The Institutional Life Markets Association (ILMA) is none too impressed with the recent and critical focus on the possibility of securitising life settlements into what have become known as “death bonds”.
Life settlements – insurance policies that ill and elderly people sell for cash, the amount of which will depend on the life expectancy of the insured – have been hailed as the next big thing to hit securitisation markets.
Like credit card receivables and mortgages before them, these settlements can theoretically be sliced, diced and repackaged into securities which can then be resold to what is currently a very small number of morbid potential investors.
But this time, regulators are determined not to be caught unawares – even if it is unclear what would happen if there is a collapse in the market for such bonds; FT Alphaville knows of no funeral home widely considered too big to fail.
Nonetheless, one regulator, William Galvin (currently secretary of state in Massachusetts), has accused those bundling life settlements of attempting to “create another investment opportunity (that) closely parallels the subprime mortgage market and subsequent meltdown, whose effects investors are still reeling from”.
Galvin has said he intends to review the conduct of a rating agency – Toronto-based DBRS – which has carved out a niche in rating life settlements, and the Securities and Exchange Commission has even created an agency-wide task force devoted to the scrutiny of the instruments.
As the Wall Street Journal reported:
SEC Chairman Mary Schapiro asked her staff [in August] to open a task force that pulls staff from several divisions including enforcement, trading and markets, and corporation finance, a person familiar with the task force said.
“There are many questions raised by life settlements — from sales practices to privacy rights to the role of securitizations,” Ms. Schapiro said. “And the answers could help determine where more oversight is needed. This is a growing market and we want to be ahead of it.”
Enter ILMA, which describes itself as a ” trade association comprised of a number of the world’s leading institutional investors and intermediaries in the longevity marketplace”.
In testimony before the House Financial Services committee, Jack Kelly, the body’s director of government affairs, sought to differentiate death bonds and subprime MBS.
ILMA then issued a press release to make sure the message reached a wider audience (a fair call, given the tiny number of people likely to have tuned in to the testimony).
Highlights, emphasis FT Alphaville’s:
When mortgages are securitized, or bundled and then cut up like a pie and sold to investors, there are two main parties at risk: the homeowner and the investor who purchased securities or pieces of the pie. This occurs because the homeowner or borrower may not be able to meet mortgage payments, said Kelly. Consequently, there is not enough cash flow to pass along to investors. The homeowner runs the risk of losing his or her home and the investor, the loss of cash flows, Kelly explained to lawmakers.
A life settlement securitization is different. The owner of the insurance policy who sells it receives payment right away. If the life settlement securitization fails, the only loser is the investor, Kelly told the subcommittee. Also, the source of payment here are high quality insurance companies. The major risk for the investor is the uncertainty associated with predicting longevity. Investors in life settlements are required to pay premiums to keep life insurance policies in the pool in force. Kelly also stated that because of the risk of loss, such investments are only suitable for institutional investors who can analyze and understand the risk in a life settlement securitization, as they should with any investment.
ILMA also made two further, interesting points:
Kelly emphasized throughout his testimony that life settlement securitizations are no different than other life insurance securitizations including natural catastrophe bonds, surplus notes and Regulation XXX transactions, none of which have had the problems that plagued the mortgage market. Further, the limited size of the life settlement market materially limits any systemic risk concerns.
On the latter, this may be true for now. On the former, room for debate, which we expect there will be quite a lot of in the coming months.
Related links:
Securitisation and subprime mortgages – a contrarian view – FT Alphaville
Dignity, death and securitisation – FT Alphaville