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July 16, 2011 – Comments (3) | RELATED TICKERS: LPHI

Life Partners Holdings Inc.(LPHI)

Business:

Life Partners Holdings Inc. Is engaged in the secondary market for life insurance, known as ‘life settlements.’ The company buys out someone’s life insurance policy for at a discount to its face value for investment purposes. Their operating revenues come from fees for facilitating life settlement transactions. In the transaction, the seller recieves a cash payment that they can use as they wish, while the buyer receives the death benefit under the policy when the insured dies. This market was practically created by this company and is the only public company operating solely in the life insurance market.

The CEO owns around 50% of market share, meaning if he is a bad CEO you can’t really get him out, but also that he will do anything to keep the company doing well and to keep the shareholders happy.

5 year earnings growth rate: 93%

5 year sales growth rate: 43%

Quick Ratio of 4

Dividend Growth of nearly 60% on a 5 year average.

EV/EBITDA of 0.89

Dividend Yield trailing 1 year: 10.8%

Currently, investors are nervous about LPHI because of its changing auditors. Its a relatively old and well managed company and I personally don't think there's much to be nervous about; however, its obvious that share prices shouldn't be making any giant breaks forward any time soon. The best play on LPHI would be an income strategy. Buy 100x shares at market price and sell x calls at a strike of $5 with a bid/ask of 0.35/0.55 and sell x puts at a strike of $2.5 with a bid ask of .5/.65 that expire on Oct. 22nd. This will yield a 20 to 25% return if the prices go higher, and it will hedge LPHI so that you won't lose money until the stock goes below 3.4. Add in the fact that at least one dividend payment can be expected before Oct. 22nd, and this is a very high income play. Remember that the potential risk is only for 3 months so in essence the total risk for this play is only if LPHI goes below 3.4(assuming it doesn't pay a dividend to lessen your risk in that time). I like my risk/reward here.

I would be interested in your comments.

Shamapant

3 Comments – Post Your Own

#1) On July 17, 2011 at 12:14 AM, tomlongrpv (88.43) wrote:

As a lawyer specializing in insurance (although admittedly more liability than life insurance) I can tell you that life settlements and viaticals is a newly developing area with a lot of problems and ill-defined regulation. And the life insurers will be trying to kill this market in order to keep policyholders captive to cash value settlements. Life insurers have a lot of money and will do everything they can to kill companies like LPHI. It's a high risk speculative investment. My personal bet is the life insurance companies will kill this business. Good luck.

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#2) On July 17, 2011 at 3:05 PM, shamapant (91.40) wrote:

Wow, thanks so much, this explains a lot about why its P/E is so low-growth prospects are a lot dimmer than they seem by the numbers. Yet I am still unsure if LPHI will die because of this, I feel like while life insurance companies want it to go away, the fact is it IS helping out its customer base, a lot. Its like the good guy bad guy scenario, and LPHI is the good guy. Its been having some recent growth in revenue, and it has enough current assets on hand to surive a while longer. Remember that I only need the price to stay the same or greater for the next 3 months.

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#3) On July 17, 2011 at 3:24 PM, tomlongrpv (88.43) wrote:

This martker would ultimately be financed by bonds. It is too risk for investors to buy a particular policy. They need a spready of poliicies to assure liquidity and safety. But the bonds have been rderided in the market as "death bonds" and had poor p[ublicity in the media. Yet the bonds financing approach is essential to real growth of thhis kind of company. Look to the current regulatory martker to choke off that potential.

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