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Risk Finance, a unit of AIG (NYSE: AIG), led a securitization of life settlement policies with a face value of about $8.4 billion. A.M. Best Co. rated the securitization, which closed in January, but because the transaction was private, A.M. Best did not publically release how the transaction was rated, Emmanuel Modu, managing director and global head of insurance-linked securities for A.M. Best, confirmed.
The transaction yielded more than $2 billion.
In a statement, AIG said it expects to transfer to the Federal Reserve Bank of New York securitization notes of up to $8.5 billion representing embedded value of certain of its U.S. life insurance businesses in return for a further reduction in its outstanding FRBNY credit facility balance.
"Securitization is a capital management strategy and will not affect the day-to-day operations, sales activities, or customers of these businesses," AIG said in the statement.
Other companies have tried to securitize life settlement pools, but have not been successful.
Accumulating a sizable pool of life settlement policies quickly for securitization remains a growing challenge due to the limited supply of policies with short life expectancies. This limited number means the period it takes to build a portfolio or the ramp-up period could be extremely long and costly for the investor (BestWire, May 8, 2008).
Modu said because of intense competition between investors for policies with low life expectancies, the hit ratio, which is the number of policies won, versus what?s on sale on the market could often be as low as 1% to 3%.
According to an A.M. Best methodology on life settlements, released in March 2008, about 8% of individuals offering their insurance policies for sale have life expectancies of six years or less as determined by medical examiners.
The competition for these highly valuable policies is fierce even as more individuals choose to sell their life insurance policies.
The effect of life expectancy adverse development on a life settlement portfolio return can be dramatic. A.M. Best compared life expectancies issued by three major medical examiners in 2008, on the exact same 909 lives, and found that the largest difference of average life expectancies issued by any two medical examiners was 24 months. The smallest difference was eight months.
In the case of a 24-month difference, the return goes from 12.4% to 6.5% ? cutting the original internal rate of return nearly in half, the report states (BestWire, March 31, 2008).
Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.
(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)
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