Write downs by large insurers likely to impact life settlement yields

Old Mutual Plc., one of London’s largest insurers dropped as much as 9.4% in UK trading today after announcing a charge of $502 million to its Bermuda based unit stemming from failed hedges. The company said that unless market conditions change they may see an additional charge of $30 million.

The life settlement industry is carefully watching the ratings of insurers to see how it may impact the yields on policies that are traded in the secondary market. In the last 60 days yields on some life settlements have increased by as much as 250 basis points. Some industry experts believe this is due to the large amount of premium financed inventory that is becoming available on the market while others believe that it is due to the deterioration of the overall credit markets.

“Although the performance of life settlements is largely mortality driven it would be naive not to take into consideration the credit worthiness of the insurers especially in light of recent market turmoil”, said an industry insider.

Old Mutual Plc. is down 41% so far this year along with other major life insurers such as AIG which has seen its stock decline as much as 65% in the last year.

CEO of Old Mutual, John Sutcliffe has removed the COO of the US insurance unit and said, ``U.S. Life is an important part of our group and I am determined that we take all the necessary steps to restore it to a proper level of profitability.’‘

Despite the volatility in equity and debt markets worldwide life settlements still continue to attract large amounts of institutional capital. Low volatility and low correlation to other asset classes has earned life settlements a reputation as a safe haven from other markets.