Massachusetts Reviews DBRS Grades on Life-Settlements

Massachusetts is reviewing DBRS Ltd.’s grades on investments tied to life insurance policies because they might be inflated like the discredited mortgage bonds at the center of the recession.

DBRS has until Oct. 7 to provide information on how it rates the so-called life settlement bonds, how it’s paid for the ratings and how it monitors them, Secretary of the Commonwealth William Galvin said in a statement today. Caroline Creighton, a spokeswoman for Toronto-based DBRS, said the company was reviewing the request and would respond “if and when necessary.”

U.S. Securities and Exchange Commission Chairman Mary Schapiro also is reviewing life settlements, which pay policyholders a fee for the right to claim their benefits when they die. Schapiro said yesterday the SEC had formed a task force to scrutinize instances when Wall Street firms package the policies into bonds and sell them to investors.

“Bundling the policies to create another investment opportunity closely parallels the subprime mortgage market and subsequent meltdown, whose effects investors are still reeling from,” said Galvin, the state’s chief financial regulator, in the statement.

Regulators have said ratings companies were too generous in assigning top credit grades to securities comprised of bundled subprime mortgages before the financial crisis showed many of them were more prone to default than the ratings suggested.