.
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Our management has little experience in our chosen industry of operations and must initially rely on our general legal counsel and outside consultants or others in this industry to make informed business decisions; and potential conflicts of interest involving those parties who are relied upon could adversely affect the value of our life insurance products.
Members of our management have had their first exposure to the life settlement industry during the last nine months. They have and will continue to rely on consultants and servicers in this industry, along with our general legal counsel, in evaluating life insurance products for purchase. Many of these consultants or servicers represent or provide services to others in this industry, and no assurance can be given that we, as a new, developmental stage company and a small competitor competing with larger competitors in this industry, will not be treated less favorably by these consultants than our competitors. Even as management accumulates expertise in this industry, we will still being relying on the expertise of outside consultants for various factors, including valuation, life expectancies, actuarials and other matters specific to life insurance policies, most of which are outlined below under this caption under the heading Risks related to Policies.
Proposed securities regulations and other governmental regulations may increase our costs of doing business substantially, and our results of operations will suffer.
The SEC and Congress, along with various states, have proposed various regulations of the life settlement industry, any of which could substantially increase our costs and limit our business operations, even though we intend to acquire life insurance products and hold them to maturity. Also, compliance with these regulations will be costly, and may hinder our ability to successfully implement our business model, and we may fail.
Our Projections, Forecasts and Estimates may be incorrect, which may subject us to liability or cause us to fail.
Any projections, forecasts and estimates contained herein are forward-looking statements and are based upon certain assumptions that we consider reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. Accordingly, any such projection is only an estimate. Actual results may vary from a projection, and such variations may be material. Our present business and revenues are dependent upon our reliance on others.
We are substantially dependent upon information provided by consultants and servicers of the life insurance policies underlying the NIBs for evaluating life settlements or NIBs for purchase. The success of our business largely depends on the skills, experience and efforts of servicers and consultants such as Europa, their management teams and other key personnel. The loss of the services of one or more members of such senior management teams or other employees with critical skills needed to operate their businesses could have a negative effect on our business. Competition for these types of personnel can be intense, and we and our consultants may not be successful in attracting, assimilating and retaining the personnel required to replace any of its senior management team and other key employees. This could substantially adversely affect our business.
Our projections are based on our ability to purchase NIBs related to Policies with combined face amounts in excess of $500,000,000 and at least 100 underlying insureds. The more underlying insureds we have related to our NIBs, the more reliable the actuarial results will be. We understand that rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability. It will take years for us to reach such levels, if ever. The relative low number of insureds makes our models and projections less reliable. We currently own Policies with an aggregate original face amount of $129,038,933, with 22 underlying insureds, which increases our risk that our actual yield may be less than expected as our portfolio may not be sufficiently diversified.
The Lux Sarls may not be able to pay fees and costs of the Senior Lender, and we may lose the interest in our NIBs, which could cause our business to fail.
The Senior Lender has entered into the Loan Facility, the proceeds from which will be available in certain circumstances for the payment of premiums in respect of the Policies and the Fees. No assurance can be given that amounts available under the Loan Facility will at all times be sufficient to pay all the premiums and fees due and payable. In addition, the Loan Facility generally has an initial term of five years, and no assurance can be given that the Loan Facility will be renewed. Furthermore, if an event of default occurs under the Loan Facility (which, among other things, includes an Event of Default), no assurance can be given that we will be able to cure such event of default, in which case the Senior Lender will have the right to exercise remedies against the Policies, and will be entitled to cause a disposition of Policies and receive proceeds of such disposition in priority to us. The Senior
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Lender is not rated, and although it currently anticipates having sufficient capital to honor its funding obligations under the Loan Facility, no assurance can be given that it will continue to have sufficient capital for the entire term of the Loan Facility.
Our business activities are highly regulated and new or proposed government regulation or legislative reforms could increase our cost of doing business, reduce our revenues and liquidity, increase our losses or subject us to additional liability.
The limited number of sellers of NIBs and similar life settlement products may have an adverse affect on our planned business model and may limit our ability to negotiate favorable prices in the acquisition of these life settlement interests.
To our knowledge, Del Mar Financial and PCH Financial, the two sellers from whom we have acquired all of our present interests in NIBs and similar life settlement products, are the only sources for these life settlement products. Unless other sources become available, our ability to purchase the life settlement products desired under our business model may be limited, and our ability to seek competitive pricing will be limited. These factors could have an adverse affect on our business, growth potential and our success. We are currently seeking other sources of providers of these life settlement products. Further, our business model includes acquiring life settlements directly and obtaining loans for premium payments and MPIC or similar insurance arrangements to those associated with our NIBs, though no assurance can be given that we will be successful in these endeavors, or that the lack of competitors in providing NIBs and related life settlement products will not have an adverse effect on our business model and the quality and price of life settlement products we purchase.
We do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing NIBs.
Our guidelines for purchasing NIBs do not track concentrations of pre-existing medical conditions, and this could have an adverse effect on our estimates of life expectancies, which would in turn have an adverse effect on our anticipated revenues or projections.
We are not licensed in any state to engage in the purchase of life insurance policies from original policy owners.
Because we are not licensed in any state to allow us to purchase life insurance policies directly from insureds, our purchases of life insurance policies must be made in the secondary market where the prices are often higher and include fees to agents or providers. Accordingly, those with adequate licensing could obtain life insurance policies at prices that are less than we can acquire them. Although this lack of licensing for direct purchases may be a competitive disadvantage, we do not intend to purchase life insurance policies directly from insureds under our business model, and accordingly, the lack of such licensing is not otherwise material to our operations.
Current and future federal regulation may have an adverse effect on our business and our planned business operations.
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) into law. The Dodd-Frank Act contains significant changes to the regulation of financial institutions including the creation of new federal regulatory agencies, and the granting of additional authorities and responsibilities to existing regulatory agencies to identify and address emerging systemic risks posed by the activities of financial services firms. The Dodd-Frank Act also provides for enhanced regulation of derivatives and asset-backed securities offerings, restrictions on executive compensation and enhanced oversight of credit rating agencies. The provisions include a new independent Bureau of Consumer Financial Protection to regulate consumer financial services and products, and life settlement transactions may be within the scope of its jurisdiction. Actions taken by the Bureau of Consumer Financial Protection may have material adverse effects on the life settlement industry and could affect the value of the Collateral securing our NIBs and the value of our NIBs or life settlements in general. In addition, the Dodd-Frank Act also limits the ability of federal laws to preempt state and local consumer laws. While it is too early to assess the full impact of the Dodd-Frank Act generally on our business and prospects, the Collateral manager and the Servicers, prospective investors should be aware that the changes in the regulatory and business landscape as a result of the Dodd-Frank Act could have an adverse impact on us, the Collateral managers, the Servicers and/or on the value of the Collateral and the NIBs. Greater oversight of
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the life settlement industry may have a substantial adverse impact on how we conduct our business and may substantially increase our costs of operation.
In August 2009, the SEC established a Life Settlements Task Force to investigate the life settlements market. On July 22, 2010, the SEC released a Staff Report by the Life Settlements Task Force that recommended the SEC consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlement policies, such as the Policies, as securities. Several months ago, one U.S. Congressman sought to introduce a bill to amend the definition of security as recommended by the SEC. While that attempt did not result in any action, there can be no assurance that such a bill will not be passed at some future date. If federal securities laws are indeed amended to include such policies within the definition of security, or if courts with relevant jurisdiction interpret existing securities laws to that effect, our ability to operate our business under our current business model may be constrained by additional registration and securities compliance requirements under the Securities Act, the Exchange Act and the Investment Company Act. Intermediaries may be required to register as broker-dealers or registered investment advisers, and would otherwise be subject to oversight by the SEC and the Financial Industry Regulatory Authority, which require adherence to numerous rules and regulations.
The Senior Lender is believed to be one of only one or two current sources for financing the Senior Loans.
There is currently believed to be only one or two current sources of financing for the Senior Loans, one of which is the European institution that has provided the Senior Loans for our present NIBs portfolio. This European institution is unrated, and although we have indicated that we have a close relationship with this institution, we have no binding agreements or understandings pursuant to which this Senior Lender has agreed to finance other life settlement products for us. Our inability to finance life settlement products in the future with the Senior Lender or through some other source, could have a substantial adverse impact on our business, and the fact that our Senior Lender is unrated, raises questions about the stability of the Senior Lender and our Senior Loans. These factors can negatively affect the value of our NIBs portfolio and may make it difficult to use our present NIBs portfolio as a source of debt financing, if desired, and may also result in a decreased valuation in the event we are required to dispose of these assets.
If our NIBs are determined to be securities, we may be required to register as an investment company under the Investment Company Act, which would increase our SEC reporting costs and oversight of our business operations.
The SEC has recommended that the Securities Act and the Exchange Act be amended to define life settlements as a security, so that persons involved in the life settlement markets would be afforded the protections of applicable federal securities laws, rules and regulations, along the probability of regulation under the Investment Company Act. The adoption of these regulations could substantially increase the costs of our filings with the SEC, including further oversight of our business model that could limit our ability to change investment policies without stockholder approval, prohibit acquiring assets from an affiliate without an approved exemptive application from the SEC, limit our leveraging of assets to one-third of our total asset value and account for all derivatives as a leverage of assets to the extent that they create an obligation on our part to pay out assets to a counterparty ahead of our stockholders and generally, require 40% of our directors to be independent directors, along with other requirements that may impact operations, like recordkeeping requirements, reporting requirements and privacy requirements. All of these potential regulations could have a substantial negative affect on our business model and anticipated revenues and greatly increase our expense of regulatory compliance.
92% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets that are subject to significant fluctuations in fair value.
Our currently owned NIBs comprise approximately 92% of our assets, resulting in no diversification of our risks of business. Life settlement products like our NIBs and planned future purchases of life settlement products are subject to substantial fluctuations in value, primarily based upon matters that are not within our control, including financing costs, the solvency of our lenders and MPIC Providers, the health and life expectancy of the insureds under our Policies and the costs of maintaining the Policies, along with continually updating information about the health of the insured. This lack of diversification increases our risk of loss, and there can be no assurance the effect of any of these factors will not result in a substantial adverse impact on our business.
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The life settlement industry has overall transaction risks and involves a very speculative investment.
Despite a partys best efforts in design and implementation of a life settlement investment product, there can be no assurance that the transactions contemplated in our business model will perform as anticipated. It is a desirable goal to minimize, to the extent reasonably possible, risks relating to investments related to life settlements with the understanding that it is not possible with respect to the Policies, to determine in advance either the exact time that a life insurance policy will reach maturity (i.e., at the death of the insured) or the profit, loss or return on an investment in a life insurance policy.
In addition, no assurance can be given that any life insurance policy will perform in accordance with projections, and any such life insurance policy may decline in value. Consequently, there can be no assurance that we will realize a positive return on our investment and these types of investments should be considered to be speculative in nature. This, in turn, may directly affect the amount and timing of funding sought or received by us, which in turn will affect our ability to conduct our business. Thus, an investment in our Company is suitable only for investors having substantial financial resources, a clear understanding of the risk factors associated with such investments and the ability to withstand the potential loss of their entire investment.
Recent Economic Events could have an adverse effect on our business.
Recent market and economic conditions have caused significant disruption in the credit markets. Continued concerns about the availability and cost of credit, the mortgage market, declining real estate values and the systemic impact of inflation or deflation, energy costs and geopolitical issues have contributed to increased market volatility and diminished expectations for the U.S. economy as well as economies of other countries. Beginning in 2008, concerns fueled by events such as the federal governments conservatorships of Freddie Mac and Fannie Mae, and the failure of Lehman Brothers Holdings, Inc., led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with declines in business and consumer confidence and increased unemployment, have contributed to volatility in domestic and international markets.
As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets and the strength of counterparties has led many lenders and institutional investors to reduce, and in some cases cease, lending to borrowers.
There continues to be uncertainty about the prospects for growth in the U.S. economy as well as economies of other countries. A number of factors influence the potential uncertainty, including, but not limited to, high current unemployment, rising government debt levels, prospective Federal Reserve (and similar foreign bodies) policy shifts, the withdrawal of government interventions into the financial markets, changing consumer spending patterns, and changing expectations for inflation and deflation. These factors have adversely affected the financial markets and the claims-paying ability of many insurers. Moreover, there is a risk that economic activity could be weaker and financial volatility and uncertainty could be greater than anticipated.
These factors and general market conditions could adversely affect the performance and market value of our NIBs and our future prospects. There can be no assurance that governmental or other actions will improve these conditions in the near future.
The costs in time and expense of being a publicly-held company are substantial and will only increase if our business model is successful.
We are a reporting issuer under Section 13 of the Exchange Act, required to file annual reports (SEC Form 10-K), quarterly reports (SEC Form 10-Q) and current reports respecting certain events (SEC Form 8-K), along with proxy or information statements for any meeting of stockholders or written consents of stockholders holding sufficient securities to effect corporate actions. Most of these reports require financial information, including the annual report, which requires year end audited financial statements by an independent public accountant that is PCAOB registered, like our auditors, and the quarterly reports, which require reviewed quarterly financial statements by such auditors. The preparation of these reports, their review by management and professionals, and the preparation of these financial statements by our in-house accountants and management, as well as the auditing and review process
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of such financial statements is time consuming in terms of management resources and costly in terms of professional fees for lawyers, accountants and auditors. It is difficult to quantify these costs, but they are expected to be not less than between approximately $87,500 and $100,000 annually. As our business grows, these costs can only increase.
Risk Factors Relating Our Common Stock
There is no established public market for our common stock, and any market that may develop could be volatile.
There is currently no established public market for our common stock. Less than 10,000 shares of our common stock have publicly traded during the quarter ended March 31, 2013, and no assurance can be given that any established public market for our shares will commence, or if one does commence, that it will continue, in any respect. Interest in our common stock may not lead to a liquid trading market, and the market price of our common stock may be volatile. The following may result in short-term or long-term negative pressure on the trading price of our shares, among other factors:
·
Conditions and publicity regarding the life settlement market and related regulations generally;
·
Price and volume fluctuations in the stock market at large, which do not relate to our operating performance; and
·
Comments by securities analysts or government officials, including those with regard to the viability or profitability of the life settlement industry generally or with regard to our ability to meet market expectations.
The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies.
We are an emerging growth company, subject to less stringent reporting and regulatory requirements of other publicly-held companies, and this status may have an adverse effect on our ability to attract interest in our common stock.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting and regulatory requirements that are applicable to other public companies that are not an emerging growth company. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile. See the heading Emerging Growth Company of this Item 501 above.
Our common stock is be deemed to be Penny Stock, which will further limit any potential future public market for our shares.
Our common stock may be deemed to be penny stock as that term is defined in Rule 3a51-1 of the SEC. Penny stocks are stocks (i) with a price of less than $5 per share; (ii) that are not traded on a recognized national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years); or $5,000,000 (if in continuous operation for less than three years); or with average revenues of less than $6,000,000 for the last three years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the SEC require broker dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investors account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be penny stock.
Rule 15g-9 of the SEC requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-
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dealer to (i) obtain from the investor information concerning his, her or its financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor, and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investors financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them.
Our Management and two stockholders own approximately 74.4% of our outstanding common stock and could elect all of our directors who in turn elect all of our officers.
This percentage of stock ownership is significant in that it could carry any vote on any matter requiring stockholder approval, including the subsequent election of directors, who in turn elect all officers. As a result, these persons effectively control the Company, regardless of the vote of other stockholders. As a result, other stockholders may not have an effective voice in our affairs. See the caption Security Ownership of Certain Beneficial Owners and Management of this Item 5.01 below.
Future sales of our common stock could adversely affect our stock price and our ability to raise capital in the future, resulting in our inability to raise required funding for our operations.
Sales of substantial amounts of our common stock could harm the market price of our common stock. This also could harm our ability to raise capital in the future. There are approximately 826,000 shares of our common stock that are freely tradable without restriction under the Securities Act by persons other than affiliates, as defined under the Securities Act. Any sales of substantial amounts of our common stock in the public market, or the perception that those sales might occur, could harm the market price of our common stock. See the captions Market Price of Common Stock and Related Matters and Security Ownership of Certain Beneficial Owners and Management of Item 5.01 below. Further, certain stockholders have piggy-back registration rights afforded to them if we file a registration statement with the SEC; these shares or any registered securities we may register can also have an adverse effect on any market for our common stock. See the Capitalization Tables in Item 1.01.
We will not solicit the approval of our stockholders for the issuance of authorized but unissued shares of our common stock unless this approval is deemed advisable by our Board of Directors or is required by applicable law, regulation or any applicable stock exchange listing requirements. The issuance of those shares could dilute the value of our outstanding shares of common stock.
Risks Related to the Policies.
Our Policies may be determined to have been issued without an insurable interest and could be void or voidable.
State insurance laws in the United States require that an insurance policy may only be initially procured by a person that has an insurable interest in the continuance of the life of the insured. Whether an owner has an insurable interest in the insured is a question of applicable state law. The general concept is that a person with an insurable interest is a person that has a continuing interest in the insured remaining alive, whether through the bonds of love and affection or due to certain recognized economic relationships. Typically this includes the insured, the insureds spouse and children, and in some states, other close relatives. In some jurisdictions, however, this could also include entities such as the insureds business partners, creditors, employer, business partners or certain charitable institutions. It also typically includes a trust that owns a life insurance policy insuring the life of the grantor or settlor of the trust where the beneficiaries of the trust are persons, who, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured.
A policy purchased by a person without an insurable interest may, depending on relevant state insurance law, be (i) void, (ii) voidable by the insurer that issued the policy and/or (iii) subject to the claims of the insureds presumptive beneficiaries, such as his or her spouse or other family members. In some states, the insured must consent to the purchase of a policy by a person other than the insured.
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Generally, state insurance law is clear that an individual has an insurable interest in his or her own life and may procure life insurance on his or her own life and may name any person as beneficiary. However, if a person purchases insurance on his or her own life for the benefit of a party who does not have an insurable interest in the life of the insured for the purpose of evading the insurable interest laws, the purchase may be viewed under applicable state law as a violation of the states insurable interest laws. Should the Issuer own an interest in a policy that was originally issued to an owner or for the benefit of a beneficiary (if required) that did not have an insurable interest, it is possible that the Issuer may not have a valid claim for the death benefits on such policy, and upon the death of the insured, the issuing insurance company may refuse to pay the death benefits on the policy to us or may be required to pay the death benefit to other beneficiaries of the insured. Should any such claims be successful, we may lose some or all of the amounts we have invested in our Policies, although in some states the issuing insurance company may be required to repay the premiums if it rescinds the policy. Some states, such as Florida, allow the carrier to retain all the premiums and some states that require premiums to be returned permit the carrier to maintain an action for damages. Even if such claims are unsuccessful, significant amounts may need to be expended in defending such claims, thereby reducing the amounts we may receive from our NIBs and other life settlement interests we may purchase.
Concern also exists regarding the applicability of state insurable interest requirements to the purchase of a policy by an insured or a person with an insurable interest in the life of the insured in circumstances in which the owner of the policy obtains a loan secured by the policy to finance the payment of premiums on the policy, often referred to as a premium finance transaction. A substantial number of the Policies were originated pursuant to premium finance transactions. Neither the Collateral manager nor any other party makes any representations or warranties with respect to the premium finance programs relating to such premium finance transactions or any other documentation relating to such premium finance transactions. While it is generally accepted by state law that an individual has an insurable interest in his or her own life, it is possible that a court might construe a premium finance transaction as an attempt to evade the requirement that an insurable interest exist at the time an insurance policy is issued. If the borrower in such a transaction is found to be acting, in fact, on behalf of a premium finance company to procure an insurance policy, it is possible that a court might find that the real party in interest is the premium finance company, which by itself would not have an insurable interest sufficient to support the insurance policy. As a result, the insurance policy may be void or subject to attack, which could diminish the value of the policy. States have varying precedent on this subject. California and New York have case law that is very favorable to the policy owner (
see
Lincoln v. Jack Teren and Jonathan S. Berck, as trustee of the Jack Teren Insurance Trust
(Superior Court of the State of California, San Diego) and
Alice Kramer v. Lockwood Pension Services, Inc., et al.
, (United States District Court Southern District of New York)). These courts have held life insurance policies to be enforceable even where the policies were clearly purchased with an intent to sell the policies in the future. Florida and Delaware have case law that is more favorable to the insurance carrier (
see
PrucoLife Insurance Company v. Steven M. Brasner, et. al.
(US District Court Southern District of Florida) and
PHL Variable Insurance Co. vs. Price Dawe
, (Supreme Court of Delaware)). These courts of invalidated policies where the original policy owners financed the policies and did not intend to purchase the policies with their own money and further intended to ultimately sell the policies in the life settlement markets.
Also, in every state that has addressed the question other than New York and Michigan, the expiration of an insurance policys contestability period may not cut off the insurers ability to raise the insurable interest issue as a defense to the payment of the policy proceeds.
One or more states could adopt legislation that would require a holder of an insurance policy to have an insurable interest in the insured at the time a policy is purchased and at the time of death of the insured. We will not have an insurable interest in the insureds polices acquired by or on our behalf. If such legislation were to be adopted without a grandfathering provision (i.e., so as not to be applicable to insurance policies then in force), then we may be unable to collect the proceeds on the death benefits of the insured persons under our Policies purchased prior to the enactment of such legislation.
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Additional insurable interest concerns regarding Policies originated pursuant to premium finance transactions may also result in adverse decisions that could affect our Policies.
The legality and merit of investor-initiated or stranger-originated life insurance products have been questioned by members of the insurance industry, including by many life insurance companies and insurance regulators. For example, the New York Department of Insurance issued a General Counsels opinion in 2005 concluding that a premium finance program that was coupled with the right of the policy owner to put the financed insurance policy to a third party violated New Yorks insurable interest statute and may also constitute a violation of New York States prohibition against premium rebates/free insurance. More recently, many states have enacted laws expressly defining and prohibiting stranger-originated life insurance (STOLI) practices, which in general involve the issuance of life insurance policies as part of or in connection with a practice or plan to initiate life insurance policies for the benefit of a third-party investor who, at the time of the policy issuance, lacks a valid insurable interest in the life of the insured. Under these laws, certain premium finance loan structures are treated as life settlements and, accordingly, may not be entered into at the time of policy issuance and for a two or five year period thereafter, depending on the state. Certain court decision issued over the past few years may also increase concerns with premium financed policies. In one recent decision, the Delaware Supreme Court stated that that the key focus in insurable interest cases is who paid the premiums. While the decision was not issued in connection with a premium financed policy, no assurance can be given that a court would not apply such reasoning to premium financed policies. We cannot predict whether a state regulator, insurance carrier or other party will assert that any of the Policies should be treated as having been issued as part of a STOLI transaction or otherwise were issued in contravention of applicable insurable interest laws. This risk is greater where the insured materially misstated his or her income and/or net worth in the life insurance application. Recent decisions in Florida and Delaware have increased the risk that challenges to premium financed policies may be decided in favor of the issuing insurance company. Moreover, because the Collateral consists of s portfolio of Policies that were originated in the same or a similar manner and in a limited number of states (generally, California and Wisconsin, although the insured may reside in other states), there is a heightened risk that an adverse court decision or other challenge or determination by a regulatory or other interested party with respect to a policy could have a material adverse effect with respect to a significant number of other Policies, including the rescission of Policies or the occurrence of other actions that prevent us from being entitled to receive or retain the death benefit under the related Policies upon the death of the related insured persons. Concerns of such nature could also negatively affect the market value and/or liquidity of the Policies.
Fraud in the application for life insurance can also affect our assets and our interest in our NIBs.
There are risks that the Policies were procured on the basis of fraud or misrepresentation in connection with the application for the policy. Types of fraud that have occurred in applications where carriers have successfully rescinded or voided the policies include, among others, misrepresentations concerning an insureds financial net worth and/or income, need for and purpose of the life insurance protection, health or age and whether he or she is a smoker. Such risk of fraud and misrepresentation is heightened in connection with life insurance policies for which the premiums are financed through premium finance loans or other structured programs. In particular, there is a significant risk that applicants and potential insureds may not answer truthfully or completely questions related to whether the life insurance policy premiums will be financed through a premium finance loan or otherwise, the applicants purpose for purchasing the policy or the applicants intention regarding the future sale or transfer of the life insurance policy. Such risk may be further increased to the extent life insurance agents communicate to applicants and potential insureds regarding potential premium finance arrangements or profits to be made on policies that will be sold after the contestability period. If an insured has made any material misrepresentation on his/her application for life insurance, there is a heightened risk that the insurance company will contest or successfully rescind or void the related policy, although an issuing insurance company may not be able to raise such claims after the expiration of the contestability period. Each of the Policies beyond the contestability period. Even if such fraud in the application could not serve as a basis to challenge a policy because the contestability period has expired, it may be raised as evidence that the policy was provided as part of a STOLI arrangement.
The risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase or risk of loss.
Some of the programs relating to the premium finance transactions through which the Policies were originated, or other programs having similar characteristics, may be objectionable to certain life insurance companies and other parties, including certain regulators, on the basis of constituting a means of originating stranger-originated life insurance. Additionally, as described above, life insurance policies that are originated through the use of premium
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finance programs often present a greater risk of there having been fraud and/or misrepresentations in connection with the issuance of the policies. For these reasons, among others, it is possible that we may become subject to, or may otherwise become affected by, litigation involving one or more Issuing Insurance Companies (either as a plaintiff or a defendant), including claims by an issuing insurance company seeking to rescind a policy prior to or after the death of the related insured. Moreover, such risk may be enhanced with respect to an issuing insurance company that is experiencing financial difficulty, since a successful claim by an issuing insurance company could reduce its financial liabilities. In the event any litigation was to occur, we would bear the costs of defending against the litigation, and would be unable to predict its outcome, which could include our losing our right to receive (or retain) the proceeds otherwise payable under one or more of the Policies.
Contestability of life insurance Policies is a further risk that can result in the loss of the benefits on Policies and have adverse consequences on our results of operation.
The significance of the risk that an issuing insurance company may seek to rescind one or more Policies depends on whether the issuing insurance company is barred from bringing a rescission action by operation of an incontestability clause contained therein or contestability limitations applicable as a matter of state law. Each life insurance policy, in accordance with laws adopted in virtually every state in the United States, contains a provision that provides that, absent a failure to pay premiums, a policy shall be incontestable after it has been in force during the lifetime of the insured for a period of not more than two years after its date of issue. However, some states recognize an exception to incontestability where there was actual fraud in the procurement of the policy. A new contestability period may also arise in connection with information provided on any application for reinstatement of a life insurance policy following lapse of a policy due to non-payment of premiums, or an application for an increase in policy benefits. These events could prove to be adverse to us and our life settlement interests if the Policies are contested and the issuing insurance company is successful in any such claim.
Our longevity assumptions may prove to be inaccurate, and our interests in our NIBs and any other life settlement interests could lose value or be lost because we may not have the funds to pay required premiums beyond what was anticipated in these assumptions.
In addition to risks in the manner in which the Policies were originated, another principal risk related to ownership of the Policies, and consequently to us and investors in our common stock, is the uncertainty regarding the date of death of an insured with respect to a policy. Life expectancies are projected from the medical records of the insured and actuarial data based upon the historical experience of similarly situated persons. It is impossible to predict with certainty any insureds life expectancy. We have and will base our longevity assumptions on the reports of third-party life expectancy providers, among whom there is no uniformity of assumptions, approach or procedure. Also, there are significant disputes among third-party life expectancy providers regarding the mortality rate relating to certain disease states and the efficacy of certain treatments. Many of these life expectancy providers have revised their methodologies resulting in increased longevity estimates. On January 22, 2013, 21st Services LLC announced a significant revision in their methodologies. These changes in methodologies may have reduced the internal rate of return on the Policies and could cause increased difficulty in financing premiums. The Loan Facility requires that certain loan to value ratios be maintained and decreases in policy values could result in violations of these provisions. There can be no assurance that additional revisions extending predicted life expectancies will not be forthcoming, exacerbating these risks.
We rely primarily on four different life expectancy providers, 21
st
Services LLC, American Viatical Services LLC, Fasano Associates and EMSI. It is somewhat unclear how the changes in the 21
st
Services methodology will impact our current or future portfolio purchases. If the changes are significant, it should lower prices for future NIBs (to our benefit), but could also lower the value of our current NIBs portfolio due to the lower resulting present value of the death benefits forecasted to be paid at later dates due to the life expectancy changes. The existing NIBs portfolio should not be materially impacted by the changes in the 21
st
Services methodology in the short term because the financing is locked in for four to five years. Further, the remaining three life expectancy providers have not made changes that would impact the value of the Policies, which provides stability. Life expectancy changes are hard to predict. This is one of the factors we considered when utilizing the MPIC, which lessens the impact of life expectancy variances by guaranteeing certain minimum levels of payments when the Policies do not mature as expected.
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Some factors that may affect the accuracy of a life expectancy report or other calculation of the estimated length of an individuals life are:
·
the experience and qualifications of the medical professional or life expectancy company providing the life expectancy estimate;
·
the completeness and accuracy of medical records received by the life expectancy company;
·
the reliability of, and revisions to, actuarial tables or other mortality data published by public and private organizations or developed by a life expectancy company and utilized by its medical professionals;
·
the nature of any illness or health conditions of the insured disclosed or undisclosed;
·
changes in living habits and lifestyle of an insured and medical treatments, medications and therapies available to and used by an insured; and
·
future improvements in medical treatments and cures, and the quality of medical care the insured receives.
If the insured lives longer than any or all of the life expectancy appraisals predict, then the amounts available to us on our NIBs or other life settlement interests could be diminished, perhaps significantly, due to the additional time during which premiums will have to be paid in order to keep the related policy in force, the longer period that will elapse before any death benefits are paid on the related policy and the longer the time in which our ancillary operating, financing and servicing costs will be incurred. If the period for too many Policies exceeds beyond the maturity date for our Policies, then our interests in the Policies may have to be liquidated instead of receiving the related death benefits, and the market value of such Policies will necessarily be significantly less than the related death benefits.
Increases in cost of insurance could reduce our estimated returns and lower our revenues.
Insurers pass on a portion of their expenses to operate their business and administer their life insurance policies in the form of policy charges borne by each policyholder. In the event an insurer experiences significantly higher than anticipated expenses associated with operation and/or policy administration, the insurer has the right to increase the charges to each of its policy owners. In the event of material increases to the policy charges, it is possible that additional premium payments will be required to maintain the policy in force. While the increased cost of maintaining the affected Policies has been taken into account in the Servicers projection of premiums on the portfolio, there can be no assurance that there will be no additional increases nor can there be any assurance that premiums on other Policies will not be increased. No assurance can be given that we will have sufficient funds available to pay all premiums on the Policies if policy premiums increase.
The lapse of Policies will result in the entire loss of our interest in those particular Policies.
We will be required to make premium payments on the Policies in order to keep them in force. These payments generally will be made from amounts available to the Lux Sarls pursuant to the Loan Facility, Death Benefits, and MPIC Payments. If there are insufficient funds available for this purpose or if we (or the Servicer of the Policies) does not pay premiums on a policy in a timely manner, the policy could lapse and the value of the asset could be lost.
There is poor liquidity in the secondary market for life insurance and life settlements.
The secondary market for life insurance and life settlements is relatively illiquid, and it is often difficult to sell Policies or interests in Policies at attractive prices, if at all. The ability to sell Policies may be made even more difficult due to the nature in which the Policies were originated, especially with respect to policies where the premiums were financed by the original owner, and the increased risk associated with holding such Policies. The Collateral manager may be limited in its ability to liquidate assets if it needs to do so in order to raise funds to pay premiums or otherwise. We may experience a loss (including a total loss) if Policies must be liquidated under less than optimal circumstances.
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Inflation and interest rate risk and their effect on the Policies.
If interest rates increase, the value of the Policies is likely to decrease. The market value of a policy is based, in large part, on the estimated discounted value of future cash flows from the policy, including death benefits, minus the estimated discounted value of future premiums due on, and other costs of maintenance of, the policy. Also, if the interest rates used to determine the market value of a policy change, the present value of the policy may also change. Generally, if interest rates increase, the present value of a life insurance policy decreases. If a policy holder is forced to sell a policy in a higher interest rate environment, the market price for the Policies may be less than the price at which such policy was acquired.
Carrier credit risk can adversely affect our interest in our NIBs or other life settlements.
We will be subject to the credit risk associated with viability of the issuing insurance company. The insolvency of an issuing insurance company or a downgrade in the ratings of an issuing insurance company could have a material adverse impact on the value of the Policies issued by the issuing insurance company, the collectability of the related death benefits and the ability of the issuing insurance company to pay the cash surrender value or other amounts agreed to be paid by the issuing insurance company. Any such impairment of the claims-paying ability of the issuing insurance company could materially and adversely affect the value of the Policies issued by the issuing insurance company, the ability of the policy holder to pay the premiums due on other Policies and our ability to pay any required policy premiums, fees and expenses of the service providers and our other expenses.
The inability to keep track of the insureds could keep us from updating the medical records of the insured.
It is important for the servicer to track the health status of an insured and keep information current, which is done by contacting the insured and/or other designated persons and obtaining updated medical records from an insureds physician. There are significant U.S. federal and state laws relating to privacy of personal information that affect the operations of the servicer and its ability to properly service the Policies, especially with regard to obtaining current information from an insureds physician.
Under the Health Insurance Portability and Accountability Act (HIPAA), the federal law that governs the release of medical records from medical record custodians, an insured may revoke his or her authorization for previously authorized third parties to receive medical records at any time, leaving the servicer unable to receive additional medical records.
The servicer may have to rely on a third party to track an insured, especially if states continue to adopt laws that would limit the ability of person other than a licensed life settlement provider or its authorized representative to control insureds for tracking purposes, and the servicer may lose contact with such insured. For example, the insured may move and not notify the servicer or any other third party that has authority to contact the insured. The servicer attempts to maintain contact information for the insured and/or one or more close family friends or relatives whenever possible so it can maintain contact with the insured. Additionally, the servicer subscribes to various databases that use public records and other information to track individuals. The servicer also subscribes to death notification services which use Social Security and public records information to notify the servicer if an insured has passed away so that it can begin the process of obtaining a death certificate and arranging for the payout of the policy. Changes adopted last year to the Social Security Administrations Death Master File have resulted in the elimination of many state records that were previously included in the Death Master File. The number of new records being added to the Death Master File has been reduced by approximately 40%. Thus, it has become necessary to enhance alternative methods for learning of an insureds death. On average, it now takes longer to learn about an insureds death as compared to periods prior to the changes in the Death Master File.
Despite these various tracking methods, it is still possible for the servicer to lose contact with an insured, making any additional updates of medical condition for the insured impossible. There can also be no assurance that the servicer will learn of an insureds death on a timely basis.
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Lost insureds can result in a delay or a loss of an insurance benefit that would have a negative effect on our revenues and prospects.
Occasionally, the issuing insurance company may encounter (or assert) situations where the body of the insured or reasonable other evidence of death cannot be located and/or identified. For example, the insured may have been lost at sea and there may not be proof of death available for several years or at all. Alternatively, the fact that the original beneficiaries no longer have any financial interest in a claim under the policy may mean that the issuing insurance company faces practical obstructions to recording accurately and in a timely manner the death of the insured. In the event of a lost insured, the death claim may be delayed for up to seven years by the issuing insurance company. Under these circumstances, typically, the claim will then be paid with interest from the date that the insured was originally presumed lost. Nonetheless, it remains possible that it will be difficult or impossible to locate and/or identify an insured to establish proof of death and, as a result, the related issuing insurance company may significantly delay (but not ultimately avoid) payment of the underlying death benefit. This delay could result in a longer than anticipated holding period for a policy which, in turn, could result in a loss to us.
Delays in receiving insurance proceeds result in a decrease in the death benefit.
The death of an insured must have occurred to permit the servicer to file a claim with the issuing insurance company for the death benefit. Obtaining actual knowledge of death of an insured, as discussed above, may prove difficult and time-consuming due to the need to comply with applicable law regarding the contacting of the insureds family to ascertain the fact of death and to obtain a copy of the death certificate or other necessary documents in order to file the claim. The death benefit typically increases subsequent to death by an interest rate that is less than the Senior Loan; thus, the policy proceeds become less valuable as time passes.
U.S. life settlement and viatical regulations may result in our being determined to have violated applicable law.
The purchase and sale of insurance policies in the secondary market from the policys original owner and among secondary market participants is subject to regulation in approximately 45 states and Puerto Rico. The scope of the regulations and the consequences of their violation vary from state to state. In addition, within a given state, the regulations may vary based upon the life expectancy of the insured at the time of sale or purchase. In many states, a policy on an insured with a life expectancy of two years or less is referred to as a viatical settlement or a viatical. A policy on an insured with a life expectancy of more than two years is referred to as a life settlement. The policy holders have not, and do not intend to, purchase viatical settlements and should not be subject to the regulatory regimes that govern these policies. However, the states vary in their technical definitions of viatical settlements and life settlements, and state insurance regulators, who are charged with interpretation and administration of insurance laws and regulations, vary in their interpretations. Therefore, despite our expectations, it may be possible that under the rules of a particular state a policy underlying our NIBs that is not commonly thought of as a viatical settlement may meet the technical definition thereof. Engaging in the purchase or sale of life settlements or viatical settlements in violation of applicable regulatory regimes could result in fines, administrative and civil sanctions and, in some instances, criminal sanctions. United States and state securities laws could have an adverse effect on our ability to liquidate any Policies we believe should be sold.
It is possible that, depending on the facts and circumstances attending a particular sale of a life insurance policy, a sale could implicate state and federal securities laws. The failure to comply with applicable securities laws in connection with dealings in life settlement transactions could result in fines, and administrative and civil sanctions and, in some instances, to criminal sanctions. In addition, parties may be entitled to a remedy of rescission regarding such transactions. State guaranteed funds give some protection for payments under Policies, but no assurance can be given that we will benefit from them.
State protections for the insolvency of an insurance company are limited
With respect to the Policies, the payment of death benefits by issuing insurance companies is supported by state regulated reserves held by the issuing insurance companies and, under certain circumstances and in limited amounts that vary from state to state, state supported life and health insurance guaranty associations or funds. However, such reserves and guaranty funds, to the extent in existence, may be insufficient to pay all death benefits under the Policies issued by an issuing insurance company if such issuing insurance company becomes insolvent. The obligation of a state guaranty fund to make payments may not be triggered in certain circumstances. In addition, in the event of an issuing insurance company insolvency, courts and receivers may impose moratoriums or delays on payments of cash surrender values and/or death benefits. In addition, the benefits of most or all of such state
29
supported guaranty funds are capped per insured life (irrespective of the number of policies issued and outstanding on the life of such individual), which caps are generally less than the net death benefits of the insurance policies. Guaranty fund laws often include aggregate limits payable with respect to any one life across different types of insurance policies, generally $300,000 to $500,000 depending on the state. Most state guaranty funds are statutorily created and the legislatures may amend or repeal the laws that govern them. In addition, most state guaranty fund laws were enacted with the stated goal of assisting policyholders resident in such states. Therefore, non-resident policyholders, beneficiaries, and claimants may not be covered or may be covered only in limited circumstances. As a result, state guaranty funds will likely provide little protection to us in the event of the insolvency of an issuing insurance company.
We may incur liability for failing to comply with U.S. privacy safeguards.
Both federal and state statutes safeguard an insureds private health information. In addition, insureds frequently have an expectation of confidentiality even if they are not legally entitled to it. If any of the Collateral manager, the Administrator, the Trustee, the Servicer, the Securities Intermediary, or the Custodian (each, a service provider) properly obtains and uses otherwise private health information, but fails to maintain the confidentiality of such information, such service provider may find itself the recipient of complaints from the affected individuals, their families and relatives and, potentially, interested regulatory authorities. Because of the uncertainty of applicable law, it is not possible to predict the outcome of such disputes. Additionally, it is possible that, due to a misunderstanding regarding the scope of consents that a service provider possesses, such service provider may request and receive from health care providers information that it in fact did not have a right to request or receive. Once again, if a service provider finds itself to be the recipient of complaints for these acts, it is not possible to predict what the results will be. This uncertainty also increases the likelihood that a service provider may sell, or cause to be sold, Policies in violation of applicable law, which could potentially result in additional costs related to defending claims or enduring regulatory inquiries, rescinding such transactions, possible legal damages and penalties and probable reduced market value of the affected Policies. Each of the foregoing factors may delay or reduce our return on Policies, and we may suffer a loss (including a total loss) on our investment in our NIBs or Policies or other life settlement interests.
Access to accurate and current medical information regarding the insured is necessary to evaluate Policies, but is affected by U.S. privacy concerns.
The value of a life insurance policy underlying our NIBs is inherently tied to the remaining life expectancy of the insured and information necessary to perform this valuation may not be available at the time of purchase or sale. For example, if a policy is being purchased in the secondary market from an entity that had earlier purchased the policy directly from the insured, it is likely that the insured made his or her medical records available at the time of his or her sale of the policy to the initial purchaser. However, if necessary consents were not obtained from the insured it is possible that this information cannot legally be made available at the time of the subsequent purchase of the policy. If it is legally available to the subsequent purchaser, it is possible that such information is outdated and of little utility for a current evaluation of the remaining life expectancy of the insured. Even if the insured made available to the then owner of the policy a general consent that purports to give the owner of the policy the right to subsequently request and receive medical information from the insureds health providers, it is possible for the insured, in the interim, to have revoked such consent. Likewise, it is possible that under applicable law, the consent expires after a certain period of time. Even if the consent is effective, without the then cooperation of the insured it may be difficult to convince the insureds health care providers of the consents efficacy and as such they may be reluctant to release medical information. These impediments to accessing current medical information can prove to be a significant obstacle to the proper valuation of a policy at the time of either the policys purchase or sale.
Changes to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on our ability to obtain loans with respect to our life insurance products and limit our ability to acquire additional life insurance products.
Our current business model relies on the availability of the Loan Facility. In the event of adverse regulatory changes or reduced capacity for life settlement lending, we could experience the same liquidity issues that have plagued other market participants. Changes to the Senior Lenders loan to value requirements and changes to regulatory large exposure limits could also result in liquidity issues for us. As mentioned above, changes in life expectancies
30
could cause decreases in policy values, which could result in loan to value violations and violations of large exposure limits. Either violation could result in need to provide liquidity to pay down the loan balances.
The availability of MPIC coverage is a condition of our business model and assumptions, which, if unavailable, will substantially increase our risk of failure.
The MPIC is a relatively new product, and there are no guarantees that the MPIC Providers will be able to meet our coverage needs. Without the MPIC coverage, we will have limited options when the Senior Loans mature (in four to five years) because we will have lost the guaranteed liquidity to be provided by the MPIC Providers. The Senior Lender could demand repayment and all future premiums could be our responsibility. We may be unable to find alternate financing.