Board members present: Herz, Batavick, Crooch, Schipper, Seidman, Trott, Young

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1 MINUTES To: From: Subject: cc: Board Members Goodman (x295) Minutes of May 11, 2005 Board Meeting (Life Settlements) Date: 5/17/05 FASB: L. Smith, Golden, Wilkins, Laurenzano, Belcher, Cropsey, Bielstein, Petrone, Mahoney, Swift, Polley, Getz, Thompson, Vernuccio, Intranet IASB: Leisenring The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation. Topic: Life Settlements Basis for Discussion: Memorandum dated April 20, 2005 Length of Discussion: 11:45 to 12:30pm Attendance: Board members present: Herz, Batavick, Crooch, Schipper, Seidman, Trott, Young Board members absent: Staff in charge of topic: None O Callaghan Other staff at Board table: Belcher, Golden, Goodman, Laurenzano, L. Smith Outside participants: Leisenring

2 Summary of Decisions Reached: Page 2 The Board decided the following regarding life settlements: 1. Life settlements (active life insurance policies that are purchased by third parties who intend to continue paying the premiums and collect the benefit) should be accounted for under the investment method as follows: a. The initial investment and continuing costs would be capitalized as the carrying value of the investment. b. The income recognized would be the difference between the proceeds of the policy and the carrying amount of the investment. c. Once the carrying amount of the investment equals the face value of the policy, subsequent continuing costs would be expensed. 2. The unit of account for measurement purposes would be an individual life settlement contract. 3. The following disclosures would be required as of the latest balance sheet date: a. The following information in the aggregate for life settlement contracts, categorized by remaining expected term of the contracts: i. The number of contracts ii. The face amount of the underlying insurance policies iii. The carrying value of the contracts. b. The maximum cash outlay for premium payments during the next fiscal year, assuming that none of the life settlement contracts are settled. 4. The guidance would be issued as an FASB Staff Position (FSP) on FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, with a 45-day comment period. 5. Retrospective application would be required. 6. This guidance would be effective for fiscal years beginning after the issuance of the final FSP, with early adoption permitted.

3 Objective of Meeting: Page 3 1. The objective of the May 11, 2005 Board meeting was for the Board to decide on the measurement, disclosures, and transition and effective date for life settlements. Matters Discussed and Decisions Reached: 2. Mr. O Callaghan opened the meeting by updating the Board on subsequent measurement issues regarding waivers for the Health Insurance Portability and Accountability Act of 1996 (HIPAA). He stated that although some life settlement providers obtain HIPAA waivers from insureds when purchasing their life insurance policies, which allow providers to obtain updated medical information, often they do not obtain such information because of the prohibitive cost. 3. Mr. O Callaghan presented the following measurement attribute alternatives for the Board to consider for life settlements: a. Investment method b. Effective yield method c. Present value income method d. Fair value method 4. Mr. O Callaghan also presented the following three alternatives regarding interaction of this project with the fair value option project: a. If the Board does not decide on the fair value method, allow providers to elect fair value at the effective date of the Fair value option project guidance. b. Allow providers to elect fair value prior to that effective date, and provide guidance as to which of the remaining three measurement alternatives would be the default. c. Exclude life settlements from the scope of the Fair value option project. 5. Mr. Young stated his preference for the investment method. He explained that he was concerned about the fair value method because of the reliability of actuarial data, lack of regulation of life settlement providers, rate of medical

4 Page 4 and technological breakthroughs, and immaturity of the life settlement industry. 6. Ms. Schipper stated her preference for the fair value method. She noted that although subsequent recognition might require level four measurement within the fair value hierarchy being established in the fair value measurement project, such measurement would reflect the way providers evaluate their investments in life settlement contracts. 7. Ms. Schipper further clarified that only the estimate of the timing, not the amount, of life settlement proceeds was uncertain. She noted that there are many instances in GAAP where fair value is the measurement attribute when both the timing and the amount are uncertain. 8. Mr. Batavick stated his preference for allowing providers to elect fair value prior to the effective date of the fair value option project guidance, with the investment method as the default measurement alternative. He stated that the current accounting for life settlements under FTB 85-4 is inappropriate. 9. Mr. Crooch stated his preference for the fair value method. He agreed with Ms. Schipper that subsequent recognition using level four measurement within the fair value hierarchy appropriately reflects the way providers make business decisions about their investments in life settlement contracts. 10. Mr. Trott stated his preference for the fair value method. He explained that recognition at fair value would capture the uncertainties noted by Mr. Young (paragraph 3). 11. Ms. Seidman stated her preference for the effective yield method, with the investment method as her second choice. She noted that any of the four measurement alternatives would be a vast improvement over the current accounting for life settlement contracts under FTB Ms. Seidman expressed concern that the fair value method was not sufficiently reliable either for initial or subsequent measurement, given the wide bid spreads initially offered to insureds by providers, even with current medical information.

5 Page Ms. Seidman stated that an incremental improvement would be more appropriate than another measurement anomaly for the Board to need to consider in either the fair value option or the insurance project. 14. Mr. Herz stated his preference for the investment method. He noted that he would prefer the fair value method if subsequent measurement data were sufficiently reliable. He clarified that his concern with the reliability of subsequent fair value measurements would not apply if the unit of account were the life settlement portfolio. 15. Mr. Golden noted that the notice to recipients would include a question on the reliability of such measurements. 16. The Board decided that the unit of account for measurement purposes would be an individual life settlement contract. 17. Ms. Seidman noted that providers could apply actuarial data from the portfolio to individual contracts. 18. The majority of the Board (Herz, Batavick, Seidman, and Young) decided on the investment method. Three members (Crooch, Schipper, and Trott) were in favor of the fair value method. Mr. Trott stated he and Ms. Schipper would likely formally object to the Board s decision. 19. Under the investment method: d. The initial investment and continuing costs would be capitalized. e. The income recognized would be the difference between the proceeds of the policy and the carrying amount of the investment. f. Once the carrying amount of the investment equals the face value of the policy, subsequent continuing costs would be expensed. 20. The Board decided that the following disclosures would be required as of the latest balance sheet date: g. The following information in the aggregate for life settlement contracts, categorized by remaining expected term of the contracts: i. The number of contracts ii. The face amount of the underlying insurance policies iii. The carrying value of the contracts.

6 Page 6 h. The maximum cash outlay for premium payments during the next fiscal year, assuming that none of the life settlement contracts are settled. 21. The Board decided that the guidance would be: i. Issued as an FSP on FTB 85-4 with a 45-day comment period. j. Applied retrospectively. k. Effective for fiscal years beginning after the issuance of the final FSP, with early adoption permitted. 22. Mr. Smith ended the meeting by requesting that the staff seek feedback from life settlement providers regarding application of this guidance and subsequent measurement. Follow-up Items: None. General Announcements: None.