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GWG Holdings, Inc. Reports Results for the Fourth Quarter and Full Year Ended December 31, 2018

MINNEAPOLIS, July 09, 2019 (GLOBE NEWSWIRE) -- GWG Holdings, Inc. (GWGH), a financial services holding company committed to transforming the alternative asset industry through innovative liquidity products and related services for the owners of illiquid alternative investments, today announced its financial and operating results for the fourth quarter and full year ended December 31, 2018.

In 2018 and in the second quarter of 2019 GWGH consummated a series of transactions with The Beneficient Company Group, L.P. and related entities (BEN) which has resulted in a significant reorientation of GWGH’s business and capital allocation strategy, the replacement of the Board of Directors and changes in executive management. BEN provides liquidity to the owners of alternative assets and illiquid investment funds, including mid-to-high net worth individuals, family offices, and small-to-mid-size institutional investors. In addition to its liquidity offerings, BEN plans to offer a variety of services including custody and clearing of alternative assets, fund and trust administration, retirement funds, and insurance services for covering risks attendant to owning or managing alternative assets.

GWGH believes its expanded strategic relationship with BEN will accelerate GWGH’s growth, financial capability and diversification as well as BEN’s efforts to build the most comprehensive and innovative liquidity provider for alternative asset investors.

Recent Corporate Events

  • In the second quarter of 2019, GWGH and BEN completed a significant expansion of their strategic relationship:
    • BEN and certain of its founders acquired all of Jon and Steven Sabes’ interest in GWGH;
    • Jon Sabes resigned as Chairman and CEO of GWGH and was named CEO of GWGH’s insurtech subsidiary, InsurTech Holdings, LLC;
    • Murray T. Holland, a trust advisor to the seller trusts which in the aggregate own approximately 79 percent of GWGH’s outstanding common stock, was named CEO of GWGH;
    • GWGH’s Board was succeeded by 11 new board members designated by BEN, including BEN Chairman and CEO Brad K. Heppner and Thomas O. Hicks and was subsequently increased to 14 members;
    • GWGH intends to facilitate the separation of InsurTech Holdings, LLC to become independent of GWGH on commercially reasonable terms as soon as practicable; and
    • GWGH anticipates funding a total of $20 million in capital to InsurTech Holdings, LLC over the next two years.
    • See the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2019.           
  • Announced expansion of the use of proceeds for its L Bond offering to encompass growth in alternative asset exposure primarily through additional investments in BEN; and
  • GWGH’s wholly owned subsidiary GWG Life, LLC entered into a $65 million promissory note with certain liquid trusts, the ultimate proceeds of which will be used to position BEN’s balance sheet, working capital, and liquidity profile.

Financial and Operating Highlights

  • Reported total assets of $1.5 billion representing an 81 percent increase over the prior year-end;
  • Increased total equity by $147 million versus the prior year-end, more than doubling total equity versus December 31, 2017;
  • Ended 2018 with a life insurance portfolio of $2.048 billion in face amount of policy benefits consisting of 1,154 policies;
  • Acquired 318 life insurance policies for a total of $441 million of face amount of benefits during 2018;
  • Realized $71 million of face amount of benefits from 62 life insurance policies in 2018;
  • Adopted a new life insurance portfolio valuation methodology that combines the continued use of independent life expectancy reports and the actual performance of the portfolio resulting in a net pre-tax, non-cash charge of $87 million in the fourth quarter of 2018; and
  • Reported a net loss attributable to common shareholders, excluding non-recurring items, of $49 million or $8.04 per basic and fully diluted share compared to a net loss attributable to common shareholders of $33 million or $5.72 per basic and fully diluted share for the prior year.

“This significant expansion of our strategic relationship with BEN is a milestone – and yet just a first step for GWGH and Beneficient,” said Murray Holland, GWGH’s Chief Executive Officer. “We have brought together two innovative providers of liquidity to owners of alternative assets with complementary capabilities into a publicly traded platform. We will continue working toward our goal of leveraging this platform to meet the vast, growing and underserved market for products and related services targeted to the owners of illiquid alternative investments and secondary transactions in private-equity funds.”


1.  Financial & Operating Highlights

($ Thousands except per share information)   Q4 2018   Q4 2017   FY 2018   FY 2017
Revenue   $ (60,184 )   $ 17,681       $ (390 )     $ 64,134  
Revenue Excl. Non-Recurring Item1     26,916               86,710            
Expenses     39,528       24,127         119,079         86,864  
Per Share Data2:                                
Net Income (Loss)3     (15.16 )     (2.77 )       (22.32 )       (5.72 )
Excluding Non-Recurring Item1     (2.46 )             (8.04 )          
Capital Raised     97,883       85,367         370,203         259,076  
Liquidity4     141,897       159,430         141,897         159,430  
Life Insurance Portfolio5     2,047,992       1,676,148         2,047,992         1,676,148  
Life Insurance Acquired5     107,478       78,582         440,569         378,947  
Face Value of Matured Policies     20,991       25,061         71,090         64,719  
TTM Benefits / Premiums6     135.0 %     123.8 %       135.0 %       123.8 %

(1)  Adoption of a new life insurance portfolio valuation methodology (the Longest Life Expectancy method)
(2)  Attributable to common shareholders
(3)  Per basic and fully diluted share outstanding
(4)  Includes cash, restricted cash and policy benefits receivable
(5)  Face amount of policy benefits
(6)  The ratio of policy benefits recognized to premiums paid on a trailing twelve month (TTM) basis


2.  Revenue and Expense Discussion

Fourth Quarter 2018 vs. Fourth Quarter 2017:

  • Total revenue was ($60.2) million in the current period, compared to $17.7 million in the prior period primarily related to:
    • A net charge of $87.1 million resulting from the adoption of a new life insurance portfolio valuation methodology;
    • Higher unrealized gain from policy acquisitions reflecting higher policy acquisition volume – $107.4 million of face value acquired in the current period compared to $78.6 million in the prior period; and
    • Lower gain from policy benefits due to decreased realization of policy benefits – $21.0 million of life insurance policy benefits realized in the current period compared to $25.1 million in the prior period.
       
  • Total expenses were $39.5 million in the current period, compared to $24.1 million in the prior period primarily related to:
    • Increased interest expense of $9.5 million due to increased debt outstanding and higher interest rates on its senior credit facility partially offset by a lower balance outstanding on this facility during the period;
    • Increased incentive compensation costs including expense related to stock-based compensation;
    • Costs of $2.3 million relating to the YouSurance and Life Epigenetics wholly owned insurtech subsidiaries compared to $0.6 million in the prior period; and
    • Bad debt expense of $4.5 million compared to $0.4 million in the prior period.  The increase is related to a specific life insurance policy that GWGH deemed uncollectable during the period.

Full Year 2018 vs. Full Year 2017

  • Total revenue was ($0.4) million in the current period, compared to $64.1 million in the prior period primarily related to:
    • A net charge of $87.1 million resulting from the adoption of a new life insurance portfolio valuation methodology;
    • Higher realization of policy benefits – $71.1 million of life insurance policy benefits realized in the current period compared to $64.7 million in the prior period;
    • Lower charges relating to the fair value impact of updated life expectancy estimates on certain policies in the portfolio: a charge of $4.9 million in the current period compared to a charge of $20.3 million in the prior period; and
    • Lower unrealized gain from policy acquisitions due to lower purchase yields in the broker and tertiary markets partially offset by a higher amount of policy purchases.
       
  • Total expenses were $119.1 million in the current period, compared to $86.9 million in the prior period primarily related to:
    • Increased interest expense of $25.7 million due to increased debt outstanding and higher interest rates on its senior credit facility partially offset by a lower balance outstanding on this facility during the period;
    • Higher employee compensation and benefits expenses;
    • Increased technology costs relating to systems development and cybersecurity initiatives;
    • Costs of $4.2 million relating to YouSurance and Life Epigenetics wholly owned insurtech subsidiaries in the current period compared to $1.6 million in the prior period; and
    • Higher bad debt expense related to a specific life insurance policy that GWGH deemed uncollectable during the period.


3.  Life Insurance Portfolio Statistics

Portfolio Summary:

Total life insurance portfolio face value of policy benefits   $ 2,047,992,000  
Average face value per policy   $ 1,775,000  
Average face value per insured life   $ 1,984,000  
Average age of insured (yrs.)     82.1  
Average life expectancy estimate (yrs.)     7.8  
Total number of policies     1,154  
Number of unique lives     1,032  
Demographics     77% Male; 23% Female  
Number of smokers     52  
Largest policy as % of total portfolio     0.6 %
Average policy as % of total portfolio     0.1 %
Average annual premium as % of face value     2.9 %
         

Distribution of Policies and Benefits by Current Age of Insured:

                        Percentage of Total        
Min Age     Max Age     Number of Policies     Policy Benefits     Number of Policies     Policy Benefits     Wtd. Avg.
LE (yrs.)
 
  95       100       16     $ 23,483,000       1.4 %     1.1 %     2.0  
  90       94       129       257,877,000       11.2 %     12.6 %     3.6  
  85       89       232       519,107,000       20.1 %     25.3 %     5.5  
  80       84       243       458,529,000       21.1 %     22.4 %     7.5  
  75       79       230       407,087,000       19.9 %     19.9 %     10.3  
  70       74       213       275,933,000       18.4 %     13.5 %     11.4  
  60       69       91       105,976,000       7.9 %     5.2 %     12.0  
  Total               1,154     $ 2,047,992,000       100.0 %     100.0 %     7.8  
 

4.  Life Insurance Policy Origination

Life Insurance Portfolio Activity:

      Three Months Ended     Twelve  Months Ended  
      December 31, 2018     December 31, 2017     December 31, 2018     December 31, 2017  
                           
Total policy benefits purchased   $ 107,478,000   $ 78,582,000   $ 440,569,000   $ 378,947,000  
Total life insurance policies purchased     85     68     318     255  
Average policy benefit purchased   $ 1,264,000   $ 1,156,000   $ 1,385,000   $ 1,486,000  
Direct policy benefits purchased   $ 12,870,000   $ 6,340,000   $ 42,432,000   $ 50,218,000  
Direct insurance policies purchased     12     11     51     51  
  • Life insurance policy purchases were higher in both the fourth quarter of 2018 and full year 2018 reflecting more aggressive pricing and improved pipeline pull-through rates. All of the company’s policy acquisition channels were highly price competitive during the reported periods. While the company is continuing to work to maximize the value of its secondary life insurance business, it has made the strategic decision to begin reducing capital allocated to additional life insurance policies in the secondary market and to begin increasing capital allocated toward providing liquidity to a broader range of alternative assets, primarily through investments in BEN.
  • Direct purchases of life insurance policies (not through a broker) were higher in the fourth quarter of 2018 and lower in the full-year period versus a year earlier and continue to remain at lower levels than GWGH had anticipated.


5.  Longest Life Expectancy Methodology

The fair value of the portfolio of life insurance policies owned by GWGH is determined as the net present value of the life insurance portfolio’s future expected cash flows (net of policy benefits received and required premium payments). The net present value of the future expected cash flows incorporate life expectancy estimates and current discount rate assumptions. The life expectancy estimates used by GWGH for acquiring and valuing life insurance policies has in the past been typically based upon the average of two life expectancy reports received from independent third-party medical actuarial underwriting firms (Life Expectancy Providers). After the acquisition of a life insurance policy, GWGH has sought to update these life expectancy reports on a periodic basis.

During the fourth quarter of 2018, GWGH undertook a comprehensive study to determine a more accurate, transparent and cost-effective method of pricing, valuing, and modeling the performance of its portfolio of life insurance policies. GWGH’s goal was to incorporate life expectancy estimates from Life Expectancy Providers, the historical experience of the portfolio, the diversification and mortality factors of the portfolio, and relevant market-based observations and inputs.

GWGH has resolved to use the Longest Life Expectancy methodology going forward based upon using the longest life expectancy report received from the Life Expectancy Providers used for pricing at the time a life insurance policy is purchased (the Longest Life Expectancy). GWGH believes that its portfolio of life insurance policies has grown sufficiently large in size and diversity to establish that, while individual mortality experience is inherently unpredictable, the actual mortality experience of the portfolio should be expected to approach the mean modeled prediction.

GWGH believes that a Longest Life Expectancy methodology that incorporates the actual mortality experience of its portfolio and the use of third-party estimates is superior to its historical methodology. GWGH believes this methodology should minimize future fluctuations of valuation, decrease its reliance on Life Expectancy Providers for updated reports, and improve its ability to finance the portfolio and forecast future revenues and earnings.

The implementation of the Longest Life Expectancy methodology required GWGH to take a net non-cash charge to revenue of $87.1 million, reflecting a decrease in the fair value of its portfolio of life insurance at December 31, 2018. This non-cash charge represents approximately 10 percent of the fair market value of the portfolio prior to adjustment.

6.  Insurtech Initiatives

Since 2017, GWGH has been investing in the development of epigenetic technology through its wholly owned subsidiary Life Epigenetics Inc. GWGH believes it can serve as foundational technology for a new era of medical underwriting in life insurance. The strategic expansion with BEN included a leadership change that will lead to the further development of the insurtech businesses that are applying technology to the insurance industry with the potential to significantly disrupt the historical approach to assessing and selecting acceptable underwriting risks.

In order to continue developing these businesses, former Chief Executive Officer and Chairman Jon Sabes, will serve as the CEO of a new wholly owned subsidiary InsurTech Holdings, LLC, which will be the parent company of two direct subsidiaries, Life Epigenetics Inc. and YouSurance General Agency, LLC, that hold all insurtech assets. In addition, consistent with prior approval by the Board of Directors, GWGH anticipates funding a total of $20 million in capital to InsurTech Holdings over the next two years and plans a future separation of the wholly owned subsidiary to unlock shareholder value.

7.  Additional Information

Gain (Loss) on Life Insurance Policies:

    Three Months Ended
December 31,
    Year Ended
December  31,
 
    2018     2017     2018     2017  
Change in estimated probabilistic cash flows (1)   $ 19,961,000       23,208,000       75,444,000       63,241,000  
Unrealized gain on acquisitions (2)     6,227,000       5,156,000       28,017,000       31,019,000  
Premiums and other annual fees     (14,417,000 )     (17,173,000 )     (54,087,000 )     (53,296,000 )
Change in discount rates (3)     -       2,801,000       -       14,931,000  
Change in life expectancy evaluation (4)     -       (6,283,000 )     (4,890,000 )     (20,257,000 )
Change in life expectancy evaluation methodology (5)     (87,100,000 )     -       (87,100,000 )     -  
Face value of matured policies     20,990,000       25,062,000       71,090,000       64,719,000  
Fair value of matured policies     (12,696,000 )     (15,774,000 )     (42,579,000 )     (38,243,000 )
Gain (loss) on life insurance policies, net   $ (67,035,000 )     16,997,000       (14,105,000 )     62,114,000  

(1)  Change in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically attributable to changes in life expectancy, discount rate or policy maturity events.
(2)  Gain resulting from fair value in excess of the purchase price for life insurance policies acquired during the reporting period.
(3)  The discount rate applied to estimate the fair value of the portfolio of life insurance policies we own was 8.25% as of December 31, 2018, compared to 10.45% as of December 31, 2017.
(4)  The change in fair value due to updating life expectancy estimates on certain life insurance policies in our portfolio.
(5)  The change in fair value due to the adoption of the Longest Life Expectancy methodology on life insurance policies in our portfolio, partially offset by the impact of a decrease in the discount rate.
             

Policy Benefits Recognized and Premiums Paid (TTM):  

Quarter End Date   Portfolio
Face Amount ($)
    12-Month
Trailing
Benefits Realized ($)
    12-Month
Trailing Premiums Paid ($)
    12-Month
Trailing
Benefits/Premium
Coverage
Ratio
June 30, 2015     806,274,000       47,125,000       24,348,000       193.5 %
September 30, 2015     878,882,000       44,482,000       25,313,000       175.7 %
December 31, 2015     944,844,000       31,232,000       26,650,000       117.2 %
March 31, 2016     1,027,821,000       21,845,000       28,771,000       75.9 %
June 30, 2016     1,154,798,000       30,924,000       31,891,000       97.0 %
September 30, 2016     1,272,078,000       35,867,000       37,055,000       96.8 %
December 31, 2016     1,361,675,000       48,452,000       40,239,000       120.4 %
March 31, 2017     1,447,558,000       48,189,000       42,753,000       112.7 %
June 30, 2017     1,525,363,000       49,295,000       45,414,000       108.5 %
September 30, 2017     1,622,627,000       53,742,000       46,559,000       115.4 %
December 31, 2017     1,676,148,000       64,719,000       52,263,000       123.8 %
March 31, 2018     1,758,066,000       60,248,000       53,169,000       113.3 %
June 30, 2018     1,849,079,000       76,936,000       53,886,000       142.8 %
September 30, 2018     1,961,598,000       75,161,000       55,365,000       135.8 %
December 31, 2018     2,047,992,000       71,090,000       52,675,000       135.0 %
                                 

About GWG Holdings, Inc. 

GWG Holdings, Inc. (Nasdaq: GWGH), the parent company of GWG Life, Life Epigenetics and YouSurance, is a leading provider of liquidity to consumers owning life insurance policies, an owner of a portfolio of alternative assets, and the developer of epigenetic technology for the life insurance and related industries. GWG Life provides value to consumers owning illiquid life insurance products across America, delivering $593 million more for their policies since 2006 than the cash surrender value on those policies. GWG Life owns a life insurance policy portfolio of $2.05 billion in face value of policy benefits as of December 31, 2018. Life Epigenetics is working to commercialize epigenetic technology for the life insurance and related industries. YouSurance, a digital life insurance agency, is working to embed epigenetic testing into life insurance purchasing to provide consumers a value-added ecosystem that supports their health and wellness while reducing the cost of their insurance. GWGH also has a strategic investment in The Beneficient Company Group, L.P., a financial services company providing proprietary liquidity solutions to owners of alternative assets.

For more information about GWG Holdings, email info@gwgh.com or visit www.gwgh.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this press release regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "would," "target" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about our estimates regarding future revenue and financial performance. We may not actually achieve the expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the expectations disclosed in the forward-looking statements that we make. More information about potential factors that could affect our business and financial results is contained in our filings with the Securities and Exchange Commission. Additional information will also be set forth in our future quarterly reports on Form 10-Q, annual reports on Form 10-K and other filings that we make with the Securities and Exchange Commission. We do not intend, and undertake no duty, to release publicly any updates or revisions to any forward-looking statements contained herein.

Media Contact:
Dan Callahan
Director of Communication
GWG Holdings, Inc.
(612) 746-1935
dcallahan@gwgh.com


GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

    December 31,
2018
    December 31,
2017
 
ASSETS                
Cash and cash equivalents   $ 114,587,084     $ 114,421,491  
Restricted cash     10,849,126       28,349,685  
Investment in life insurance policies, at fair value     747,922,465       650,527,353  
Life insurance policy benefits receivable     16,460,687       16,658,761  
Financing receivable from affiliate     184,768,874        
Equity method investment     360,841,651        
Other assets     45,437,164       8,898,884  
TOTAL ASSETS   $ 1,480,867,051     $ 818,856,174  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY                
LIABILITIES                
Senior credit facility with LNV Corporation   $ 148,977,596     $ 212,238,192  
L Bonds     651,402,663       447,393,568  
Seller Trust L Bonds     366,891,940        
Accounts payable     9,276,507       6,394,439  
Interest and dividends payable     18,555,293       15,427,509  
Other accrued expenses     4,705,170       3,730,723  
TOTAL LIABILITIES     1,199,809,169       685,184,431  
                 
STOCKHOLDERS’ EQUITY                
                 
REDEEMABLE PREFERRED STOCK                
(par value $0.001; shares authorized 100,000; shares outstanding 97,524 and 98,611; liquidation preference of $98,093,000 and $99,186,000 as of December 31, 2018 and December 31, 2017, respectively)     86,910,335       92,840,243  
SERIES 2 REDEEMABLE PREFERRED STOCK                
(par value $0.001; shares authorized 150,000; shares outstanding 148,359 and 88,709; liquidation preference of $149,225,000 and $89,208,000 as of December 31, 2018 and December 31, 2017, respectively)     129,062,704       80,275,204  
COMMON STOCK                
(par value $0.001; shares authorized 210,000,000; shares issued and outstanding 33,018,161 as of December 31, 2018 and 5,813,555 as of December 31, 2017)     33,018       5,813  
Additional paid-in capital     249,662,168        
Accumulated deficit     (184,610,343 )     (39,449,517 )
TOTAL STOCKHOLDERS’ EQUITY     281,057,882       133,671,743  
                 
TOTAL LIABILITIES & EQUITY   $ 1,480,867,051     $ 818,856,174  


GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

    Three Months Ended     Year Ended  
    December 31,
2018
    December 31,
2017
    December 31,
2018
    December 31,
2017
 
    (unaudited)     (unaudited)              
REVENUE                        
Gain (loss) on life insurance policies, net   $ (67,034,580   $ 16,996,965     $ (14,104,572   $ 62,114,403  
Interest and other income     6,850,640       683,980       13,714,281       2,019,515  
TOTAL REVENUE     (60,183,940     17,680,945       (390,291     64,133,918  
                                 
EXPENSES                                
Interest expense     25,125,464       15,653,797       80,135,983       54,419,444  
Employee compensation and benefits     4,879,843       4,173,294       17,406,982       14,869,749  
Legal and professional fees     1,789,856       1,161,615       5,541,177       5,095,643  
Other expenses     7,732,162       3,138,060       15,994,487       12,478,676  
TOTAL EXPENSES     39,527,325        24,126,766       119,078,629       86,863,512  
                                 
INCOME (LOSS) BEFORE INCOME TAXES     (99,711,265 )     (6,445,821 )     (119,468,920 )     (22,729,594 )
INCOME TAX EXPENSE (BENEFIT)     -       4,384,546       -       (2,097,371 )
                                 
NET INCOME (LOSS) BEFORE EARNINGS FROM EQUITY METHOD INVESTMENT     (99,711,265 )     (10,830,367 )     (119,468,920 )     (20,632,223 )
                                 
Earnings from equity method investment     17,507       -       17,507       -  
                                 
NET INCOME (LOSS)     (99,693,758 )     (10,830,367 )     (119,451,413 )     (20,632,223 )
                                 
Preferred stock dividends     4,306,218       5,255,318       16,662,731       12,702,341  
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS   $ (103,999,976 )   $ (16,085,685 )   $ (136,114,144 )   $ (33,334,564 )
NET INCOME (LOSS) PER SHARE                                
Basic   $ (15.16 )   $ (2.77 )   $ (22.32 )   $ (5.72 )
Diluted   $ (15.16 )   $ (2.77 )   $ (22.32 )   $ (5.72 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING                                
Basic     6,861,799       5,813,555       6,098,208       5,826,033  
Diluted     6,861,799       5,813,555       6,098,208       5,826,033