EFG faces the threat of lawsuits from Swedish investors who claim they lost money on a life insurance portfolio.
Zurich-based EFG pulled out of Sweden in 2011, but that's where a legal threat by institutional and private investors looms, according to Swedish outlet «Realtid» (in Swedish). The investors claim they lost as much as 1 billion Swedish krone ($119 million) on investments dating back to when the Swiss private bank was still in the Swedish market.
EFG isn't commenting on the report – which is unsurprising given the extent of the investments. The private bank itself has already lost more than 100 million Swiss francs ($109 million) in this area, and stands to lose more.
The business dates back to 2007, when then-CEO Lawrence Howell bought a portfolio of life insurance that grew t0 900 million francs on EFG's balance sheet. U.S. life insurers were offloading life insurance policies. The purchase price should ideally be less than the projected payout in case of the policyholder's death.
Veering From Statistics
The practice of which repackaging them as financial investments quickly morphed into an asset class before the 2008/09 financial crisis hit, promising high returns with no market correlation – as long as statistical life expectancy was accurate. Few investors questioned the ethics of the so-called death bonds.
However, EFG bought a portfolio which veered from statistical life expectancy. In 2008, it took a first financial hit (59 million francs) after revaluing the portfolio. The investment continued to plague the Swiss bank, which was stuck with the premiums as well as higher-than-projected life expectancy of policyholders.
Wreaking Havoc
Four years ago, EFG recorded a credit default of 108 million francs in connection with funds held by third parties in Sweden. It was the repackaged life insurance which have reportedly wreaked havoc for their Swedish investors, who are evaluating their legal options.
For the Greek-controlled Swiss wealth manager, death bonds represent not only a poor investment, but also an ill-fated decision to offer them to EFG's Swedish private clients as well. The investments were sold through a Swedish company called Longevity Management, led by Jonas Fischerstroem, a former EFG executive in Sweden.
Eighth World Wonder
Because of the leverage in the instruments, interest was due – eight percent plus Libor at first, which EFG later lowered to 6.5 percent. When KBC withdrew credit lines during the financial crisis, EFG stepped in, even though it had left the Swedish market in 2011.
Management fees and interest have since decimated the investors' money. The triple threat was longer life expectancy of policyholders, an entirely different interest rate paradigm following 2008/09, and what Albert Einstein referred to as the eighth wonder of the world (compound interest).
EFG International now treats the portfolio as a legacy asset which cannot be sold or unwound, and reports its status on the last page of its financial results. Since 20187, the portfolio is cash flow positive, but EFG has little hope of recouping the losses. It is pursuing various U.S. insurers in court over the policies.
