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.
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