On September 6, 2009, the New York Times featured an article on the front page titled “Wall Street Pursues Profit in Bundles of Life Insurance.” In my opinion, the article was a relatively positive overview of a process that has been in the making for quite some time. In fact, Wall Street firms have been investing in life insurance policies and other longevity-related products for several years, so this product is not new to them. What is relatively new is the securitization of portfolios of life insurance policies, which has only been accomplished on a very limited basis in the past. Through a larger scale process of securitizing policies, investment firms could bundle large quantities and issue bonds based on the cash flows of the portfolio. This achievement, on a large scale, would greatly legitimize life settlements as a true asset class, to the chagrin of the life insurance industry that has been trying to demonize life settlements. The article quotes Kathleen Tillwitz, a Senior Vice President at DBRS, about what the key ingredients are in a potential bond rating. DBRS has prepared a methodology for rating bonds based on a securitization of a life settlement portfolio – a key element is limiting concentration issues to ensure a balance of risk in a large portfolio (e.g. carrier ratings, variety of carriers in the portfolio, the variety of medical conditions of insureds, etc.). Ms. Tillwitz says that the phones at DBRS are ringing off the hook with inquiries about her securitization strategies from major financial firms.
Despite the generally positive tone of the article, the overwhelming reaction to the article was highly negative. I believe this negative reaction is due to two separate reasons – a total lack of knowledge and understanding of the life settlement industry and the current mistrust, even disgust, of everything Wall Street. I think people are missing the big picture here. The fact is simple: a significant increase in capital invested in life settlements (which would be a likely outcome of a robust securitization market) would directly result in even more additional cash going into senior consumer’s cash-strapped wallets.
Because the article’s general premise is that Wall Street is looking for another way to make big money through the bundling of life settlements, uninformed people, who do not know the difference between a life settlement and a credit default swap or a subprime mortgage, immediately assume life settlements are very risky and paints life settlements with the same brush as these other financial instruments. A skeptical public sees another “risky,” unknown Wall Street creation and incorrectly assumes that it could lead to more financial carnage. In fact, with recent modifications in life expectancy methodologies, the life settlement pricing has never been more conservative. Life settlements offer investors an asset class that has a very low correlation to general market trends – mortality rates do not change when the economy goes south – and provides returns not exposed to economic risks.
Some of the reader comments are so extreme that they border on paranoia and have no relation to the realities of the life settlement market. The life settlement market is backed by capital from institutional investors, not individuals (sorry, Tony Soprano does not end up owning the policies at the end of the day, although it would make for a good episode if HBO brings back the Sopranos). For years, institutional investors have successfully bought thousands of policies without any known “premature induced death collections.” There has never been an incidence of an insured’s untimely death as the result of a life settlement. Conspiracy theories of corporations marketing unhealthy products in an attempt to make the older population die sooner are just ludicrous. This kind of nonsense is indicative of people who clearly are not the least bit familiar with life settlements and the overwhelmingly positive consumer impact of the industry. In fact, many policy investors do not even know whose policies they are investors in, and the industry is moving closer every day to more and more identity protection methodologies. In any event, institutional investors own large portfolios to balance for risk and increase the predictability of returns – one untimely death has minimal impact on a portfolio.
There was another line of commentary how the industry is void of essential decency because it is profiting from the sick and dying. People that are truly sick and dying would not be considered for life settlement – these transactions are known as viatical settlements transactions. Then there were many comments about Wall Street taking advantage of the elderly and even violating their privacy rights, which again reflects the lack of knowledge of life settlements. Remember, no one is forcing people to sell their policies. On the contrary, people that no longer need or can afford their policies were forced by the insurance companies to let their policies lapse or surrender them back the company, thus losing their investment over the years and not realize the true value of their asset and personal property. Life settlements give policy owners another choice. When people sell their policies, they get more (often multiples more) than the cash surrender value and can use the proceeds however they see fit. In fact, we have heard of many seniors using the proceeds to supplement their retirement, which is especially important now after the tremendous financial losses suffered during the current recession.
Life settlements’ tremendous growth over the past 10 years is proof that seniors enjoy the benefits reaped from the sale of their policies. Growing from a handful of policies sales in 2000 to an estimated of $15 billion sold in recent years, the industry has proven its viability, and the consumer demand for policy sales. Wall Street’s embrace of this product makes the future of life settlements more certain than ever and will undoubtedly help educate the general public on what a life settlement is and isn’t and the true consumer benefit each life settlement creates.
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