May 2 was a great day for us. Imperial (NYSE:IFT) announced that it secured a 15-year $300 million line of credit from Andy Beal. (I owe you a drink, Andy!) The stock went up 40% that day. Today at $6.08 per share – a $129 million market cap – the stock is still tremendously mispriced. I’m going to explain this in a simple way that anybody can understand, without oversimplifying.
Imperial is now comprised of two assets. First is White Eagle, a portfolio of life insurance policies with a net death benefit of $2.28 billion. There are 459 insureds within White Eagle. By the time the last person in the portfolio dies, White Eagle will have collected $2.28 billion from the insurance carriers. The first $76 million goes to Imperial. The remaining $2.204 billion is split 50/50 with Beal Bank. So $1.102 billion will belong to Imperial.
Imperial’s second asset is a portfolio of 177 life insurance policies with a net death benefit of $820 million. All of the upside of this portfolio belongs to Imperial.
In simple terms, the upside to Imperial totals just short of $2 billion in cash ($76 million + $1.102 billion + $820 million). To earn that $2 billion, Imperial is going to have to pay the insurance companies premiums every year (about $60 million in 2013). Premiums will gradually decline in the next few years as insureds in the portfolio die; at some point premiums will drop off dramatically as deaths accelerate. I estimate that premiums paid plus interest on the Beal loan will total around $500 million over the next decade.
So $2 billion in cash minus $500 million needed to fund the investment leaves Imperial with $1.5 billion of upside. Operating costs going forward will be de minimis. In fact the great majority of Imperial’s operating costs arise from payroll expense in the structured settlements business. I have heard that Imperial can sell the structured settlements business for $1 per share. Today you can buy Imperial at a $129 market cap. The terminal value is $1.5 billion, over 10x current market cap.
If the insurance carriers try to pull anything, Andy Beal has Imperial’s back. You don’t want to mess the guy. He’s worth $8.5 billion and I think he could hire some good lawyers.
I’m not afraid of expenses getting out of hand … Phil Goldstein is Chairman of the Board. The CEO also has $6 million, probably the majority of his net worth, invested in IFT so I trust him.
In closing, my suggestion to IFT (as its most concentrated shareholder) is that we treat the 636 insureds to a free one-month cruise to the Bermuda Triangle. And what meals should we serve them? McDonald’s (NYSE:MCD) of course! Supersize them! Feeding them burgers and fries every day for a month should get us $2 billion in no time. And if the cruise ship happens to disappear in the Caribbean? Well, even better.
I kid. I kid …