Feature: Industry experts shrug off settlement securitization hearing

A Congressional hearing last month on the securitization of life settlements was a mixed bag, people in the settlement industry agree.

The September 24, 2009 hearing discussed securitization of life settlements but concluded with no clear consensus about a need to regulate life settlements. (See Life Settlement Securitizations Pose No Systemic Threat.) The session was conducted by the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House Committee on Financial Services.

J. Russel Dorsett, president of the Life Insurance Settlement Association, Orlando, Fla., felt the air go out of the securitization controversy during the hearing, where he testified on behalf of the industry.

“I think by the end of the hearing, the chairman (Rep. Paul E. Kanjorski, D-Pa.) and members of the committee were comfortable that life settlements were not a cause for further action, considering the size of the market and that the potential for systemic risk seemed rather far-fetched,” says Dorsett, who is also director of Veris Settlement Partners, Rockville, Md.

The hearing “did raise the profile of the industry and gave us a chance to tell our side of story,” he adds. “Anything that promotes awareness so that legislators and the general public are informed on how settlements really work, that’s a good thing.”

Dorsett doesn’t expect further inquiries into settlements from Congress in the immediate future.

“There had been some indication a similar Senate hearing might take the subject up, but I think as a result of the House hearing, there may be no further effort.”

David Mickelson, head of David Mickelson Insurance Services, Oceanside, Cal., labeled the hearings as “a knee-jerk reaction to a New York Times article about life settlements.” (See Settlement executives comment on Times article.) That article raised a red flag for potential problems reminiscent of the mortgage-backed securities that created the downfall of the world as we know it, financially speaking,” he says.

Mickelson argues that the hearings, along with the article that helped to instigate them, overplayed the idea that securitized settlements carried an underlying risk similar to that of subprime mortgage securities.

At end of the hearing, committee members appeared to conclude that settlement security investments are probably not a big threat but also that there haven’t been enough of them to draw any conclusions, one way or another, Mickelson believes.

He thinks the hearings showed that life settlements securitization “couldn’t pose as much of a systemic risk as mortgages, because the market would be billions of dollars, not trillions. The underlying paper in the mortgage meltdown was overrated, and borrowers had no business borrowing so much money when the asset was so very weak. It was almost criminal, the way the system spun out of control.”

In contrast, there have only been two large settlement securitization deals, he notes. He believes even if the investments should become more widespread, they would still not pose a potential for serious economic impact, unless two developments arose: People living far longer than expected, and life insurance companies significantly raising the cost of premiums.

“I don’t think either development is likely,” Michelson says.

If nothing else, the hearing produced “a sigh of relief from all the people in the life settlement industry that there will be no witch hunt, at least for the foreseeable future,” he concludes.

Steve Ingles, managing partner with Opulen Capital, La Jolla, Calif., welcomed the attention to the industry that the hearings presented.

Ingles thinks that the inquiry may signal more Federal regulation of the industry in the future, but he believes that could be a good thing, if it helps weed out some of the bad players in the business.

As for securitizing settlements in packages for purchase by institutional investors, Ingles doesn’t think the issue is cause for concern.

“I know there are people comparing securitization of settlements to the subprime mortgage crisis, but that’s definitely off base,” Ingles says. “There’s no such thing as a subprime life insurance policy.”