GWG Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Welcome to the GWG Holdings’ Third Quarter 2016 Earnings Conference Call. Today’s call is being recorded and will be available for replay beginning at 9

[Shileen Weber:]

Thank you, Shannon and good afternoon everyone. Welcome to the GWG Holdings’ third quarter earnings call. On the call with me today are Jon Sabes, CEO and Bill Acheson, CFO. Following their remarks, we will be happy to take your questions. Some statements made on the call today along with any projected financial results include forward-looking statements 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 the understanding of our performance. Reconciliation of the non-GAAP numbers to the 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 Tuesday, November 15th. Replay details are available by going to our website at gwgh.com and selecting the Investor Relations tab. And with that I will turn it over to Mr. Jon Sabes, CEO of GWG Holdings.

[Jon R. Sabes:]

Thank you. Thank you Shileen and thank you everyone for joining our third quarter earnings call. Last quarter we reported during the summer Olympics and this quarter it is the election. We are not going into politics but it does appear to be a historical election in many ways and I can only hope that our leadership continues to make America even greater. So when I always prepare these quarterly updates I feel compelled to remind investors that we are in a long-term business, both in terms of realizing value from our assets and the growth from participating in what we believe is a very large, untapped market opportunity. To that end I want to be sure investors are aware of the facts that I recently articulated in public what I refer to as our secret masterplan. Our secret masterplan can be found on the technology page of our new corporate website at www.gwgh.com. By publishing our secret masterplan it is not so secret now, but it was -- but what it does is articulate an exciting vision of where our business has the potential to go by disrupting the status quo of the life insurance industry. Disrupting the status quo is what we have been doing for the past decade at GWG as the secondary market exists only because life insurance carriers offer inadequate surrender values to consumers who purchase their products. And with the recent announcement of acquiring rights to technology invented by Dr. Steve Horvath, we think that we not only found a significantly improved way to improve our current business, but we might have also found a way to reinvent how the life insurance industry operates in the future. So before I get too carried away about the exciting future at GWG, let's discuss a few notable achievements for the quarter. First, we closed a $172 million 10 year credit facility with Beal Bank. That increases a total senior lending capacity to $272 million between the credit facilities with the Beal Bank and DZ Bank. This additional new credit facility should send a strong market signal to the marketplace that GWG has the financial tools and the banking relationships to continue to be at the forefront of the emerging life insurance secondary market. Our senior lending capacity dramatically enhances our key strategic goal of continuing to service and grow our portfolio of life insurance. And the new long term credit facility finally allows us to get to work on improving the asset liability profile of our balance sheet. To that end we announced both the elimination of the sale and renewal of our short-term debt. Again we are very positive about these changes and expect that over the course of the next year we will dramatically improve our overall asset liability duration matched funding. Second, this quarter marks the continuation of growth of our broker dealer financial advisor and life insurance agent network. We are finally seeing the results from the leadership provided by Mariah Hudkins [ph] who has led our key accounts and business development efforts for the last six months. To that end, all of our alternative investments products are now eligible for purchase through the DTC system. In addition, we are finally on the verge of having all of our alternative investment products available to be held by the major custodial securities firm. This may sound like the mundane but let me assure you solving these distribution challenges cannot be underestimated in terms of their importance of knocking down the barriers and creating the conditions for our future growth. Thus despite dealer headwinds negatively impacting the sale and distribution of alternative investment products at large, we believe we will continue to see growth and momentum in the sale of our investment products as investors look for non-correlated, yield bearing growth opportunities. In Q3, we saw our greatest capital raise to date with over $83 million raised. This strong capital raise when taken into account with our senior credit facility puts us on the strongest financial footings we’ve been on since before the credit crises of 2008. Third, this quarter we saw a continued portfolio growth with a significant portion of this growth coming from our direct origination channels. We continue to refine our operational processes and procedures for recruiting life insurance agents to engage in the secondary market. Our integrated call center team is reaching record numbers of main street life insurance producers with a message of opportunity. Our message of opportunity is both a valuable resource to grow their practice as well as a valuable option for their clients who no longer want, need, or can afford their life insurance. We continue to find our message of opportunity resonates with well experienced producers which tells us that not only that the secondary market continue to mature but that the market itself is large and untapped. On our direct originations front we believe we are building a one of a kind process to purchase life insurance policies through main street producers. Who we find our mostly spending less small face life insurance policies. We define small face policies as those with insurance benefit of $1 million or less. We believe the opportunity to purchase small face policies is meaningful since the majority of life insurance sold in America is small face. In addition we believe owning small face life insurance policies helps us with our diversification which is critical through our strategic objective of realizing normalized actual performance from our portfolio. What’s interesting about this is that historically small face life insurance policies have not been readily available for purchasers. This is because life insurance purchasers have significantly relied on brokers to present opportunities and brokers have focused on larger face policies because of the higher payout commissions. As a result in an almost oxymoronic way despite the clear benefits associated with purchasing small face policies the industry has failed to develop origination practices for underwriting and purchasing small face policies. This has led us to focus on changes needed to the traditional approaches of underwriting and purchasing life insurance. For example obtaining complete medical records and two professional life expectancy reports with each policy we purchase is neither needed nor justifiable when purchasing small face life insurance. So to realize what we believe is the secondary market's true potential as well as of course our direct origination efforts that are leading through increasing policy diversification. We have built and continued to refine what we believe is a state of the art system that is in an efficient, cost effective, and reliable means to underwrite and purchase small faced life insurance. This effort has also led us to our announcement that we are exclusively licensing DNA based predictive mortality technology from the University of California, Los Angeles. We believe that this predictive technology discovered by Dr. Steve Horvath will greatly enhance our current business by improving the accuracy of our underwriting. And as we announced in our secret masterplan, we are working to explore how this technology may impact and have commercial value to the larger life insurance industry. So let me summarize the successes I believe GWG achieved this quarter, all of which are foundational to the continued growth and opportunities ahead. We continue to acquire life insurance assets that we expect will yield high returns than our financing cost and this is represented in our non-GAAP financial measures. We are in the strongest financial positions we have ever been. We are executing on the key areas necessary to achieve our short, medium, and long-term goal and we have articulated a much more compelling vision for the future of GWG that equity investors are truly excited about. I know that I am. I will now turn the call over to our Chief Financial Officer, Bill Acheson. Bill?

[William Acheson:]

Thanks Jon. The third quarter was as Jon mentioned, one in which we continue to execute against virtually all of our key operating metrics. As we have said many times on these calls we believe that the continued execution against these metrics will in the long-term leave a consistent GAAP net income. We have also said, that performance in the quarter is not defined by GAAP net income alone. This is particularly true when taking a long-term view of our business and the value that we are trying to create. The third quarter 2016 was just such a quarter where key performance metrics were met or exceeded, the GAAP net income was not the result. Nonetheless we are pleased both with the internal and external elements of our business. Internal referring to the operating results against our key metrics and external as it relates to the continued growth and acceptance of the secondary markets of life insurance as a viable and valuable market for seniors only life insurance looking to realize the hidden value of the life insurance policies. Since the credit crisis in 2008, capital fall was an institutional interest in this market has never been greater in our opinion. Now before I walk through the performance versus our key operating metrics which I do on every call, I want to reiterate very simply what GWG does. Number one, we raised debt and equity capital to purchase, service, and finance life insurance policies. The purchase price of these policies flows to seniors of America providing a spectacular value. Consider this, since we began building our current portfolio of insurance we have paid seniors more than $379 million for their life insurance policies which is $350 million more than the combined cash surrender value in their policies at the time of purchase. That trend is repeating, GWG has paid seniors of America $354 million more than the cash flow and the value in the policies at the time of purchase. The cash surrender value equates to the value offered to these same seniors by the life insurance companies. Now once the policy is owned by GWG, we seek to earn a spread on the policy which is equal to the difference between the policy benefit we collect and our accumulated cost base which is the original purchase price paid plus premiums and financing cost incurred during the insurance life. Finally we seek to acquire a large number of these life insurance policies so that we can achieve the realization of this spread in the form of consistent cash flows and earnings. So, all of the following metrics that I will take you through have something to do with one or more of these simple business objectives, so let’s get started number one financial advisors. The more advisors approve to sell our investment products the more we will sell. We have increased the number of advisors approved to seller investment products to approximately 4300 at quarter end and as Jon mentioned this number continues to grow. Number two investment product sales. Our success in expanding our network of financial advisors has indeed resulted in more investment product sales. During the third quarter we raised a total of 83 million in capital from the sale of our investment products. This amount is nearly double the combined amount sold in the second quarter of 2016 and is the second consecutive quarterly records of the company. Metric number three is portfolio growth. The increased sales of investment products that we have experienced has also resulted in life insurance portfolio growth. During the third quarter we purchased 122 million of policy benefits, our third consecutive quarter of growth in excess of $100 million. Our portfolios stood at 1.3 billion in face amount of benefits at the end of the quarter consisting of 625 policies covering 562 unique lives. Importantly our portfolio has grown by nearly $400 million or 45% from the end of the third quarter of 2015 net of maturities. Metric number 4 is our direct purchases of life insurance policies. We strive to acquire our policies through financial advisors who also sell our investment products and insurance agents as Jon mentioned in his remarks. By so doing we put more money into the pockets of the seller and have a greater control over the transaction. And we are able to reward our financial advisors and life insurance agents for their role in the transaction giving them another source of income for their practices. At quarter end we had over 2900 financial advisors and life insurance agents that have signed up to bring life insurance policies directly to GWG for a purchase. This is a proprietary origination program for GWG and one that we expect will continue to grow quickly. Number 5 is portfolio of cash flow and as our portfolio grows its ability to produce consistent cash flows and earnings improves thus cash flows from the received policy benefits is a metric we track closely. During our third quarter of 2016 we recognized $5.3 million in policy benefits from 4 life insurance policies as compared to 0.4 million in benefits from one policy in the same period one year ago. We are encouraged by the performance of our portfolio this year as we have recognized policy benefits in 10 consecutive months through October 2016. Which is a record for the company and we believe further evidence that our portfolio is maturing. Number 6 is our GAAP results for the third quarter ended September 30, 2016. Total revenue was $13.9 million up over 68% from the same period one year ago. Our net loss attributable to common shareholders of $2.6 million or $0.50 for basic and fully diluted share. This compares to a net loss attributable to common shareholders of 3.6 million or $0.61 per basic and fully diluted share for the same period one year ago. The better performance in the third quarter of this year versus the year ago period was driven by higher realized gains from the recognition of policy benefits and higher unrealized gains from new policy purchases during the quarter. These amounts were largely offset by higher operating cost due to the record results and activity in our financial products and life insurance policy acquisition channels. Although our operating cost have been growing in absolute terms they are lower as a percentage of capital raised and life insurance purchased both face amount and the number of contracts as compared to a year earlier. We are now beginning to operate on a scale efficient to rationalize expenses associated with our business model. Year-to-date through September 30, 2016 we have produced over 1 million of income attributable to common shareholders and we remain optimistic that GAAP profitability for the full year of 2016 is within reach. Finally our last metric is adjusted non-GAAP income. We calculate net income on an adjusted non-GAAP basis and we do this because we feel this measure better highlights the economic value occurring within the portfolio prior to the receipt of policy benefits. Once the life insurance policy has been recorded on our books that acquisition it generally produces GAAP losses until the maturity date. This is premium and interest payments are expense in the current period and that some of these expenses tend to outweigh the increase in value of the policy from the passage of time. The increase in value from the passage of time is called the actuarial accrual in our parts. The adjusted non-GAAP net income treats the interest and premium payments as additional investments in the policy increasing our investment bases overtime. We use the expected deal on the policy against this investment basis to stimulate the actuarial accrual. We then net this accrual against our adjusted cost for the period to calculate our adjusted non-GAAP income. Our adjusted non-GAAP income for the third quarter of 2016 was $7.6 million or $1.28 per basic share outstanding. So let’s recap, we raised capital which we have done in record amounts, to put to work purchasing and servicing license policies which we have also done in record time. We priced policies to earn the spread and we assemble large numbers of policies to diversify our portfolio and realize this credit consistently. Last but definitely not least we put money into the hands of seniors of America owning life insurance, a great deal more than that offered by the life insurance companies. We continue to stay focused on executing against our key performance metrics and we are encouraged by the results we’ve achieved not just in the third quarter but in 2016 as a whole. We continue to believe proudly in the growth opportunity that is a secondary market to life insurance and we are happy with our leading position in this market. I will now turn the call back over to Shannon who will moderate a question-and-answer session. Shannon?

[Operator:]

[Operator Instructions]. Our first question is from William Gibson with Roth Capital Partners. You may begin.

[William Gibson:]

Hi Bill, I was a little surprised that interest I understand you sold a lot of Dell bonds in the quarter but I was a little surprised to see interest expense went up as much as it did. Do you expect that to trend lower with the elimination of the short term debt or was that about what you expected?

[William Acheson:]

Thanks Bill for the question, it was about what we expected. The elimination of the short-term debt which is a really key objective for our balance sheet as Jon described actually in the short-term will increase the interest expense a little bit and we think that’s a valuable trade off in terms of the long-term stability of that having a duration match portfolio, having the debt matched the asset that will provide us. So, yes it has increased a little bit, we expected to grow up a little bit more but it was within the realm of what we expected here.

[William Gibson:]

Thank you and then on to the new bio markup, which sort of the sense of timing of actually getting that out in the field and being able to use?

[Jon R. Sabes:]

Hi Bill, it is Jon here. We’re expecting by Q1 to certainly be using this on a perspective go forward basis at some level and incorporating results in our underwriting process and making decisions using it to help us make our purchasing decision.

[William Gibson:]

Good and then there is also just one last observation, at least it sounds like you are picking up steam attracting life insurance agents to your origination program is that indeed accelerating?

[Jon R. Sabes:]

Yes, I would describe it as accelerating I think we been working on quite diligently on the messaging and some of the operational processes for our call center, the consistency of that outreach so overall we’re holding our message, we’re increasing the velocity of the outbound calling and the quality of the calls that we’re having with insurance agents and we’re finding a lot more traction there than we have in months pass.

[William Gibson:]

Thanks Jon.

[Operator:]

Thank you, our next question comes from Ian Corydon with B. Riley and Company. You may begin.

[Unidentified Analyst:]

Hi this is actually Mark Doeker [ph] on for Ian. Do appreciate the time, with regard to recently acquired DNA technology, how soon do you anticipate incorporating it into the underwriting process and how much might have lower acquisition cost of the policy?

[William Acheson:]

Yes, good afternoon. So I just thought responding to Bill Gibson with the expectation that by first quarter we should be having some version of this biomarker technology occurring and being able to look at the information provided by it and incorporating it into our buy decisions. Overall we think over the long-term it may have significant implications in terms of lowering the cost of underwriting and acquiring the life insurance but that’s going to take some work and we need to get to scale. Initially it will be a little more expensive than traditional underwriting so incurring a little bit more expense but again we’re building these tools of the systems here at GWG for scale for a much larger market that we are growing into.

[Unidentified Analyst:]

Okay, would you say multiple years or would you say under a year or is that not something you can share?

[William Acheson:]

Is the question when will the cost come lower?

[Unidentified Analyst:]

Yes.

[Jon R. Sabes:]

I think it’s too early to answer that question at this point.

[Unidentified Analyst:]

Okay, I understand you acquired 30 policies from your direct origination channel this quarter, what might volume capacity be for direct origination in 2017 and secondly where does your volume go in that year?

[Jon R. Sabes:]

Yes we are formulating our strategic plan that we’ll be presenting to the Board here coming up in the year-end where we’ll get some specific numbers but we think that is an ever increasing overall percentage of what we acquire and growing both in terms of a percentage of total and in absolute terms as well so it’s a big effort on our part we’re seeing the results we’re refining our processes and the protocols to be even more successful at it as we do we’ll scale into it we’re clearly not operating it at scale we’re just still operating at as we refine it.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Jeff Noard Premier Legacy Wealth management. You may begin.

[Jeffrey Noard:]

Hi Jon, how are you guys doing. My primary questions still revolves around the common stock. We’re trading in that 8, I think went over 9 there actually didn’t it. Over 9 today, what is the plan to get more stock out in the market getting into that -- I don’t want to get into secret master plan there Jon but potentially creating a secondary offering at some point, what’s the kind of outlook on that?

[Jon R. Sabes:]

Hi Jeff, we’ve been actively working in the capital markets arena. We fully expect at some point in the future that we will continue to capitalize our balance sheet across the spectrum. We’ve achieved it and now in terms of our senior debt facility it’s really increasing that. Where we’ve now really dealing with the duration mismatch if you will on some of the short-term debts so that’s working its way through the system over the next 12 months. And kind of with those initiatives behind us and really the articulation I think and the execution of our business plan on the metrics that we discussed and presented and we clearly see in Q3 we believe that will be a much better position to have. So, all sort of meaningful conversations with investment banks interested in supporting the continued growth and development of our business and our balance sheet from a common equity perspective. So nothing concrete on the table but we believe we have taken the steps necessary to create the conditions by which we can have that opportunity to further capitalize the balance sheet.

[Jeffrey Noard:]

And then just a follow up, what would you say the current percentage of institutional ownership is and what do we think the book value is right now, I missed that I think?

[William Acheson:]

Yes, hey it is Bill Acheson. Virtually no institutional ownership in the firm at all and the book value of the firm is basically as we’re going to grow from what they described kind of in the non-GAAP metrics piece of it. The common -- the book value of the company is about 40 million and the common book value is still negative as we grow the company and look for earnings from the portfolio to create that equity in addition to what Jon described.

[Jeffrey Noard:]

Okay, alright, thanks guys.

[Operator:]

Thank you. Our next question comes from Leonard Kent [ph] with National Securities Corporation. You may begin.

[Unidentified Analyst:]

Hi, I have two questions I’ve been listening very carefully to it and I guess some of my questions have been answered already but the two I really have is one we have bond guys and the stock guy is that essentially disappointment in the rate cycle, rates are going to be going up it seems and you have been cutting the rates on the Z bonds. So if you are looking to bring in more money to buy more policies it seems likes it’s going in the wrong direction for you?

[William Acheson:]

Yes thanks for the question. So if we re-price the L bonds as we call it, that is our billion dollar offering. And really the main reason that we did that is because as the portfolio in the company grows and the cash flows begin to stabilize from the portfolio which we’re seeing evidence of, we believe that the risk to the investor is going to be going down overtime. And so as we looked at our rate structure this summer we really decided that that was the time to make the move in conjunction with the termination of the short-term debt offering that we did and Jon mentioned in the summary. So it was really more of a function of the risk reward that we see in the portfolio and then we still think they are very attractive yields for the risk in the deal. That’s answer to your number one.

[Unidentified Analyst:]

And number two on the licensing of this DNA mortality -- goes into a technology, do you anticipate a lengthening of the maturity of some of these things policies you have or shortening of it, I am sure you have some idea which way it’s going?

[Jon R. Sabes:]

Well, this is Jon Sabes speaking, we really will look to use this technology prospectively. We really have no ability to go back and back test our current portfolio using it so it’s really a tool that we’ll use prospectively going forward as we underwrite and look to make future purchasing decisions. But we think it’s pretty compelling based upon the results and we think it will improve the accuracy, the overall accuracy of the life insurance assets we do buy. So we think it will have a pretty profound effect going forward and again the portfolio we own today we hope and expect it will be a fraction of what we ultimately own as this company continues to grow and build.

[Unidentified Analyst:]

So you still the maturities of these things on to 7 years I think?

[Jon R. Sabes:]

So, yes, I mean the portfolio itself has a bell curve if you will on terms of an actuarial mortality profile. So what you get is as the policies age we’re seeing early maturity events and we’re receiving policy benefits as we continue to own this portfolio.

[Unidentified Analyst:]

Understood, just again I am asking actually was 6.8 years that you projected maturities well in some of these things I am curious as to whether you anticipate being a little higher, a little bit lower?

[Jon R. Sabes:]

I don’t know that we expected it to be higher or lower at this time. We’re confident and feel good about where we got that pegged. It will in the future really be driven by which policy we buy going forward if we buying the majority of life insurance policies whose life expectancy is with people are longer than that will trend longer versus if we buy life insurance policies with insurance with life expectancy shorter than that would trend that shorter. So that’s what’s going to drive that number more than anything.

[Operator:]

Thank you. Our next question is from Timothy Sharer [ph] with Gulliver [ph] you may begin. Timothy your line is open please check your mute button. I am showing no further questions at this time. I’d like to turn the call back over to Jon Sabes for closing remarks.

[Jon R. Sabes:]

Great. Thank you, thanks everyone for tuning in and your continued support and interest in GWG. I hope you cast your vote today and I look forward to watching the great experiment in self government called the United States transition power this evening. So good luck for that candidate to whom you are rooting for. Have a great day. Thanks again.

[Operator:]

Ladies and gentlemen this concludes today’s conference. Thanks for your participation, have a wonderful day.