Wall Street Pursues Profit in Bundles of Life Insurance

[jk]

Wall Street Pursues Profit in Bundles of Life Insurance


After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

Betting on Your Life

Looking to Profit From Life Insurance

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

etc

http://www.nytimes.com/2009/09/06/bu...e.html?_r=1&hp


jk comment- i see at least one problem with selling these things to pension plans- duration. if, for example, medical advances prolong life expectancies, these things will pay more slowly even as pension plan liabilities increase. it would make more sense if they were securitizing packages of annuities, but i don't think enough people have purchased annuities to make it worthwhile as a business. mostly, i'm just amused at the intense need to find income streams to securitize. how about securitizing 10-year olds' allowances? the other idea that occurs to me is bondholders hiring hit-men.

[LargoWinch]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

jk, I always thought that this service was a "win-win" because the private seller would be able to obtain more by selling his policy to a private party who wishes to hold it to maturity, than to the insurance company.

Of course, as you are pointing out, I am certainly counting on Wall-Street to find a way to screw the little guy somehow - even without hit-men as those are too uneconomical, but if they were not...

[ThePythonicCow]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

jk comment- i see at least one problem with selling these things to pension plans- duration

For at least the last two years, some guy has had an hour long show on a local radio stationselling these as virtually guaranteed 18% per annum investment opportunities.

The other problem I see with them is counter-party risk. A life insurance policy isn't worth much if the Insurance company fails.

Everyone who thinks that all the Life Insurance companies in America will still be in business five or ten years from now say "aye".



... I thought so.

[don]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

FIRE never sleeps ;)

[bcassill]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

Dear God. This is just sick. I guess with the carbon credits market on hold, they have to make $$$ somehow. Next thing you know they'll be out in front of their offices doing the three cups and a ball carny trick with passersby. Ooh, ooh, or how about a nice game of street craps? Or pop the balloon with the dart? Anyone? Any takers? Three tries for a dollar.

[ThePythonicCow]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

Felix Salmon has an excellent article on these Life Settlements (prompted by the same NYTimes article as this iTulip thread) at http://seekingalpha.com/article/1602...-still-no-dice. Felix observes two more possible problems that trading in Life Settlements could create.

1. Since it is less likely a life insurance policy would be allowed to lapse, unpaid, prior to the insured persons death, this could cause life insurance companies to have to raise policy rates.
2. Since life insurance payouts are not taxed out of sympathy for the bereaving recipients, this could cause them to be taxed if many payouts go to investors, not estate inheritors. Currently life insurance policies are a good way to pass on wealth, including essentially the investment earnings on that wealth, without incuring the inheritance tax.

[pwcmba]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

Finally an investment that one could take matters into their own hands if it's not paying off as expected.:eek:

[don]

Re: Wall Street Pursues Profit in Bundles of Life Insurance

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.

The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

In addition to securitizing life settlements, for example, some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits).

Morgan Stanley says at least $30 billion in residential re-remics have been done this year. (and if this sounds like a bowel clearing palliative, it is!)

(Ibid. above, first post)