Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Life Settlements

2009 TCM Transition

As Toomre Capital Markets LLC ("TCM") starts the fourth quarter of 2009, we are cognizant that our consulting business is once again in transition. As it is sometimes said, as one door closes, another door opens. We are just not quite sure which door (professionally at least) might be opening.

For much of the past two years during the on-going credit crunch, the TCM staff has been working extensively with a major participant in the Life Settlements sector. We have used various pieces of the MATLAB mathematical modeling language together with Microsoft SQL Server relational data bases and ActiveX technology to create the calculation code for their customized portfolio management application. The resulting code is rather advanced.

This MATLAB-compiled code enables TCM's client to quickly price various individual life insurance policies and to help identify the risk/rewards in simultaneously managing several portfolios of such investments. It has moved the client away from the risks and confusion of large complicated Excel spreadsheets and onto a modern web-based platform. Alas, though, the heavy development work for that particular project is drawing to an end and we are now in the acceptance testing phase. There is unlikely to be any further enhancement work necessary until at least the code has been used in production for some time period.

Partly as a result, TCM has wondered where we should turn our attention to next. Should we turn to focusing our efforts on developing similar types of MATLAB-based code for other financial clients? Certainly there are many financial firms that enjoy the convenience and ease of data input into Excel spreadsheets. With time, though, many of these same spreadsheets become large, many times unwieldy and often contain inaccurate cell references in some of their formulae.

Depending upon the complexity of what information the spreadsheet is attempting to model, MATLAB often is an effective tool for tying together: the ease of that spreadsheet bring to data input and manipulation; easy access to data stored elsewhere in relational data bases; mathematical calculation of arrays (including good routines for various types of optimization); integration with tried and time tested C/C++ calculation libraries; and excellent visualization opportunities for understanding the results.

TCM is quite skilled in doing this advanced MATLAB development and integration work. (The reader might note the many posting on the TCM website about the term MATLAB and then appreciate why we receive so many visitors each day looking for information on such terms as ActiveX, Excel and MATLAB together.)

As we contemplated during the last few weeks which way to turn, Mathworks (the maker of the MATLAB product) contacted TCM about possibly working with a hedge of hedge funds that needed help with integrating some of their existing MATLAB models with their client-facing website. Could we help? It now appears that very shortly we will be starting an initial project focused on foreign-exchange investments.

Madoff Victims Selling Illiquid Assets And Life Insurance Policies

The Sunday January 11th 2008 edition of The New York Post included an article entitled Antique & Gem Dealers Get Hock Of A Deal. This article has some details about how the victims of the Bernard Madoff Ponzi scandal are selling off their antiques, fine art and jewels in order to raise cash from their high-end collections. "You've got these people who lost all of their investments, but have Rembrandt, Matisse, Van Gogh and Picasso on their walls," said a source close to several victims. Kofski Antiques, a shop in Palm Beach, Fla., has received items from several Madoff victims, said owner Chris Hill, including a 75-year-old who told him, "I was worth in excess of $100 million, and, son, I don't think I could buy you lunch today."

Apparently Mr. Hill also recently put an advertisement in a local paper asking, "Have you been affected by Bernard Madoff, a downturn in the economy, a reversal of income? You may want to contact Kofski." Another ad also openly asks "Madoff victims" if they want to sell their life insurance.

This last line of the article caught the attention of Toomre Capital Markets LLC ("TCM"). In the year plus since it was first posted, the TCM post Appeal of Insurance-Linked Securities and Life Settlements has been quite popular with those looking for further information on this relatively novel sector of the collateralized debt markets. Some have been interested in how these type of investments have had limited correlation with other types of debt and collateralized structured products. Others have been interested in how they might realize more than surrender value from the disposal of an often forgotten asset such as a whole life insurance policy.

Appeal of Insurance-Linked Securities and Life Settlements

As some readers are aware, Toomre Capital Markets LLC ("TCM") is one of the few Capital Markets consultancies with considerable experience in one arcane sector of the securitization markets called insurance-linked securities. Lars Toomre was originally retained in 1997 by what is now known as Munich Re America, Inc. to help that subsidiary of Munich Re thrash out what strategies to pursue in the convergence of the capital markets and more traditional insurance markets driven by fortuitous loss. Partly as a result of that initial strategy work, American Re Financial Products was established to pursue three major initiatives:

  • Finite reinsurance (now much discredited after the abuses exposed by the AIG/General Re finite reinsurance abuse scandal)
  • Reinsurance of credit enhancement mono-line insurance companies and other credit enhancement opportunities primarily originating from world-wide project finance needs (now shut down due to Munich Re's downgrade from AAA to A in 2001), and
  • Creation of American Re Capital Markets to create, underwrite and trade in various insurance-related opportunities such as future film production securitizations, weather derivatives, insurance-linked securities, guarantees of index total rates of return, insurance swaps, the hedging of Enterprise Risk Management exposures and the secondary trading of various property and casualty, health and life insurance policies (now part of Munich Re Capital Markets operation in New York City).

Lars Toomre ended up joining Munich Re to help establish American Re Capital Markets where he focused on weather derivatives, enterprise risk management and other odd-ball initiatives with "hair on them". One of the odd-ball type of requests that periodically would come across the Capital Markets desk concerned "What would Munich Re want to pay for a particular insurance policy (or sometimes portfolio of insurance policies) in the secondary market?" Some of these requests concerned structured settlements, some concerned viatical insurance and some were marketed as "life settlements". Generally, the insurance broker was looking for a better price than what the leading aggregators of the day (generally JG Wentworth or General Re Financial Products) were willing to pay. The type of policy and details within caused the valuations from various sources to often vary considerably.

Some people have asked why bother with all the complications of acquiring a portfolio of life insurance policies in the secondary market or a diversified portfolio of P&C risks? In short, the answer is that the returns from such diversified portfolios do not correlate with the returns from more traditional investment sectors such as equity, fixed-income, currencies or commodities. Hence, some of the smartest diversified investment companies (like Berkshire Hathaway, PIMCO, Citadel Investments and Greenlight Capital) have made some very significant allocations to insurance, insurance derivatives and insurance-linked securities, particularly because of how this sector risk increases their risk-adjusted returns (as calculated by such measures as the Sharpe Ratio).

On Monday, November 26th 2007, The Wall Street Journal published a front-page article entitled An Insurance Man Builds A Lively Business in Death written by Liam Pleven and Rachel Emma Silverman. This article describes in quite some detail how life settlement contracts are acquired and some of the pratfalls of dealing with retail clientele that have primary life insurers and regulators warily circling this rapidly expanding industry.