Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, April 21, 1995 TAG: 9504210108
SECTION: BUSINESS PAGE: A9 EDITION: METRO
SOURCE: ASSOCIATED PRESS
DATELINE: NEW YORK LENGTH: Medium
Making securities out of a macabre new class of assets - life insurance policies held by the terminally ill - is gaining some acceptance on Wall Street.
Already, terminally ill patients are selling future death benefits on insurance policies to investment firms for 70 percent to 80 percent of their face value. The dying patient gets cash before he or she dies. The investment firm gets a profit when the death benefit is paid.
Now, pools of those purchased death benefits are being grouped into a specialized class of investment called asset-backed securities. Much the way mortgage-backed securities combine the right to collect on large numbers of mortgages, these securities give investors a stream of income derived from the sum of the future death benefit payments.
To date, there's been only one offering of just $35 million of these securities. That may not sound like much in financial markets where trillions of dollars in transactions are recorded daily, but proponents say the potential investment pool is vast and untapped.
On the plus side, investors view such policies as relatively stable collateral for asset-backed securities. ``There can be no default on payment, only delay,'' says Sharon Crockett, director of structured finance at Standard & Poor's Ratings Group.
Purchases of life insurance policies from the terminally ill are known as ``viatical settlements.'' The somewhat unusual financial term comes from the Christian church's viatica, the Eucharist when administered to a person near or in danger of death. Before that, in the Roman Empire, a viaticum meant the money and supplies given to officials before risky journeys.
Most of the people who have sold their policies for cash have had AIDS, but about 50 companies have begun to offer the service to terminally ill cancer and heart-disease patients.
Standard & Poor's has been one of the most vocal proponents of securities backed by death benefits. S&P keeps a renowned AIDS researcher on retainer to rate the offerings and spent a year and a half developing rating criteria.
``We wouldn't have done that if we didn't believe there was a potential for growth,'' Crockett said. Only 7 percent of 400,000 people diagnosed with AIDS in the United States have sold their policies since the business emerged in the late 1980s, but the pool of ``viated'' policies is estimated at $350 million and growing 25 percent a year.
Last month, in the first securitization of viatical settlements, Ironwood Capital Partners Ltd. of Hartford, Conn., closed a $35 million deal for Dignity Partners Inc., a San Francisco-based viatical company.
The package was backed by a pool of life-insurance policies purchased from AIDS and advanced HIV patients.
At first blush, the business of backing securities with collateral derived from dying patients sounds callous. In fact, it was no small consideration in selling the offering.
``That's the difficulty in doing a transaction like this,'' said David Olson, managing director at Ironwood. ``There's about five minutes where you just sort of shudder and get this dirty feeling, but people quickly realize that this is a good thing.''
With the upfront cash, patients are able to improve their quality of life, buy needed medical supplies or support themselves, proponents argue.
``Once you're able to hand someone a check for $100,000 you change their lives,'' said Bradley N. Rotter, chairman of Dignity Partners. ``You empower them to get pay for medical care and get their financial affairs in order.''
by CNB