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'Death Bonds' Look for New Life

Stocks in this article: C LPHI PRU CS JPM AIG GS

Life Settlements Eye a Comeback

But many in the life settlement industry it has less to do with fraud, and more to do with being caught off guard by people living longer. With new changes in place, they argue, life settlements are poised for a comeback.

Alan Buerger, CEO of Coventry, a life settlement company, says that regulation has, in fact, made the industry better and more transparent. He adds that part of the problem with previous life settlement pools was that there was not enough accurate data that over the past few years the industry has acquired more accurate data on life expectancy.

"We have different requirements for reporting state to state, and we do quite a number of things including interviewing the policy owner and the insurer person before buying policies from investors," said Buerger. "The industry has much more data. We have seen what has happened and we have to be more conservative with how we underwrite. We have 70 thousand lives in our database and track the lives of those individuals."

With people living longer due to improvements in the medical field, it has become harder to calculate longevity, but data is becoming more accurate, said Darwin Bayston, executive director of the Life Insurance Settlement Association, who talked about the industry in a video with TheStreet

"In 2008 there was a big adjustment in the actuarial tables and everyone in the longevity business experienced that people are living a little longer. They did extend their payrolls a couple of years and that did impact returns, and that is where the uncertainty lies today," said Bayston. Bayston says that investors can earn eight to 10 percent returns and the upside to an investor is that it is uncorrelated to other assets in a portfolio.

Bayston explains that life settlement investments are not for everyone. He said that those elderly people who sell their life policies most often would have let their policies lapse, cannot use them or need the cash for long-term care or retirement. He added that primarily hedge funds or institutional investors get into the life settlement industry; for individual investors it is different.

"If I am an individual investor and I buy a policy then I am not going to be paid until that person dies and the sooner they die, obviously, the higher my return would be," Bayston said. "Institutional investors have put together 300, 400, and 500 to thousands of policies. For them, they are not concerned about whether one individual dies. What they are concerned about is how the cash flows from these policies. "

Coventry's Buerger says you see less individuals now buying in the life settlement market due to the risk involved.

"We are seeing a continuous increase in the amount of policies for institution investors. Right now there are a number of private equity firms and hedge funds looking for distressed pools," Buerger said.

Buerger compares the life settlement industry to the life annuity industry and long term care industry. "Life insurance companies are betting that an insured annuitant will die soon enough and they will make a profit. It is not a death bond."

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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