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Edited Transcript of GWGH earnings conference call or presentation 11-Sep-19 8:30pm GMT

Q2 2019 GWG Holdings Inc Earnings Call

MINNEAPOLIS Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of GWG Holdings Inc earnings conference call or presentation Wednesday, September 11, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Callahan

GWG Holdings, Inc. - Director of Communication

* Murray T. Holland

GWG Holdings, Inc. - President & CEO

* Timothy L. Evans

GWG Holdings, Inc. - CFO

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Presentation

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [1]

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Hello, everyone. Thank you and good afternoon. My name is Dan Callahan, Director of Communication at GWG Holdings. Welcome to our second quarter 2019 earnings webcast.

On the webcast with me today are Murray Holland, our President and Chief Executive Officer; and Tim Holland (sic) [Tim Evans], our Chief Financial Officer.

Following our remarks, we'll be happy to take some questions. You can submit them online through the webcast dashboard, looking for the question text box, type your 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 made 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.

Please note that everyone, but the participants, are in listen-only mode. Again, questions can be submitted through dashboard text box, they 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.

So with that, I will turn it over to our President and Chief Executive officer, Murray Holland. Murray?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [2]

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Dan, thank you very much, and everybody, welcome to our second quarter webinar. And today, as everybody is probably aware, is the 18th anniversary of the 9/11. And I would like to take a few moments to reflect upon the lives that were lost that day and in remembrance of those lives and also and thanks for the first responders at that tragedy.

Okay. Today, we have an agenda for everybody that includes an overview of GWG's business and the investment in Beneficient, second quarter corporate events updates, financial metrics and results and a path forward. We've previously released obviously the 10-Q on -- and earnings press release on the second quarter. And so rather than rehashing the details of all those, we want to spend today talking about some of the higher-level substance in those.

Slide, please. GWG's business is providing liquidity for alternative assets. For consumers, we provide liquidity for life insurance assets and now through Beneficient for other illiquid alternative assets. For investors, we offer an income-producing alternative investment with defined liquidity. And for our shareholders, we are adding diversified assets to our balance sheet to reduce our debt-to-equity ratio.

Slide, please. The current portfolio of assets that are owned by GWG include a little over 50% of the asset base as life insurance assets, 42% as investments in Beneficient and almost 6% in cash and other assets. We have a total asset base of $1.5 billion and stockholders' equity of $233 million.

Slide. The liquidity that GWG provides is primarily for the life changes -- life events that happen to people. These events include death, disability, distress, estate planning techniques and capital for use in investment and business opportunities.

Slide, please. So as everybody knows, our -- we have partnered with Beneficient for a number of reasons, and the primary reason is the diversification of asset investments into alternative assets. And so in particular, what are these assets that BEN is targeting?

The alternative asset classes BEN are targeting include private equity and the major participants their LBO funds, venture capital funds, fund of funds and secondary funds, credit funds such as mezzanine structured credit special situations, real estate funds, real estate natural resource and infrastructure funds and other alternatives, including several hedge funds.

Now all these funds that BEN is focusing on are managed by professional managers. And the strategy of BEN's acquisitions is to diversify into an endowment model to completely diversify into industry, asset classes, vintage funds, geography and by manager. There are roughly 4,500 managers worldwide of professionally managed assets that are in our BEN's focus.

Next slide. So the corporate events that happened during the second quarter of 2019 include: we closed the BEN transaction that was well described back on April 26. We completed the first quarter under a new auditor. We had -- the GWG's previous auditor had been Baker Tilly, and they audited through year-end and first quarter. And when we implemented a change to Whitley Penn, and the reason we did that change is because Whitley Penn had previously audited BEN and understood how the 2 companies worked together and understood all the accounting issues of both companies. And we determined that it was more efficient for us to use both concurred to use that Whitley Penn. We got L Bonds restarted after a little over of 3 months and a week or so of no sales.

We hired Jenniffer Daigle. Jennifer has an extensive background in alternative asset sales and distribution. She is going to be the Senior Vice President of our Business Development group. We have been included -- as of July 1, we're included in the Russell 2000. And we named Tim Evans as CFO.

And Tim is going to be the next speaker. So Tim, I will hand it off to you.

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Timothy L. Evans, GWG Holdings, Inc. - CFO [3]

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Thanks, Murray, and thanks, everyone, who is joining us on the call today. I look forward to sharing with you our Q2 financial results here.

Before I get into that, just wanted to give you a little bit of background about myself. I joined GWG in May of this year as the Chief Integration Officer. I joined GWG from BEN, where I previously served as the Chief of Staff as well as the Vice President, Deputy General Counsel of BEN and where I contributed significantly to BEN's legal and financial structure and also spent significant time working on BEN's audit and setting up BEN's accounting program, practices and other parts of the accounting group there.

Based on that experience, I was asked joined GWG to serve in the transition to help bring the companies closer together. And I'm looking forward to that opportunity to continue serving as Chief Financial Officer with the background with BEN that I have. Including that background, I have also served previously at the United States Securities and Exchange Commission for 6 years, where I served as a trial attorney and also as counsel to the Director of Enforcement for the national enforcement program.

Prior to joining the SEC, I have worked in private legal practice at Thompson & Knight in Dallas, Texas where our practice largely focused on SEC related matters and accounting and other financial matters. Prior to going law school, I worked as an accountant. And so most of my career has been focused on accounting and the legal field.

Moving to the Q2 financials. I think we'll see that the -- we'll start with the 2019 Q2 financial metrics review, and then we'll move to a discussion of the balance sheet, followed by discussion of the investment sales and then the [life summit] portfolio that we have here at GWG.

So let's start with the 2019 second quarter metrics. Based on the nature of our portfolio at GWG, we look at our financials sequentially. So we look here Q2 versus Q1 2019. A couple of things to point out here is the variance in our revenue for Q2 over Q1, down about $1.2 million from the prior quarter. That's largely driven, as you can see in the bottom left, by lower purchase gains. We bought fewer and less frequent policies over the period. So that contributes to about $2.8 million of that variance. But cutting back against that significantly are the higher returns that we were able to realize on the policies that were purchased during the second quarter, significant gains there of $1.2 million as opposed to over the prior quarter. Then we also had about $400,000 of additional income in Q2 that was not present in Q1.

On the expense side, we see significantly higher expenses in Q2 over Q1. A lot of those are in the transaction-related cost we see, $4.8 million, which are largely constituted by legal insurance and other expenses. Also, we see $1.6 million increased expense in personnel along with the transaction-related expenses. A number of those expenses we do not see as recurring or the -- as continuing going-forward expenses that we would see in future quarters. We also had additional interest expense of $1.5 million in the second quarter.

We'll turn now to taking a look at BEN's balance sheet. On BEN's balance sheet, you can see here in the bottom left-hand, the graph, in Q3 of 2018, we see a significant increase in the size of BEN's balance sheet, and that's attributable to the BEN transaction that was closed in Q3 of 2018. As you -- and this matches up to the chart that we were looking at when Murray was speaking on the overall assets of BEN.

As to the liquidity, you will note that there was a considerable drop in Q2 of 2019 on the liquidity, driven by 3 primary factors. Number one, the biggest one is that the L Bond offering was paused for a little over 3 months. During that time, we were not offering L Bonds, and so our liquidity certainly was affected by that pause. Second, we took a reduction in our senior line. We paid down our senior creditor by about $17 million in the quarter. And then the third item is that we made some additional investments that redirected some capital towards BEN. So that accounts for our liquidity difference there.

On the next slide, we'll see our investment sales. We continue to see strong and steady capital raise through our L Bond program. We attribute this primarily to the attractive yields that these ones offer and the fact that they're largely noncorrelated assets to the rest of the market. Again, we'll see that in Q2 of 2019, the quarter investment sales are far below what we've seen in prior quarters. But again, we were only selling L Bonds for 1 month of that quarter. So on a typical quarter, I think we would expect to see something more in line with what we had seen before.

One thing to note here is that in the current environment of falling interest rates, our L Bond yields are still sitting at 5.5% to 8.5% yields, and there are no current discussions on changing those at this time.

In addition -- we can go back just one more time to that slide please. On the right-hand side, I just want to point out the maturity profile. Again, even though we were only active 1 month in the quarter, you can see that even that 1 month of sales was pretty representative of past quarter sales and our current balance. So effectively, we're seeing that our L Bond sales are fairly consistent among the mix of sales by term. We're staying pretty consistent in that mix. Some work that we could do there to work on that mix, but overall, we're staying consistent on how that's been handled through the past few quarters.

Further on our investment sales, 2 things we focus on a lot here are our renewal rates and just keeping an eye on our maturities. I think it's the last time I'll say this, but again for Q2 2019, we see that there is a big dip in the chart here on the bottom left on the renewals. Obviously, if we're not offering the L Bonds, we were not able to renew the L Bonds during those months that we were dark. So we will see something closer to the 20% renewal rate for Q2.

If you look back, though, from our prior quarters, you'll see we were staying strong in 50% to 60% renewal rate. And we expect to be back in that range as we've come back into the market in early August and seeing the successful relaunch of those renewals.

And then on the maturities here, you can see that we're taking a look at what our maturities are going to be over the next few years. This is certainly something we keep our eye on as we are taking into account the future performance of the company. And we see that we have, through 2024, maturities marked out and then anything past that grouped together.

Let's turn now to the portfolio. As Murray said, the current portfolio accounts for about half -- just over half of our balance sheet we carried on our books at about $800 million -- I think $799 million. And that's backed by a face amount of $2.1 billion of maturity -- or policies. Of those policies, we have about $300 million of those policy benefits are backed by insureds who are aged 90 or over. And I think that's indicative of the seasoning of the portfolio that we're going to see. And what's further evidence there is, on the right-hand chart, we see that we have more consistent benefits that are coming out of the portfolio.

So this chart is showing, in the dark blue, we can see the benefits that are turned off for each 12 month -- trailing 12-month period for each quarter. And in the light blue, we can see the premiums that are required to support the policies. And as you can see, since Q4 2016, we have had a strong ratio of benefits versus premiums. So the -- and it's been growing. And again, that just says more to the seasoning of the portfolio and the strong value that's being created there. And further reflected by the fact that for Q1 2019, our cash flows for that period as well as for year-to-date 2019 are both record numbers, stronger than we've seen in any prior year. And also happy to report that for the year-to-date 2019, we've exceeded our full year maturities for all of 2018. So every dollar we bring in now just puts us further ahead of next -- of last year rather.

We'll go to the next slide here. And so we'll see through here that we're going to bring up another chart that shows just more on the age of the policy. We saw in the last slide that the 90-plus insurers is right around $300 million. We can also see here that the 85 to 89 is running right at $600 million. So you have about $900 million of the portfolio rather that's in 85 or older. So 42.7% of our benefits are backed by insureds that are at or older than 85 years of age. So again, strong portfolio and we see on the right that strong portfolio supported by strong creditors. Over about half or right about half of our portfolio is supported by creditors whose S&P rating is A+ or higher. So strong portfolio with strong creditors.

That is my review of the Q2 financials. So at this time, I'll turn it back to Murray to discuss our path forward.

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [4]

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Tim, thank you very much. The path forward includes continued alignment with GWG and BEN, and that will include a number of integration items that we're currently working on. Growth in alternative asset exposure, so we -- our plan and strategy is to diversify the portfolio further in continued diversification and a number of balance sheet initiatives that are planned to reduce the debt-to-equity ratio in GWG today. And with that, I will turn it over to Dan Callahan for some questions. Dan?

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Questions and Answers

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [1]

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Thank you, Murray. We've been getting questions, and we just have a few that we're going to get to. Again, if we don't get to your question, we will be responding by e-mail or a phone call. So feel free to send us your questions, and we will get back to you. One, it's a continuing question is, if GWG is going to continue to purchase insurance policies.

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [2]

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The answer is yes, provided we can get the yield on the policy -- expected yield on the policy that we get with other investments and other alternative assets.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [3]

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Another question is, the 27 million shares of stock that came on at the end of last year, do you have plans to market that stock?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [4]

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That 27 million shares is subject to an Orderly Marketing Agreement, which requires us to enter into a broad distribution of stock. And currently, we are working on plans to implement that. It will be done over in orderly marketing mechanism over a long period of time.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [5]

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And BEN's portfolio, are you going to be giving investors more insight into what's in BEN's portfolio?

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Timothy L. Evans, GWG Holdings, Inc. - CFO [6]

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I'll cover that one, Dan. The -- on BEN's portfolio, certainly we have information on what's in BEN's portfolio, and we are working with them to determine what is appropriate to disclose in public filing. So we're certainly continuing to work towards that. I guess I would add to that point as well that as we previously announced, that we're working with BEN towards potential future transactions. Potentially among those transactions, there could be transactions that are closed that would consolidate the financial statements of the company. And so that could inform the process of disclosing more about the collateral portfolio behind BEN's assets. It's (inaudible).

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [7]

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So that answers one of the other questions we got about consolidation.

So with that, I'm going to turn it over to Murray for some final thoughts.

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [8]

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Yes. I want to thank everybody for joining us on this webinar. We're going to continue to be a very transparent company and continue with the quarterly earnings calls. And that next earnings call will be sometime in November, so I look forward to talking to you all in November. Thank you for joining.