AIG Tries to Sell ‘Collateralized Death Obligations’

Securitization of life settlements raises ethics, fraud concerns among critics

American International Group in recent weeks has sought to rally support among investors and credit-ratings firms for a controversial deal: the sale of securities backed by insurance policies on the lives of older people.

There have been few offerings of these types of securities, which critics have called "death bonds," "blood pools" and "collateralized death obligations" because they pay off when the insured dies, The Wall Street Journalreports. And AIG's effort so far isn't panning out. Standard & Poor's recently declined to provide a rating, an essential step in selling such securities to most investors.

The giant insurer's life-settlements portfolio totals about $18 billion in anticipated death benefits, according to the company's financial filings—or well over a third of the estimated $45 billion that has changed hands since the market revved up about a decade ago.

"We are looking at this portfolio as we evaluate AIG going forward," an AIG spokesman said, declining to elaborate to the paper.

The activity on AIG's part provides a glimpse into the company's entrepreneurial culture and shows how the company, slimmed down over the past two years as it raised cash to repay its 2008 government bailout, still has little-known pockets of business.

In general, The Journal says, life insurers have said widespread ownership of their policies by investors—essentially betting on death—would be bad for the industry's reputation. Many insurers, including one of AIG's units, have gone to court asserting that buyers misled them about wanting policies for estate planning when the goal was to flip them to investors.

For investors, many life settlements have proved to be losing bets, as people have lived longer than expected and as credit dried up in 2008. Since then the market has remained depressed, in part because of the mounting litigation.

The new wrinkle of securitization arose in the market's boom years before the financial crisis, the paper notes. Just as Wall Street banks bundled mortgages to make mortgage bonds, financiers looked into bundling hundreds of life-insurance policies into bonds that they could then sell, with the bonds' income coming from the death benefits.

The industry's trade group, American Council of Life Insurers, has criticized the concept, saying the existence of a Wall Street pipeline that needs to be filled with policies could encourage fraud by commission-paid agents and others trying to get older people to purchase and sell policies.

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