Life settlement securitizations have picked up some renewed interest in recent weeks, and the sector is better placed than ever to live up to its volume potential. However, it still needs to get a few things in order for it to really take off.
A life settlement is the sale of a life insurance policy to a third party. It's been referred to commonly as senior settlement, senior life settlement and also, with those involving the terminally ill, viatical settlement. It may also involve an owner selling his or her policy before maturity. A viatical settlement is for those who have a life expectancy of 24 months or less.
Life settlements have primarily existed as a small niche that served mostly viatical settlements. This type of life settlement started around 1988 or 1989 when the HIV and AIDs epidemic started. The industry was small and not heavily regulated then.
However, these assets have recently gained more interest from the buy-side because they are non-correlated to the ups and downs of the financial markets. There is also the certainty of death, and the asset class is tied to well-rated insurance companies.
Life settlements themselves, because of the down economy, are also being priced at better levels. Additionally, a growing number of customers who cannot make their premium payments have become very interested in receiving cash instead. These have lead to an increase in supply for the asset class. Hedge funds might also be looking to unload at prices that some of this sector's players deem as favorable, which has also led to the supply growth within the asset class.
"We're buying life settlement pools as we speak," said William Scott Page, CEO of the Lifeline Program and committee chair for the educational committee of the International Society of Life Settlement Professionals (ISLSP).
"It's kind of misleading in that hedge funds are having redemptions like mad, banks and financial institutions have capital requirements that they have to make and the only real asset they can sell that has held any value at all are the life settlement pools," Page said. "So they are selling life settlement pools not because the life settlement pools are in trouble, but because the institutions behind the life settlement pools are in trouble, and yes you can get distressed sales out there now."
DBRS has also published criteria indicating that it might soon begin assigning ratings to life settlement securitizations, a number of which are currently under review by the agency. Its methodology focuses on certain risks inherent to the asset class and how market participants can mitigate these risks.
How the Deals Work
ISLSP is hosting a three-part Webinar series on life settlement securitization and ran its first session at the end of October.
These transactions can take anywhere from four to eight weeks depending on the complexity of the life insurance policy. The types of policies that can be sold include universal, whole life, some joint life and some convertible terms.
ISLSP breaks down the process into a few steps. The first step is how to source the policy - through a broker or an agent that completes an application and presents consumers to a provider for evaluation.
During the second step, the provider evaluates two primary aspects - first is the life insurance policy and second is an individual's medical history to determine if the projected life expectancy falls within the purchasing parameters.
The next step would be the facilitator or the provider collecting the offers (if accepted, contracts would go out), executing the change of ownership, moving funds into escrow and, once ownership is established, distributing the funds to the consumer.
Washington State recently approved a regulatory motion that would require life insurance companies to disclose to the consumer the availability of the life settlement option when a potential lapse or possible cancellation of a policy arises. This, said Page, will further broaden and expand the access to consumers who might want to sell to the industry.
Regulatory Changes on the Horizon
It's fair to say that the life insurance regulatory landscape is still evolving, although market observers believe this could be a good thing because, at the moment, there is no market for retail life settlement securitizations.
"If there is clear regulation, and a more commoditized product results, it will ultimately help grow volumes in this asset class," said lawyers from Dechert.
Congress conducted a hearing in October on the securitization of life settlements focusing on the prevalence of life settlement securitizations.
A Securities and Exchange Commission (SEC) task force has also been established to look at the life settlement business. The task force is looking specifically at life settlement deals' potential to be sold as public transactions versus remaining institutional offerings that are privately placed and not sold to individual consumers.
The commission is examining whether the industry's securitization activity is with institutional investors that have the ability to do the proper analysis to invest in any particular transaction. What the task force is trying to determine is whether additional regulation is needed, keeping in mind that extensive state regulation already exists and that the insurance industry is generally governed at the state level.
"If they do determine that additional regulation is needed, then the next question will be the appropriate agency to be involved and, at that point, they will also look at whether there is a retail market or is this really an institutional market," said Boris Ziser, a partner at Stroock & Stroock & Lavan who was also a speaker on the Webinar. "Our securities laws, which already exist and already are there to protect investors, protect retail investors one way and institutional investors another. So there is really no difference between a life settlement securitization and a securitization of any asset class in that the regulatory framework to protect investors already exists in our securities laws."
But the recent attention on this asset class hasn't been without some negatives. There have been comparisons made between life settlements and mortgages. Some published articles have even raised the question as to whether a life settlement is the next subprime mortgage.
Ziser said that it is an entirely inaccurate implication because no one loses their house by selling their policy. "In fact, they might save their house if they use the proceeds from the sale of their policy to pay off the mortgage," he said. "It's important to note that a bad mortgage can cause a financial strain on the consumer, whereas when the consumer sells a life insurance policy that they no longer need for whatever reason, it actually produces cash flow to the consumer."
The Dechert lawyers also believe that the analogy drawn is likely driven by the fact that the subprime meltdown is so close in the rear-view mirror.
They added that the market's scope doesn't come anywhere near where the U.S. or international mortgage market was and that the credit to this asset class isn't tied to the individual but to better-rated insurance companies.
"I think that generally the regulatory authorities recognize the value of life settlements and the value of securitization and, on a combined basis, the benefits that securitization of life settlements would bring to consumers, would bring to investors and would bring to the marketplace overall," Ziser said. "The goal is to create a robust marketplace that's efficient, that's transparent and that lends itself to a healthy life settlement and securitization business environment."
However, until regulators come to an agreement, it's likely that most of the activity for this asset class will remain in the private placement market.
The Dechert lawyers said they have one deal in the works, and the goal is to place it as a rated private placement.
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