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AIG's Death Bond Play

It would be ironic if the mega government bailout of American International Group (AIG)results in the once-mighty life insurer becoming one of the first major financial firms to sell “death bonds” to the public.

Early this year and with little publicity, AIG completed the largest securitization of life settlements to date—well over $2 billion. The deal, which AIG handled internally, was a securitization of a substantial portion of the insurer’s giant life settlements portfolio. Last year, AIG valued its life settlements portfolio, which is composed of the death benefits on 4,000 unwanted life insurance policies, at $2.58 billion.

The securitization was done, in part, to reduce some of AIG’s ongoing borrowing from the Federal Reserve by $1.2 billion. A portion of AIG’s life settlements portfolio was being financed with a credit line from AIG Financial Products—the discredited entity that sold insurance-like protection on tens of billions in ailing mortgage-backed securities.

The death bonds, which were privately rated by AMBest, are being held by AIG’s commercial insurance group. In a written reponse to questions from BusinessWeek, AIG says the “securitization notes are an attractive asset class (for AIG) because their performance is not correlated to credit or real estate markets and the notes pay an attractive coupon.” AIG wouldn’t disclose details on the rating by AMBest, nor the yield on the bonds.

But the firm left the door open to the possibilty it might look to sell some of the notes down the road. “We do anticipate that at some point in the future, interest in these notes will develop due to their high rating,” says AIG.

It that happens, one of the legacy assets to emerge from the financial crisis could be AIG-backed death bonds.

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