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Edited Transcript of GWGH earnings conference call or presentation 21-Nov-19 9:30pm GMT

Q3 2019 GWG Holdings Inc Earnings Call

MINNEAPOLIS Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of GWG Holdings Inc earnings conference call or presentation Thursday, November 21, 2019 at 9:30:00pm 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 third quarter 2019 earnings webcast. On the webcast with me today are Murray Holland, our President and Chief Executive Officer; and Tim Evans, our Chief Financial Officer. Following our remarks, we'll be happy to take some questions. (Operator Instructions) 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've 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.

(Operator Instructions) Today's webcast is being recorded and will be available on the website at gwgh.com through the Investor Relations tab.

So with that, I'll 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 welcome, everybody. Today, I'd like to go over a number of items with you that involve the third quarter of 2019, including our business overview, the investment in Beneficient, various corporate events updates, financial metrics and results and our path forward.

The business of GWG is to provide liquidity for alternative assets owned by individuals who need liquidity for life events and investments. These -- traditionally, GWG's business has been purchasing life settlements out from individuals who need liquidity, and we have furthered our strategy of diversification into these alternative assets by our investment in Beneficient. Today, we have a diversified portfolio of investments. About 52% of our investments are in life insurance assets, 42% of our investments in Beneficient, and we still retain about 5.5% of cash, for total consolidated assets of $1.5 billion with shareholders' equity of just over $200 million.

The Beneficient asset investment strategy provides a significant diversification of investments for GWG. Beneficient strategy is to invest in professionally managed funds, including private equity, credit funds, real estate funds, other alternatives such as hedge funds, and that provides -- our investment in Beneficient provides GWG this diversification as direct exposure into these assets. A breakdown of global alternative assets in the class of investments that BEN will participate in are contained in the pie chart that's on the screen, and the largest portions are hedge funds and private equity funds, real estate investments, private credit, infrastructure and natural resources. And again, these professionally managed funds are the type of investments that larger financial institutions, such as pension funds, endowments and foundations have had access to over the last 25 or 30 years that individuals are just now getting access to. So the liquidity that BEN provides and that GWG provides are liquidity for primarily life changes of high net worth individuals, and these include a number of life events, traditionally, events such as death or disability, divorce and business needs. They're also used for state planning and other investment opportunities.

During the last quarter, we've had a number of events that have happened with GWG, including we've had maturities that exceeded in 2019, all of 2018. We successfully restarted the L Bond sales program in early August of 2019. We've hired 5 new sales executives with strong experience in alternative asset investments. We've been included in the Russell 2000 Index of small-cap stocks, and we have begun the separation of the insurtech subsidiaries, Life Epigenetics and YouSurance, as we disclosed to you over the last year or so.

And with that, I would like to hand it over to Tim Evans, our Chief Financial Officer of GWG. Tim?

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

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Thank you, Murray, and thanks to everyone who is on the call. I'd like to go through a few different items today, beginning with our 2019 GWG Q3 financial metrics review. We'll then move on to GWG's balance sheet and our liquidity position, talk about our security sales and then finish with continually strong news on our life insurance portfolio and the performance of the portfolio.

So let's begin with a summary of our metrics. As we always do at GWG, we look at our performance results quarter-over-quarter. And what we see looking at Q3 versus Q2 is that we've had very similar results quarter-over-quarter, which is really to be expected as the work that we've done in Q3 largely matches what was done in Q2, as we are preparing to see how the connection between GWG and its investment in BEN can be brought to a better fruition. So what we see as far as our net income is that we had about $5 million less net income pretax in Q3. That's driven really by 2 big factors. Number one, on the revenue side, lower purchase gain, both in rate and volume. This is to be expected as we've -- that for some time as we're allocating assets and capital away from the purchase of new policies. We would expect to see lower purchase gains there, and that is further enhanced by lower expenses of about $2.4 million, most of that coming from lower personnel expenses in Q3 related to the completion of the transactions that were conducted in Q2.

So very similar results quarter-over-quarter. One thing -- another thing that's similar as we go to our balance sheet is the size and strength of the balance sheet, still right under $1.6 billion. A lot of that value came in through Q3 of '18 with our transaction with BEN, and we continue to see increased common equity and coverage from that transaction. We also see steady asset balance to our liquidity. We reported at the end of Q3 about $90 million in liquidity, and that number in the earnings release that was later issued was year-to-date, or at the time, rather, $144 million. So we continue to hold strong cash reserves as we're preparing to send those investments into BEN in a way that is approved by our special committee going forward.

Moving on to our investment sales. Have had very strong sales since relighting back in the early part of August, and we attribute that to the attractive yields in a low interest rate environment. As we look at the chart at the bottom of the page, we can see that for Q3 of 2019, we had just under 2/3 of the quarter that where we were selling, but we were already substantially close to where we were back in Q1 of '19, where there was a full quarter of sales. So very happy about the investment sales there. Not only do we have good sales, but the mix by quarter is also very steady. So we have an attractive maturity profile of the 84-month coverage at 37.2% in Q3, where we liked having that longer-term debt. And we see, not only is it consistent there, but also consistent in the 36 months and across the board, a fairly consistent sales mix, which we are happy to see.

Then moving on to our life insurance portfolio. The total portfolio face amount, still about $2 billion and $321 million of that is in insureds over the age of 90. So we continue to see the seasoning of the portfolio. And that's supported by our more consistent benefits that we are earning off of those maturities from those life settlements, consistently covering our premiums, you can see at the chart on the bottom right. For Q3 2019, our trailing 12-month benefits versus premiums is in a great position, and that is in large part due to a record year-to-date 2019 maturity profile, where we've had over $108 million as of today. And this year-to-date 2019 exceeds our full year of 2015 by 50%. So we're at 150% of full year of 2018 already sitting here today in 2019, continued evidence of the seasoning of the portfolio and the strong maturities we expect to continue off of that.

In addition to the $321 million of policy benefits of insureds over the age of 90, we can see that a full 44% of the face of our policies is at 85 years of age or older. So that's $909 million of the $2.1 billion that is in age 85 or older. And not only do we have good seasoning of the portfolio, but we have good credit risk with very highly rated obligors on the other side of those policies.

On the next slide, we see a discussion of path forward. Again, what we're looking to do is to bring closer our -- the alignment of GWG and BEN and ensure that we're doing that in a way that increases GWG's growth in the alternative asset exposure and brings positive impacts to our balance sheet as a result of those transactions.

So with that, I think I'll turn it back to Dan for any questions or other items.

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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, Tim. We've been getting some questions. And we have a few that we're going to get to. Again, if you don't get to -- 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'll get back to you. Our first question is one that we have been getting for a little bit, is the purchase of insurance policies, is GWG going to continue to purchase insurance policies?

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

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Dan, and the answer to that is that we will purchase policies that can provide the yields equivalent to the yield we expect out of BEN investments.

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

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We have another question from William Gibson, who is an analyst who covers us, who asks for the gross yield on Beneficient's alternative assets.

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

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That will range between 14% and 17%.

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

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All right. Another question from Bill is timing of consolidation, has that been worked out yet?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [6]

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Well, there is a -- the transactions between BEN and GWG are -- they're pretty significant transactions that we've undertaken to date, and we continue to work on further consolidation of 2 companies. We spent a considerable amount of time over the last quarter preparing the special committee for a number of proposals that they're considering at this time. And we need to respect the process and the considerable work the committee is undertaking. So we can't comment on the specific items at this time until they're completed. But we are excited about the prospects and look forward to announcing those soon.

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

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Another question we have is the types of investments you'll be investing L Bond proceeds with going forward.

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

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Okay. Those are investments into Beneficient. And as an earlier slide that I walked through up here talked about the type of investments BEN will be providing the liquidity for and those are professionally managed funds that are the -- right now, the focus of a lot of the major financial institutions in this country, including pension funds, endowments and foundations that invest in these.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [9]

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We have a question from David Simon who asks about the spin-off of the insurtech business. Will GWG benefit from the successes of the insurtech business?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [10]

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Yes, we will. The spin-off is done for a number of reasons, but we will have -- today, we own 100% of the equity in that subsidiary, and we will continue to own essentially all the economics of the company even after the spin-off.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [11]

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Now a couple of questions about life insurance policies. Some -- give us some explanation for why fewer policies have been purchased? What are the dynamics of that?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [12]

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Okay. As we have witnessed at GWG over the last 5 years, there's been a significant decline in yields on these policies. And the yield is critical to us because we've obviously financed them with debt instruments that have a yield of their own. And while that margin has been shrinking, we've had to be -- we've had to look for alternative investments and Beneficient represents that avenue for us and the future of the company will be with Beneficient.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [13]

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We have another question about the status of the trust charters that BEN has been seeking.

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [14]

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Okay. BEN has worked on those considerably, obviously, for a long time, and is continuing to work with the State of Texas, those are state charters. They provided a number of rounds of questions and meetings. The state has been up a number of times to Beneficient, even attended some Beneficient board meetings. And the process is continuing. We expect it to be near the end, and we were hoping it would be -- we would have had them by now, but there's some continuing dialogue, but nothing that I see that will be an impediment to getting them issued soon.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [15]

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And I believe this is the final question. We love the income from the life insurance portfolio, but do you have a projection for when you could reach profitability?

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [16]

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Well, that, I'm afraid we're going to have to answer after we show, after we can disclose the transactions that we're currently working on sometime in the near future.

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Dan Callahan, GWG Holdings, Inc. - Director of Communication [17]

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So with that, we're going to close it out. Again, if you have questions, feel free to e-mail us at invest@gwgh.com, and we will get you an answer. And with that, I'll turn it over to Murray for some final thoughts.

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Murray T. Holland, GWG Holdings, Inc. - President & CEO [18]

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Yes, as we're approaching the holiday season, I want everybody to know that we'll be talking to you early next year in an earnings release. And I wish everybody the greatest during the holiday season. Be safe and don't eat too much.