The Securities and Exchange Commission is investigating Life Partners Holdings Inc., a Waco, Texas, company that has arranged for investors to buy several billion dollars of life-insurance policies from their original owners, according to four people who have been contacted recently by the agency.
As part of its probe, the SEC's enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.
The shorter an insured person's expected life span, the more Life Partners generally can charge for that policy, because investors expect a faster payout. If the death comes later than anticipated, not only is the policy payout delayed, but investors who buy policies or parts of them must continue to pay premium bills while they wait to collect on a death benefit.
Questions about the accuracy of Life Partners' life-expectancy estimates were the focus of a December Page One article in The Wall Street Journal. The article reported that many of the insured people are living well beyond the company's estimates, suggesting that the 10% or 15% yearly returns promoted to Life Partners' investor clients may prove elusive for many.
The company has said it remains confident in its methodology, and that even if many insured people outlive their projected life spans, investors likely will still make respectable single-digit annual returns.
Attractive projected returns for clients are a key part of Life Partners' formula for success. One of the fastest-growing small companies in the U.S. in recent years, Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.
Life Partners says it has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since its 1991 founding. Life Partners extracts often-hefty fees in the deals, averaging $308,000 apiece for the 201 policies sold in its most recent fiscal year. Investors often buy pieces of multiple policies.
The company uses a Reno, Nev., physician, Donald T. Cassidy, to provide its life-expectancy estimates. Wednesday, Dr. Cassidy didn't respond to requests to his office for comment. He declined to be interviewed for the Journal's earlier story.
Rick Bergstrom, an actuary in Bellevue, Wash., who has worked in the life-settlements field since 1997, said an attorney from the SEC's Fort Worth, Texas, office called him last week, to ask whether he could help analyze Life Partners' life-expectancy projections.
Mr. Bergstrom said he and a partner five years ago examined Dr. Cassidy's work for an institutional investor that was thinking of hiring the physician. They concluded Dr. Cassidy was using an "unrealistic" approach that tended to produce inaccurately short life expectancies, Mr. Bergstrom said.
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