Citron Research looks behind the curtain at the business of Life Partners – (NASDAQ:LPHI)


For investors, this Life Partner might not be good for you …

Life Partners is a viatical/life insurance settlement provider based in Waco, Texas.   LPHI acts as dealmaker – it arranges for buyouts of life insurance policies in cases where the death of the policyholder can be anticipated within a finite timespan.  It earns fees by connecting these potential settlors with investors, who agree to front the money and pay the premiums, in exchange for rights to the policy benefit face amount, which is received following the settlor’s subsequent death.  Clients are mostly individuals who are referred to Life Partners through financial planners, lawyers, insurance agents and CPA’s.

It is the belief of Citron that this company has too many red flags that investors are advised to consider carefully: 

  Red Flag # 1. Egregious fees. 

We believe Life Partners is charging their retail investor clients egregious fees.  Are LPHI’s clients getting a good deal?  It is hard to believe.  LPHI makes money by connecting sellers and buyers of life insurance policies and collecting an upfront fee.  However, it is difficult to understand how clients of Life Partners can make attractive or even positive returns when fees of $500,000 per transaction are layered into the IRR calculation. 

Below let’s explore some transaction statistics from LPHI’s most recent quarter:

  Q3-09 as of 11/30/2008


Brokerage and referral fees


Revenue, net of brokerage fees




Face value of policies settled


Number of policies settled


Average face value per policy


Average fees per settlement


Fee as a percentage of policy face value


Average fee split to broker 


Average fee retained by LPHI


Citron’s first question is whether this level of fee income is even remotely sustainable.  How does the company garner such a big piece of the settlement pie for itself ?  When a company out-margins its competition by hundreds of percent, investors should understand the business model.  There had better be a significant competitive edge, and a high barrier to entry, or competition will rapidly erode those margins. 

A recent lawsuit by the Colorado Securities Commissioner provides significant insight into how LPHI has been operating. 

As you can see above LPHI’s gross commissions were 14.4% of the face value face in 3Q09 (ended 11/30/08).  Yet, according to the Wall Street Journal, “life-settlement brokers often pocket the lesser of 6% of a policy’s face value or 30% of the gross sale price.”  If you invest in a policy through LPHI, however, you are paying nearly two-and-a-half times the customary industry fee level

According to Sanford Bernstein, investors of life settlements typically seek target IRR’s of 9% to 13%.  However, Life Partners has promised as high as a 16% IRR on their investments, according to their radio adds.   
( )

If LPHI is forced to cut margins even by half to approach industry norms, its net profit will sink by 63%.

And it gets even more fishy here.

 Red Flag # 2. Are those fees sustainable? 

Is this high fee level sustainable?  Or in other words, how does LPHI get away with their egregious fees and still provide higher than market IRR’s to their investors?

In our opinion, they are not.  They can only be carving out such huge fees by concealment:

  1. Failing to disclose their fees transparently to the investors and settlors
  2. Preventing the transaction from being priced competitively by any sort of bidding process
  3. … and worst, not disclosing the true actuarial life expectancy of the insured (the largest single factor impacting the ultimate percentage IRR on the investment )

While Life Partners may be better than other providers at finding attractive policies, with 90% of volume (according to their 10-K) coming from brokers, it appears that they are partnering with brokers and insurance agents to thwart a competitive bidding process. 

In the above example, assuming the transaction is completed at 35% of face value ($1.2mm), LPHI’s clients are paying $500k of upfront transaction fees, or over 40% of the gross sale price.  Note that LPHI takes its entire fee upfront, while the investor will not find out how the true investment performance for years down the road.  According to the May 2007 complaint filed by the Colorado Securities Commissioner against Life Partners alleging violations of the Colorado Securities Act, Insurance Commissioner alleges that LPHI:

“failed to disclose to investors the method by which life expectancy was determined; the high frequency rate in which viators outlived the life expectancies predicted by Life Partners.”

“It is further alleged that Life Partners failed to disclose the original purchase price of the policy and commissions paid to the sales agents, making it impossible for an investor to determine the true market value of the policy.”

Therefore. investors do not know their cost basis or how much of their “investment” is being pocketed by LPHI. 

The need to conceal the fee structure is so central to LPHI’s operation that even last week LPHI’s CEO would not give any information on his fee structure to a Wall Street Journal writer who was doing a puff piece on the company.

’Life Partners Chief Executive Brian Pardo declined to give specifics of the fee structure or the size of lump-sum payments, which vary according to “underwriting factors”. ‘

As a comparative data point, investors are encouraged to consider the fate of National Financial Partners, which owns Advanced Settlements, the largest life broker in country.  They are famously run by Jessica Bibliowicz, the daughter of Sandy Weill.  Yet, looking at their stock price in the $2 range tells us that the market for life settlements have cooled and their margins have been compressed.  It is the opinion of Citron that this is the eventual future of LPHI.

In addition, LPHI shares a portion of the fees with their licensees and selling brokers.  In its 2007 10-K, LPHI disclosed it paid one licensee over $6 million and two brokers over $4.5 million dollars.  LPHI is not the only company getting rich at expense of individual investors.  The Colorado lawsuit increases the regulatory risk for these brokers and licensees as well.  The Colorado lawsuit names 10 of these brokers and licensees’ in its lawsuit.  This notoriety may disincentive others from entering into these cozy relationships with LPHI.

This explains why the lawsuits piling up in states across the country are so significant.  As LPHI is found to be selling securities in state after state, and requiring insurance licensing in others, it faces a burden of disclosure which will force exactly those fee disclosures that will narrow its margins. 

There is a consistent movement by states and regulatory bodies to license life settlement activity, cap fees and increase disclosure of fees.  We believe litigation in Colorado, which went to trial in December 2008 is representative of legal pressures in many venues, and judging by LPHI’s business practices, is well justified.   Other states have gone after Life Partners, including Virginia and the Utah Division of Securities.

Life Partners is licensed only in the state of Texas and a handful of others, and most notably absent is Florida, the largest life settlement state.  But more and more states are requiring life settlement providers to be licensed in their state. 

There are only 12 license providers in the State of Florida :  (   (Company Type “Viatical Settlement Provider”). 

In July 2007, Florida issued a cease and desist order against Great West Growth, an unlicensed life settlements provider ( Great West was conducting business in Florida by using a licensed provider, Life Equity, to act as a fronting agent for Great West. 

LPHI also operates in Florida … without a license.  

“On March 28, 2008, LPI filed a declaratory judgment action in the United States District Court for the Northern District of Florida to determine whether LPI is required to be licensed as a life settlement provider in order to purchase policies from Florida residents.  We claimed that the Florida Office of Insurance Regulation does not have jurisdiction over LPI and that to assert just jurisdiction violates the Commerce Clause, Contracts Clause, and the Due Process Clause of the United States Constitution.  On December 1, 2008, the District Court dismissed all of our claims except the due process claim.  The matter is still ongoing.”

Yet, in fairness to the company, they do disclose this risk clearly to investors in their 10Q through the all important line that some might overlook

“Some states are moving to license life settlement brokerage activity, which may result in the capping of fees or great disclosure of fees, either of which would tend to lower the fees.”

Obviously this all provides significant business risk to LPHI … and its lofty margins.

 Red Flag # 3.   Management track record

Past indiscretions by management, including accounting abuses and other issues increase the risks for investors in LPHI. 

We have a CEO previously sanctioned by the SEC for materially misrepresenting financial results.  In the 90’s,  LPHI’s CEO was the CEO of American Solar King, which had a spectacular rise and fall (from over $90 per share to bankruptcy).  It seems the CEO arranged for sales to dealers financed by huge uncollectible receivables.  Specifically, the Complaint alleges that defendants violated the antifraud and reporting provisions of the securities laws and that the CEO made false statements to the company’s auditors, materially overstating the company’s revenues and profits.  OOPS!

 Red Flag # 4.   Who’s minding the store?

Who is minding the store now?  LPHI’s auditor is a tiny firm with a really small public company practice.   And we mean really small. 

Murrell, Hall, McIntosh has about 16 other publicly traded clients:

Symbol Company Recent Price / Share Recent Volume

Market cap

CPSL China Precision Steel, Inc.




QELP Quest Energy Partners, L.P.







< 20




< 20




< 20

GRMH GrayMark Healthcare, Inc.




FFHL Fuwei Films (Holdings) Co., Ltd.



< 10








< 10




< 10




< 10








< 10




< 10




< 10

QRCP Quest Resource Corporation



< 10

LPHI Life Partners Holdings Inc




LPHI has a higher market cap than all the auditor’s 16 other publicly traded clients combined!

Citron notes that the auditor fees paid by LPHI to Murrell et al. in the last three years are really tiny:

LPHI Auditor Fees








In the wake of the accountants’ role in the Madoff scandal, investors and regulators clearly need to be mindful of whether the protection assumed to be provided by independent auditors is sufficient to provide investor protection within the given context.  Remember that we’re considering a $400 million market cap company here.

Further the independent director in charge of the audit committee is Tad M. Ballantyne.  Mr. Ballantyne has a colorful background with a variety of pink sheet penny stock companies, one of which is a “Republic of Mauritius” corporation, plus and a bean canning plant in the Midwest. 

We’re concerned that this lack of oversight leaves LPHI’s receivables and net revenues open to “management”. 

 Red Flag # 5.  Analyst coverage?

Interestingly enough only one firm “covers” Life Partners:  Taglich Brothers.   The only thing Citron can say is to look at the history of companies covered by Taglich … did we mention that the company pays Taglich $21,000 per year for “the creation and dissemination of research reports” ?

 Red Flag # 6.  Competition

Major competitors in the viatical settlement sector include: Maple Life, Peachtree, Coventry First, Life Settlement Solutions, and Life Equity.  The five major providers have adopted “the full disclosure model”.  And now, an online auction site, Cantor Fitzgerald’s LexNet, brings even more transparency to the process of matching investors and settlors for fees of only 1% to 2% vs. 14% from LPHI. 

 Red Flag # 7.   Life Insurers: no longer “The Rock”

Life insurers are under enormous distress due to the financial crisis.  In years past, investors in viatical settlements could assume with certainty that the policies in which they invested bore no counterparty risk.  But those days are gone.  Nearly every major life insurer is at risk of “insolvency” due to crisis of toxic real estate paper.  The debt of several major insurance companies is already trading at distressed levels.  In fact, potential investors can get similar returns by buying insurance company debt, without the mortality risk of viatical settlements.

Perhaps this is why there seems to be a current shortage of viatical investors.  That “risk-free” 16% might not look so risk-free if the investor has to ask “Which will survive longer, the insured or their insurance company?”


Just two years ago, LPHI was an OTCBB stock that had never traded over $10.  With its colorful CEO, lack of management oversight, tiny 30-employee operational footprint and string of regulatory troubles, it falls far short of the standard of accountability and transparency required of mid-cap Nasdaq companies.  From an actuarial perspective, we’d say the odds are this one is terminal. 

Cautious investing to all.