They addressed this issue on the conference call this week. The upshot is that the 7.5% discount rate is only applied after reserving for various risks in the portfolio. The effective discount rate is 17.7%, which appears to be in line with what everyone is seeing in other pools. Unless, of course, you are arguing that other pools reserve for risk and then discount at a rate in the high teens, but that would lead to an effective discount rate that is an astronomical number.
To Amtrust: Since your investor relations people seem to be monitoring this board, how about enhancing the disclosure? There is no reason the CFO's discussion on the call can't be fleshed out in the 10K. While the company may be meeting the bare minimum requirements (although this itself may be questionable, given the very reasonable confusion here), perhaps you should take the opportunity to educate investors.
You can get a transcript of the call here. The remarks come at the end of CFO Ron Pipoly's discussion of the financial results (note there are some mistakes in the transcript).
Here's the question that they did not answer and should:
What types of policies did you buy for 3.6% of face value?
I made a math error and thought they paid over 6% of face value for the policies and currently valued the policies at 20% of face value. By my corrected calculation, they paid 3.6% of face value.
Anyone in the life settlement industry knows that policies that traded in 3% range or below were Phoenix, the worst STOLI and premium financed programs, policies with obvious applicant fraud, and beneficial interests in policies (one degree removed from actually owning the policy).
ASFI is now valuing these policies at 11.6% of face value - which is still more than a 3X mark-up from their original purchase price.
The other question someone should ask Pipoly: What exactly happened to make these policies worth three times more than when ASFI purchased them.
The effective discount rate of 17.7% may be what AFSI is currenlty using, but it is not "in-line with what everyone else is seeing in other pools" because the "other pools" never traded at 3.8% of face value. This is not a comparable asset.
Seems like AFSI answered only one part of the question. Maybe they should tell us what effective discount rate they used to buy these policies and why they are now using a significantly lower rate to mark them up 3X, which has generated materially signficant earnings growth over the past three years..
The answer on the conference call really didn't answer anything at all. It was (IMHO) a distraction.
Is it just me or does this remind you guys of Life Partners, except Life Partners substituted the Dr. Cassidy LE for the market LE, and these guys are substituting the 7.5% discount rate for the 18% plus discount rate used to purchase the policies?
Different approach but and the end results are even better. Based on a quick read of the 10K, it appears that these guys paid roughly $60 million for a portfolio valued at $193 million - a more than 3X mark up. Life Partners was only able to get a mark up of 2.5X with their bag of tricks.
Cynical, you are right about the valuations driving the earnings. Looks like net gains on life settlements totaled $72 million over the past three years and fueled a period of unprecedented earnings growth for the company. Stock price more than doubled during this period.
Looks like they have the settlements currently valued at 20% of face. This must be some super clean product to support this valuation with an average LE of 139 months. Wonder where they were able to find $941 million of the good stuff.
This one may be interesting to watch over the next year or two..