GWG Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Welcome to GWG Holdings Second Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 9 PM Eastern Standard time. At this time all participants have been placed on listen-only mode and the floor will be open for your questions following the presentation. Now first, I would like to turn the call over to Dan Callahan, Director Communication. Please go ahead, Mr. Callahan.

[Dan Callahan:]

Thank you, and good afternoon, everyone. Welcome to the GWG Holdings second 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 the 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 website. Please note that today's conference call is being recorded and will be available through next Thursday, August 17. Replay details are available by going to our website at gwgh.com and through the Investor Relations tab. And with that, I will turn it over to our – Jon Sabes, Chairman and CEO of GWG Holdings.

[Jon Sabes:]

Thanks, Dan, and thank you, everyone, for tuning in into our second quarter call of 2017. I'll start off the call today by just reminding everyone, what our goals at GWG are for 2017 and certainly beyond. And it starts with purchasing a large profitable portfolio of life insurance policies. And in doing so, we are creating the capability to source these life insurance policies directly at scale. To build this profitable portfolio of life insurance policies, we've been acquiring life insurance policies at yields expected around the mid-teens. And we've been financing these acquisitions through the sale of our investment products, namely redeemable preferred stock and now bonds, and institutional bank financing at rates below our portfolio's expected IRR. This creates excess spread and it's this excess spread that will ultimately lead to our long-term profitability. The key to acquiring life insurance policies at the mid-teens IRRs, we think, is our ability to source these policies directly. Notably in Q2, we experienced significant increase for the competition and the assets we acquire in our non-direct channels. This means that the IRRs were lower and the prices we needed to pay increased. We don't believe that any of our other industry players have either the strategy or the resources in place like GWG does, that can lead to an exponential growth of this marketplace. And in so by doing, we increase the market and the value for the shareholders of GWG. In addition to our core business growth strategy, we're forging an Insurtech Business for the larger primary life insurance industry. We believe that by applying cutting-edge technology known as epigenetics, we can dramatically enhance the predictability for life insurance companies and their traditional underwriting factors. These are neither small nor easily achievable goals, in fact I would frame them as big, hairy audacious goals or BHAGs. And when we succeed at them, we will create significant shareholder value. Through that end, I expect we will be able to clearly report results in Q4, that are indicative of the success we are achieving and the trajectory at which we are achieving these goals. First we turn to our core business and our market position. We've really – we find our market position in the insurance industry as one who provides for the long-term care needs of consumers, with innovative products that are disruptive to traditional notions of life insurance. In fact, we believe that the secondary market is the primary platform or a vehicle for new innovative products. Chris Orestis, who has joined us only four months ago, has been very active in combining his expertise and resources, with those of our long-term efforts. Over the summer and during Q2, Chris and the team traveled the United States, presenting in over 43 meetings and in front of hundreds of life insurance agents, talking about our rebranded effort called the LifeCare Exchange, and this talks about the exchange value of a life insurance policy and the opportunity to exchange that policy into products that better meet a consumer's needs. We did this in partnership with some of the largest life insurance and long-term care distribution entities and our message of opportunity and consumer innovation was well received. Engaging with insurance distribution at this level has never happened in the history of this company nor do I believe in the history of the industry. Take that in conjunction with the regulatory recognition this company received in the NAIC regulatory bulletin issued July 19, that specifically talked about the need for private-market options for financing long-term care services. In this report, it highlights the need for innovative products that meet a pressing need among consumers. When I stand back from the activities that I saw this quarter, I get the sense that we may be at a tipping point in terms of the creation of a much larger viable secondary market. And when you look at the reported annual volume of this industry, which in 2016 was reported at $2 billion in face value of life insurance. If we extrapolate that out in terms of, this is the business that early adopters and innovators have been doing, that we are at a position for exponential growth into a multibillion dollar opportunity, of which GWG sits at the forefront of making that opportunity happen. Again, at the end of Q4, I expect we will be able to report results that clearly indicate how we're doing this and the velocity, at which this market is expanding. Now let's talk a little bit about our M-Panel technology or our Insurtech division. We renamed this business Life Epigenetics. We recruited Tom Nodine as our EVP to lead this group. My brother, Steven, has slid over to the chief operating position of this company, he has a PhD in chemistry; and Brian Chen, a PhD is leading innovation in the testing itself. We are at the final stages of commercializing a test that includes Dr. Horvath's mortality predictor, as well as other predictive technologies that match traditional underwriting factors, that life insurance companies look to improve at. We have testing lab partners in place, our test is refined and ready to go to market, and as a result, we are about to be talking to the largest re-insurers and insurance companies in the word, about how this technology can improve their business. Again, by Q4, I expect to firmly communicate to you, how we intend to monetize this opportunity to create shareholder value for GWG. So at the end of Q2, our core business owns a profitable portfolio of life insurance policies, expected to produce yields in excess of its cost of capital, creating excess spread. And we are executing a strategy that puts us at the center of the life insurance industry with innovative new products for consumers. And our Insurtech business is at the exciting cutting-edge of technology of innovation for the global life insurance industry. And by Q4, we expect to report results, that clearly demonstrate our success on our strategies of expanding the market of our core business and defining an exponential business strategy that applies epigenetics to the global life insurance industry. With that, I am going to turn it over to Bill Acheson, to go through some more details of Q2. Bill?

[Bill Acheson:]

Thank you, John. Despite our GAAP results for the quarter, the levers of our long-term profitability are intact. Chief among them is our ability to raise capital and in that end, we raised $66.2 million of capital from our investment offerings, which is the second highest amount in the company's history. We are working with 5500 independent financial advisers across the country, which is also a record amount for the company. Our story and our products offering non-correlated yield in an ultra-low interest rate environment are resonating with these 5500 advisers, as well as their investors. A second long-term growth lever, as Jon mentioned, is our life insurance portfolio. The money we raise, goes directly to build and maintain a profitable life insurance portfolio. And as Jon mentioned, we target mid-teens, when we purchase and acquire these portfolios or these policies. To that end, we purchased $89 million of face amount of benefits, in the first – in the second quarter of 2017. For the six months ended June 30, that number is just under $200 million. Now the source of these policies matters, and as Jon mentioned, we are working diligently to grow our direct acquisition capabilities. To this end, 20% of our policies in the second quarter were purchased directly. For the six-months ended June 30, that number is 25% and we've been bouncing around between 20% and 35% of our policies purchased directly over the past several quarters as we figure out how to penetrate and operate in this market at scale, and as you've heard from Jon, we have aggressive goals in that regard. At the end of the quarter, the policy – the portfolio had $1.5 billion face amount benefits, covering 709 unique lives. The portfolio continues to age with over $550 million of that $1.5 billion amount of benefits, associated with insureds aged 85 or greater. Of that subset, $150 million of policy benefits, are associated with insureds greater than age 90. So we feel confident about the near-term ability of this portfolio to generate significant cash flows. And to that end, we recognized $11 million of cash flow from the portfolio from 9 policy maturities. Year-to-date through June 30, this puts us at $30 million realized from 19 maturities. For those of you who followed us and been on these calls, we do talk about something we call our trailing 12 months benefits to premium ratio, which simply measures on a trailing 12 months basis, the amount of cash that we've collected from the portfolio or realized versus the attended premiums that we had to pay during that 12 months. And in the last five quarters, including the quarter that we're discussing here, Q2 of '17, we've been at or above 100% coverage, which is an important metric to keep an eye on and also an important milestone for the company. Now getting into our financial results a little bit more, we reported a GAAP net loss attributable to common shareholders $7.7 million or $1.34 per basic and fully diluted share. This was on revenue of $11.6 million versus the prior period one year ago of just under $21 million. The two key items that make up this difference are

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of William Gibson with Roth Capital Partners. Your line is open.

[William Gibson:]

Yes. In terms of the decline in the number of settlements purchased, is that you just setting your price limit and then walking away once you get outbid?

[Jon Sabes:]

Yes, Bill, it's Jon. Yes, I would say that we've stayed pretty conservative in terms of the yield we haven't been chasing it and therefore we walked away from policies we could have otherwise acquired.

[William Gibson:]

And I'm actually surprised though, and you addressed it that only 20% of the origination – or the settlements came from your own sources. How many appointed agents do you have?

[Jon Sabes:]

Yes, it's still that 5,000 number but more importantly, Bill, there was – I would say, as we are refining our strategy, I will call it go-to-market strategy, we redeployed some of our key resources towards attending to our appointed agents and soliciting agents in general towards recruiting agents to the events that we held in 43 cities and that really changed some of our efforts right now as we refine. What I think is a much more broader defined go-to-market strategy that we've landed on over Q2.

[William Gibson:]

Okay. And what – could you explain the charge on the changes in mortality or was that it on the portfolio?

[Bill Acheson:]

Yes, Bill, it's Bill Acheson. Yes. We're required to update our life expectancy periodically relative to our senior credit facility and its normal operating course where we go, and essentially we underwrite a selection of our policies within the portfolio.

[William Gibson:]

Okay. Thank you.

[Jon Sabes:]

I think I’m good. It’s I can’t wait till the fourth quarter.

[William Gibson:]

Thank you.

[Bill Acheson:]

Likewise.

[Operator:]

Our next question comes from the line of Jeff North with Premier Legacy Wealth. Your line is open.

[Jeff North:]

Hi Jon, quick three questions here. Any update, I know you can't get into specifics, but how are we moving on a potential secondary offering for potentially more liquidity, more stock volume out there?

[Jon Sabes:]

Hi, Jeff. You're right, I can't say anything.

[Jeff North:]

Any of the steps that are being moved forward without specifics?

[Jon Sabes:]

Well, I'll tell you this. Bill and I, we've been actively talking to banks and bankers. I think what I'm suggesting is there is more interest and excitement than we felt in a long time relative to both our industry and I think how we're positioning ourselves to be a leader in the industry. That said, I think what I have also suggested is we've got some pretty important things going on between now and the end of the year that we really want to see play out, which in our minds anyways will really drive the trajectory of our financing and our capitalization going forward. So I think it's a little bit of wait and see but conditions are good. We expect to perform, and as a result, grow exponentially coming into 2018.

[Jeff North:]

Okay, I just want to thank you guys I’ve been part of the preferred – I am just kidding. And then the last question, I may have missed it, what were the maturities through June 30?

[Bill Acheson:]

Hi Jeff, its Bill Acheson

[Jeff North:]

Hi Bill.

[Bill Acheson:]

$30 million from 19 policies.

[Jeff North:]

Okay. Alright. Keep up the great work guys. Thank you.

[Jon Sabes:]

Thank you, Jeff.

[Operator:]

[Operator Instructions] Our next question comes from the line of Lawrence Greenfield with Arete Wealth. Your line is open.

[Lawrence Greenfield:]

Hi Jon and Bill, kind greetings from California. I'm just wondering if you have any concerns about IRR. If mortality rates change, people live a little longer maybe than we thought they might. And what would be the plan to address that? Would you pay a little less for future policies, expecting people might live ever longer, or some other technique to protect the company in case we are in an era of longevity?

[Jon Sabes:]

Hi, Larry, greetings from Minneapolis. We'll be missing you more later this year. First of all, I think, your point's well taken. Longevity, in general, is increasing, although recent reports have been, that longevity in the United States is actually decreasing. It's sort of – some of the first times, that they're seeing longevity actually step back, after years of increase. That said, certainly there is a lot of interesting things going on in medicine, precision medicine in particular. And there's the possibility for step change increases in longevity. We focus on the older age sector of the population and we do think about and our models – have the capability of pricing in longevity increases. So the guys who are much smarter than myself anyways, they are running models and they have the capability to the extent we think that's more problematic i.e. longevity increase are more problematic, then we're currently taking into account, to adjust our models on a go forward basis. Of course that doesn't help us with what is already in the portfolio today and some evidence of that you saw reflected in our results this quarter, whereby we reunderwrote some of the policies and that reunderwriting extended the life expectancy, and therefore, created a loss for us. So it's a real part of our business. I don't think that the massive change that people are thinking of is something that we think about too critically in the population that we frankly deal with, which are basically impaired lives. That said, we think about it and we think about the fact that our technology, some of the epigenetic technology as we begin to use that for our own predictive underwriting can help us, both avoid those who will live longer and – than expected, and buy policies that perform as expected.

[Lawrence Greenfield:]

Thank you. Very thoughtful. Thank you.

[Jon Sabes:]

Thank you.

[Operator:]

And our next question comes from the line of Burt Bartlett with Worden Capital. Your line is open.

[Burt Bartlett:]

Hi guys, question, how specifically are you going to address this issue of being out-bid on these policies? The competition is not going to go away and people who are selling policies are going to want the highest price for their policy. And I realize that you have to stay disciplined, as far as your IRRs so it all works, but where – because you have take-in $66 million and that has to go someplace and you're paying interest on that, and I'm wondering, what steps – why is this going to change?

[Jon Sabes:]

Hi, Burt, it's Jon. Yes I think that really goes towards, what has been a major directive of ours, over the last four or five years, which is the opportunity to source the policies directly. And really we think that we can acquire these policies at, up on that mid-teens IRR and yet because we don't have the series of intermediaries involved. The consumer really will still get the, about the same economic benefit had they gone through other markets, non-direct and because of the friction cost involved in transacting. So, net-net, we think the consumer is going to do as well dealing with us direct, and to that point too, we're really focused on a strategy and the execution of that strategy to expand this market well beyond the $2 billion in annual face value of life insurance that was estimated to transact in 2016. I think Conning, who reports on this subject, says it's a $185 billion annual market opportunity in terms of face value. I'll just say I think that's aggressive, but I think we can easily be in the $10 billion per year face value of life insurance policies transacting. And we expect to have a big piece of that, starting in really 2018 and beyond, and we think we can maintain that IRR hurdle rate for years to come, despite the fact that some of the other money competing for the same asset class will have to pay more. And that, in turn, will give our portfolio and our company a much higher valuation all around.

[Operator:]

I'm not showing any further questions. I will now turn the call back over to Mr. Sabes, for closing remarks.

[Jon Sabes:]

Great. The quarter call is always a great opportunity to update everyone, on where the company's at. Both its challenges and opportunities. In sum, we feel exceptionally positive about where the company's at. The strategies that we have in place and always more importantly or most importantly the people involved in executing. It's going to take us, as I've mentioned, a couple more quarters I think, to really provide those who are interested in the company, clear guidance on the velocity of some of our strategies that we're deploying right now because we've really landed on some of those over the last quarter. But needless to say, we think that these are the right ones and they are very exciting and they are big deal goals and if we are even moderately successful, it will be a home-run for GWG and its shareholders. So thanks for your continued interest and support. We will be working hard here in Minneapolis. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.