Monday, March 24, 2008

a long idea - lphi

the market for buying and selling life insurance policies is growing, and not just by going to your local aig office for a new term policy. more people are deciding to monetize their policy’s value while they are still alive, selling the right to the payout upon their death for its net present value and skipping paying month after month of the premiums. buyers include closed-end funds, special purpose entities and sophisticated investors looking to earn a rate of return that is uncorrelated with traditional stocks and bonds. the market isn’t widely tracked so estimates for the face value of policies changing hands in 2006 range from $6 billion $15 billion, but the range is unequivocally higher than the 2005 total. i'm looking at lphi, the oldest and one of the largest intermediaries in the business.

financial and estate planning professionals seek out lphi for their clients and receive a referral fee when the company matches the seller with a willing buyer from its worldwide client rolodex of over 18,000 accredited and institutional investors. according to one research firm, the company has completed over 50,000 transactions in connection with 5,700 policies since incorporating in 1991. in the most recent quarter, the number of settlements totaled 52, eight fewer than in the same quarter a year ago, but thanks to a tripling of the transaction’s face value, the company’s revenue was up better than threefold. yet to take effect are agreements made in 9/07 and 10/07 with german financial conglomerate WestLB and with another closed-end life settlement fund through an exclusive agreement.

life policy transactions are consummated through an escrow account with the purchaser continuing to pay the premiums through the escrow agent to protect the seller’s personal information. lphi is responsible for monitoring the insured individual’s health status (much more palatable than if the policy buyer knew the identity of the person they were waiting on to pass on) but there are still many who consider it to be an unsavory industry. so far, 36 states have adopted common laws allowing and regulating the life settlement industry but some still require separate qualification. in addition, lphi's largest competitor is being investigated by the new york attorney general, so this stock is not for those of weak stomach.

nevertheless, acting as a facilitator in this burgeoning industry could pay off handsomely in the long run. a complement to an attractive growth story, the company has an inexpensive valuation, something that always piques my interest. now trading for about 10 times what the company earned over the last 12 months as the stock has sold off from $42 in september, i would seriously consider buying up to $16.00, as it seems reasonable this could eventually trade to 27 to 32 in a better environment. with a strong, cash-flow positive business, the company in january announced plans to use its growing capital surplus to buyback up to one million shares and the stock sports a dividend yield of 1.6%.

disclosure: none, just looking right now

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