American International Group Inc. (AIG) is trying to get credit-ratings firms and investors to get behind the sale of life settlements, which are securities backed by the life insurance polices of older people. Per the insurer’s recent proposal, a subsidiary of AIG’s Chartis property casualty unit would collateralize notes valued at $900 million with 1,157 policies. AIG would like to sell $250 million to outside investors.
So far, AIG’s efforts have been met with resistance. It doesn’t help that Standard & Poor’s won’t rate the securities, which could help rally investors. In fact, S & P’s March report emphasizes the securities “unique risks.” It doesn’t help that some critics call these securities “collateralized death obligations,” “blood pools,” or “death bonds” because they pay off upon the insured’s death.
Investors who buy life settlements are betting that the benefits they get upon the insured’s death will be greater than the cash they’ve paid for both the policy and its premiums. However, due to the 2008 credit crisis or because some of the insured ended up living longer than expected, many life settlement investors have lost money on these securities. Securities lawsuits have followed and the market has stayed depressed. AIG says that as of the end of 2010, it has paid over $177.8 million to settle 479 claims. In exchange, it received the policies. Per AIG’s financial filings, the insurer has about $18 billion in anticipated death benefits. That’s more than 1/3rd of the approximately $45 billion in these benefits that have changed hands in the last decade.
The Wall Street Journal reports that generally, life insurers consider investor ownership of policies—especially involving those betting on someone’s death—as not good for the industry. There are even some insurance companies that have gone to court claiming that they were misled buy buyers who said they wanted policies for estate planning when, in fact, they actually wanted to flip them for investors.
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AIG Tries to Sell Death-Bet Securities, The Wall Street Journal, April 22, 2011
Seniors Beware: What you should know about life settlements, FINRA
Life Settlement Securitizations Present Unique Risks, Standard and Poor’s
More Blog Posts:
Texas Lawyer Pleads Guilty to Involvement in Alleged $100M Life Settlement Scheme, Stockbroker Fraud Blog, December 7, 2010
Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress
, Stockbroker Fraud Blog, August 5, 2010
Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers, Stockbroker Fraud Blog, September 27, 2009