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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mr.Gogo who wrote (40536)	12/12/2010 9:12:01 AM
From: gcrispin	1 Recommendation Read Replies (2) \| Respond to of 78744

From Morningstar: Life Partners Holdings facilitates life settlement transactions by matching potential buyers of life insurance policies with sellers. The market for life settlement is still in relative infancy, which has allowed Life Partners to achieve rapid growth as it penetrates a market that was almost nonexistent a few years ago. The industry remains relatively small and lacks developed competition, allowing Life Partners to generate strong margins and high returns. We don't believe the company has an economic moat to protect these returns, however. As the industry matures, revenue growth and margins will contract. Additionally, we have concerns about Life Partners' history of legal entanglements with state governments and some of its accounting and disclosure practices. Every year, millions of elderly Americans voluntarily allow their life insurance policies to lapse because it no longer makes economic sense to pay high premiums to maintain a policy they do not need or they simply can't afford their premiums. Rather than letting their policies lapse, some policyholders have begun to consider life settlements. Companies like Life Partners step in to broker a sale from the owner of the life insurance policy to a buyer who is interested in purchasing the policy as an investment. This transaction is attractive to both parties, as the seller collects a payment in excess of the cash surrender value for his or her previously illiquid life insurance policy while the buyer acquires the policy at a discount to face value, providing a potential return uncorrelated with traditional markets. If the industry becomes more accepted and mainstream, we think there will be a natural pressure on the fees Life Partners is able to charge buyers and the margins it will be able to generate. Potential competitors have largely overlooked life settlements because of the relatively small size of the market. While so far the life insurance companies have generally turned a blind eye to life settlements, they have financial incentive to diminish or eliminate their use. Life insurers assume a certain level of lapse rates in their insurance pricing calculations. If lapse rates fall from increasing use of life settlements, life insurance companies will have incentive to begin buying back the policies themselves. What's more, in contrast to Life Partners, which must pay intermediaries to find potential sellers, life insurance companies already have existing relationships with policyholders, allowing them more financial leeway to bid up prices over life settlement companies. Also, large financial institutions have been considering securitization of life settlements or creating an exchange for their transactions. Either of these events could greatly increase competition in the industry and lower Life Partners' returns. As it stands now, the life settlement industry is relatively opaque. It is not clear whether competitors are actively bidding on the same policies Life Partners is or whether each policy is sold to the first bidder. Life Partners does disclose the fees it collects on each transaction to the buyers of policies. Life Partners' fees seem to be high relative to the face value of the policy and even higher relative to the discounted value at which the policies are purchased. Over the past three fiscal years, the firm has collected gross revenue (before payments to brokers and licensees) representing about 17% of the face value of policies, and this number is even higher in recent quarters. As the industry becomes more competitive, we expect those fees to decline. In the past few years there have been disagreements between Life Partners and a number of states regarding whether life settlements should be treated as financial securities. While the settlements are not treated as securities under federal law, some states have sued Life Partners on the basis that the transactions were securities based on state law. Florida and Colorado have both ruled against Life Partners in this regard, and the company does not currently facilitate any transactions in these states. As a condition of its settlement with the state of Colorado, Life Partners agreed to offer to repurchase all of the settlements it had issued in the state at a premium to what the buyers had originally paid. When Life Partners bought the policies back, it did not recognize a loss. This raises questions as to how closely the value of the settlements the firm holds on its balance sheet matches the economic value of the policies. Given that the company now holds more than $18 million worth of policies on its balance sheet, a change in the accounting rules could have a material impact on its earnings.