Well, that’s a well known word around here. Anyway today I got a paper-cut in my LPHI longs, no thanks to a Citron report. Those guys… you don’t want them uttering anything about any company you’re invested in. Grrr. Anyway, I sold out early in the day Wednesday, but am intending to re-buy this stock in the near future. At that time LPHI was down about -5% and I was at 1/3 position.
If you’re not familiar with Life Partners (LPHI), well, they basically make money off of death. Hmmm… let’s see, first they set you up with someone to buy your life insurance then pay you some of the benefit while you’re alive (because what use is all the money once you’re dead), however when you die, they get your death benefit. What a money making concept! I remember my accounting professor talking about this once in class… its a clever way to make money, but you need to have money to begin with. So yeah, it makes the rich richer kind of thing. Evil.
Well, I do have some experience selling life insurance. I think it’s a good product for families, but the sector got so nasty internally I got out in a few months. I think people didn’t fully understand the mechanics of cash-surrender value blah blah, and were trying to take out money that was getting heavily penalized/taxed… almost in the same way people are dipping into their IRAs for “emergency funds” (dumb idea. Get a loan.). Whoa, I kind of got off topic…
… okay, back to LPHI. Here’s the blah blah from Forbes 2/10/09:
Sucking the Life Out Of Life Partners
02.11.09, 10:40 PM ET
Life Partners Holdings has made a business out of profiting from death. But whether those profits are sustainable was the question of the day Wednesday.
The Waco, Texas-based life insurance settlement provider matches people who no longer need or can’t afford their life-insurance policies with investors, who pay a fee–plus the premiums–to buy the insurance and receive the benefit upon the person’s death.
But Citron Research sees red flags where investors see green. Citron warns that the $500,000 fees Life Partners charges are “egregious” and may not be “sustainable.” Citron claims that Life Partners’ gross commissions were 14.4% of the face value of settlements in its third quarter, which ended on Nov. 30. Yet, the average fee is around 6.0% of the face value. “If Life Partners is forced to cut margins even by half to approach industry norms, its net profit will sink by 63%,” Citron said.
Following Citron’s report, Life Partners shares plunged 13.7%, or $4.41, to $27.85, at the close on Wednesday.
Citron questioned the integrity of Life Partners Chief Executive Brian Pardo, who it says was “previously sanctioned by the Securities and Exchange Commission for materially misrepresenting financial results,” when he was CEO at Solar King. Citron said the SEC charged the defendants violated the antifraud and reporting provisions of the securities laws and that Pardo made false statements to the company’s auditors, materially overstating the company’s revenues and profits. (wow! what an awesome attack! Good job Citron)
Pardo fired back after the closing bell, saying Citron’s report “contained inaccurate assumptions, misinformation and erroneous facts about our company.”
Pardo said he is confident that Life Partners’ business growth will remain strong. “We vehemently disagree with the conclusions reached by the author of the report and believe strongly that our business model will continue to demonstrate the sustainable growth we have exhibited over the last 18 years.”
Since 1991, Life Partners has completed over 84,000 transactions totaling over $1.7 billion in face value.
… so, as you can see, Citron was egregious in using the word egregious. Does that make sense? Anyway, LPHI is a “leader stock”, so I’m actually considering buying this dip just because they have a business model that might work really well in times of crisis. If not, I see LPHI as a long term short (with an entry point later in the year), because I do feel their CEO Brian is a big red flag and will come up again in the future. Keep this on the same list we had ARTC on.
… if you look at the 1-year chart, you can see that Citron’s revealing of this report was very well timed. I’ll leave you to figure that out…
MELI!
I do feel their CEO Brian is a big red flag and will come up again in the future
You can bank on that. LPHI longs are vulnerable in two big ways: declining margins (and likely some lawsuits); and unscrupulous management.
With a shady CEO, and a business model that depends on screwing their clients, LPHI has a very high likelihood of blowing up at some point.
Gio,
Came over here just to tell you I have learned more about the VIX watching you on Twitter and following on charts real time these last couple months than in the last two years of reading articles, listening to others ect. ect. Thanks millions.
I was in the insurance business straight out of college, but i quit once i figured out you need to be a sociopath to sell. That LPHI is a crazy scheme. I mean how many guys just write the policy on someone and just off um (or take them hiking).
I do believe life insurance is the most under utilized product to create wealth in a family. If every generation bought a big life policy then it would ensure the bloodline would have the means to be successful. That’s how you create a dynasty.
I toldya LPHI’s fucked months ago. Cost of capital in those markets has gone ballistic, and the actuaries who price these deals finally admitted last fall that maybe the 100-year old life companies are right about how long people are going to live. They’re toast.
Thanks my well tanned friend, banked some coin on that sucker today.
Cramer just put LPHI in the ‘sell block’ .