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Tickers in this Article: LPHI
The credit markets may have most of the economy in shackles, but one emerging industry stands to benefit handsomely from the turmoil. Life Partners Holdings (Nasdaq:LPHI) is the largest broker of so-called "life settlements", which enable policyholders to sell their life insurance policies at a discount for cash now. These life settlements are uncorrelated to the stock market and economy and are quickly drawing the attention of many institutional investors. (For everything you need to know about life settlements, read Rid Yourself Of Unwanted Life Policies.)

Welcome to the Biz
Life Partners is a financial services company that facilitates viatical and life settlement transactions between high net worth individuals and professional investors. In fact, it is one of the best-positioned companies in the $15 billion industry with a Rolodex of 18,000 accredited institutional investors and more than 50,000 transactions since 1991.

The recent economic turmoil has only increased business. Life settlements enable struggling individuals to not only receive cash now but also avoid paying any future premiums. Meanwhile, investors like the idea that these policies are not correlated with the stock market or economy. In essence, this service comes at a time when both buyers and sellers are highly motivated!

When all is said and done, it is estimated that some 95% of term life insurance policies and over 80% of permanent life insurance policies lapse and become worthless, according to Harry Beck's article "Life Settlements The Growth Rate Continues" in California Broker Magazine. Eventually, insurance sellers will figure out what is going on and help their clients. This means there is a $14 trillion potential market with the largest segment - baby boomers - becoming eligible to trade their policies. That's a huge opportunity for companies like Life Partners. (To learn more about life insurance, check out Buying Life Insurance: Term Versus Permanent.)

A High-Growth, Value Stock
Life Partners' stock is attractively priced at just 13-times current earnings and 7-times forward earnings. These multiples are especially low given the firm's impressive growth rates of 201% when the industry compares at 10%. Unfortunately, there is no benchmark to base Life Partners earnings multiple off of since it is the only public company in the industry. However, we do know that other diversified investment funds (with a similar profile to life settlements) are commanding multiples of over 40-times earnings and a PEG of around 1. These same multiples would price Life Partners at around $55 per share, or 300% higher than its current price!

Some Grave Concerns
The life settlement industry is still relatively new, so it faces a somewhat unsettled legal foundation that is often challenged. Life Partners is facing lawsuits in Virginia, Utah and Colorado, but the company does not anticipate any of these will have a material adverse affect on its business. Additionally, Life Partners has begun to license in certain states that are important for its business model to ensure that it remains in compliance.

Recently, the industry has seen a lot more controversy amid so-called "stranger-originated life insurance" policies. These are instances were life settlement companies approach elderly people who do not already have an existing policy and offer to give them "free life insurance" for a few months if they agree to sell the policy back to them. While Life Partners is not likely to have partaken in this type of activity, it remains a concern for shareholders.

The Final Note
The life settlement industry offers both consumer and investors a very compelling service and product. Life Partners is the only public company in this arena and appears to be undervalued on the surface. However, the industry's youth and legal uncertainties may be behind the low valuation. In the end, Life Partners may be very well positioned for success once the industry matures and moves past these problems.

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