GWG Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Welcome to the GWG Holdings’ First Quarter 2017 Earnings Conference Call. Today’s call is being recorded and will be available for replay beginning at 9

[Dan Callahan:]

Thank you and good afternoon, everyone. Welcome to the GWG Holdings’ first quarter 2017 earnings call. On the call with me today are, Jon Sabes, our Chairman and CEO and Bill Acheson, Chief Financial Officer. Following our remarks, we’ll be happy to take your questions. Some statements made on the call 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 call 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 call, you will 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 Web site. Please note that today’s conference call is being recorded and will be available through next Wednesday, May 17th. Replay details are available by going to our Web site at gwgh.com and through the Investor Relations tab. And with that, I will turn it over to Jon Sabes, Chairman and CEO of GWG Holdings.

[Jon Sabes:]

Thank you, Dan. This is our first quarter and 2017, and we’re coming off of our strongest year ever in 2016. We mark this quarter with a continuation and acceleration of the growth and development plans we set for ourselves in the Company. In terms of growth and development, we are focused on three areas of our business; the life insurance secondary market; our capital markets and portfolio growth; and our M-Panel technology. Today, I'm going to cover our activities related to the life insurance secondary market and our M-Panel technology. And our Chief Financial Officer, Bill Acheson, will cover our capital markets and portfolio growth activities in further detail. So with respect to the life insurance secondary market, as I stated at year-end, the key elements for our robust life insurance secondary market are capital formation, a stable regulatory environment and the delivery of highly valued consumer product and services. In terms of capital formation, we see continued strong demand from capital for the life insurance asset class. In terms of regulatory environment, we see a continued stable environment, which supports capital formation and the right to consumers to access the value of their life insurance assets. In terms of delivery consumer value, we are making an impact. In Q1 alone we returned $20 million to seniors in exchange for their life insurance. This compares to the $1.6 million in value offered by carriers for these very same life insurance policies. This is a 12 times value improvement for consumers from the traditional option offered by the life insurance industry. These numbers are self evident as the value we contribute back into the economy and the positive social impact our businesses having on individuals’ lives. This quarter, we announced several changes to our management team with the retirement of our Executive Chairman, Paul Siegert and the transition of Michael Freedman and John Gangelhoff. While we are deeply appreciative of the efforts of these individuals, we are also excited about a new era of leadership with Chris Orestis, joining GWG as its Executive Vice President of Life Insurance Secondary Markets. Chris Orestis was formally the CEO and Founder of Life Care Funding. At Life Care Funding and over his carrier, Chris has been an innovator and working with ways to deliver healthcare, life insurance and long-term care solutions to consumers. Already this year, we have launched a new branded effort, called Life Care Exchange, in partnership with some of the largest national insurance distribution organizations. This effort is focused on creating care funding specialists out of life insurance and annuities professionals who are receiving training on how to support the long-term care needs of retirees. This is a national campaign that kicks off in June with over 40 training seminars scheduled throughout the United States through July. And we expect this is just one of several training seminar waves that we will occur in 2017 alone. Our LifeCare Exchange represents the opportunity for care funding specialists to help their clients exchange their life insurance for other valued products and services, such as annuities or long-term care funding benefit plans. The national campaign and the agent training initiative is perfect for our GWG west team to support. Judy West is responsible for executing our direct originations strategy, which we now call Project D-100, which means we are working to receive 100% of the life insurance policies we work with directly from our appointed agents. Our team continues to grow ever more sophisticated and efficient in our message of value and opportunity. This process and the infrastructure is built on the scalable platform that we expect to deliver exponential value to our shareholders as we execute our plans and goals. With respect to our M-Panel Technology, this quarter, we announced that we concluded and received the exclusive license for the Mortality Predictive Technology created by Dr. Steven Horvath from the University of California. For those who are new to the story and aspect of our business, M-Panel technology was created by Dr. Horvath, who is a leading ageing researcher, a Biostatistician and Geneticist. We met Dr. Horvath in our quest to find improved ways of predicting life expectancy. For those who are new to epigenetics and the science of DNA methylation, let me be clear as to what this science is and what it is not; first, epigenetics is a new revolutionary field of science; second, scientists have learned that our environment impacts our gene expression and this is called epigenetics; third, epigenetics literally means above the gene or above the DNA. So what this science is, it's reading measurements of methylated DNA sites along the top of our genome. And what these methylation sites reveal, are a variety of environmental factors and exposures we have encountered along our life. What this science is not, is reading the DNA code you are born with. In another words; if you smoke, if you drink, if you are exposed to heavy metals, and I'm not talking about heavy metal the music, if you are obese, if you don’t exercise; this will all impact your gene expression through methylation. As I reported at year end, we have translated Dr. Horvath’s science into an actuarial methodology. And we, through the help of leading actuaries and a global consultancy firm, we have articulated those results and an associated business strategy in a report that we will be published as an exhibit to our 10-Q to help explain the details behind our M-Panel Technology. Let me highlight the following key aspects of that report. We found that by converting methylation factors and hazard ratios reported by Dr. Horvath that over 30% of the population reveals changes and life expectancy of two years or more. The ability to predict life expectancy at this level puts our M-Panel Technology on par with other major life expectancy factors, such as gender and smoking status. As a result, we believe M-Panel Technology clearly provides us with an ability to better predict life expectancy of individuals across large populations. This creates an opportunity to better select and price associated risk of consumer who purchase life insurance and annuity products. Among the business opportunities the report focuses on, we are focused on the ability to streamline the underwriting process. Specifically, traditional medical underwriting, which involves medical exams, collecting blood and urine, could be replaced simply by collecting saliva. This would save weeks, cut costs and improve timelines and accuracy from traditional methods used in life insurance underwriting. Finally, the report states that Moore's Law and economies of scale are driving down the cost of these types of tests at an exponential rate, making the epigenetic analysis that M-Panel deploys much more economical and global in scale. These findings have helped us focus our strategy while confirming our original belief that the M-Panel Technology will change how life insurance products are created and ultimately deliver to consumers, and we are excited that this research shows that we are on the forefront of an emerging technology whose predictive applications could not be even imagined a year ago. We are working now on creating a high volume testing solution for M-Panel Technology and expect to begin direct industry conversations with respect to our opportunity in 2017. The digitization of the insurance industries happening and we expect advance analytical technologies, such as M-Panel, to be foundational in the industry's transformation. So, for the first quarter of 2017, for the national movement of foot to develop care funding specialists in conjunction with our LifeCare Exchange product suite, the team we’ve assembled to execute on that vision and the progress we are making on the groundbreaking M-panel technology, we believe that focus on these areas will translate into GWG shareholder value. As a result, we continue to work every day on being the best versions of ourselves in order to deliver the results that we seek. I'm going to turn the call over to our Chief Financial Officer, Bill Acheson, who will provide additional remarks on our capital market activities and our financials. Bill?

[Bill Acheson:]

Thanks, Jon. Before I run through our key metrics, I will spend a little time talking about the market environment, both the macro and micro, in which we operate and the changes that we have seen over the past quarter. And then I'll run through our key business metrics, before handing it back over to our operator for a Q&A session. First the macro, yields in the market remain low, whether we’re talking about treasuries, CDs, corporate or high yield bonds, and debt remains high. For the first time in history, credit card, student loan and auto debt, are all above $1 trillion. Not to mention, the growing Federal Government debt. While underlying economic growth and job creation appear solid, there is a worrying deterioration in less than time auto and consumer credit delinquencies. Simultaneously, equity markets are at or near all time highs, as is the case for many residential and commercial property markets in the U.S. We believe this macro environment continues to support life insurance as an attractive alternative to investments in the traditional financial markets of stocks, bonds, currencies, commodities and real-estate and should the economy or any of these markets experience the downturn for any reason, the value preposition of life insurance as an investment only gets stronger. Now the micro, the life insurance secondary market, much of which is transacted through brokers who conduct auctions for life insurance policies, is becoming more competitive as investors are attracted to the unique combination of high-yield non-correlation and the fact that investment grade insurance companies back the benefit obligation. The ageing U.S. population and the need for seniors to pay for retirement and rising healthcare costs add additional reasons for the rising investor demand. While this is good for us, because we own a large portion of these assets, it poses a challenge to our growth plans as we currently rely on the broker market for majority of our life insurance purchases. This increased competitive dynamic in the market was the factor in the volume of our purchases in the first quarter, and we see this continuing in the second quarter. We have anticipated this market environment, however, and have built and are beginning to scale a direct acquisition channel, which John referred to as D-100, which taps the thousands of life insurance agents across the country who are looking for innovative ways to serve their clients and create value in their practices. Direct purchases offer the seller and the buyer better economics, enables us to purchases a greater number of policies with a given amount of capital, shortening the path to a portfolio that is actuarially stable. In other words, a portfolio of generating consistent cash flows. As Jon mentioned, we expect the portion of our direct purchases to grow significantly in the coming quarters. And now for our metrics, of which there are seven that we track. Financial advisory, we begin our metrics discussion by measuring our success in attracting and retaining a network of independent financial advisors. These financial advisors sell our investment products, raising the debt and equity capital that fills our business. At quarter end, there were over 5,300 financial advisors approved to sell our investment products, a record number for the firm and further evidence of the growing demand for our investment products. Number two, our investment product sales; we raise $56 million of capital from our investment products during the quarter; this is our second highest quarterly amount on record. A significant portion of this capital, roughly half, resulted from our preferred stock offerings. In fact, in the first quarter, we reached two milestones with regard to preferred stock; first, we sold out our publicly registered $100 million offering of 7% redeemable preferred stock; and second, we commenced the sale of our publicly registered series two $150 million 7% preferred stock offering. These offerings are important components of our strategy to strengthen our balance sheet and position the Company for further significant growth, and we are pleased that these products have been so well received in the marketplace. Number three, our portfolio growth; in the first quarter, we acquired $105 million in phase monopolicy benefits; and this was the fifth consecutive quarter of acquisition volume exceeding $100 million. At quarter end, our portfolio of life insurance totaled $1.45 billion in face value of life insurance benefits, covering 675 unique lives, representing a net year-over-year growth of $420 million or 41%. Number four, direct acquisition of life insurance policies; as Jon and I have both previously mentioned, we are working to create a large direct acquisition channel that we believe will create significant shareholder value when operating at scale. In the first quarter, 27% of our policy acquisitions came from our direct origination channel versus 13% in the first quarter of 2016. We expect further growth in our direct channel as we now have over [3,750] insurance agents approved to source products directly for us via our market leading point of agent program. Number five, portfolio cash flows; monitoring cash flows from our portfolio is important, because it is one of the key outcomes of our acquisition and portfolio management strategies. To this end, we recognized $19 million in policy benefits from 10 life insurance policies during the quarter and an additional $9 million in policy benefits from three policies through April 30, 2017. This four months total of $28 million results in an annualized run rate of $84 million compared to the $40.5 million realized for the full year of 2016. While we expect our cash flows maybe lumpy over the coming quarters, we are encouraged by this rising trend. Additionally, our portfolio continues to age with the face amount of the portfolio associated with insurers age 85 or greater had over $500 million or 35% of the portfolio as of the end of the first quarter. Number six, our GAAP results; although, we reported a net loss for the quarter, the conditions for future GAAP profitability are gradually appearing. These conditions are; one, the realized gains from policy maturities; and two, the beginning of a flattening in the growth rate of our expenses. In fact, as we met our goal for policy purchases for the quarter, we would have reported a breakeven quarter, give or take, on a GAAP basis. So for the first quarter ended March 31, 2017, we reported a GAAP loss attributable to common shareholders of $1.9 million or $0.32 per basic and fully diluted share outstanding on revenue of $20 million. These numbers compare to the first quarter of 2016, where we reported net income attributable to common shareholders of $1.1 million or $0.18 per basic and fully diluted share on revenue of $18 million. Total expenses for the first quarter were $20.1 million as compared to $16.2 million for the same period in 2016. As in prior quarters, increased expenses versus the prior year period were directly related to growth in headcount, infrastructure, financing and operating costs, as we continue to execute our growth strategy. The rate of increase in our total expenses is declining, however, as evidenced by sequential growth in total expenses of approximately 2% for the first quarter of 2017. While we see our total expense growth rate flattening, we remain prepared to invest the resources necessary to support our growth plans and the opportunity we see in the life insurance markets. Finally, our adjusted non-GAAP income; our GAAP realized gain or loss on a policy is driven primarily by the date of the maturity of the policy; while our non-GAAP measures attempt to measure the value accruing in the policy prior to the maturity event; in other words, while the policy is still in the portfolio. The non-GAAP measure acts to smooth out what can be lumpy GAAP results at the stage in the Company's growth. Our adjusted non-GAAP net income attributable to common shareholders for the first quarter was $10.8 million or $1.83 per basic share outstanding. In summary, we feel that 2017 is off to a great start. The demand for our investments products is growing. We have maintained solid portfolio growth, while continuing to diversify the sources of our policy purchases and our balance sheet and liquidity position have never been stronger. I will now turn it back over to our operator to moderate a Q&A session.

[Operator:]

Thank you [Operator Instructions]. Our first question comes from William Gibson with ROTH Capital Partners. You may begin.

[William Gibson:]

Once state that you've shared in the past that I think is pretty meaningful is the amount you paid peoples selling their policies versus the surrender value. Do you have the surrender value on the first quarter policies acquired?

[Jon Sabes:]

Yes, I believe I mentioned that in my remarks. It was $1.6 million with the surrender value as compared to $20 million in value return to consumers.

[William Gibson:]

And then the average interest rate paid on your debt?

[Bill Acheson:]

Just under 7.5% for the quarter, Bill, little bit of up from the Q4 of just a few basis points.

[William Gibson:]

And then just one last one, you talked about 27% of the policies direct and 22% of the face. But that's a little below what it was in the fourth quarter and third quarter last year, isn’t it?

[Bill Acheson:]

Yes, it is Bill. It's certainly up over the year ago period. And what we’re finding is that currently that level is leveled off around that 25% to 30%. And so what we see this year, lot of that has to do with the small changes, have a lot to do with the timing of when these close. But suffice to say that we need to move it up beyond that 25% to 30%. And as Jon mentioned, we’re shooting for 100%, and I think we’re going to be hopefully delivering well over half as we move through this year. But yes, a little down from the quarter, but really nothing meaningful to drop on that other than timing of pipeline or when things close.

[William Gibson:]

Thank you…

[Jon Sabes:]

I just would add is that we’re really working hard to increasing meaningfully, and that’s by this national campaign and the LifeCare Exchange aspect and our message and partnering with insurance distribution is designed to achieve that. And we’re expecting to deliver on those results in 2017, significantly.

[Operator:]

Thank you [Operator Instructions]. Our next question comes from Ray Arndt with Cabot Lodge Securities. You may begin.

[Ray Arndt:]

Jon, back at the beginning of the call, you made reference to the M-Panel Technology. It sure seems like this could be a potential game changer. I'm just wondering if there is anything else you can share regarding the third party research report that you referenced?

[Jon Sabes:]

Yes, we do believe it has the potential to be a game changer. The research really is not a, I'll call a third party, it is our report; although, it was heavily authored by and through the consultancies that we retain to work on the project on our behalf. We're going to publish the report or the majority of it and just right for public consumption. To give those who have the interest the opportunities look deeper into what this business represents. But yes, you'll see from the report itself that it really has the opportunity to be a game changer in that test appears to be on par with smoking, gender and other main decision making matrices that life insurance companies use to price and select risk. So we’re going to put that out there for people who are interested, and we’ll happy to schedule calls one-on-ones with those who want to deeper dive on more technical aspects of the business.

[Operator:]

Thank you. I'm showing no further questions. At this time, I’d like to turn the call back over to the CEO, Jon Sabes, for closing remarks.

[Jon Sabes:]

Great. Thanks everyone for tuning in for our first quarter results of 2017. Once again, we are as excited as ever to be on this mission of GWG relative to our opportunity and the strategies that we are employing to meet our growth objectives going forward. So thanks again. If you have further questions, detail or otherwise, please follow-up with us directly.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.