“Shares of life insurance settlement provider Life Partners Holdings Inc. (LPHI: News ) went down by over 13% at close of Wednesday’s trading, after an analyst research report called its fees egregious and non-sustainable, and put out a warning to potential investors.”
Citron advised investors to consider carefully as the company had “too many red flags”. The analyst termed the high-level fee of $500 thousands per transaction that was being charged by the company as “egregious” and not “sustainable”.

The report claimed that Life Partners’ gross commissions were 14.4% of the face value of policy settlements in its third quarter that ended on November 30, 2008. But, on an average, the fee is only about 6.0% of the face value or 30% of the gross sale price for such companies.

The report further claimed that investors of life settlements normally seek target of an Internal Rate of Return or IRR’s of 9%-13%, but Life Partners promised as high as a 16% IRR to its investors.

Citron infers, “If Life Partners is forced to cut margins even by half to approach industry norms, its net profit will sink by 63%.” The report concluded that Life Partners sustained their high-level fee income only by “concealment.”

More positive stories about how investing in life settlements is essential for a diverse portfolio should help to drive more media coverage of the tremendous benefits for senior policyholders as well.  There is uncertainty in the market, and amongst financial professionals who advise their clients that selling their unwanted policy to a 3rd party could have dangerous consequences.  The reality is however, the vast majority of investors are institutional investors buying and trading portfolios of settlements – 200 policies at a time.  The insured’s information is confidential and notification of a passing of an insured is not managed by the investor.

Our opinion is additional regulation of the life settlement industry will add needed confidence and clarity to the settlement process for seniors and their advisors.