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Wall Street Pursues Profit In Bundles Of Life Insurance

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http://www.nytimes.com/2009/09/06/business...mp;ref=business

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.

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.

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.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,†says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“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.

Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive.

But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.

“It’s bittersweet,†said James D. Cox, a professor of corporate and securities law at Duke University. “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.â€

Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

“When they set their premiums they were basing them on assumptions that were wrong,†said Neil A. Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,†said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.â€

After Mortgages

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.

Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment.

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

More at the link.

Is this the insurance recovery?

Hmmm

Financial innovation is good because it lowers the cost of borrowing?? Would this mean that the core element of central bank monetary policy has been severely compromised?

Perhaps the magical mystical tool of interest rates aren't quite the flexible tools a certain mystic Merv believes them to be.

It appears that the parasites on Wall Street are looking for another opening to attached there suction leads to the populace.

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Is it me or is this just wall-street making short-term profits by creating anothe massive timebomb that will go off in a few years time when the people start dieing and the insurers have to pay out far more than planned and go bust?

It seems to me to be nothing more than banks betting with each other on which people will die first.

I expect the whole equation may be screwed up if obama gets his healthcare bill through and everyone lives longer.

Edited by TaxAbuserOfTheWeek

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Guest sillybear2
Is it me or is this just wall-street making short-term profits by creating anothe massive timebomb that will go off in a few years time when the people start dieing and the insurers have to pay out far more than planned and go bust?

It seems to me to be nothing more than banks betting with each other on which people will die first.

I expect the whole equation may be screwed up if obama gets his healthcare bill through and everyone lives longer.

It was ever thus, that is basically what these respectable institutions are all about, and you wonder why they crave respectability and the best buildings in town? Life assurance companies want people to live as long as possible to avoid pay out, pension companies want people to die as quickly as possible so they can cease payment, there are already swap agreements in place that basically trade in longevity.

Meshing investment banking with life assurance is like making a snuff movie in a casino.

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Nothing real gets created here at all- just tokens of value being shuffled around. You can't help feeling that at some point all this clever stuff must collide with the fact that the real economy it's a parasite of is dying.

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We have had this for decades in the UK. Barclays set up funds for this in the early 90s. The Life company offers you £15k for your £100k 'product'. If a fund or bank offers you £30k then the person surrendering the product gets twice as much money and the bank wins. It stops people getting screwed by their life company when surrendering products.

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Guest sillybear2
Nothing real gets created here at all- just tokens of value being shuffled around. You can't help feeling that at some point all this clever stuff must collide with the fact that the real economy it's a parasite of is dying.

All true, and when they've passed the (toxic) parcel a few times they just resort to time honoured fraud and theft from the tax payer :-

http://www.guardian.co.uk/business/2009/se...property-assets

These parasites have just turned everything into casino chips and steal from you every minute of every day.

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All true, and when they've passed the (toxic) parcel a few times they just resort to time honoured fraud and theft from the tax payer :-

http://www.guardian.co.uk/business/2009/se...property-assets

These parasites have just turned everything into casino chips and steal from you every minute of every day.

wtf has this to do with surrendering life insurance? If you had a 'policy' you wanted to cash in you'd be very grateful for a choice and a decent price instead of being stuck with being ripped off.

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Guest sillybear2
wtf has this to do with surrendering life insurance? If you had a 'policy' you wanted to cash in you'd be very grateful for a choice and a decent price instead of being stuck with being ripped off.

You could have argued 5 years ago what's so bad about securitizing mortgages, so banks can spread risk, replenish their capital and lend at lower rates.

Finance is a zero-sum (nay, negative sum), if somebody is benefiting in the form of short term profits then somebody has to lose out in the long term, and the banks always make sure it isn't them, so when all this blows up you see defaults on these policies because of insurance owned by unregulated thinly capitalised hedge funds, huge haircuts for the little guy and eventually a tax payer bail out.

If you want an example of unregulated insurance with zero oversight then look now further than AIG with CDS's.

Edited by sillybear2

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You could have argued 5 years ago what's so bad about securitizing mortgages, so banks can spread risk, replenish their capital and lend at lower rates.

Its irrelevant unless you can demonstrate a connection.

Finance is a zero-sum (nay, negative sum), if somebody is benefiting in the form of short term profits then somebody has to lose out in the long term, and the banks always make sure it isn't them, so when all this blows up you see defaults on these policies because of insurance owned by unregulated thinly capitalised hedge funds, huge haircuts for the little guy and eventually a tax payer bail out.

What we're talking about here is the ordinary man in the street getting a much higher cash payout. Why would you bar the ordinary man from surrendering his policy to whoever will pay him the most? There is no better security than cashing out.

If you want an example of unregulated insurance with zero oversight then look now further than AIG with CDS's.

Nobody mentioned unregulated insurance apart from you.

In dire economic times why stop the ordinary many from cashing out at the best price?

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There was always a fundamental flaw in a market that you pay for something that only hits the jackpot if you peg out. This idea is exploiting that and seems perfectly reasonable to me, HOWEVER...

The problem for the bankers is that the life insurers will be really happy as they will continue to receive premiums on profitable contracts. I say profitable because in simple terms, the older the contract is, the greater the profit for them as that premium set out the outset of the contract, is weighted with old and, relatively pessimistic mortality tables.

The alarming conclusion is that the investment bankers will be packaging investment products that will only profit if life expectancy does not improve as projected, or even falls, from that expected by actuaries.

I find it hard to imagine a scenario where the actuary of an investment or pension fund would countenance getting on the other side of those bets and having to pay a bunch of charlie-nosed greebos for the privilege.

In summary then, there may be a supply of policyholders happy to flog a policy they no longer need, but I can't see a demand to buy the bundles.

Of course, I'm assuming banks themselves won't be interested..... :ph34r:

Edited by Bring forth the guillotine

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Guest sillybear2
What we're talking about here is the ordinary man in the street getting a much higher cash payout. Why would you bar the ordinary man from surrendering his policy to whoever will pay him the most? There is no better security than cashing out.

True, great for those cashing out, but eventually the resulting sliced and diced over priced security will most likely end up in your pension fund anyway.

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much life insurance is Term...ie you buy and pay for a 15 year policy that only pays out A: youhave paid your premium and B:, you die during the term.

these cant surely be what they are bundling.

the other main type, is a savings scheme with death benefit...an endowment, a with profits or an index linked one.

Investors have for a long time bought these up from early cashers....the idea was that over the period of the insurance the bonuses in with profits would ensure a larger payout.

People today would buy these to cover things like mortgages, we have all heard of the short payouts by endowments.

No doubt, some silly quant is going to try and outguess the Acutaries...I mean, the rates are set so that the insurer wins over a given set of risk...thats what insurance is , a bet that an event WONT happen.

Course, shares and profits on policies only ever go up....we can see this in pension fund overfunding everywhere, and of course, AIG was immensely profitable in all areas EXCEPT those to do with the WALL STREET BOYS, which blew up to take the lot down.

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Course, shares and profits on policies only ever go up....we can see this in pension fund overfunding everywhere, and of course, AIG was immensely profitable in all areas EXCEPT those to do with the WALL STREET BOYS, which blew up to take the lot down.

AIG the keystone of the entire system.

Thank god for the regulators.

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http://www.nytimes.com/2009/09/06/business...mp;ref=business

More at the link.

Is this the insurance recovery?

Hmmm

Financial innovation is good because it lowers the cost of borrowing?? Would this mean that the core element of central bank monetary policy has been severely compromised?

Perhaps the magical mystical tool of interest rates aren't quite the flexible tools a certain mystic Merv believes them to be.

It appears that the parasites on Wall Street are looking for another opening to attached there suction leads to the populace.

This has gone on for years. Now it is has reached the public consciousness, it will turn into a bubble.

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Any long dated insurance has a large element of investment products about it (investment returns, credit risk, etc.). I expect in the UK the banks couldn't claim an insurable interest and therefore this would be illegal under one of the earliest insurance acts. Remember this is why CDS's are called Swaps and not Insurance, because if they called it insurance they couldn't sell them! The real problem here is a regulator who can't tell the financial difference when the names change.

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True, great for those cashing out, but eventually the resulting sliced and diced over priced security will most likely end up in your pension fund anyway.

I had them in my pension in the 90s and they were great. I got pushed onto a Money Purchase pension and chose my own asset classes and while Pac Rim equities imploded during the Asian crisis and Emerging Markets imploded during the Russian Government Bond Default, all the time these were nice little earners.

They were being bought for 25p in the £1 in the 1990s - thereby returning quadruple my investment after a few years. Even if 3/4 of them defaulted through their life it would still have been a nice little earner. The point is at some price they're all worth something. The problem only comes when they're overpriced.

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Guest sillybear2
I had them in my pension in the 90s and they were great. I got pushed onto a Money Purchase pension and chose my own asset classes and while Pac Rim equities imploded during the Asian crisis and Emerging Markets imploded during the Russian Government Bond Default, all the time these were nice little earners.

They were being bought for 25p in the £1 in the 1990s - thereby returning quadruple my investment after a few years. Even if 3/4 of them defaulted through their life it would still have been a nice little earner. The point is at some price they're all worth something. The problem only comes when they're overpriced.

Amen. The only reason the big houses are now interested in such products is precisely because they will try and bundle them up and resell them for 99p in the £1 rather than your 25p.

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