Joe Lambert – Director of Marketing, Singular Research
William Jones – Senior Analyst, Singular Research
Scott Peden – General Counsel, Secretary and President
Life Partners Holdings, Inc. (LPHI) Singular Research Annual “Best of the Uncovereds” Conference Transcript September 10, 2009 11:00 AM ET
Hi. This is Joe Lambert with Singular Research. Welcome back from our short break here. Our next session is going to be with Life Partners Holdings. Scott Peden is the President. He will be presenting. But we are fortunate to have one of our analysts here. In fact, actually Bill Jones is one of our senior analysts. And he is here to actually introduce Scott, and I'm going to have Bill come up and just say a few words and then introduce Scott. Bill Jones, a Singular Research senior analyst.
Thank you, Joe. Again, we have Life Partners up next. Life Partners is the growth story with also a stock that trades at an attractive valuation, and that's kind of our thesis at about nine times trailing earnings, at about seven times – little more than seven times our forward estimate, which we have grown at about 25% this year, and we also have a price target of $35. The stock is currently in the $17 range.
Mr. Peden is the President of the operating company. He is also General Counsel of holding company, and you know the company recently outlined a growth strategy including exciting new securitized product, which I'm sure he will address.
So without further ado, I give you Scott Peden.
Thank you very much. I appreciate it. And I know that I'm in a very important position right now because I stand between you and lunch, so I'll try to go along or anything like that. But today is a very important day for me. It's my birthday, but also it is the birthday of Life Partners.
With that, oh, thank you very much. Thank you. I'm 26 today. Yes, right. I wish, but anyway…
You better watch out, I'll turn the camera on [ph].
There we go. There we go. The important thing to know is that 19 years ago, our company was incorporated and so we are really the 19-year overnight success story. Some of you may have seen Sunday New York Times, this particular asset class which we invented at Life Partners. It's finally taken up getting a lot of notice now on Wall Street because of the value, the inherent value in life settlement as an asset class.
So we are very pleased to see that. We were also very pleased to see a Forbes article, came out a couple of days ago, listing our company as well as four others as great dividend yield plays. And so, it's always nice to have that level of support and free advertising for your company.
All right, so Life Partners Holdings, that is the company that’s publicly traded. The holding company, I am the President of the operating company and we do – all right, so make sure we’re there.
So first question we generally guess is what is the life settlement? There's lot of people who don’t know that.
Well, life settlement is only ends where we involve. A lot of people think we are in the life insurance business. Now, that’s not true. It’s the secondary market of the life insurance. It is the purchase of an existing life insurance policy at a discount to its face amount. The policyholders that we’re talking about are financially sophisticated, but this isn’t Ma and Pa Kettle, these people had a reason to have a $10 million policy.
You have to have a couple of bucks in the bank to be able to have a reason for that. These were policies that have a very specific purpose. A lot of times it's temporary for say a development project or some other reason. But they have a very specific kind of purpose, and that purpose has been fulfilled or is no longer necessary, and so they no longer need the coverage.
Now being financially sophisticated, they know the value of a dollar. They understand that you can either leave that policy to the insurance company, which you get nothing and let me tell you on a $10 million policy you might have $2 million or $3 million in premiums in that policy, and they have virtually no surrender value or sell that policy to a company like Life Partners on the secondary market, and you can recover maybe 20% of face or so, which should be about $2 million, it's my example. Well, that’s a nice deal, because these are still under your cost basis, but its $2 million on free cash and $2 million being zero everyday of the week.
Next question, we typically get at is this thing illegal, what about then insurable interest thing? Well, actually life settlements, the legal construct for them were recognized by the United States Supreme Court way back in 1911 in a case called Grigsby versus Russell. So that's a legal construct.
A policy, once it is issued is your private property, you can do whatever you want to with it, you can sell it, you can give it away to you know (inaudible) university whatever you want to do is fine, because the insurance company has no say at that point as far as what you can do with it. It is your private property.
The only thing they do once the policy is issued, the only thing they can do is pay out the check, whoever the beneficiary. They keep track of that (inaudible) owner of the policy. That is the limit of their involvement and their discretion.
The life settlements of course have combined with the appetite for alternative investments, the advancements in medical science and actuarial science, and also of course a great deal of emphasis on proprietary software developments in order to make this an ongoing business and to be able to do the level of business that we are doing today.
So why would they want to learn invested life settlement? Let's go to the reasons. Number one, inherent asset value, because even during the Great Depression, insurance companies paid off and when we talk about too big to fail, no insurance company is going to be in a position where interest can't pay out its clients. The government's not going to standing for that.
Typically, if that was the case, the other insurance companies would come in and buy those companies at a prior sale price, but the companies we are talking about are huge, gigantic. I mean, there's a reason, they get write at $10 million policy, because the regulators will not let them write that policy unless they have the assets to be able to pay it out. It’s a great deal. Same reason you buy policy from John Hancock continue to do $10 million policy, right.
All right, second reason, true diversification through non-correlation. Why settlements (inaudible) from fluctuations in the stock and buy market, because they have nothing to do with it. What you are talking about is a different way of making money, a different way of getting appreciation, not from market appreciation but from inherent appreciation
You are talking about a property that has a known face value and purchased at a discount to its face. So you make money in a completely different way and you are then insulated from a lot of the economic fluctuations, and other kind of things that can happen in normal business cycles.
Finally, exceptional return potential, because the key factors are affecting the yield or the initial discount, in other words, you make your money when you buy the property, right. All right, so that is what we are talking about. The initial discount and time rather than future market appreciation.
You can get some exceptional returns from life settlements, but you don’t have that parity of risk. In another words, you don’t have this thing, ordinarily when you have exceptional return potential, you also have exceptional risk exposure. And that is not the case with life settlement, and you may not hit it completely out of the park, but it’s – you are likely to make something out of it and you do have that exceptional return potential on every single policy.
All right, so what kind of returns are possible with life settlements? This is all into discount. It’s our proprietary discount processes that allow us to do and return this kind of discounts to our clients. And you are talking about an 82-year old female, the five-year life expectancy, the $6 million face value. If you'll go on to year 5, you see that it's 12.7%, it’s a policy matured at that point. You may then get around 12.7. You could see if the policy matures later, say at seven years or even -- that would be a 7.5% annualized return. Even if you go out 10 years, which should make 92, you're still making above the bank rate, so – I mean above the bank rate of that 3.6%. So you could see that.
However, if you -- if that personal policy was to mature early, let's say, in the year three, you're talking about making a 25% return on investment. Now, that correlates with the non-correlation of the aspects of this being an alternative investment and truly an alternative investment and an easy investment to understand. A lot of people are really attracted at. This isn't some kind of a very complicated derivative type of arrangement. This is very simply buying a policy at a discounted rate. That's all the risk to it. It's not a black box, it's a glass box. And let me tell you that sells very well to many investors these days.
Business, we're going to have not only from today but also continuing on. This is a accounting [ph] research and consulting company, perhaps a -- their life settlement volume estimate back in 2007, a little long from where they are, but as you can see they expect by 2015 – 2016, I'm sorry, to be a $15 billion business, that's a per year. Now, they had estimated for 2008 that the market would be about $8 billion policies -- face value policies actually transacted. In reality, that's closure to $10 billion. So really we expect that to be more of a j-hook with regard to the level of expansion in the actual amount of business being conducted in this industry.
What you're going to see, there have been a couple of studies out there. Many people who are in a position to want sell their policies, don't even know they can do it. So that's the kind of market penetration and market education. That's a challenge for us to be able to advice people. Now the good news is 80% of them do know they can do it. Now they may not be in a position today, but they will be in a position at some point and so that is a nice thing. You don’t have to be creating new markets. You are not trying to sell them another product which they already own, like the cell phone market or anything like that. This is a product which they already are massive, they already own, their needs for specific purpose and it's like recycling. Now, you can get some value for it from something you are going to completely throw away.
LPHI is a different kind of financial services company. We are specialty finance company, but there are several reasons for this. Number one, we are different...
If you could hold the question for just one moment because I'll come right back to it. I'd like to pause for just a moment to see and on the Web cast, you are live. All the lines are un-muted. If there is a question, we'll pause right now if you would like to ask a question from the Web cast. So go ahead if you have a question there and then we'll continue from the floor.
Okay. Let's go ahead and continue from the floor with the next question. Thank you.
Is there much variance in institutional ownership. Most of them seem to be (inaudible)?
The question was, there are a great deal of variance within the institutional players as far as the return – I assume by the returns that are actually received as opposed to what the targets are? Is that what your question is? Yes. What we have seen is and it’s a little bit, you were targeting a little bit higher than that, 16%. We’ve seen it -- the ranges of policies or the IRRs four [ph] targets range between 12% and 16%.
We don’t really see a whole lot pass that. Certainly, you can get individual returns that are like that. But from an institutional standpoint, you are looking for, as you say, a momentum player and what is the entire portfolio going to yield, and so about 12% to 14% within the current market and that remains fairly stable. That continues to deliver – that price point continues to deliver value to the person selling your policy as well as a substantial return to the institutional investor as well.
It is possible that could come down, but because of the volume of policies that’s out there as well as the lack of viable alternatives from the insurance companies, I mean as I said, your alternative is getting zero, so really I think that there is a -- going to be a tremendous degree of stability in that regard. I don’t think that you're going to see a lot of margins being pushed down in that for quite some time because that’s you know that's one of the things that you are looking at, you are going to -- in order to have a secondary market for as a seller, you are going to you know be willing to accept the prices that will yield those kinds of returns.
And that’s another reason that the institutions are looking at this just easily modeled kind of asset class which you can look at. I mean the kinds of policies that we are -- if you are going to increase those returns, there are a couple of tweaks that you can do but they require the acceptance of more risk and we have not really seen that hasn’t been necessary. You know if you are not old enough to sell your policy, that you are only 68 or 70 something like that, you're probably not ready to sell it any way even if – or even if you were to wait a couple of years and that decreases the risk for the purchaser and that the pool of policies that can be bought still continues to increase. So it's not the same level of risk or volatility like in the stock market where you have a very small window in order to capture those kinds of gain.
Any other questions either from the floor or from the Web? Yes, sir.
Let me repeat the question for the Web participants. The question was we are currently trading around $17 a share, the target price is – I think really $35 a share and Bill John is going to come back and explain why you think so.
We are – for our price targets, we do a couple of different methodologies. One is simple target P/E Ratio. I mean if you look at the history of this company, in the prior year they grew 40 -- over 45% and we are projecting 25% in the current year. So our target multiple is 15 times. So basically, 229 times 15 get you in that range.
And we also do discounted cash flow methodology as well. Because the company -- mostly growth company, they also generate returns. It’s not a company that doesn’t have earnings. And you could see the earnings and you could – and when we do model it and discount it for present value at, you know, our estimated cost of capital required rate of return and you know that’s where we come out is about $30. Sure.
The company won an award recently. May be you could speak to that.
Yes, we. -- yes, we have – thanks. we have won several awards. The most recent award that we -- one was for our CEO, by – award by the DeMarche Associates for being second year in the row, as being one of the best CEOs in the country and that they have a way of formula for working that out with regard to how much he saved relative to the value that's run.
The award that you are referring to, however is, it was awarded by Fortune Small Business, and we were the number one fastest growing company -- fastest growing small public company in the United States. Last year, we were number seven, and this year we were number one, and we are very pleased to see that.
I hope that -- did that answer your question with regard to billing methodology? (inaudible). We have that – and particularly high has been high as $42, I personally believe price is quite a bargain right now, but as you may disagree and I'd say it's fairly naive and I think that – there's no question. There is plenty of headroom with regard to this and you know there's opportunities still out there, because for the reasons as Bill mentioned. We are continuing to post earnings and be able to grow this company.
What was the -- question was what was the stock doing in 2008? We were taken down -- our price was taken down along with all of the other financial sector stocks. And however, you know as I talked don’t make any decision just because we are in the financial services sectors; don't mistake us for being another company. We didn't require bailout or anything like this. We were actually making money and still continue to do that.
We were completely unaffected by the credit crisis or the other situations happening – that occurred with the other financial services companies, so we have fared very well as a company. And the main reason I think that the stock prices have been down and there is not a lot of people who know about it that's one of the reasons you came to this conference, is to be able to see companies that aren't familiar or maybe not widely known but are doing well and I think Singular does a good job of pointing those companies out.
Any other questions? Yes sir.
Question was, are any of the other major financial -- major Wall Street companies and analysts starting to pick up on us and we're getting calls from them. I will say that we do get calls periodically. We do not have anything yet, but there is at least some interest out there.
We have not been -- realized now in the post Sarbanes markets, though it's bit more difficult to get coverage than it used to be, unless you have an investment banking deal going. We don’t really have that, so it is a bit more difficult, but as we continue to increase our presence, winning awards like the Fortune Small Business award, as the fastest growing small company that gets you on the radar screen and I think we will get more analyst coverage as things go on.
Are you seeing more competition in the discount side -- discounted side of acquiring the (inaudible) versus what it has been in the past, are there more people getting involved in this deal and has the discount narrowed?
The question was are you seeing more competition on the buying side and actually the – over the past year we have seen less competition, because many of our competitors used leverage in some form or another, warehoused or for operations or some kind of leverage components to their business and those companies either stop business completely or substantially curtailed their business.
So we on the other hand having a business volume that is (inaudible) leverage, as I said we were completely unaffected by that. The companies that were there were solid and that sort of things still remain there and we will be included in that groove, but no we have not seen a wide increase in the number of companies there. In fact as I said we had a decrease.
Now, one other thing that’s important to note is there is a tremendous amount of supply out there too and so even if there was additional competition it's not enough to substantially affect the margin. We are not seeing compression of margins at all and we're just kind of what I related to earlier there are so many policies out there which can be bought at the target that we really don’t see any level or any risk of compression of privacy for a good while, certainly for foreseeable future.
The question was does the company define their policies themselves? It depends on the company. For example, there are some companies that buy and resell, our company just purchases on behalf of our clients, even actually on the phone.
However, if you look on our balance sheet we do have interesting policies we bought ourselves. That we buy it out of retained earnings so again we don’t use debt or a leveraged deal in order to do that. We just buy it as we go. So we do eat our own cooking. Yes. There is no question about that. It is a very, very good place to your retained earnings and we intend to grow the company in that regard, as well as well as you know not quitting our day job.
We are still providing our clients with services as well. But we like the investment very, very much. I can’t think of another investment to rather be in...
Which is the section of Seattle – downtown Seattle
Are there any...
...it is only 20 minutes from the city itself.
So this is one section of the city that...
And that have been changing.
Got a very nice restaurant on the water and you see the front of the – the water front at the (inaudible) at a distance so it’s a very nice place.
(inaudible) gentlemen well that technical stuff here.
And this is how you look at the feedback?
All right. The question was, was there any kind of regional concentration. I would say that there is concentration to the extent where you see people who are elderly and wealthy. So you would respect them you know if you had anybody who left (inaudible) and he went to Florida or something like that. Actually however many of these policies are held in trust and so very frequently the owner of the policy is in Connecticut or New York where as the insurance may be in Phoenix or Los Angeles or someplace like that, I guess someplace warm.
So there is not really that level of concentration, also there are some stage that – whose laws are more favorable for the construction of certain kinds of trusts and that sort of thing. So you would – we would see that. Just like a Delaware corporation is more often incorporated in Delaware. So same kind of idea that way.
Most of the policies that we see are within some kind of legal kind of organization or legal entity along with other kinds of assets, because they are part of this state planning – plan and so it would be you know you would say the reasons they would already be in, as part of that state planning type of thing.
Unfortunately, there was no one who was untouched by the economic crisis. The question was since the economic crisis affected folks say in Florida and in California more so have [ph] affected our business. We have seen more presentations from individuals who I think were adversely affected. Even if you're wealthy, you're still affected. And so, you can think about those.
This is one of the least objectionable assets to sell, right, because you're not using it anymore you know, whereas if you're in a situation for liquidity where you need liquidity now, it's not you're poor, you just you know have a liquidity issue. You can sell the yacht, but the yacht market stinks. Your stock and bond portfolio stinks; you need some time to get passed that.
You can sell the condo, but you know that market stinks and the stipend [ph] people know about it. This is a very private sector solution to what could be a public sector problem, so it fixes up liquidity issue. Nobody knows that, so yes. There is no question. We have seen benefit from that, and we were able to help those seniors who would have been in that case very substantially affected. And you can see how that would roll. You have a lot of folks in Palm Beach or other places like that, who offer their real estate on the market, at the same time that only depresses and it has rolling effect [ph] that way.
A little macro question. (inaudible).
Absolutely. The question was, as the population of United States ages, does that have an affect -- a positive affect on our company? And there is no question, we're not even to the baby boomer share, but that's like about the baby boomers compared with their parents, the greatest generation, that's pretty much the people whose policies we are buying right now.
The baby boomers we're marketing to over the past you know 40, 50 years by insurance companies. Every Sunday (inaudible) you're a bad person if you don't have lots of interest, okay, right. So they've done our marketing for us. You must buy interest. So they were better insured. There were more of them who had their own businesses, more entrepreneurs. So they had a need for these kinds of special purpose policy to begin with. They expanded the market themselves. They also have a tendency not to hold on to assets. A lot of them was the greatest generation, were very, very psychologically affected by the depression and so they tended to hold on to assets sometimes in an irrational fashion.
Baby boomers did not like that. They're the people who'll buy a stock at 75 and going to sell at 74, just as a stop loss [ph], that’s what happy to get rid of assets. That only benefits us because they understand the value of selling an asset after it becomes no longer valuable at that time.
So there is a number of different things that we think and of course this is just more level [ph] too, a much more higher number of folks who were into this sort of thing and I mean into that area that we would want to buy the policies. I realize of course we are buying on the more extended age, so we won't be touching the baby boomers for a while.
Now, this market is here to stay because that -- our CEO is kind of at the beginning of the baby boomers things 65 and I am 46 today and so that's the kind of the end to that. That's a very, very big window and you know it continues on really to as far as the whatever [ph] the population up until by 1967-68. And so what we see is a lot of those who once they know they have that opportunity and their owner and they qualified, I mean there [ph] is no question they are going to think about it.
In Texas for example, for a long time you couldn't take out a second mortgage on your house about 15 years ago you were finally able to do that. So with a bit of standard practice in most parts of the country, we're still relatively new in Texas, but as more people catch on [ph], they start doing it and that’s what I think we will see here same kind of ideal you could never do it before.
And this kind of ramps up but it's going to ramp up very quickly with regard some of the snowball effect, because if you’re wealthy and elderly you have wealthy and elderly friends just like when you have kids, you have other people who parents that were friends. And so just a word of mouth and good experience that you have with my partners and in doing the transaction is going to substantially increase our business. Every single transaction is important to us, because you never know when your next referral is going to come from, but it is very easy to get a bad reputation, it's very difficult to hold and keep a good reputation, but that’s what we concentrated on all these years.
What is your average age (inaudible)?
Absolutely, 8 or 80, yes. So you should say (inaudible) they are not quite there yet, but they will be and that will give us tremendous value for many years to come.
There is a discussion about analysts following you know your firm and it kind of leads into the foundations of Singular Research and what we are about. We have our logo there, that’s right up there on the wall says, "Unbiased performance-based research." Unbiased because we don’t have any conflicts from investment banking, we don’t have any page for research.
And in fact, the companies that you are listening to and seeing today, they are kind of surprised because they don’t have a lot of analyst coverage. Well, one of our screening criteria that we look for at Singular Research is that we are actually purposely screening for companies that have little or no analyst coverage.
They are uncovered stocks, because in our research and what we have found is that when companies have even just one or two analysts that follow them new or they are under followed at all, they are trading at roughly at 32% discount and that doesn’t include whether the company is a good or bad, it just mean analysts coverage can make a big difference when you are covering the stock.
Now, our methodology and what we do at Singular Research is very purposeful, because many of us who started it you know Robert Murphy [ph] and myself comes from money management background. In that money management background, every time we read or report, we were very disappointed that it didn’t work out and part of the reason why it didn’t work out is because the analyst who was writing the report had some kind of underlining conflict of why they were writing that report, even though we might have some good projections in earnings.
And so that’s why Singular Research is winning an award, you know the first you know the first coverage. You know we are one of the top performers of 2008. We are winning these awards, because we are very purposeful and our analysts are free to choose and go after their best ideas. You know and Bill has (inaudible) and you've seen you know last two companies are ones that Bill follows. You know one of our senior analysts.
So really the whole model that we have and some of the companies like you know what's Scott's company Life Partners is that – is that we are bringing value to the table and what happens eventually if we can be one of the first ones on covering that, then you will start seeing another analysts start picking up coverage on it. Again that plays exactly into our model and what we do at Singular Research.
I am going to mute the lines and go live again to see if there's any final you know questions from the Web cast here or we move on to our next. Any other questions from the floor? Go ahead. (inaudible)
I can take care of that. That's a background noise, and people who are in. So any other thing, Bill you have any other comments that you would like to say here.
Good. What I would like to do is we are at 5 minutes to noon at this time, and let me review -- and first ask what the schedule it is and hang in there, Scott.
Let me review the schedule. This also plays into what's going to happen in 5 minutes. Now, this is not going to be live Web cast, but in 5 minutes we'll break into the other room and we'll have lunch. And we have a panel discussion that I think is very, very relevant to this whole thing of what we just talked about, but future of independence -- the future of independent research. And on the panelist there, we have several -- you know several people from different research firms.
And we're going to be having this discussion on this very topic as we adjourn to our noon luncheon. We will have lunch from 12 to 1, and then I -- and then right after that, 1 o'clock we will resume the Web cast again and we have Seabridge Gold, who will have 1 o'clock Eastern Time.
All right, with that, I'd like to say also that Life Partners and Scott, I believe you are sticking around for lunch, okay. So we'll be having lunch, but also I wanted to tell you that at 1 o'clock, if you are going to still be around at 1 o'clock Scott will go into his breakout session in Madison 1, and you can have more one-on-one time with Scott and certainly we can do some networking at lunch. And I do not want you to forget that at 5:30, we have several of the CEOs that are going to coming back for our cocktail hours sponsored by Vandham Securities and you can network and get to know the CEOs even one-on-one there as well.
But Scott's will be taking place at 1 o'clock and we will resume again the Web cast at 1 o'clock after lunch and lunch has been served right next door and let's get a round of applause for Scott for the presentation.
Thank you very much, Scott. See you at 1 o'clock.
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