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Life Settlement Securitizations Pose No Systemic Threat, LISA Asserts

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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.

In convening the hearing, Kanjorski said he was doing so out of fear that “financiers are eager to return to the casino culture before they have even settled up the bad bets they made on subprime mortgage-backed securities.”

Paula Dubberly, associate director of the Division of Corporation Finance at the Securities and Exchange Commission, testified at the hearing that the agency has created a Life Settlements Task Force to examine emerging issues in the life settlements market and to advise the Commission whether market practices and regulatory oversight can be improved.

She said the new panel is reaching out to other regulators, both state and federal, “to obtain a greater overview of the life settlements marketplace and assess any regulatory gaps.”

A primary concern is that while some holders of life insurance policies may be looking for additional liquidity, “these individuals may be more vulnerable due to the current environment,” Dubberly said.

“The task force will consider ways to better inform and protect these individuals,” she added.

Susan E. Voss, vice president of the National Association of Insurance Commissioners and Iowa insurance commissioner, said that “regardless of how federal regulators address life settlement securities, protecting the basic virtues of the life insurance policies will be of paramount importance to state insurance regulators across our country.”

Specifically, Voss said, “we must ensure that life insurance beneficiaries-those people holding insurable interest, such as relatives of the deceased-will still be able to receive their proceeds tax-free.

“Beneficiaries are financially and emotionally dependent on the life of the insured person, and their needs remain as great today as they were before the development of the life settlement industry,” Voss said.

Moreover, if securitizations of life settlements do indeed grow, “there is an abject need for federal securities regulators to work together.”

She said they must quickly and efficiently fill all existing gaps regarding oversight of life insurance settlement securitization, in order to ensure that policyholders and investors alike are properly protected.

Voss also said the interests of state regulators when a life insurance product morphs into an investment product, is that “the rights of the insured must still be guaranteed.”


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