Friday, February 27, 2015

Meet The Dumbest Insurance Company In The World And the 68.6% Annual Return

From FT Alphaville:

Meet the man who could own Aviva France
When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.
The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.
There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.

The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.


Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.

L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference.

In a world where the price of everything is now a mouse click away, offering a hindsight investment service seems incredible, if not suicidal. Yet thirty years ago prices for funds were published infrequently. Trading involved calling your broker, visiting him person, or maybe sending a fax. It could take days for the trade to be processed, during which time the market could move again.....READ ON