The past 12 months have been, to say the least, dramatic. Global financial markets came perilously close to a total meltdown, and in the aftermath the world is mired in a deep recession. The secondary market for life insurance policies–life settlements–did not escape unscathed. Given the unique characteristics of the asset class, there is no good reason to believe the market will not only recover, but will come back stronger than ever.
Although 2008 was a very volatile period for financial markets in general, the life settlement market continued to grow robustly through the first three quarters of the year. Toward the end of the third quarter, two significant events (one external and the other internal) had a dramatic impact on market momentum. Externally, AIG “bailed-out” through a de facto nationalization, and Lehman Brothers faltered and was allowed to fail. The financial soundness of even the largest global financial institutions suddenly seemed questionable.
During the same period, 21st Services announced the introduction of a revised mortality table, ostensibly triggered by the introduction of the 2008 VBT table. The new mortality table was advertised as resulting in “slightly” longer life expectancies at some ages, and 21st offered to update “old basis” LEs at a reduced fee .
In practice, all previously issued 21st LEs were invalidated, and the other major LE providers quickly followed suit. The most immediate impact was on files in the closing process. As new basis LEs were received, “slightly” longer turned out to be 20%-30% longer in the many cases. While most funding sources honored offers already extended and accepted, many chose to “re-price” on the new basis, resulting in offers being withdrawn or substantially reduced.
While most of the investment capital already committed to the settlement market was not withdrawn, very few money managers were willing to commit funds to any new investments other than cash. As previously committed pools of funds were exhausted during the early part of the 4th quarter, the market for settlements ground virtually to a halt–a condition that persisted through the first half of 2009.
The state of the market