Life Partners Holdings Inc., a Waco, Texas company that has arranged sales of several billion dollars of life-insurance policies to investors, is being dissected by the Securities and Exchange Commission, according to Mark Maremont and Leslie Scism in their Wall Street Journal article, “SEC Probes Company Over Life-Span Data.” The SEC is examining how the company derived its mortality estimates, which are critical for investors who seek to value the investment.
Since investors are on the hook for premium payments until the insured dies, a short mortality estimate would result in the investor anticipating less cost and a higher return on investment. The company’s mortality estimates suggest annual returns of 10% or 15% – not all that great considering the fact that the SEC considers them unrealistically short and, if that is true, investors face much higher costs and lower returns.
And that is what seems to be happening. Many of insureds are living well beyond the company’s estimates, according to the article.
Interestingly, the company apparently derives its mortality estimates from a Reno, Nevada, physician, one Dr. Cassidy, who refused to talk to the Wall Street Journal. But he did provide information the SEC. The SEC concluded Dr. Cassidy was using an “unrealistic” approach that tended to produce inaccurately short life expectancies, according to the article.
Based on data Life Partners filed with the Texas Department of Insurance, for policies sold from 2002 through 2005, insureds (many of whom were HIV positive) outlived the company’s projections approximately 90% of the time, according to the article.
Between January 2004 and July 2009, the SEC took legal action against 27 U.S. life-settlement funds and advisers, according Leslie Scism and Larry Light in their Feb. 6, 2010 Wall Street Journal article, “Grim Risks of Reaping Death’s Rewards.” Life settlements are on the North American Securities Administrators Association’s top-10 list of “investor traps.” In 2008, Life Partners reportedly settled a fraud action filed by Colorado regulators, agreeing to repurchase policies sold to Colorado investors.
Life Partners appears to be doing better than its clients, who often buy pieces of multiple policies. The company has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since 1991, and extracted fees averaging $308,000 per policy sold in its most recent fiscal year, according to the article. Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.
In sum, life settlements may benefit the sellers and promoters, but are a risky gamble that is unsuitable for most investors.
Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.