Life Partners’ pitch change is a curveball for investors, attorneys say

Settlement provider lowers advertised rate of return from 12% to 7%; litigation ahead?

Life Partners Holdings Inc.’s decision to reduce the rate of return it advertises for segments of its life insurance policies likely will stir up a wave of litigation — and possibly closer regulatory scrutiny.
The settlement provider, which has confirmed that it’s under investigation by the Securities and Exchange Commission, told its sales agents that it will now aim for annual returns of 7% over seven years, instead of the generous 12% to 14% it claimed investors achieved over a shorter period, according to The Wall Street Journal.
The SEC has targeted the firm following a series of articles by the Journal that revealed that many of the insured individuals were living far beyond their life expectancies, dampening investors’ returns.
Life Partners’ choice to change its advertised rate of return is a red flag, attorneys said.
“You don’t change your pitch unless you’re concerned about what others are finding,” said plaintiff’s attorney Andrew Stoltmann. “It’s an acknowledgement by the firm that something might be amiss, and it will embolden regulators.”
Regulators and plaintiff’s attorneys may charge the firm with misrepresentation and omission for the change in returns, Mr. Stoltmann said.
In recent days, plaintiff’s attorneys have been releasing notices, searching for investors who think they might be entitled to a claim against Life Partners.
Mr. Stoltmann said he has received a few calls from investors who have purchased interests in policies procured by Life Partners. “So far, my advice has been to just stand pat and see what happens,” he said. “It seems the regulators are doing a decent job, and it’s very much in a state of flux right now.”
Life Partners said in its note to agents that it would change the way it pays the premiums on insurance policies: It will start paying carriers the least amount required to maintain the policies in force, rather than the premium level illustrated by the carrier, according to the Wall Street Journal.
The news came as a surprise to attorneys in the life settlements arena. The premium charged by a carrier includes the cost of insurance and an amount that it can reinvest for itself.
But firms that buy up policies can reverse-engineer the cost of insurance so that investors only pay the bare minimum to keep the policy in effect, said James W. Maxson, a partner at Morris Manning and Martin LLP.
“It’s a little surprising that they’d be paying full premium,” he said of Life Partners. “It’s a different model from what life settlement companies do.”
The change in paying the premiums may also suggest that Life Partners’ mortality levels are lower than expected, said Julius Rousseau, a partner at Arent Fox LLP.
Companies that happen to hold policies — as Life Partners does — need to record a certain amount of cash flow from death benefits to help foot the cost of premiums on other policies, he said. When individuals live longer than expected, the company holding the policies ends up tight on cash and unable to pre-fund the following year’s premiums.
Calls to Life Partners attorney Ida Draim and Life Partners Holdings Inc. were not returned.