Investing in Death
German investors might have calculated wrong when betting on how
fast Americans will die.
Gisbert Soballa has a rather dispassionate stance toward death.
The 72-year-old retired cardiologist says that, to him, dying was always
"something completely normal."
Given that, the doctor didn't pause
when his adviser at Deutsche Bank suggested a peculiar deal with death. The
"db Kompass Life" fund buys up life insurance policies of Americans
and assumes responsibility for paying their future premiums. When a
policyholder dies, the entire payout from the policy goes to the fund. And
since everybody dies, it would seem to be a fairly crisis-proof investment.
Soballa and his wife together invested €16,000 (about $23,000)
into the fund. In 2007, they received a small dividend. Since then, the
Bavarian couple has received quarterly statements -- all of which notify him
that "unfortunately, there will be no dividend payments this
quarter." So, it would appear that bankers' betting on the demise of
anonymous Americans hasn't born much fruit.
Many thousands of investors have had similar experiences. Since
2005, Deutsche Bank has taken in €500 million ($720 million) from clients for
its db Kompass Life I and II funds. But, now, huge losses are on the horizon.
When Dreams Become Disenchantment
"At the Deutsche Bank branch, they told me it was a booming
business," said a 50-year-old executive assistant who was looking to
securely invest a severance payment for her retirement. Today, she is worried
about her savings. In a call to the fund's public service representative, she
was informed "promptly and unequivocally" that her contract also
stipulated the possibility of a total loss -- a warning that's pretty well
buried in the small print of the sales prospectus.
But how can that be? Returns ostensibly only depend on the life
expectancy of the original policyholder, which should be a fairly simple
statistical variable. Still, the fact is that, since the funds take over entire
policies, they have to pay monthly premiums for the duration of each and every
one of them. A life insurance policy pays out only once the insured person has
died. But, until then, there are only costs.
The real issue is related to the fact that the insured aren't
dying as fast as they were expected to. Apparently Deutsche Bank, like many
other providers, relied too much on medical experts and statistics for the
When Deutsche Bank launched these funds, the market was still in
the grip of great euphoria. In
But it didn't take long for disillusionment to set in. Many
providers couldn't generate the yields promised in their prospectuses. For one
thing, many of the insured simply lived longer than expected. For another,
buying up policies became more and more expensive due to high demand. Also, a
change in the law made American life insurance funds taxable in
As early as 2005, the Sachsenfond, a subsidiary of the Sachsen LB,
the now-dissolved bank of the state of
Even Deutsche Bank is getting back into the business, as well. In
2008, it launched a third Life Kompass fund, though it has been structured
somewhat differently, which collected investor funds in two tranches, one of
$100 million and the other of $144 million.
Still, when it comes to the other two funds, things haven't gone
so well for investors, and only the bank itself has turned a profit from them.
One fund -- db Kompass Life I -- netted the bankers €32 million ($46 million).
For instance, they figured on "fund structuring" fees of 3.485
percent. And the bank took 9.5 percent up front in equity capital brokerage
fees.
The structure of the product is so complicated that even experts
don't understand it. The Kompass Life funds were structured by London-based
bankers for Deutsche Bank, who apparently put their own profit above all else.
With things just too far above their heads, investors chose to simply rely on
the judgment of their advisers. In essence, the lion's share of the risk was
palmed off on investors, while financial managers raked in a buck.
Uppity Investors
Investors in the db Kompass Life I fund financed the purchase of
life insurance policies with total maturity payments of $770 million. Through
the end of January 2009, a total of three policies had paid out, bringing in
about €20 million ($29 million). But, as investors were tersely informed, the
money was "applied to the advance payment of premiums and other
costs."
At the moment, time is of the essence: The funds will reach
maturity in 2015, when Deutsche Bank's London-based operation must buy back the
remaining life insurance policies from investors at 80 percent of their
purchase price. "Through the payment of this sum, which is considerably
smaller than the maturity payments of these policies, investors would incur
financial losses," the prospectus notes.
But, now, investors are slowly beginning to revolt. "In what
dark alleyway have my savings been hidden?" an e-mail from one investor
reads. Another writes: "I now have a very bad feeling that I'll never see
my €10,000 again."
One of them -- who prefers to remain
anonymous -- wants to call a special shareholders' meeting to launch an
independent inquiry aimed at looking into whether Deutsche Bank was negligent
in how it calculated the funds' value at the time they were launched. But
there's just one problem: To call such a meeting, you first have to know who to
call. And the only entity that has such information -- the names and addresses
of the co-investors -- is the fund administrator itself.
The anonymous investor has been pestering the fund administrator
to release this information for months, but the fund has refused to do so,
claiming that data-privacy protection laws don't allow it to. In the end,
though, the fund sent out a letter to all the investors saying that one of the
fund's investors had taken "the occasion of the fund's current economic
development" to request that he be given their personal information.
Dozens of co-investors then contacted the anonymous investor directly. Together,
they have employed the services of a lawyer and launched a Web site.
The lawyer, Karl-Georg von Ferber, agreess that the fund's
prospectus spells out the investment risks rather thoroughly. But, he argues,
the document gives rise to the impression "that it's all just about
statistics and actuarial mathematics."
It's probable that many of the investors just took a cursory
glance at the description of the highly complicated products. Soballa, the
physician, for one, will admit to this. At the time, he says, he was just
putting his faith in the strong reputation of his bank -- and his financial
adviser. "He seemed very reliable," Soballa says. But it just might
be the case that, when it came to these funds, the banker didn't really know
what he was talking about.