idea #21, LIFE PARTNERS, LPHI

Life Partners would be a screaming Magic Formula buy with it's high ROA and low P/E ratio, except for the fatal flaw that it's a financial stock.   It's growing fast and paying a big dividend. LPHI popped up on an AAII screen.  They are "life insurance policy dealers."  If you want to sell your life insurance, they will find a buyer.  Everybody wins.  The buyer is uncertain of the end return on the policy, the seller takes a discount to the potential final value in exchange for cash now (and to not have to keep paying on the policy).  Life Partners makes money putting the 2 together.  It's arguably a very necessary service for our society.  Baby boomers want their money now, not when they die.

A quick look reveals that the CEO (age 66) owns over 50% of the company and gets a very high salary for such a small company.  The company is involved in numerous lawsuits and subject to bad publicity from unsatisfied investors...  afterall, people are living longer now.  They are the only publicly traded company in this "highly fragmented" space.  Interestingly, they finance their operations by direct investment so they sailed through the financial crisis without a hitch.  Investor demand went up, people wanting to cash in policies went up.  It was a beautiful thing.
 
Government regulation is a risk.  There is a licensing process to deal these insurance policies, i.e. Consumer Protection Licensing  .  "The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC).  At least 40 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way.  These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive."   I wonder if this organization could shed light on other, non-life insurance settlements.

Of particular interest in their standard "risks" disclosure in their 10k is something that is conspicuously absent.  Insurance companies have to make good on the payment when the insured person dies.  AIG could default, major insurers default, etc.  That is a real risk and it is not mentioned.  Is the risk so inconceivable that it doesn't have to be disclosed?   I called their investor relations number and spoke to Andrea.  She said that if major insurance companies default then you will have a lot more to worry about than your investment in a life insurance policy.  So it appears that to them, that risk is inconceivable.

 

Interesting, high roa biz
Listen to conference call to learn about default risks associated with insurance companies.

Listen to how it holds policies on balance sheet

Life Partners looks cheap, and like the last idea, some of the discount is likely because of the controlling interest (& very high salary) of the CEO, Pardo.