The global market place has been shaken badly over the last several weeks, starting with the sub-prime mortgage meltdown, and including the forced unwinding of leveraged positions in the credit markets. This has caused many large and trusted institutions to fail: Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. AIG, a major player in the life insurance industry, was also affected by the massive write downs in the credit markets, principally due to its business of providing insurance against credit defaults of other entities. However, its life insurance division of AIG has not been affected at all by these developments and has remained profitable and sound. In fact, Bloomberg reported that AIG may sell the division that hold the life policies because it would be the most expedient way to repay the 85 billion dollar loan that the Federal government provided to bail out AIG’s credit default business.
Most of AIG’s write downs come from the investment division of the company, AIGFP, where the major losses are in the Senior Credit Default Swap Portfolio. It is common knowledge, and should be understood, that AIG is not simply just a life insurance company but rather a bigger player in the traditional equity and bond markets.
The State of Pennsylvania Insurance Commissioner reaffirmed the viability of the AIG life insurance policies to pay out on demand, saying, “I want to assure Pennsylvania policyholders that the AIG insurance companies doing business in our Commonwealth are solvent and have the assets needed to pay present and projected [death benefit] claims.” (Source: The Wall Street Journal’s on-line web-site, Market Watch)
Apart from the specific reassurances of the Commissioner, in general, life insurance policies are protected in every state by individual state pools, so that, that if a life insurance company goes bankrupt, the individual US State will pay out the death benefit.
Further, historically, in most instances of a life insurance company’s failure, the failed company’s policies have been packaged and sold to other existing Life Insurance Companies because the purchasing insurance company then receives the premium payments on those acquired policies and its business expands.
AIG’s troubles have not affected the rest of the Life Insurance market broadly speaking. There have been no bankruptcy or reorganization filings of any Life Insurance Companies to our knowledge and credit ratings of most insurance companies/ policies have remained largely the same.
If one looks further back in time, to the so-called Great Depression that started in 1929 and continued throughout the 1930s, all death claims during that period were paid. There are no statistics in any of the US States where death benefits have not been paid because of an insurance company’s bankruptcy.
The conclusion to be drawn for this data is that the purchase and sale of life insurance policies, the life settlement market, is alive and well. Tranen should have no problem in reselling policies that it acquires. Your investment in Tranen is not only viable, but, again, as the values of life insurance policies are not correlated to other asset classes, the Fund’s policies have and do retain their intrinsic value and will increase in value simply due to the passage of time, as each policy gets closer to maturity.
Tranen Capital remains alert to ongoing developments and changes in the markets, and shall be a watchdog with respect to the likelihood that in the near term financial markets will remain unsettled at best. Caution must be heeded. In our investment parameters, we shall, as always, continue to purchase policies issued by highly rated companies.
While the financial and popular press will usually make activity in the markets look either more dire or more exciting than what is really happening, Tranen Capital will continue to report to shareholders the Fund’s status, and any changes or effects this current economic crisis may have on the policies that the Fund does and shall own. In our view, the crisis dramatizes the important place in any securities portfolio of the allocation of a certain portion of assets in the uncorrelated class comprised of the life settlements market.
As always, your comments and questions are welcome. Please feel free to write to us by email at info@tranencapital.com.