GWG Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 16 Aug 2018

[Operator:]

Hello, everyone, and welcome to today's webinar. My name is Sarah from GoToWebinar, and I'll be your technical moderator today. Before we get started, I would like to go over a few items so you know how to participate in today's event. [Operator Instructions] Today's webinars is being recorded, and you will receive a follow-up with a link to view the recording. All right, I would now like to turn things over to Dan Callahan. Welcome, Dan, you now have the floor.

[Dan Callahan:]

Thank you, and good afternoon, everyone. My name is Dan Callahan. I’m Director of Communications for GWG Holdings. Welcome to the second quarter 2018 earnings webcast. On the webcast with me today are Jon Sabes, our Chairman and Chief Executive Officer; and Bill Acheson, Chief Financial Officer. Following all of our remarks, we’ll be happy to take your questions and as Sarah outlined you’ll be able to do that by raising your hand through the web interface. Also you can submit written questions on the webcast dashboard. Again, we’ll be taking questions at the end of the presentation. Some statements made on the webcast today, along with the projected financial results, including forward-looking statements are subject to certain risks and uncertainties. Any forward-looking statements made on this webcast are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our earnings release and in our most recent 10-K and 10-Q reports. During the webcast, you’ll hear references to various non-GAAP financial measures, which we believe enhance understanding of our performance. Reconciliation of the non-GAAP numbers to their respective GAAP numbers can be found in the press release available on our website. Please note that everyone but the participants are in listen-only mode, again, questions can be submitted at after the presentation. And today’s webcast is being recorded will be available on our website at gwgh.com through the Investor Relations tab. With that, I will turn it over to our speakers’ Jon and Bill.

[Jon Sabes:]

Thank you, Dan. And thanks everyone for tuning in today and happy to be here. So I’ll kick it off, as I always do, is talking about the purpose on which we are engaged in our business, which is an industry innovator on several fronts. First, as an owner of alternative assets and our alternative asset portfolio with respect to investing in the life insurance secondary market, and now our alternative asset portfolio expanded to include BEN. We'll talk about BEN as well in the transaction we recently announced. And we'll talk about our purpose relative to the primary life insurance market relative to our Insurtech efforts as well. Kick it off, I'm going to first hand the presentation over to Bill Acheson, he’ll walk us through our Q2 results and performance metrics updates, and then I'll circle back around with updates on our strategy. So Bill, take it away.

[William Acheson:]

Thank you, Jon. Thank you all for joining. As I typically do, we will just walk through some of the high level numbers for our quarter before I turn it back over to Jon to talk about some of our other recent events and announcements. And we'll kick it off here with little metrics summary. We'll talk a little bit about our earnings comparison to the same period one-year-ago. And then we will revisit our balance sheet, our independent broker-dealers and we'll finish up with the current state of our life insurance portfolio. So looking at the quarter ended here in June of 2018, we reported record revenue of $24.3 million which is roughly double where we were for the same period a quarter ago, and we'll get into this a little more detail. Total expenses were up about $3 million over that same period. Our general and administrative expenses, which are total expenses, less our interest and fees came in a bit lower this quarter versus the same quarter one-year-ago. We reported a GAAP pretax basically breakeven for this quarter versus about a $9 million pretax loss for the one-year-ago same quarter. We reported a GAAP net loss attributable to common shareholders of $4.4 million versus roughly twice that amount one-year-ago. We reported record total assets of $895 million in total equity of $172 million. We have plenty of liquidity to meet our cash needs and fund our future growth. That number came in $158 million at the quarter end. We reported strong investment product sales of $75 million. Policy purchases this quarter, which we’ll get into a bit, rebounded to $118 million a face versus just under $90 million in the second quarter of 2017. And as maybe some of you saw from our press release, our portfolio at the end of the quarter exceeded 1,000 policies for the first time in our history, which is a milestone for the Company and really the results have a lot of support from a lot of people on this phone and years of growing this portfolio, and now we finished the quarter I believe at 1,010 and we've grown from there. So that's a big deal for us, happy to report that. Our portfolio is also seasoning. $226 million of the face amount of the benefits are on now aged –insured’s aged 90-plus, and that's up nearly $100 million from that same cohort in the second quarter of 2017. We reported near record cash flows this quarter – second quarter of 2018 of $27.6 million versus less than a half of that in the quarter ago period. And we reported adjusted non-GAAP income of $13.4 million this quarter versus $7.3 million one-year-ago for the second quarter. Taking a little closer look at our earnings, I mentioned that we had bought doubling of income topline revenue from the 2017 second quarter and I'll just kind of give you some of the insights on what’s going on there. You basically have three kind of positives and three kind of negatives. We had the higher policy maturities, so it’s $27 million versus the $10 million. So that's a big impact of positive. We had what we call a higher gain rate on these matured policies, which simply means that the policies that matured in the second quarter of this year, we haven't held this one and so we had a higher contribution to our revenue from that maturity event. And we had no material life expectancy update adjustments which have been a feature really of our P&L for the past four or five quarters as we've been working through our life expectancy update schedule. So we had virtually zero this quarter. So those are the positives. We had a lower unrealized gain on the acquisition of our policies, which I’ll get into, say it’s a margin compression there. We did have a cost of insurance adjustment, which means some of the premium on [indiscernible] were increased. And we had no change in discount rate from the prior period, which was a negative in terms of comparison. But broadly on the revenue line, obviously a very good number. Taking a look at interest and fees, those were significantly higher and those are really as expected, but we had higher debt balances outstanding and we had a higher interest rate on our senior facility, which floats on one-year LIBOR and as a lot of you know that one-year LIBOR has increased significantly over the past year. Taking a look at our general and administrative, we're down about 20% period-over-period and that really has to do with some lower compensation expenses from our restructuring of our Las Vegas operation and some lower professional fees due to some projects we’re working on. So that gives you a pretax basically breakeven for this quarter. If you take out the preferred dividend that we paid $4.3 million, you end up with the reported GAAP number of negative $4.4 million attributable to common, which is about $0.76 a share and 5.8 million basic shares outstanding. Moving into our balance sheet and some of our other areas that we look at, we continue to strongly grow our balance sheet with high quality assets. And as I mentioned, we reported a record amount of stockholders equity. Importantly to be reminded or if you don't know all of the – 95% of our carriers of our policies are backed by investment grade carriers, our top 10 carriers by face amount, which represent about 70% of the portfolio. Those carriers are rated A-plus, AA-minus right around there, so very highly rated carriers with super senior obligations to pay their claims. Our liquidity position, which we measure as our cash and our restricted cash that maybe in our facilities as well as our benefits receivable continued to be at a high level, cash cushion for safety as well as to look for opportunities to deploy that. And in the second quarter we did begin deploying some of it and we reduced our senior line by about $27 million sequentially from Q1 of 2018 to Q2 of 2018, and we'll look for further opportunities to use that money in a accretive way to the income statement. Taking a look at our sales, we continue to enjoy strong interest from our independent broker-dealer network, which broadening that base is a key objective for us. We continue to resonate well with the independent advisor who is looking for these types of investments. The small hiccup you see there in the Q1 and Q2 of 2018 really has to do with our closing of our successful preferred stock offering and some of the advisors who were on that offering are no longer talking to our selling group. That's very normal when an offering closes. So we're very happy with the – both the support we receive from our advisors as well as our sales. So you can look at this graph on our sales, which is the L Bonds are in the blue and you can see the finishing off of the preferred stock just in the first month of Q2, that was some carryover into April of 2018. You will see that lower gold bar on the right, in future quarters it will be all blue. And our renewals rates, which is also something we keep a very close eye on has been [indiscernible] for the quarter in line with our expectation. So that’s an important metric to watch as well. Looking at our life insurance portfolio, bringing all the competitive – purchase market continues to be competitive, although we did rebound a bit as you can see in our buys. We did that really by becoming more aggressive in our pricing. And although we were more aggressive in pricing, we are not sacrificing on quality or underwriting or any types of policy features that we consider to be undesirable. And although still competitive our Q3 margins have been improving a little bit and I expect they'll come in better than they were in Q2, but will still be in a competitive space until we really figure out our D100 strategy, which Jon will talk a little bit about, but that's ongoing. We've had some positives in that. We have seen an uptick in the number of opportunities that have been submitted to us for review from that insurance distribution group and they've also – these opportunities have come from a wider range of advisors and broker general agent, so those are both good. And our pipelines are growing, but I will say that we still need some time to see how big the pipeline can get and then most importantly to get that pipeline due to conversion. So some positive news on the horizon, but we still have some work to do on our direct 100. Our portfolio continues to grow, as I mentioned the 1,000 – we’ve reached the 1,000 policy mark, which is fantastic, which means there are actuarial diversification is increasing, and really in this case growth really equals options. And that means options to finance this portfolio, it would lower cost of funds, which we've mentioned several times on the call something that we are still pursuing as we look at our post-BEN capital structure and as we look into the future, and I believe we are right on track with our portfolio. Very happy with where it is and how it's constructed. Looking at our portfolio seasoning. As I kind of mentioned a little bit, it continued to season, we've got 2 billion out there, 226 is associated with insured’s age 90 plus and it's a great – still a great long duration yield the asset for GWG that fairly going to make up a big portion of our returns going forward. And looking at cash flow from the portfolio, which is one of the key graphs here in the presentation is where you can see the blue line is our trailing 12 months cash flows realized versus the gold line, which is our trailing 12-month premiums paid and you can see that seven consecutive quarters recovering our premiums, which is a really good sign. The first half of 2018, if you take the Q1 and Q2 together that represented a record dollar amount or benefits realized. So we’re very happy with where that is and we expect to see this to continue to grow and to continue to see more room between that blue bar and that gold bar. So we're also very happy with the consistency in the growth there. I suspect there will be periods of time where it will be lumpy, but I think those are going to be fewer and further between, and for those of you who have known us for years now, you certainly have seen a certain market improvement in the consistency, and so I think we will continue to enjoy that. So finally before I turn it back over to Jon, we look at this portfolio really as a driver as we look at our balance sheet in earning assets. We look at it really obviously as a very high quality key driver of future growth and future income. And one way of thinking about it is looking at our policy benefits, which is about $1.8 billion at quarter end. And then looking at our investment cost basis, which is about $730 million, what that number represents is our purchase price, capitalized premiums and capitalized financing costs. And the difference between those is gross spread and that is really that gross spread when that comes out. That is really the driver of our economics. And as we look at that that's over about a 6.8 year average life. And so as I think about it, I think about $2 billion roughly of events certain cash flows, so we know these cash flows are coming, we don't know when. As I mentioned, they're highly rated carrier obligations, so these are investment grade rated and even more so with 70% of our portfolio. These obligations are also senior to the carriers, most senior obligations. It's been organically grown and well underwritten portfolio that we're very proud of. You add that to a large and growing investment spread and then you consider also what we call our targeted life expectancy. We've really attempted to keep that life expectancy in a relatively short spot between let's call it six and seven years where we've really been for the past several quarters. If you combine that with the statistic I gave you, the amount of benefit over age 90, and another way to look at that is also 442 million of our benefits have a life expectancy of less than four years that’s a table that we have in our 10-Q. Really when you add all that together, the size of it, the age of it, the quality of it, the certainty of it, we really feel like it is a super high quality asset that is going to be a key measure and a key feature of our returns as we go forward. And really a nice piece of the balance sheet when you consider what beneficent is going to bring to the table. And for that and for other developments, I'll turn it back over to Jon to pick it up from there.

[Jon Sabes:]

Thanks Bill. So just staying on that slide for a minute, I think if you think about the type of assets that we do own in terms of this life insurance portfolio, it really does relate well to BEN and why we did the BEN transaction. And I'll kick it off really from that point, which is BEN is a transformational transaction that's how we've been talking about it around here. And I think that's appropriate how you should think about it as a investor or advisor or analyst following the company. Just to recap the transaction itself, we changed it just at the very end in the third amended exchange agreement to be a two-step closing. So we had our first closing, our initial closing last Friday 8/11, August 11. And we expect to have the final closing sometime in Q4 and that will kind of flow through when we can complete some of the regulatory work that we need to do with the SEC later this year. The transaction that we are closing in large part remains exactly how we described it many months ago, and we're grateful for the effort of the many teams who spent the hours and brain damage to kind of get to the close. It took a collective effort on both the teams’ parts. But in the end, we believe this is transformational for GWG and we're really excited because what it ultimately brings to the company, which has been and continues to be significant balance sheet growth. And that growth comes with significant diversification in the types of alternative assets that we own. We are a big believer in the alternative assets space and our partner BEN is as well and it's what they. First were attracted and were interested in working with us on which was our alternative asset that we owned. As well this transaction will provide a significant increase to our common equity in the amount of $292 million at the final closing and that equity will come in at a $10 a share price. So that's a major investment. Those are major significant changes to the overall structure of GWG. It's coming at a significant dilution to the common shareholders, but at an accretive valuation. One new aspect of the transaction that came in late as part of this two-step closing was a new element which included a $50 million investment in GWG. This came in at the initial closing and it structured as a convertible preferred, no coupon, no voting, but will convert into common shares at $10 a share at the final close. So that was an exciting addition to the overall transaction and it aligns interests and allows us to do some things that we've been wanting to do for a long time in particular prior to the dilution that will come to common shareholders. And that first is a return to common shareholders who have been patiently supporting this company and the strategies that it's executing against. And so the Board declared a special divided of $4.30 per share of common for shareholders as of record day August 27 and that will be payable on September 5. The Board felt that it was appropriate to do so. Our preferred shareholders have been collecting yields from this portfolio along the way. Our L Bondholders has been collecting yields, and again, our common shareholders who we've had certainly comments from shareholders that they would appreciate to see some return as well. So this is a big deal. We're really excited to be able to deliver this to our common shareholders prior to the dilution that will happen. In addition, the $50 million investment, the Board decided to commit the balance around $25 million to our Insurtech. We'll talk about some of the updates on the strategy with our Insurtech, but it just simply is a strong endorsement of this Company's commitment to the strategies that are in play. Our advisors, our broker dealers can be assured us to where the source of capital is coming from for this initiative. And as people who follow the Company will start to show sort of how we're spending that money and they can model appropriately for potentially losses that might come from the investment in what is a tech aspects of our business. And then finally, this transformational transaction does allow for a really exciting joint venture for GWG and work with BEN and distribute BEN liquidity products to owners of illiquid alternative assets. We intend to joint venture and distribute these liquidity products with our broker dealers and financial advisors to the investors that they serve and beyond, this is really an exciting innovative product and we think it's a key driver on what will create value for GWG shareholders. So that's a recap of BEN. Think of us – as we think of about alternative asset portfolio that Bill was just talking about, again GWG you know in love and owner of illiquid alternative assets in the form of life insurance policies that have some certain cash payout that have uncertainty as to when that cash is going to come out. As really a functional equivalent in BEN and BEN being an owner of illiquid alternative assets now. In the form of limited partnership interest and these are limited partnership interest that have invested in professionally managed funds, whether they be late stage growth, venture capital, buyout, across the board, why diversification in endowment model, where again the limited partners – the partnerships will provide cash in capital. There's some uncertainty. They have long duration assets. So BEN can provide liquidity to the owners of these assets and well received the cash flows as those assets are realized. GWG is a limited partner in BEN. So we are the majority limited partner in BEN by a long shot and that's how we will participate in the performance of these assets and that ownership will shrink over time as BEN now gets underway and continues to grow its balance sheet. So all-in-all we partnered with an experienced management team. We're certainly have our experience in the illiquid alternative asset life insurance. BEN is a proven team in illiquid alternatives and managing endowment model types of portfolios, all of which have experience and expertise, evaluation, underwriting and servicing these assets and together we do expect to realize the benefits of revenues, earnings and opportunities together. So a transformational transaction focused in the alternative asset space expanded for the better of everyone involved. So that’s again just to recap in a way to sink about GWG going forward in partnership with BEN. Coming back to the life insurance secondary market, we noted in our release that we have a new team member that is an important addition to our team. We named Brian Bailey, as Chief Investment Officer at GWG. That's the first time we've had so much hold this position at the Company. And Brian joins with a level of leadership and expertise that heretofore we haven't had. That's going to really allow both Bill and I to execute more, add some of the operational strategies that we have and allow someone who has a real deep understanding of leadership to look over our origination. Be sure we have a profitable origination of life insurance policies and work with our partners at BEN. So we’re excited about Brian joining us. Prior to joining GWG, Brian was the Senior Leader at Beal Bank, where he deployed $3 billion of capital towards life insurance secondary market. So again we're getting someone who really understands this asset class at a level that heretofore we haven't had as well. Brian has a deep understanding and experience with capital markets and corporate financial, which again will be a big addition to Bill and I and the execution of the business that we have underway. I see just locked in the rooms, so I'm going to make mention of them Craig Opp. Yes, there he is. He is looking up now. Craig Opp joined us as General Counsel recently. So that's a big addition for us as well. So we'll be showing our investors a different – I’ll call executive team as we look towards – executing our business plan in the near-term, but there's a lot to cover, so I couldn’t capture it all. So we did want to mention Craig, welcome Craig. I'm going to have Brian by the way, join our next call in on a regular basis or quarterly call and talk about our alternative assets from a Chief Investment Officer’s perspective. As to our direct origination, D100 as we call it, direct 100% origination buying life insurance policies directly from consumers by working with the life insurance distribution hierarchy. For those of you who have been following us, this graphic shouldn’t be a surprise and that is the idea of working with insurance distribution, IMOs, BGAs and agents. This is where we will find life insurance policies to buy. There exists a very large untapped market opportunity and we're committed and we believe that the way in which to access this market opportunities through this insurance distribution hierarchy. We've been in the process of retooling this team. As Bill mentioned, in May, we transitioned the team from Las Vegas call center back into Minneapolis. In June, we transitioned our leadership and we put that entire sales effort under Merriah Harkins, EVP who runs our entire sales team. That sales team is comprised of about 18 sales professionals who have national exposure. We run six different territories against – in which to sell in. So in July, we integrated this D100 effort into this entire sales team. Heretofore, we had kind of run it separately. But now we really integrated into our entire sales infrastructure and that's exciting for us because this sales team has done extraordinary for us by working with financial advisors in the alternative asset field and now bringing them into liquidity products, but agents and life insurance policies and ultimately the liquidity product with BEN is a big deal as we think about our business going forward. In August, we're doing our first what we call BGA partners rollouts with this sales team. So again, by the time we do our Q3 call in November, we'll have some tangible results to talk to you. Again, we're seeing signs of life there, so we're definitely not given up yet and we will hopefully have some better metrics to report later this year on it. We haven't given up as well on our life exchange annuity. I brought that up again in our last call. Our partner who – insurance care partner, who we thought we had there stepped away. As recently as a couple weeks ago, I've got a new carrier who appears interested in providing us a life exchange annuity. Again, an insurance product pushed through this insurance distribution hierarchy as a way to bring to life and realize the opportunity of the secondary market through an insurance product. So we continue to focus on that execution. So switching gears away from secondary market on alternative assets, I'm sure for again those of you who have been following my favorite topic insurtech. A great slide, the future of life insurance is here. It's a great slide produced by one of our branding partners and how we think about this business. I'm really proud of that statement because we're not the only ones who think this. This is a slide taken from a webinar that was published July 10 just last month by Dr. Daniel Zimmerman, who is the Senior VP and Chief Medical Director at RGA, the Reinsurance Group of America, one of the largest global life and health reinsurance companies in the world. So Dr. Zimmerman published an article in a webinar entitled, Be Kind to Your Genes

[Dan Callahan:]

Sarah, our operator.

[Operator:]

All right. Thank you, guys. [Operator Instructions]

[Jon Sabes:]

We do have a question that came in on the chat, the text question. And the question is, “It’s actually what steps remain in the fourth quarter to finalize the BEN transaction?” Yes, so the question is – what step needs to happen before we close the final closing and really it has to do with the delivery of our final proxy statement to the SEC. And that requires us to kind of conclude some of the audit of BEN, which we expect in end of September and with that we'll be able to file our final proxy and do the final close. So that's really all that stands in the way and yes.

[Operator:]

We still do not have any raised hands.

[Jon Sabes:]

Okay. “How exactly is YouSurance going to change the insurance application process?” is a question. Great. I don't know if it's going to change the application. I think it change the underwriting process. Again, this is kind of – to me that the most exciting opportunity I've had with BGAs in this office and have the chance to present and talk to them. If you think about it, life insurance, 90% of life insurance is still sold by insurance agents and probably 50% of the insurance that they sell is required to go through what we call paramedical underwriting. That paramedical underwriting can take anywhere from six to eight weeks and it requires a nurse to visit the insured, collect blood, collect urine, potentially get medical records and a very long drawn out process not to mention not a great experience for the customer. We think that if we can match the epigenetic signature to the same paramedical underwriting risk classifications through the collection of saliva, we can reduce that underwriting time to 10 days. So you're really talking about a dramatic change in the – about the time and how you collect your underwriting data. So we think that by creating a YouSurance product that has underwriting process that collects saliva that can turn around in 10 days that that product will be highly marketable and saleable inside the insurance distribution when all the other products have paramedical underwriting that require six to eight weeks. Question is, “Does the YouSurance potentially diminish the future typical writing life agent today?” No I don't think so at all. In fact on the contrary, I think the YouSurance will make the agent relevant again and it will make insurance great again and as the promise anyways. The digital MGA, we don't really think about selling or distributing the insurance through the web, although you'll be able to get the insurance through web. Really as I said, our main goal is to bring an insurance product that is easier, faster for the agent to write with the client and therefore make the agents opportunity to write that business better. I believe the statistic commonly saw quoted is agents lose 25% of their insurance sales in between the time they've made the sale and the paramedical underwriting is complete. So again that would – if we could solve for that that's a massive uptick for the agent. And our hope is that we'll build in value added features inside YouSurance, not only will you be able to tell where your ancestors came from, but potentially whether or not you have a particular risk of a disease category. So again that agent stands to be much more of value added to their clients, overall health and wellness and informed decision making about financial planning and insurance purchasing. Another question, “Could you give us some examples of the BEN products that will be distributed through the GWG channel?” is a question. Yes. I mean, I could – one kind of example might be the opportunity to – say just a simple loan product, so for someone that may own a particular REIT product or an energy product that still a great asset, but for whatever reason liquidity has not come as planned, but that liquidity is still expected. They could effectively margin the product and get some access to capital from that. Alternatively another example might be if BEN were to list on a national exchange, they could simply contribute illiquid say REIT investment and exchange for a publicly traded master limited partnership interests, so kind of the functional equivalent, maybe a [10.35] type of exchange and expanding your overall ownership in a pool. So that's a couple of examples, great question. Question here is, “The total cash invested $50 million or will the cash come in at the final closing? The cash is closed, so the investment has occurred the convertible preferred has been issued, so that is a complete?” Question again related or will BEN received? No, BEN will not receive the dividend. This is again no common stock has been issued. A common stock does not get issued until the final closing and so this dividend will be distributed to current shareholders only. We're just looking at more questions written in here, bear with us. A question here, “Can epigenetics detect if someone just got cancer for example?” Maybe again thing start out as science fiction. They become science and then become reality. I think we're all on the idea that we're looking at things at a molecular level and as you look smaller sort of the notion is that cancer has been in your bloodstream a long time before you feel a nodule or a tumor or some symptom. And so finding it sooner on a molecular level, sorry is – I think everyone believes that that's a distinct possibility and whether it's epigenetics or genetics or other molecular biomarkers we – I think you can expect that to occur in just about everyone’s lifetime who's on this call. Another question here, “What is the coupon on the preferred stock to BEN?” There is no coupon attached to that preferred stock to BEN. That is just a convertible preferred that will convert into common. That's about as planned and all as you can get.

[Jon Sabes:]

Okay I think we're going to conclude our call. I want to again thank everyone who has been on the call or watch the webinar for your support and interest in GWG. Again the team here has never been more excited about the initiatives underway. Again I hope that enthusiasm shows through and we expect to deliver on the strategies that we have discussed today. So to an end for some other maybe mid-quarter webinars or calls that we might have or otherwise we'll catch you in November, have a great balance of the summer. Be safe and we'll see on the flip side. Bye-bye.

[Operator:]

Thanks for joining us everyone. This officially concludes today’s webcast. Have a great rest of your day.