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GWG Holdings Inc (GWGH) Q1 2019 Earnings Call Transcript

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GWG Holdings Inc (NASDAQ: GWGH)
Q1 2019 Earnings Call
Aug 13, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Dan Callahan -- Director of Communication

Thank you, and good afternoon, everyone. My name is Dan Callahan. I'm Director of Communication at GWG Holdings. Welcome to our 2018 and First Quarter 2019 Earnings Webcast. On the webcast with me today are Murray Holland, our Chief Executive Officer, Bill Acheson, our Chief Financial Officer; and Brad Heppner, Chairman of the Board and CEO of The Beneficent Company Group LP.

Following our remarks, we will have a Q&A session from among questions we've been asked. You can submit your questions online should webcast dashboard, look for the question text box and type a question in. Some statements made on the webcast today, along with any projected financial results include forward-looking statements that are subject to risks and uncertainties. Any forward-looking statements made on this webcast are based on assumptions as of today, and we undertake no obligation to update these statements as the result of new information or future events. A sample list of factors of risks that could cause actual results to be materially different from forward-looking statements that can be found in our earnings release and in our most recent 10-K and 10-Q reports.

Please note that everyone -- that the participants are in listen-only mode. Again, questions can be submitted through dashboard text box. Today's webcast is being recorded that will be available on our website at gwgh.com through the Investor Relations tab.

With that, I will turn it over Murray Holland, Chief Executive Officer of GWG Holdings. Murray?

Murray Holland -- Chief Executive Officer

Thank you, Dan, good afternoon, everyone, and welcome to the special earnings call. It's been a while since we had an earnings call, we are appreciative for your patience during this time period. This is my first earnings call as CEO of GWG. I took over the job a little over three months ago after we completed our strategic transaction with The Beneficient Company Group, L.P.

We are pleased to be back on track and talk to you about our business with all of you. The strategic transaction with BEN is an important milestone. Let me give you just a quick description of the highlights of BEN's transaction impact on GWG. As I said, I took over as CEO, replacing the co-founder of GWG, Jon Sabes, who's moving over to our insurtech subsidiary. Jon and his brother Steve sold their interest in GWG to BEN, and BEN's founder in an exchange for future cash payments and founders shares in BEN.

Brad Heppner, the CEO of BEN, is now Chairman of GWG Holdings. The GWG Board of Directors was replaced by the members of BEN's Board of Directors, plus a special committee. Expanding the total board to 14 members who represent a world class group of advisors. Brad will give you a little bit more color about the board in his remarks.

A little bit about me, after graduating from the University of Virginia Business School, and Washington and Lee University Law School. I began my career in corporate finance as a lawyer with the Dallas space law firm of Akin Gump Strauss Hauer & Feld, where I was a partner in the corporate security section of the firm. In the mid 1980s I was hired by First Boston, which is now known by everyone it's Credit Suisse First Boston as an investment banker and later canopy body both in the motors and acquisitions groups.

From 1993 through 2006, I served as the CEO of three technology enabled firms that serve diverse markets. These firms had combined revenue of over $3 billion with over 4000 employees. In 1999, I worked with Brad Heppner on a transaction where his firm bought a portfolio of our trend of assets for $550 million and that was my first experience with Brad. In 2001, I was an original investor and advisor to a new investment bank, MHT Partners, which specializes in rapidly growing middle market firms in mergers and acquisitions in corporate finance.

MHT Partners was retained by Beneficient in 2014 to advise them regarding the formation of the company and its operations. We see the GWG BEN transaction as a win-win for everybody. We are building on the strong base that Jon Sabes and his team built. By joining with Beneficient, we have a market opportunity to provide liquidity beyond the life insurance secondary market to a much larger market of owners are professionally managed alternative assets. It is clear that putting these two organizations together will offer great opportunities for both GWG and BEN.

With that, I will turn the call over to our CFO, Bill Acheson, who will discuss the financials. Bill?

Bill Acheson -- Chief Financial Officer

Thank you, Murray, and welcome again, everyone, to our earnings call this afternoon. As I typically do, I'll walk through some of our key metrics that we look at. The only difference being on this call is I'll do a little bit on the full year of 2018 and then we'll look at spend probably most of our time on Q1 of 2019. But given the length of time expenses we've been together, we'll take a look at 2018.

As well, before I get into the financials and the metrics, there's a few themes that you'll recognize going through here, the presentation and things that we've talked about in the past. And they really are three decreasing margins in the life insurance business. We've been talking about this now for several quarters or I'll call variability in the mortality cash flows, although you'll see some quite oppressive improvements, they still vary period-to-period. And three would be higher interest expense kind of across the board. And when I think of the BEN transaction, the ones we've completed in 2018 and the expansion of our strategic relationship as of the second quarter in April, I really think of actions that we are taking to address those three issues.

So number one would be finding higher yielding alternative assets. Number two would be lessening our reliance on the life insurance portfolio. And number three would be using our bigger balance sheet and expanded access to capital markets to address our cost of funds and to eventually recapitalize the balance sheet. So without further a do, we'll look at 2018 and then we'll look at Q1 of 2019. From a top line perspective, our revenue year-on-year here this is '18 over '17 increase quite a bit really mainly due to a couple of things.

Number one, what I call portfolio accretion was just means a larger portfolio, which you're accreting [Phonetic] income on. And then kind of roughly offset with a lower amount of purchase gains due to lower margins in the purchase market for life insurance offset a little bit by a little bit higher realizations of policy maturities in the year. You can see in our interest and other line for the year the presence of the BEN transactions, which we closed the first one in August of last year and the final one in the final closing was at the end of December. So you can see that show up in the interest and other lines there.

Looking at expenses, the big item really year-on-year is what I mentioned just now is higher interest expenses. Most of the increase in the line items year-on-year in the expense side, G&A was up a little bit, but not much. We did invest a bit into our Insurtech tech around $4 million, but the line of share that increase is due to increased interest expense due to higher debt balances outstanding as we've been growing the balance sheet. Kind of looking down to dividends. Those are a little bit higher than year-over-year as we had a full year in 2018 of our second offering, which many of you remember the redeemable preferred stock Series number two. So that was in there for an entire year.

Dropping into the balance sheet a little bit here. And we'll take a little closer look at this in a minute. But our total assets were up significantly, we've talked about that and telegraphed that, that's really the two closings of the BEN transaction. Our investment sales year-on-year were up significantly that was a record number for GWG and I think reflects -- you know interest in the product, interest in the company, very attractive yields in a low rate environment, but also a lot of interest in the Beneficient transaction and what that can do for GWG and what that's mean for our balance sheet and for our prospects going forward.

Policy purchases $441 million, that's a strong year, we were aggressively buying really the drive through that 1,000 policy mark, which we did in the second quarter early third quarter of 2018. We ended the year of 2018 with just over $2 billion in phase and that represented about 1,154 policies. Both of those numbers up significantly over their 12, 31, 17 benchmark. From a benefits realized perspective, this would be a mortality face amount of benefits. We recognized $71 million versus cash, net [Phonetic] income, $71 million versus $65 million in 2017. And I'll say that the $71 million was somewhat lower than we had anticipated, which is one of those themes again that I mentioned at the top.

Now kind of moving into 2019, Q1, kind of going in the same order here. Looking at the revenue line here, we had a significantly higher now this is Q1, 2019 over Q1, 2018. We had a significantly higher number on revenue, $21.5 million and that's largely driven by higher benefits realized during the quarter. So from a cash flow perspective, we recognized about $31 million of policy benefits in Q1, which was a record quarter in terms of the gross amount of benefits realized.

Part of this income number is also a little bit lower, a little negative offset is a lower policy purchases, which will get into a minute. You can see our interest and other that's as a BEN commercial loan in place. For those you remember, we had something called an exchangeable note that went away at year end and that's why in the previous slide, you saw a quite high income number for interest and other and now what you see here is going to be a much more normalized number moving forward for our interest and other, although that will grow as we make additional investments in Beneficient, which we have done and plan to do.

Looking at expenses, similar story here is really your interest expenses is the lion's share of that increase, about 10 of the 14. We did start to see and we'll probably see for the next quarter or so some higher expenses related to compensation and deal expenses -- just some general higher G&A. I think it's transient, at least at the GWG level, but it did show up in Q1.

Looking down at our dividends, there is a much more normalized kind of run rate now that we had the full year for the full quarter of RPS dividends in there and you'll see that number be pretty flat quarter-over-quarter for the remainder of the year. Looking into our asset side, again, same story, you know, this one, significantly higher assets that's the Beneficient transactions. Our policy sales during the quarter were very good for the same reasons that they were good in 2018 or at least in the second half of 2018, let's say. And you see policy purchases here face amount purchase of $80 million that compares to $94 million in the year ago period and we had several quarters, as you'll recall, in calendar 2018 where we're over 100 and this really represents kind of our the beginning of our reallocating capital away from the life insurance businesses where we have a large portfolio and we're seeing the yields decline there. So you're really starting to see this happen in Q1 and you'll see it certainly more so in Q2.

End of the year at $2 billion, you already know that, I'm sorry, end of the quarter at just over $2 billion, a 1,194 policies and you'll see $31 million of benefits recognized, which was a twice what we recognized in the first quarter of 2018 and also a record for the company. So again, those three themes are kind of present through all the financials as we drive a little bit deeper here, we'll just look at each of the kind of primary things we take a look at. This is just simply looking at our asset in our equity growth, our leverage as measured by assets over equity is in the green line and you've seen the reasons we've seen that since Q3 moving forward and which is really the BEN deals.

When we take a look at the liquidity here, we -- which we define as cash, restricted cash and benefits receivable. We've begun allocating some of our cash toward the Beneficient toward a broader array of alternative assets. We've also drawn some of our cash down is our L Bonds have not been offered. We're not offered for through about a three month period. They are now relived and live as of last week. And we reported in our 10-Q that we just filed last week that we had about just over $52 million in liquidity at the end of July.

Looking onto our investment sales side, again, very strong, continued strong growth, this goes up through Q1 of 2019. Rates are still very low, in fact, have gotten significantly lower, and this is our maturity profile as we just look to the right here in terms of where are the predominance of the sales coming in and you can see the Q1 had a significant uptick in the very long term bonds. But as we look at the maturity mix and the cost, at least are currently of the L Bonds mix we're quite happy with that. So we're excited that the L Bonds is back open and up and running and are looking forward to moving up our liquidity and continuing down the road.

Taking a look at the our renewal rates, which is something that we track very closely, something it's very important to us into the firm. We track the amount of L Bonds that renew for -- when they mature. And you can see over the years, quarters here going back to early '17, they've been pretty consistent and running anywhere between low of 40 and high of 60. I think our ever to date average is right around 60, which is about what we plan for. Now as we go forward and we do more DTC settlements, which a lot of you participate in, that will impact our reported rate because of the way that the DTC renewals are accounted for. But something that we keep a close eye on, we're managing our liquidity and planning on our cash.

Looking at the secondary life portfolio here before we get to the end of my stuff here is basically this portfolio continues to seasons. The yellow bar just shows you the amount of face amount on insurance age of 90 plus, which is now up to $283 million. And this is the graph here that we look at, which are trailing 12 months benefits over premiums, which just simply looks back at -- if 12 months period, so how many benefits did you collect versus the premiums that you pay the idea being that you want the portfolio to pay for itself as it relates to premiums.

And you can see that, of course, has been doing that for quite some time. I referred to in a previous slide of our benefits realized in 2018 of $71 million while we reported in our 10-Q that we had already realized through July 31, $61 million of benefits. So we're very near where our total was for all of last year was about five months to go. So we're starting to see, I think that portfolio cash flow in bigger chunks, which we're anticipating and that's a very good thing for the firm. So, we've seen these factors present, the themes I mentioned at the top of the house. I think we're taking the right actions to address those. And the Beneficient part of it is a really key kind of to our future.

And on that note, I'll flip it over to our chairman, Brad Heppner, for his remarks, Brad?

Brad Heppner -- Chairman of the Board & The Beneficient Company Group

Thanks, Bill. And I want to thank everyone on this webcast and conference call. We are all very excited about potential for our two companies. We see many synergies between us. But for today, let me give you some background on just BEN. May be asking what exactly does BEN do? Put simply, BEN is working to level the playing [Phonetic] field for all owners of alternative assets who have historically had limited access to liquidity. The company lends against alternative assets, we deliver structured liquidity for these assets and we provide custody and administrative services to holders of those alternative assets. Then seek to provide these liquidity solutions to mid to high net worth individuals and small to mid-sized institutions across a variety of sub asset classes of alternatives which include institutional private equity, venture capital, real estate, non-traded REITs and BDCs and life settlements.

We believe that the opportunity and the need for this service is significant over the past 10 years, an increasing number of investors have purchased alternative assets and while certain investors are able to monetize their investments in a timely way, there are a number of investors who are unable to access a market for their investment and end up holding the asset for a substantial amount of time. That is because the market demand for liquidity from owners of alternative assets has historically been driven by large institutional investors.

By contrast, mid to high net worth investors and small to mid-sized institutions have generally been unable to access early liquidity from their alternative investments for a variety of reasons, including the lack of representation by intermediary brokers, contractual prohibitions and other liquidity constraints. The alternative asset industry has experienced substantial growth. We expect this growth to continue with some estimates predicting that global alternative assets under management will equal approximately $14 trillion by 2023.

It is our belief that one of the factors that will contribute to this growth is the participation of individuals and small institutions in the market of alternative assets, these individuals include entrepreneurs, business owners and professionals in private practice. Right now, they do not have a way to get liquidity for their alternative illiquid assets. That is where BEN comes in. BEN [Phonetic] through our subsidiaries, plans to operate three lines of business which are comp -- all complementary and they focus on the opportunity that exists within the alternative asset investment space for both BEN and GWG.

The first provides that we believe -- what we believe to be a unique suite, a private trust, lending and liquidity products focused on bringing liquidity to owners of professionally managed alternative assets. BEN's innovative and liquidity solutions are designed to serve those mid to high net worth individuals with $5 million to $30 million networth and small to mid-sized institutions which typically hold up to $1 billion in assets. We believe that BEN's liquidity solutions will provide an attractive option to this quickly growing group of investors who have historically been unable to access early liquidity from their alternative asset investments.

Second, BEN also plans to market retirement funds, custody and clearing of alternative assets and trustee and insurance services for covering the risks attendant to owning or managing alternative assets. Third, BEN plans to develop and deploy an online portal giving clients direct access to its financial services and product online. BEN's existing and planned products and services are designed to support the tax and estate planning objectives of our clients. Facilitate a diversification of their assets or simply provide administrative management transparent reporting solutions tailored to their goals. Importantly, BEN's operating philosophy centers around robust risk management guidelines that anchor and drive its origination and underwriting strategies.

BEN's risk management group is responsible for managing his portfolio with a focus on concentration risk, total exposure, duration and liquidity. The efforts of BEN's risk management process directly feeds into the work performed by our underwriting team. Through BEN's underwriting process each alternative asset is assessed is subject to both a fundamental and other words bottom up and a technical or top down analysis for valuation. BEN's originations team then takes the information they receive from the risk and underwriting teams and uses it to scope and direct BEN's sales strategy.

The execution of BEN's operating philosophy is overseen by its Board of Directors, made up of 12 individuals with extensive experience in alternative assets and financial services. As mentioned, these 12 individuals have recently been appointed to the board of GWG, which will allow them to guide the strategic relationship between GWG and BEN. These members represent a world class collection of individuals and industry experience, knowledge and temperament among them include Richard Fisher, the Former President of the Federal Reserve Bank of Dallas and a well known commentator on U.S. and global capital markets and fiscal policy.

Tom Hicks is a pioneer in this space who created one of the first private equity firms, Hicks Muse Tate & Furst.

Michelle Caruso-Cabrera, The Former Chief International Correspondent to CNBC and you'll know her from shows on CNBC, including Power Lunch and Squawk Box. Bruce Zimmerman is the Former Chief Investment Officer for the University of Texas Endowment, which is the nation's second largest Endowment fund. Currently, he is a Chief Investment Officer for the Dalio Family Office and philanthropy.

David Glazier, who recently retired as Chief Operating Officer of Bank of America Merrill Lynch's Global Corporate and Investment Banking, and Roger Staubach, we will all remember from his days playing for the Cowboys. However, Roger has more than 40 years of experience in global real estate, portfolio management, financing and capital solutions. Pete Cagney spent 37 years with Ernst and Young, including 24 years as a partner of one of the nation's largest four accounting firms.

For the sake of time, I haven't gone through the background on each of BENs Directors. But we are excited to be working with them as they each bring highly relevant and diverse experience from different facets of the alternative asset industry and broader capital markets that will be hugely valuable to both GWG and BEN. You can find more information about BEN's directors and our senior leadership team on the BEN Website. We believe that the expanded strategic relationship between GWG and BEN will facilitate synergies between the two companies and deliver additional value to our shareholders. And we look forward to providing further updates on this tragic relationship, on future calls.

So with that, I'd like to turn the call over to Dan Callahan, who will conduct the questions-and-answers session. Thank you.

Questions and Answers:

Dan Callahan -- Director of Communication

Thanks, Brad. We have questions that we've gotten really since the last time we had our last earnings call and we wanted to highlight those. If you have a question, you can submit them and we will get you an answer or you can send it to invest at [Phonetic] gwgh.com. But here's some of the questions that we've been getting. Will GWG continue buying life insurance policies?

Murray Holland -- Chief Executive Officer

Well, Dan, as I mentioned in my remarks and we saw in the first quarter, we've made a strategic decision to reduce capital allocated to the secondary market for life insurance and begin which we did in Q2 increasing the capital allocated toward a broader range of diversified alternative assets and funds for which BEN is working to access and provide liquidity. So I think that trend will continue.

Dan Callahan -- Director of Communication

Another question. Are there going to be changes in L Bond terms and rates?

Murray Holland -- Chief Executive Officer

Well, this is a question we get fairly frequently. And at this point in time, we don't have any plans to make any changes to the terms or the rates on each of those terms.

Dan Callahan -- Director of Communication

Given the BEN transaction, has there been any changes to the assets that back L Bond?

Murray Holland -- Chief Executive Officer

As in the past, with the exception of the assets pledged to our senior credit facility provider. All of the assets of the holding company of GWGH security L Bonds. Now as of the end of December 2018 when we close the second BEN transaction those assets now include a commercial loan to Beneficient as well as an equity method, investment in Beneficient. Now, when we did that transaction, we also issued L Bonds in conjunction with that. So the pool of assets set back the L Bonds now includes life insurance, not pledged to senior credit facility cash as well as then our investments in Beneficient.

Dan Callahan -- Director of Communication

The Insurtech Holdings division, the new division. So what's happening with that and what's the relationship with GWGH?

Murray Holland -- Chief Executive Officer

Well, in our Insurtech Tech business is a subsidiary -- wholly owned subsidiary of GWG. And Jon Sabes, who was our CEO, is running the Insurtech Tech business. They are doing what they have always been doing. And what we've talked to you guys about several times is trying to commercialize epigenetic technology for the life insurance industry for the benefit of the shareholders, and they're going to continue to do that, and we've made a commitment to fund the insurer tech business up to $20 million over the next couple of years with our eventual hope and intention would be to spin them off as a separate company when they've succeeded with their commercialization efforts.

Dan Callahan -- Director of Communication

With the BEN transaction and everything that's been going on. What do you see for the GWGH common stock?

Murray Holland -- Chief Executive Officer

Well, that's always a tough one to answer. And you won't be surprised that we believe the stock will be positively affected by our expanded relationship with BEN. We think that leads to better access to capital markets, greater institutional interest in the stock. We have actually been included now in the Russell 2000 as of July 1st, which is a milestone for us. All of this leading to a more liquid common stock. So, if you remember back 18 months ago when we first announced the initial transactions with Beneficient creating a liquid company, common stock was one of our three or four primary objectives of the transaction. I'm not going to say we're -- we've accomplished that. We still have a lot of work to do. But we expect and believe that over the long-term, this relationship with Beneficient will be positive for the stock, again, the inclusion of the Russell -- the Russell 2000 as of July 1st is really, I think, an indicator of at least where we've come and maybe where we're headed.

Dan Callahan -- Director of Communication

Well, that's all the questions we have right now. Again, if you want to ask a question, feel free to submit on the portal or you can email us at invest at gwgh.com.

And now I will turn it over to Murray Holland for final comments.

Murray Holland -- Chief Executive Officer

I want to thank everybody for being on this call and look forward to our next earnings call.

Duration: 27 minutes

Call participants:

Dan Callahan -- Director of Communication

Murray Holland -- Chief Executive Officer

Bill Acheson -- Chief Financial Officer

Brad Heppner -- Chairman of the Board & The Beneficient Company Group

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