Well this is court room drama good enough for TV  and you know life settlements are main stream when you hit front page of the journal. With $56 Million on the line this is hardly representative of the average life settlement case but its interesting to note what can happen when life settlements go bad.

A well known attorney Arthur Kramer died at age 81. In the previous 8 years he took out and sold $56M of life insurance. The family is suing saying the insurance was fraudulently obtained and so the investor who bought the policies should not get the death benefit…the family should. Now does that strike anyone else as having some logical issues? Putting aside the issue of whether the policies were actually fraudulently obtained lets conjecture that they were. If the policies were fraud…why should anyone be paid? They are basically accusing the late Mr Kramer of fraud and then saying but we’d still like to keep the money.

Life settlements are a great financial option. If you own a policy why shouldnt you have the right to sell it and once that transaction is done you dont get to go back on it. If you committ fraud putting policies in-force then those policies are void and dont pay out. Insurable interest is the key concept at issue. Rather than get into that right now, I’ll let you read this case and mull it over.

Another major US bank JP Morgan announced today that it was exiting life settlement investing as reported by DealFlow Media in this article but at the same time good friends of ours the Trannen Fund announce they are ramping up all across Asia.

So what are the implications of that? Is investing in life insurance a poor decision? Absolutely not.  I think that it speaks volumes on two levels, about our industry and more broadly about the US financial services sector.

JP Morgan join another high profile exit by Goldman Sachs earlier this year both citing dissappointment that the industry was showing so little growth. The fact is that foreign money has been a dominant force in life settlements growth since the start. Europe and increasingly Asia have the perspective needed for investing in this space. Investment banks are really misnamed in that they are really transaction banks their model is to make fees off of transactions…they are not investors.  The fact is that life settlements are complex assets to own and manage and understand and so simply cannot be reduced to exhange tradeable assets…its an investment not a trading opportunity. And a great one at that.

In addition, in this authors opinion these major banks are still in horrific financial shape. The fact is the accounting rules allow them to value their book according to whatever they want to report and they are dependent on a life support of free money from the Fed.  With all this support they are still not healthy and are still in triage. When a patient is in triage treating the gaping wound is what is important…Getting the right vitamins and nutrients for a long healthy life are not exactly a concern.

By contrast Asian wealth is exploding and these are investors seeking to amass assets. So it is no surprise to us that investors, with their own cash (not free money from the fed) are looking seriously at life settlements and specialist private funds that can get them the assets. The fact is these two announcements when viewed together are a perfect case study of the wealth transfer that is happening in the world. 

Life settlements is certainly not a huge asset class $10B – $20B seems to be the consensus…and in my view it will always remain relatively small. The references and hyperbole refering to the $20T life insurance market falsely represent the market potential. There simply are not that many high net worth seniors who can legitimately buy large life policies and then want to sell them, so get real about the potential. But it is a powerful asset to own and can add return and reduce volatility in a portfolio.  Investors with enough capital and perspective will increasingly want to understand and invest in life insurance. And those kind of individuals and organizations are not US investment banks.

David Mickelson runs through how to prevent life settlement fraud on KUSI News in San Diego.