The Simple Accountant

Wall St. Securitizations Reincarnated for Life Settlements

A secondary market for life insurance policies is an interesting notion, and Mr. Merkel's points on the effect on the insurers are very important. The life settlement, from an investor's point of view is somewhat like a zero coupon bond with an uncertain maturity. The yield on the instrument varies according to the longevity of the insured. Packaging a number of these tends to smooth the yield of the entire pool and make the cash flows easier to forecast within a range, allowing a valuation to be placed on shares.

In concept, the securitization of life settlements is not entirely new; as early as the early 1990s I had done some work with a group which established limited partnerships holding pools of life settlements, and sold partnership shares to investors. They tended to appeal to fixed income investors looking for higher yields without excessive risk of principal loss. It's an odd business, but one that seems to appeal to both buyers and sellers.

To answer Mr. Steinberg's question, in the former case, the general partner/sponsor of the LPs had administrative staff who kept track of the status of the underlying insureds, by what method I am unsure.