At a recent Congressional hearing, a representative of the life settlement industry derided as ludicrous claims that securitization of life settlements would constitute a potential systemic threat to economic stability.
Indeed, said Russell Dorsett, president of the Life Insurance Settlement Association, the current economic crisis prompted in part by securitization of subprime loans has caused the life settlement market to decline as much as 75% from the prior year.
Moreover, added Steven H. Strongin, a managing director of Goldman Sachs & Co., the “handful of life settlement securitizations that have occurred to date, appear to have had little or no impact on the life settlement or life insurance markets.”
They made their comments at a hearing on Recent Innovations in Securitization convened by the Capital Markets Subcommittee of the House Financial Services Committee.
“It is somewhat ironic that we might be perceived to be a threat, in that this particular industry has suffered mightily due to the current financial crisis,” Dorsett said.
At best, he noted, the number of completed life settlement transactions during calendar 2009 might approach 50% of those completed in 2008; there are some indications that the volume of completed transaction declined by as much as 75% during the first half of 2009 compared to the same period the year before, primarily due to dearth of investment capital available to purchase policies.
In his testimony, Strongin estimated that just over $1 billion of life settlements have been securitized since 2000.
“This remains one of the smallest and most sporadic of the securitization sectors, and while we have never been involved in a life settlement securitization, we see little investor interest in such a market given its size as well as numerous structuring challenges.”
Strongin said life settlement securitizations do not appear to pose any special securitization-related risk, and can be treated like any other securitization. “However, there do appear to be special issues in terms of consumer protection in life settlements in general that may be appropriate for Congress or a regulator appointed by Congress to address,” he said.
The hearing was convened by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets panel as an outgrowth of news stories indicating that Wall Street was turning to securitization of such assets as life settlements to replace the securitization of such assets as subprime mortgages that brought profits–and woe–to the financial services industry and the economy.