Life Partners Meets Expectations

Life Partners Holdings Inc. (LPHI - Snapshot Report) reported fiscal second-quarter results. The company’s net income posted a growth of 15.5% to $7.6 million, compared to $6.6 million in the year-ago quarter. Earnings per share of 51 cents was well ahead of the year-ago result of 44 cents per share, though it matched the Zacks Consensus Estimate.

Life Partners is a financial services company and the parent company of Life Partners Inc., which is engaged in the secondary market for life insurance known as life settlements. These financial transactions involve the purchase of life insurance policies at a discount to their face value for investment purposes. Life Partners' operating revenues are derived from fees for facilitating life settlement transactions, which involve the sale of an existing life insurance policy to another party. By selling the policy, the policyholder receives an immediate cash payment, while the purchaser takes an ownership interest in the policy and receives the death benefit under the policy when the insured dies.

The company reported a 17.2% year-over-year growth in gross revenues to $29.1 million, driven by a 12.7% expansion in average revenue per settlement to $558,761. Life Partners witnessed a growing demand for its services due to factors such as trends toward diversifying portfolios and avoiding economically sensitive investments. Since life settlement returns are not correlated with traditional equity and debt markets, the company is also benefiting from a shift in investor preference towards non-correlated, asset-based investments.

Brokerage fees, as a percentage of gross revenues, dipped 170 basis points (bps) year over year to 44.2%, which caused net revenues to grow by 20.8% to $16.2 million. Operating expenses grew 30.5% year over year to $5.1 million and as a percentage of net revenues by 230 bps to 31.3%. The increased expenses were caused by higher settlement costs, travel expenses as well as employee and executive bonuses linked to higher profitability. A major chunk of the settlement costs was attributable to a $770,000 legal settlement with the State of Florida.

Life Partners’ recorded a 16.8% year-over-year growth in operating income to $11.1 million, primarily driven by the strong revenue performance, partially offset by higher operating expenses. The company also stated that other income grew 11.1% year over year to nearly $537,000, mainly on account of gains from maturities of owned policies, which further boosted Life Partners' earnings performance.

During the first half of fiscal 2009, the company generated $14.7 million in cash from operations, compared to $3.6 million last year. The higher cash generation was driven by robust net income growth coupled with a modest increase in accounts receivable of $404,544, compared to an increase of $13.8 million in the year-ago period. The company deployed the cash primarily towards purchasing policies for investment purposes ($7.4 million) and towards payment of dividends ($5.8 million).

Moving forward, management expects greater demand for life settlements in the second half of the fiscal year as uncertain financial markets compel investors to look for alternative avenues for deploying investment capital. The Zacks Consensus Estimate on the company’s earnings for the fiscal year ending Feb. 2010 is currently pegged at $2.16 per share, which has remained constant over the past 2 months.