Sunday, September 6, 2009

GOOD BYE MORTGAGE BACKED SECURITIES, HELLO SECURITIZED LIFE INSURANCE



So I saw this on google news today and almost died laughing... Apparently the new hotness on wallstreet is going to be the SECURITIZATION of Life Insurance policies
Basically you buy a life insurance policy from someone who is ill or elderly for $400k-$1M. You keep making their payments, you hope they die early, and then you cash out. The idea is that if you can make a better prediction than the life insurance company, (the prediction factors into the premium that the life insurance company calculates), then you can possibly cash out if you think they are under charging for the life insurance premium.

From the article:

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die. The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.


This concept should remind you of the securitization of mortgages that brought the world to its knees recently.

However, from what I understand life expectancy tends to be more well behaved than distributions based on information (such as the stock market). Well except for people hiring assassins and starting pandemics to make $$$.

Enjoy... maybe in 10 years.. we will see the Hindenburg Omen AGAIN

When I blogged about this Market Crash prediction from seekingalpha.com back in early July, I didn't think it would actually be right... Next time i see a Hindenburg Omen I'm totally moving my 401k to bonds for 6 months and buying a ton of puts on the S&P500.

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