Servicing

A unit of American International Group has become the first company to successfully securitize a pool of life settlement policies, and has used a portion of the proceeds to pay down its loan to the federal government.

Ever-innovative capital markets are seeing the formation of new instruments – catastrophe bonds and longevity swaps – as actuaries lay off pension liabilities to quants willing to price the longevity risk of pensioners.

There are lots of obscure corners in the alternative investment space. Hedge funds have gone beyond traditional long/short or macro or arbitrage strategies, to make commercial loans. Now there’s a nascent but potentially burgeoning sector. Let’s call it depreciation on declining life expectancies.

The economic crisis of 2008 dried up much of the capital of the institutional investment community, resulting in the life settlement universe being cut by nearly half. Then the Internal Revenue Service issued an often-confusing ruling last August that attempted to clarify the tax treatment for life settlements. Adding to that were major changes in the actuarial tables in late 2008, extending life expectancy by as much as 10-25 percent.