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A Hedge Fund Gambles on Death

Posted by: Matthew Goldstein on February 04

The market for exotic securities hasn’t entirely gone away. It’s just gone underground—-six feet under, to be precise.

Hedge fund Davidson Kempner Capital Management is plunging into life settlements—a market in which speculators buy-up unwanted life insurance policies from wealthy individuals looking to score some quick cash. The $10 billion New York-based fund is planning on selling so-called “death bonds” to overseas investors, as part of a plan to potentially raise cash to finance its life settlements acquisition business.

In January, DK Life Settlements Acquisition Ltd, a foreign company with ties to Davidson, filed an offering statement with Irish regulatory authorities to sell up to $1 billion in “participating notes.’’ The terms of the offering weren’t made public, but the notes are due on Dec. 1, 2058. The long payout on the bonds is leading to speculation that the bonds will be backed, in part, by the death benefits the hedge fund collects on the life insurance policies it acquires—hence the name death bonds.

Davidson declined to comment on the deal. The hedge fund has been making headlines of late over its successful campaign to oust most of the directors of Sun-Times Media Group, the Chicago-based publisher of the Sun-Times and dozens of other newspapers.

But people familiar with the life settlements offering say the total dollar value of any bonds sold will be far smaller than $1 billion, since the fund’s life settlements portfolio is significantly less than that sum. The $1 billion figure is really marketing bravado more than anything else. In a shelf offering, there’s nothing to stop an issuer from shooting for the moon.

Some of the proceeds from the offering will no doubt fund the operations of Proverian Capital, a so-called life settlement provider that negotiates with brokers and individuals to acquire unwanted policies. Davidson is Proverian’s majority shareholder. Speculators like Davidson buy policies at a substantial discount to their death benefit and keep paying the premiums—betting the seller will die before the policy terminates

The hedge fund’s foray into life settlements comes at a time that some Wall Street players—like Deutsche Bank—are scaling back their ambitions. Still, Davidson’s linking up with the Grim Reaper is a indication that it’s far too soon to bury this most macabre of investments.

Reader Comments

Immoral funds

February 4, 2009 04:12 PM

Bloody dracula funds!


February 4, 2009 06:17 PM

Although littered with generalizations poor facts, and obvious confusion about the secondary market, a very eloquently written article! Thanks for the laugh!


February 5, 2009 03:38 AM

gold appreciation is far more greater than any of those bonds gonna be

Dumb investors are gone

February 5, 2009 07:14 AM

Most life settlements have become worthless for investors for 5 reasons:
1. Medical U/W has no clue
2. Investors can't use actuarial tables
3. Policies are originated via fraudulent practices
4. fees for intermediaries are weigh higher than embdded lapse supported discounts on premiums
5. Premiums are optimized to escalate after LEs are passed

The regulators in the US are investigating LPHI for fraudulent sales TO INVESTORS in Colorado for example ...Invest in Life Settlements if you can't find any more subprime CDOs that you use to invest in...If you know how tio use a calcualtor, you will quickly learn to avoid Life Settlements


February 5, 2009 09:26 AM

"betting the seller will die before the policy terminates"

this sounds like they are buying term life policies which have termination dates. I thought they only purchased policies without termination dates such as whole life, etc...


February 5, 2009 10:08 AM

The insured who sell their policies will in fact be desperate and unemployed average-income folks.

The process of buying small policies is just as easy as buying big ones...rookie life insurance salesmen will eagerly pursue poor people's $20,000 policies.

Wealthy people use their life insurance to dodge estate taxes: they are the LEAST likely to sell policies!

In other words, asserting intention to buy policies from wealthy people who want the cash is deceit. The intention is to victimize people with low incomes.


February 5, 2009 10:59 AM

JK - your comments are at best misguuided for if you knew anything about the Life Settlement INdustry you would know that the market place for small face policies less than $1mm is practically non existent. There are very few players who are even interested in $20,000 policies. In fact, wealthy people with net worths exceeding $2mm make up the majority of the Life Settlement transactions. And their reasons for selling their policies anywhere from financial planning, needs for liquidity for other projects, low performance of policies they are currently holding and other reasons, key man policies that are no longer needed because the key man has retired.
Do a little research before making these obviously unfounded claims.
Dumb investments are gone - another misguided individual. The reason that their are hiccups in the industry is not because they are not sound investments. They are FDIC insured. You can not really say that about the stock market can you? Actuary tables are used by Insurance companies - no one claims they don't know what they are doing do they? Wanna pick up a calculator? here are some actual numbers for you. The Life settlement industry is a $14 Billion dollar industry and has been growing at a rate that has guys like you puzzled. As far as taking advantage of seniors goes. If a senior has no need for a policy or no liquidity to pay premiums on a policy they have funded for years. As an alternative to getting little or no cash surrender value from the policy an insured can sell it for an amount that is always greater than the cash in the policy or 4 times the cash value on average. Investors buy the policy at a discount to the DB and pay COI (cost of insurance) and their returns have been anywhere from 8-14%. Insurance is morbid in general - but as the old adage says, "There are only two things that are certain, death and taxes."

Jerry Claiborne

February 5, 2009 11:34 AM

All I can say is WOW...

Life settlements have been around for years now and it is nothing new in the bond market.

Life settlements are nothing but an option for the insured and almost all of the policies will be over $ 250K.. Certainly not to victimize people with low incomes.

Jerry Claiborne

February 5, 2009 11:38 AM

Missed AP's comments.... He is right on the mark and what is really scary is the profits of the insurance companies!


February 5, 2009 04:48 PM

Very well put, and Jerry you said it regarding the Insco profits.
I've seen some of the crap sold to seniors by insurance brokers, and the premiums are obscene - to pay of course for the underlying iceberg that is the broker commissions network.
The LS industry is still reasonably young but is growing up fast, so hopefully the same greedy brokers who take up to 6% of policy face value when selling a policy on behalf of an elderly insured will soon be weeded out, so that the insured gets even better value and investors a better deal.
If the Inscos had a fair and consumer-orientated business model then the LS market wouldn't exist, so good luck to LSs for providing policy holders with an alternative to being ripped-off.

Michael Turner

February 5, 2009 05:43 PM

This is a well-established market covered with a research publication called The Life Settlements Report. For anyone truly interested in this as a legitimate asset class, you should google this publication. This story here isn't very accurate


February 6, 2009 02:20 AM

Jerry's right - Wow! The article itself is mainly mis-quoted sensationalism, but what's new! The very term 'Death Bonds'- coined by the Financial Times some years ago before they 'saw the light' (see there many mainly positive articles over the last months)is meant to induce a negative feel. JK's points are so ridiculous even a limited amount of research will show that the average policy sold has a face value of over $2m. Upto 12 months ago hardly anyone bought policies for less than $500k. Perhaps JK would prefer the 'poor' to have their homes repossessed whilst lapsing a policy to the insurer for no value when it might well be saleable in the market. Come on guys before making comments do some research and use some logic!


March 10, 2009 07:40 AM

All I can say is that, depite of often poor evalutations of Life Expectancies, Life Settlements were amongs those assets which continued to perform during the crash on the worldwide stock markets. Where lots of people lost 40 and more percent with stocks, others achieved net returns in the mid teens with their life settlements. And yes, no one is intrested in buying policies for even less than $500k !


May 1, 2009 02:50 PM

Michael makes the best point -"Life Settlements were amongs those assets which continued to perform during the crash on the worldwide stock markets. Where lots of people lost 40 and more percent with stocks, others achieved net returns in the mid teens with their life settlements."

Usually, the first response of those opposing Life Settlements are those that really don't take the time to understand or appreciate the function. They can be Life Benefits not Death Benefits!


May 1, 2009 04:21 PM

-"Life Settlements were amongs those assets which continued to perform during the crash on the worldwide stock markets. Where lots of people lost 40 and more percent with stocks, others achieved net returns in the mid teens with their life settlements."

Are you really sure about that? Life settlements yields widened by 500bp in 2008 and haven't retraced that much so far, although I think they will slowly. This move was correlated with the overall market. In addition, life expectancy estimates (real life expectancies improve much more slowly) extended by about 15% last year (at least the LE underwriters who don't know what they're doing - SOME DO). Factoring all that, a portfolio underwritten by the guys who don't know what they're doing would have dropped in value by 40% easily.
I am perplexed that the NAVs of some funds in the space show these nice steadily increasing NAVs throughout 2008, Ballooney.
Having said that, these assets are incredibly attractive now, higher yield, more accurate life expectancies.

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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