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Imperial Holdings Inc. (IFT) - Life After "Death"

|Includes: Citigroup Inc. (C)

Imperial Holdings, Inc. ($6.75)

Company Description

Imperial Holdings, Inc. ("IFT") is a specialty finance firm based in Boca Raton, FL. The Company operates in a niche industry, which buys, owns and services life settlement contracts. Typically, policyholders sell their policies to IFT, which in turn pays the premiums on the policy until death of the holder, at which point the Company receives a lump sum payment from the insurance company.

The stock is still down 37% from its IPO and a panic situation has created a unique opportunity with dramatic upside.

Investigation

Founded in 2006, the Company completed its IPO in February 2011 at a price of $10.75 and reached a high of $10.99 that same month. The story started to unravel in September 2011 when the U.S. Attorney's Office for the District of New Hampshire ("USAO") launched an investigation into the Company's involvement in the making of misrepresentations on life insurance applications in connection with its premium finance business. In addition, the SEC launched an investigation into the Company in February 2012 generally related to the Company's premium finance business.

Stepping back, "premium finance" is the business of providing loans to individuals to pay their life insurance premiums and using the policy as collateral for the loan. Given the high interests rates associated with these loans, and the view that companies like IFT were looking for individuals to default so that they could take ownership of the policies, the USAO did not look favorably at the business.

As a result of the investigation, which concluded in April 2012, IFT entered into a Non-Prosecution Agreement with the USAO, which agreed not to prosecute the Company. As part of the agreement, IFT voluntarily agreed to terminate its premium finance business, and terminated certain senior sales staff associated with the premium finance business. In addition, the Company paid $8.0 million to the U.S. Government. The SEC investigation is still ongoing.

Opportunity

While the history is tainted, the Company has many positives that investors will focus on due to the following:

Firstly, the largest shareholder, Bulldog Investors, is a shareholder-friendly activist investor, whose founder Phil Goldstein is also the Chairman of the Board. Bulldog has an excellent track record dating back to the 1990s and its interests are fully aligned with minority shareholders.

Secondly, while the Company has historically used a 15% - 17% discount rate on the policies on its books, it is currently using a 19.6% rate given the slightly negative view of the industry and the Company's personal history. As detailed in the Company's 10-Q filing, an improvement of 0.50% in the discount rate would increase book value by $0.42/share. And while the rate remains above historical levels, it continues to improve (the rate was 20.61% in 2Q13).

Thirdly, there are a couple of catalyst-type events that should positively impact the stock.

  1. Resolution of the SEC investigation, which has been dormant for quite some time.
  2. Resolution of the Company's lawsuit with Sun Life Assurance Co. of Canada (profiled in The Deal Pipeline on December 3, 2013), which could impact the entire life settlement business.

Lastly, the stock is trading at a significant discount to book value of $8.89 (~24%) and arguably the discount is even higher if one considers the conservative nature of the discount rate currently being applied by management. The breakdown of the Company's BVPS is shown below:

As of September 30, 2013

 

ASSETS:

 

Life Finance Settlements

$242,270

Structured Settlements

$50,113

Total Life Settlements

$292,383

Cash

$13,437

Restricted Cash

$13,502

Other Assets

$10,825

Total Assets

$330,147

   

LIABILITIES:

 

Note Payable (Est. Fair Value)

$114,784

Accounts Payable

$9,057

Income Taxes Payable

$6,295

Other Liabilities

$22,609

Total Liabilities

$152,745

   

Total Book Value

$177,402

Shares Outstanding

21,223.02

BVPS

$8.36

Add'l increase in BVPS from sale of Structured Business

$0.53

Total BVPS

$8.89

Current Price

$6.75

Discount to Book Value

-24.1%

Risks

One risk is that the Company runs out of cash and is unable to pay the premiums on the policies they own (though this is unlikely given the recent $300M credit facility they secured in April 2013 and the upcoming rights offering for $60M that they announced in August 2013).

Additionally, if interest rates rise dramatically, the Company may need to increase the discount rate which will reduce book value.

Furthermore, its policy holders may very well live beyond expectations, which will increase the amount of premiums they will have to pay out.

Lastly, there is a risk of an unfavorable outcome from the SEC investigation.

Conclusion

Imperial has many of the elements of an exciting investment opportunity. The Company's history has turned many investors away causing the stock price to be depressed, there is an activist investor with a solid track record who is on the board and has the largest equity position in the Company, and the stock is trading at a significant discount to its intrinsic value. Given an upside of 20%+ over the next twelve months assuming the stock trades at 100% of book, this is a very attractive situation with limited downside.

Disclosure: I am long IFT.