Wednesday, August 13, 2014

No. 63: Life Partners—An Update Based on Recent Filings with the SEC

I wrote extensively in The Insurance Forum about Life Partners, Inc. (Waco, TX), which is an intermediary in the secondary market for life insurance and a subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). I also wrote about LPHI in Nos. 15, 22, 29, 30, 35, 36, and 37. This follow-up provides an update based on recent LPHI filings with the Securities and Exchange Commission (SEC).

Net Losses and Declining Settlements
LPHI incurred net losses in 11 of the 13 most recent fiscal quarters. During that period, the firm averaged about ten life settlements per quarter compared to about 56 per quarter during the preceding 52 quarters. Here are the figures for the 13 most recent quarters:

Net Income
Number of
---------- ---------
05/31/11 –$874
08/31/11 –323 16
11/30/11 –1,083 10
02/29/12 –843 18
05/31/12 1,037 10
08/31/12 –1,849 3
11/30/12 –754 12
02/28/13 –1,311 10
05/31/13 1,679 12
08/31/13 –1,793 3
11/30/13 –939 6
02/28/14 –1,399 5
05/31/14 –1,737 1

Despite the net losses and the declining volume of business, LPHI has continued paying dividends to its shareholders. The quarterly dividends were 20 cents per share during the first three quarters shown in the table above, ten cents per share during the next five quarters, and five cents per share during the last three quarters.

According to the proxy statement filed with the SEC on July 2, 2014, LPHI had 18,647,468 shares outstanding. Brian D. Pardo, LPHI's chief executive officer, beneficially owns 9,377,605 (50.3 percent) of the shares. Other officers and directors together own 484,651 shares.

Pardo Family Holdings, Ltd. (PFH) owns 9,363,470 of Pardo's shares. LPHI's latest proxy statement says PFH is located at LPHI's headquarters address in Waco, Texas. However, PFH's most recent filing with the SEC, in January 2009, says PFH is located in Gibraltar, a British overseas territory.

The dividends during the above 13 quarters add up to $1.35 per share. Thus Pardo received more than $12.6 million in dividends during those 13 quarters. Also, Pardo received total compensation of $570,742 for the fiscal year ended February 28, 2013, and $667,261 for fiscal 2014. However, the Pardo gravy train may end soon, in light of the following extraordinary paragraph at the bottom of page 20 in the 26-page 10-Q quarterly report that LPHI filed with the SEC on July 15, 2014:
We believe our existing working capital and future cash flows from operating activities will allow us to fund our current operations through fiscal 2015. Our recurring operations are not currently generating sufficient cash to support operations. To fund our short and long-term operations and to pay dividends, we have liquidated much of our investment portfolio, including most of our investments in policies. We presently hold policies carried at $1.6 million, of which $967,116 is classified as a current asset as we anticipate selling the policy interests within the next twelve months. We monetized our investment in the life settlement trust by assigning our current rights to future income. During the fourth quarter of fiscal 2014 we received a Federal income tax refund of $3,507,242, which aided our cash available. Except for our cash and cash equivalents, we have few sources of additional liquidity. As a result, we may not be able to continue to pay dividends at the historical rate and may reduce or eliminate dividends to conserve working capital until we can realize improved operating results.
General Observations
In 2010 LPHI share prices were close to $20, in 2012 they were around $6, and in 2013 they were around $4. The shares closed on August 8, 2014, at $2.04. It will be interesting to see what happens to share prices when dividends are reduced or eliminated. In any case, the paragraph quoted above suggests that the company is in liquidation mode.