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

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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