Life Settlement Industry Shaken by Goldman Sachs Departure
The life settlement industry is off to an interesting and somewhat surprising start in 2010. The recent exit of Goldman Sachs Group Inc. from the life settlement arena gave the entire industry reason for pause. Goldman Sachs has long been an influential player in the industry and its departure leaves more questions than answers.
As a vanguard since 2006, they were not only an active purchaser of life insurance policies, but also more recently developed a well known mortality index (QxX) and related derivative products. QxX, which was established in 2008, tracked the mortality of a pool of individuals over the age 65 in order to provide context for derivatives that were to be sold to institutional investors and industry participants.
In December, 2009 Goldman Sachs Group Inc. announced they were not continuing with the index and backing away from life settlement derivative products. In late January of this year, they announced their further withdrawal from the life settlement industry by disbanding the life settlement provider subsidiary Longmore Capital.
To further cast a shadow of doubt over the life settlement industry, new federal legislation is being discussed that would change the tax treatment of life settlement proceeds for investors in an adverse manner. By changing the tax treatment of life settlement investments, buyers will in turn be forced to seek higher gross returns to offset the additional tax liabilities and preserve profit margins. As a result, life settlement offers to sellers on the secondary market may be negatively affected. This would compound the current gap between buyer offers and seller expectations that acts an impediment to a robust recovery in the life settlement marketplace.
A disconnect in the offers buyers are presenting and minimum sales prices demanded by individual sellers persists as a negative market force. As one insider at a life settlement provider remarked, "When buyers and sellers can’t agree on a price, the market comes to a grinding halt."
All is hope is not lost for a recovery in 2010 however. Anecdotal and quantitative measures do suggest a slight improvement in the overall demand for life settlement originations. The inaugural Amrita Life Settlement Index showed a slight improvement in January from the benchmarked 500 points to 528, a 5.6 percent increase in life settlement provider activity and sentiment. Hopefully, this increased activity and optimism at the life settlement provider level will continue to drive the industry’s recovery.