GWG Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 21 Nov 2018

[Dan Callahan:]

Thank you and good morning everyone. My name is Dan Callahan and I’m Director of Communications at GWG Holdings. Welcome to our third quarter 2018 earnings webcast. On the webcast with me today are Jon Sabes, our Chairman and CEO, and Bill Acheson, our Chief Financial Officer. Following our remarks, we’ll be happy to take your questions. You can submit them online through the webcast dashboard, look for the Question text box and type a question in. Again, we’ll be taking questions at the end of the presentation. Some statements made on the webcast today along with any 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 on the press release available on our website. Please note that everyone but the participants are in listen-only mode. Again, questions can be submitted through dashboard text box and will be answered at the end of the presentation. Today’s webcast is being recorded and will be available on our website at gwgh.com and through the Investor Relations tab. With that, I will turn it over to Jon Sabes, Chief Executive Officer of GWG Holdings. Jon?

[Jon Sabes:]

Thank you Dan, and thank you everyone who got up this morning to tune in. Thanks to everyone who listens to the replay at a more convenient hour, especially for those on the west coast. I’ll start off again as always talking about the purpose here at GWG. Again, our purpose has been to be an industry innovator in the area of alternative assets, owning an alternative asset portfolio in the form of life insurance policies. We’ve been acquiring those policies in the secondary market, and there we’ve been seeking to innovate on how consumers can get liquidity for their otherwise illiquid life insurance policy and extract more value out of it, and then as we’ve kind of continued in our business we’ve been working now on an Insurtech aspect of predicting human longevity, and we think that insurance technology will have wide application for the primary life insurance industry, so our purpose is defined by what we do every day here at the company, and we’re excited to talk to you about our progress in that regard. I’ll start off this morning by recapping the Beneficient transaction. It’s a transformational transaction for our company and so it bears again talking about. Ben was structured as a two-step closing. We closed the first transaction about a month ago and we look to do the final closing here in Q4. This transaction will result in $695 million of assets growing our balance sheet. We closed $453 million of assets on the initial close and the balance will close here, we expect, by Q4. We’re doing this to diversify our portfolio of alternative assets and increase our common equity, and we’ll be issuing 29 million shares at $10 a share as part of the transaction and final close. As part of the initial closing, we received a $50 million investment in GWG by Ben. That will convert at $10 a share at the final closing, and this enabled us to provide our common shareholders a common dividend, a special dividend, and gave us the capital, the clear capital to commit to our insurance technology efforts. Finally with Ben, we’re now beginning to work on a joint initiative to support and distribute Ben’s liquidity products to the wider channel of independent broker-dealers and registered investment advisors. Again, Ben specializes in providing liquidity to illiquid alts in the same way that GWG provides liquidity to owners of life insurance policies. A way to think about alternative asset portfolio of GWG, right now our balance sheet as of Q3 is $895 million, which consists primarily of an illiquid alternative asset in the form of life insurance policies and portfolio and cash. That portfolio of assets has grown to $1.3 billion with Ben, and that will be in the form of a limited partnership interest in Ben and a commercial loan backed by the assets of Ben. We’re partnering with Ben because of the experienced management team that’s involved with the Beneficient company. Their expertise in valuation, underwriting and servicing illiquid assets, the type of assets that they’re experts in much in the same way GWG is expert in the life insurance asset class, and the expected benefits we expect to receive are an increase in revenues, earnings and opportunities working together. We’re well on our way with respect to this transaction in all material respects. In terms of the life insurance secondary market, the highlights at Q3, the value proposition of owning life insurance policies remains intact, non-correlated yields backed by an investment grade-rated credit. We’ve acquired a large, well diversified portfolio of life insurance assets at this point. We’ve retained leadership and expertise to supervise that portfolio - our Chief Investment Officer Brian Bailey, so we feel really complete, if you will, in where we’re at in the secondary market and our respective position there. Things that are going on inside the market itself, we continue to see increased competition for originations. That’s been leading to higher valuations of the policies that we’re looking to buy in the marketplace and a yield compression, so that’s been challenging for us as we look to continue to grow the portfolio. As well, we announced that two life expectancy underwriters that we use revised their models and that’s causing us to reconsider some aspects of our business. In general, we’re looking to get longer term, lower cost financing to continue growing aggressively in this space, and we have continued to refocus what we call our D100 originations - again, that’s the opportunity to source or originate life insurance policies directly through life insurance agents. That continues to be a challenge for us - we have not seen the traction that we would have otherwise expected given the effort there, so we are re-thinking and re-focusing that effort as well. Those are my remarks on the secondary market. Bill will speak specifically about the portfolio itself and some more detail on the life expectancy provider announcements. In terms of Insurtech, just to clarify for everyone what is our primary goal with respect to what we call Insurtech, it’s really been to identify epigenetic tests for life insurance underwriting factors and we’re seeking to sell those tests to life insurance carriers that they can use in their underwriting. If we can succeed in doing that, we would seek then to provide additional epigenetic tests to other vertical marketplaces, so that’s been our primary goal with Life Epigenetics. What we’ve seen is that the insurance industry stands to be reinvented in many ways, and we’re wary of the velocity and speed at which carriers will take on that opportunity to fully embrace the technology that we’re bringing into the marketplace, so we’ve created YouSurance. YouSurance is a way for us to capitalize on what we think is a step change technology for the life insurance industry. We can do that on our own or we can create an opportunity for another existing carrier to participate with us to create YouSurance, the new brand and a new way of thinking about life insurance using epigenetic testing, so that’s been well underway and we’re happy with the progress we’ve made in all regards. In terms of progress, this is a picture--for those watching the recording, this is a picture of a retail space that we took over during Q3, and in this space what you see is individuals undergoing testing. We had 1,300 individuals come through a testing protocol where they gave us blood, urine and saliva, and we tested using really ground truth assays to identify tobacco use, drug use, alcohol use, and 52 clinical chemistries. At the same time, we did what we call a deep epigenetic scan, looking at 850,000 what we call CPG islands using an EPIC illumina array, and we’re looking using supervised machine learning for epigenetic signatures that both mirror these ground truth assays, so the use of tobacco, alcohol, drugs of abuse, as well as the clinical chemistries. That’s sort of our primary work on investigation, as well as we’re actually underwriting these individuals for life insurance. This underwriting, so we’ve taken sort of a traditional questionnaire, and the underwriting is being completed by one of the leading reinsurance companies, Facultative Underwriting Group, and is being supervised by one of the--a leader in the industry in terms of a senior leader in life insurance underwriting. We’ll be looking for signatures that actually mirror the life insurance underwriting risk classifications, so this is really exciting work for us. I think I reported--well, I know I reported in our last call that this is a graphic that we’re looking for, so signatures that correlate to the underwriting categories. We’ll be looking for the strong relationship between the signatures and these underwriting risk classifications, but we’ll be looking for that same relationship between epigenetic signatures and the individual blood chemistries, tobacco and alcohol. This is the big piece body of research work that we want to do. I thought I would have those results to talk about today, but it took a little longer to get underway, and so we will have the results to talk about at our year-end conference web call. We’re expecting kind of a Q1 delivery of both the data and the results from it, so stay tuned. The results of this work will really determine the path, we think, of the commercialization of epigenetic technology. We’ve been talking to a number of carriers and they’re highly interested in the technology itself, and we see other vertical applications of the technology so we’re really excited where we’re at, and we think we’re going to have a strong basis for the next business decisions we make with this business, both in life insurance and other verticals. That’s the broad remarks that I will make on the strategies and the updates. I’m going to turn it over to Bill and he will walk us through the financial metrics we use to manage the business and further updates on Ben. Bill?

[Bill Acheson:]

Thanks Jon. Good morning everybody. We’ll take a look through some of the metrics that we usually do, with a few changes, and we’ll talk about a couple of updates and then touch on Ben, before we turn it back over to Jon and then do some Q&A. For those of who have been before, we typically go through our metrics. We’ve changed it up a little bit this quarter in that we’ll look at our financial and portfolio metrics both on a sequential and year-over-year basis. I think it just gives a little broader picture. We don’t have a ton of seasonality in the business and as we’re growing, particularly with the portfolio, I think sometimes the year-over-year comparisons maybe aren’t as meaningful as having them as well as sequentially, so let’s kick that off. Revenue sequentially was down based on lower maturities - that’s really one of the themes for the quarter when you think about our gap, it’s going to be our lower policy maturities of about $8 million this quarter, so we had a much larger quarter last quarter and we’ll get into that a little bit further. Basically you’re looking at maturity events. From the expense side, your expenses are up pretty much over all the periods mainly due to interest expense. Comp and benefits and Insurtech costs on our general admin, general and admin are a little higher. Just for perspective, for the quarter we spent about a million dollars - this is Q3 now - about a million dollars or a little bit more on our Insurtech initiatives. Year to date, that number is around $2.9 million, so you can kind of get into perspective the dollars that we’re starting to allocate towards those initiatives, leads you to pre-tax dollars number that you see here. I’m going to connect these to the maturities here in a minute and you’ll kind of see the correlation on our pre-tax - that will probably lighten that up a little bit for you. Total assets growing - these do not include the first closing of the Ben deal, which I’ll get into a little bit further near the end of this presentation. We look at our liquidity, it’s starting to come down a little bit. We’re managing the liquidity down. Now, this would be our cash and benefits receivable and restricted cash in our senior facility. We have been putting some of that money to work and paying down some of our higher cost of debt, so I’ll get into that. We continue to see, I think in the next quarter or so, a few more opportunities to draw that down and to get that earning, which is a key thing that we need to do for the income statement side If you look at our investment sales, have been strong and steady. The L-bonds offer attractive yields and fit a unique niche in the non-correlated fixed income portfolio if you’re looking for securities with defined maturities, and with the return of market volatility that we’ve all been experiencing here for the last, I guess, month or so, we expect that to continue going forward. I’ll talk a little bit more about that. Looking at our portfolio policy side, our purchases - this is face amount now of benefits purchases, $120.4 million. That’s a good quarter, but as Jon mentioned, the competition in that sector is getting continually more fierce, and so I think going forward we’re still going to be allocating capital here, we’re still going to be growing the portfolio, but depending on conditions, that number may not be as large, so I think we did a good--although not on here, we did a good job of increasing our average yield in Q3 but broadly, if you look at year-to-date 2018 versus year-to-date 2017, our purchase yields are down in all of our purchase channels. That’s something that we’re going to be watching very closely as we go forward and continue to update you. Portfolio face amount, nearly $2 billion, which is great. Portfolio number of policies, almost 1,100. The average size has been steadily decreasing, which is a good thing. We think this portfolio has reached actuarial diversity and although it’s going to continue to grow, we think we’ve accomplished an objective with the size and composition of this particular portfolio. Now let’s look at one of our real big key drivers, which is the benefits realized, how much benefit did we realize face amount in the quarter. You can see it was $8 million, which is a relatively low number for us particularly versus the quarter last quarter, which was $27.6 million, and even the year-ago period. Now, as we’ve talked about in previous calls, these numbers can kind of move all over the place, but this was basically a low quarter which really drives, when you look at kind of our pre-tax, there’s a real strong correlation between two things

[Jon Sabes:]

Thanks Bill. You do a terrific job explaining our business and the metrics we use to manage it. Again as we sit here today reporting for Q3 and as we look into the year end, and certainly into 2019, again I think we have never felt more confident in terms of how we’re leveraging our infrastructure with a new balance sheet and experienced management team to distribute liquidity products to the distribution channels we serve for illiquid life insurance policies, illiquid alternative assets, and these products that we are distributing solve major problems in the market and they have large addressable markets, so we’re highly focused on the execution, as Bill mentioned. We have been busy at work with our partners at Ben on further execution in this regard. Our insurance technology, we think is just absolutely step change. We’ll expect to get those results and report them back to you at year end, and through this we do expect to deliver returns for our shareholders. I’ll make a note as well - we did approve at the board level a stock buyback. We feel as though the shares are undervalued specifically relative to the Ben transaction, and so we want to be there to support those shares going forward in that regard. I think that’s where we sit. We’re really looking forward to reporting, I would say, at year end to you, and the progress--I think significant progress we’ll make in terms of the final closing with Ben, the results of the technology and the distribution of liquidity products. I think those will be three things to look for when we report back to you at year end. With that, we’re going to take some questions. If you have questions, you can type them into the chat box, otherwise we wish you all a very happy Thanksgiving holiday. We apologize for the early time of this call on the west coast, and we hope you have a great holiday season total. So Dan, I’ll turn it over to you to augment a question period.

[Dan Callahan:]

Sure, thanks Jon. We do have one question, which is why the earnings and the call this morning were rescheduled.

[Bill Acheson:]

Oh, someone noticed that? Okay, well. Good question, really simple answer. We just need a little more time working through the accounting on the first close of the Beneficient transaction with our auditors. It’s a very complicated transaction and it just took us a while to get through the accounting. We wanted to be extra-sure that we had good disclosure around it and that it was useful, and so we took the grace period that’s available to us to take a little extra time to do that. Apologies for the impacts on the call, but I think if you read the documents, particularly looking at Footnote No.1, we just really wanted to make sure we got that right and reflected the impacts through the document where we could, so that the reader would understand the impacts of close number one. That’s really the answer, just a little extra time to get the document cranked through.

[Dan Callahan:]

A question here - can we give some color, more color on the impact of the life expectancies with the mortality multiplier changes. Again Bill, do you want to take that? I think we made some disclosure in our Q in that regard, and I think that’s the best source of that information to qualify that in that document at this point. I don’t know that we can add further color to that.

[Bill Acheson:]

Yes, not too much.

[Dan Callahan:]

Will the bond sales be reduced or ended? No plans at this time. Will the price that Ben offers for liquidity products be greater than what’s otherwise offered in the market? To be determined. We would expect it to be a much--a highly valued product inside the distribution marketplace. We’ve got a lot of questions here. You want to take one, Bill?

[Bill Acheson:]

Sure, we have one here that says, looks like we’re getting out of life repurchasing. I think that’s referring to my comments regarding secondary market purchase. I don’t think that’s accurate. I mean, we’re still going to be involved in buying policies, and like Jon says, we think the value proposition of the portfolio, particularly with lower financing, is really a good asset. I mean, if you think about what we are hoping to achieve with the Beneficient transaction and the equity, having a highly rated portfolio of life insurance that’s throwing off cash is a really good thing to have, so I wouldn’t say we’re getting out of that business. But we do need to be mindful of the yields in that business, and that’s really more what I think the flavor is. If you see lower numbers going forward, it’s going to be because we want--you know, we have a minimum yield bogey really that we’re looking for, so I think that’s probably a better way to characterize it.

[Dan Callahan:]

Okay, we’ll take one more question here. Are preferred shares available in the aftermarket? I’m not aware that they are trading in the aftermarket, so I don’t have any color to that.

[Dan Callahan:]

I think with that, we’re going to wrap it up. If you have specific questions and you work with any of the wholesaling team, please forward that to us and we’ll do our best to answer the questions. We appreciate again everyone’s time and interest this morning and look forward to seeing you in the new year. Cheers, happy holidays.