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GWG Holdings Reports Results for the Third Quarter Ended September 30, 2018

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GWGH Announces share repurchase program

MINNEAPOLIS, Nov. 19, 2018 (GLOBE NEWSWIRE) -- GWG Holdings, Inc. (GWGH), 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 industry, today announced its financial and operating results for the third quarter ended September 30, 2018.

GWGH Common Stock Repurchase Program

The Company’s Board of Directors has approved a common stock repurchase program authorizing the Company to purchase up to $1.5 million in shares of the common stock. The timing and exact amount of repurchases will be subject to various factors, including the Company’s capital position, liquidity, alternative uses of capital, stock trading price and general market conditions, and it may be modified, suspended or terminated at any time.

Financial and Operating Highlights for the Quarter

  • On August 10, 2018, we completed the initial transfer of our $695 million strategic transaction with The Beneficient Company Group, L.P. (Beneficient Transaction).

  • On November 9, 2018, we filed a preliminary information statement with the Securities and Exchange Commission (SEC) which represents an important step and further progress towards the final closing of the Beneficient Transaction. This document can be found on the SEC’s website and on our website (http://investors.gwgh.com).

  • Achieved strong life insurance policy acquisition volume totaling over $120 million of face value of policy benefits acquired.

  • Reached a total life insurance policy portfolio of nearly $2 billion in face value of policy benefits.

  • Continued to expand the number of independent broker dealers and registered investment advisors in our investment securities selling group.

  • Reduced the outstanding amount on senior credit facility with net pay-downs totaling $18.4 million for the quarter and $50.6 million year to date through the end of the third quarter.

  • Reported a total liquidity position of $131 million at quarter-end that includes cash, restricted cash and policy benefits receivable.

  • On October 18, 2018 received notice from ITM TwentyFirst, LLC and, on November 12, 2018 from AVS, LLC, that the companies, two of our primary independent third-party medical actuarial underwriting firms, released updated mortality tables and medical underwriting methodologies. Further information regarding these changes can be found in our Quarterly Report on Form 10-Q filed with the SEC on November 19, 2018.

  • Achieved significant milestones within our insurtech strategy:

    • Launched YouSurance (https://www.yousurance.com/), a digital life insurance agency that is working to apply epigenetic signatures to better assess life insurance applicants’ health and wellness.

    • Initiated a self-designed research study that includes 1,300 individuals aimed at identifying epigenetic signatures that mirror traditional biomarkers used in life insurance underwriting, as well as replicating underwriting risk classifications.

“The Beneficient Transaction is transformative for our growth as we expand our alternative asset portfolio to include new assets managed by Beneficient and look to offer Beneficient’s suite of liquidity products to the independent-broker dealer and RIA channels,” said Jon Sabes, GWGH Chief Executive Officer. “And our insurtech initiative to bring step-change epigenetic technology into the life insurance industry is under way with our groundbreaking research study. We believe both parts of our business present strong opportunities for growth as we continue to build from our core competencies.”

1. Financial & Operating Highlights

($ Thousands except per share information)

Q3 2018

Q3 2017

YTD Q3 2018

YTD Q3 2017

Revenue

$

16,653

$

14,697

$

55,509

$

46,453

Expenses

27,175

21,524

75,267

62,737

Per Share Data1:

Net Income (Loss)2

(2.52

)

(1.31

)

(5.50

)

(2.96

)

Adjusted Non-GAAP Net Income (Loss)3,4

(0.11

)

0.69

2.20

2.88

Capital Raised5

66,627

64,782

218,515

178,615

Liquidity6

131,416

135,762

131,416

135,762

Life Insurance Portfolio7

1,961,598

1,622,627

1,961,598

1,622,627

Life Insurance Acquired7

120,430

106,871

333,078

300,366

Face Value of Matured Policies

7,973

9,747

50,100

39,657

TTM Benefits / Premiums8

135.8

%

115.4

%

135.8

%

115.4

%

  1. Attributable to common shareholders

  2. Per basic and fully diluted share outstanding

  3. Per fully diluted share outstanding

  4. See Non-GAAP Financial Measures below

  5. Excludes the Series B Convertible Preferred Stock and Seller Trust L Bonds issued in conjunction with the initial transfer of the Beneficient Transaction

  6. Includes cash, restricted cash and policy benefits receivable, if any

  7. Face amount of policy benefits

  8. The ratio of policy benefits recognized to premiums paid on a trailing twelve month (TTM) basis

2. Revenue and Expense Discussion

Third Quarter 2018 vs. Third Quarter 2017:

  • Total revenue was $16.7 million in the current period, compared to $14.7 million in the prior period primarily related to:

    • Higher unrealized gain from policy acquisitions reflecting higher policy acquisition volume – $120.4 million of face value acquired in the current period compared to $106.9 million in the prior period.

    • No charges relating to the fair value impact of updating life expectancy estimates in the current period, compared to a charge of $5.4 million in the prior period.

    • Lower gain from policy benefits due to decreased realization of policy benefits – $8.0 million of life insurance policy benefits realized in the current period compared to $9.7 million in the prior period.

  • Total expenses were $27.2 million in the current period, compared to $21.5 million in the prior period primarily related to:

    • Increased interest expense of $4.2 million due to increased debt outstanding and higher interest rates on our amended and restated senior credit facility partially offset by a lower balance outstanding on this facility.

    • Increased incentive compensation costs including expense related to stock-based compensation.

    • Costs of $1.3 million relating to our YouSurance and Life Epigenetics wholly owned insurtech subsidiaries in the current period compared to $0.3 million in the prior period.

    • Increased sales and marketing costs associated with our expanding network of independent financial advisors and insurance agents in the current period.

Third Quarter Year-to-Date 2018 vs. Third Quarter Year-to-Date 2017:

  • Total revenue of $55.5 million in the current period, compared to $46.5 million in the prior period primarily related to:

    • Higher realization of policy benefits – $50.1 million of life insurance policy benefits realized in the current period compared to $39.7 million in the prior period.

    • Lower charges relating to the fair value impact of updated life expectancy estimates on certain policies in our portfolio: a charge of $4.9 million in the current period compared to a charge of $14.0 million in the prior period.

    • Lower unrealized gain from policy acquisitions due to lower purchase yields which was partially offset by a higher amount of policy purchases.

  • Total expenses were $75.3 million in the current period, compared to $62.7 million in the prior period primarily related to:

    • Increased interest expense of $12.0 million due to increased debt outstanding and higher interest rates on our amended and restated senior credit facility partially offset by a lower balance outstanding on this facility.

    • Higher employee compensation and benefits expenses.

    • Increased technology costs relating to systems development and cybersecurity initiatives.

    • Costs of $2.9 million relating to our YouSurance and Life Epigenetics wholly owned insurtech subsidiaries in the current period compared to $1.0 million in the prior period.

    • Increased sales and marketing costs associated with our expanding network of independent financial advisors and insurance agents in the current period.

3. Life Insurance Portfolio Statistics

Portfolio Summary:

Total portfolio face value of policy benefits

$

1,961,598,000

Average face value per policy

$

1,805,000

Average face value per insured life

$

2,018,000

Average age of insured (years)

82.1

Average life expectancy estimate (years)

6.7

Total number of policies

1,087

Number of unique lives

972

Demographics

76% Males; 24% Females

Number of smokers

43

Largest policy as % of total portfolio

0.68

%

Average policy as % of total portfolio

0.09

%

Average annual premium as % of face value

2.90

%

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

14

$

19,954,000

1.3

%

1.0

%

1.2

90

94

129

254,332,000

11.9

%

13.0

%

2.8

85

89

215

458,646,000

19.8

%

23.4

%

4.6

80

84

239

468,474,000

22.0

%

23.9

%

6.2

75

79

212

383,160,000

19.5

%

19.5

%

8.9

70

74

195

289,030,000

17.9

%

14.7

%

10.5

60

69

83

88,002,000

7.6

%

4.5

%

9.7

Total

1,087

$

1,961,598,000

100.0

%

100.0

%

6.7

4. Life Insurance Policy Origination

Life Insurance Portfolio Activity:

Three Months Ended

Nine Months Ended

September 30,
2018

September 30,
2017

September 30,
2018

September 30,
2017

Total policy benefits purchased

$

120,418,000

$

106,871,000

$

333,078,000

$

300,366,000

Total life insurance policies purchased

89

65

233

187

Average policy benefit purchased

$

1,353,000

$

1,644,000

$

1,430,000

$

1,606,000

Direct policy benefits purchased

$

16,524,000

$

2,734,000

$

29,561,000

$

43,878,000

Direct insurance policies purchased

17

10

39

40

  • Life insurance policy purchases were marginally higher in both the third quarter of 2018 and year-to-date 2018 reflecting improved pipeline management and pull-through rates. All of our policy acquisition channels were highly price competitive for all reported periods and we expect this to continue for the foreseeable future. We expect capital allocated to future policy purchases will be tempered as long as these conditions are present.

5. Beneficient Transaction

As we reported in our second quarter earnings release on August 10, 2018, we completed the initial transfer of the Beneficient Transaction. As part of the initial transfer, and among other consideration exchanged, we received a $50 million investment in a newly issued Series B preferred stock that will convert into common stock at $10.00 per share upon the final closing.

On November 9, 2018, we filed a Preliminary Information statement with the SEC which represents an important step and further progress towards the final closing of the Beneficient Transaction. The preliminary information statement can be found on the SEC’s website. We are optimistic that we will reach a final closing at or near year-end 2018.

Since the consummation of the initial transfer in August 2018, the parties have made substantial progress in exploring the strategic opportunities that we envisioned since first evaluating this transaction. We anticipate that these opportunities will be realized for the parties’ mutual benefit in the coming quarters.

6. Insurtech Initiatives

We expanded our insurtech capability through the addition of YouSurance, a new subsidiary that seeks to deliver on the promise of epigenetic technology. “The launch of YouSurance.com where consumers can purchase life insurance and receive information about their health and wellness demonstrates the confidence that we have in our ability to commercialize epigenetic technology,” Sabes said. “In combination with the findings we anticipate receiving from our research study of 1,300 individuals, we expect to have a profound impact on the way life insurance is underwritten and sold.”

Insurtech highlights:

  • Collected biological samples from 1,300 individuals for ground truth assessment of traditional biomarkers of health and wellness, as well as traditional life insurance underwriting information for supervised machine learning epigenetic analysis.

  • CEO Jon Sabes presented at two significant events: the InsureTech Connect 2018 conference in Las Vegas and Plug and Play’s Insurtech event in Silicon Valley.

  • Our Chief Science Officer Dr. Brian Chen and our technology were mentioned prominently in the November/December issue of MIT Technology Review and in a paper published by the National Center for Biotechnology Information.

7. Additional Information

Gain on Life Insurance Policies:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Change in estimated probabilistic cash flows (1)

$

19,069,000

$

12,568,000

$

55,483,000

$

40,033,000

Unrealized gain on acquisitions (2)

9,021,000

7,217,000

21,790,000

25,863,000

Premiums and other annual fees

(14,765,000

)

(13,174,000

)

(39,670,000

)

(36,124,000

)

Change in discount rates (3)

-

7,987,000

-

12,130,000

Change in life expectancy evaluation (4)

73,000

(5,370,000

)

(4,890,000

)

(13,974,000

)

Face value of matured policies

7,973,000

9,747,000

50,100,000

39,657,000

Fair value of matured policies

(5,650,000

)

(4,554,000

)

(29,883,000

)

(22,468,000

)

Gain on life insurance policies, net

$

15,721,000

$

14,421,000

$

52,930,000

$

45,117,000

  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 transaction price for policies acquired during the reporting period.

  3. The discount rate of 10.45% as of September 30, 2018 remained unchanged from both the prior quarter and year-end dates. The discount rate of 10.54% as of September 30, 2017 reflected a decrease from the 10.81% rate used at June 30, 2017 and 10.96% used at December 31, 2016.

  4. The change in fair value due to updating life expectancy estimates on certain life insurance policies in our portfolio.


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

March 31, 2015

754,942,000

46,675,000

23,786,000

196.2

%

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

%

Webcast/Conference Call Details

Management will host a webcast/conference call Wednesday, November 21 at 8:30 a.m. EST to discuss our financial and operating results. The webcast will give viewers audio and access to PowerPoint slides that illustrate points made during the call. To register for the call and webcast, go to http://get.gwgh.com/q32018webcastinvite.

After the webcast is completed, a replay of it can be accessed at http://get.gwgh.com/q32018webcast.

About GWG Holdings, Inc.

GWG Holdings, Inc. (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 industry and beyond. GWG Life provides value to consumers owning illiquid life insurance products across America, delivering them more than $564 million for their policies since 2006. GWG Life owns a life insurance policy portfolio of $1.96 billion in face value of policy benefits as of September 30, 2018. Life Epigenetics is commercializing epigenetic technology for life insurance industry and beyond. 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.

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

GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,
2018

December 31,
2017

(unaudited)

A S S E T S

Cash and cash equivalents

$

117,873,668

$

114,421,491

Restricted cash

3,069,759

28,349,685

Investment in life insurance policies, at fair value

791,468,587

650,527,353

Life insurance policy benefits receivable

10,472,696

16,658,761

Other assets

13,022,023

8,898,884

TOTAL ASSETS

$

935,906,733

$

818,856,174

L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y

LIABILITIES

Senior credit facility with LNV Corporation

$

162,469,172

$

212,238,192

L Bonds

570,199,704

447,393,568

Accounts payable

2,579,323

6,394,439

Interest and dividends payable

16,228,341

15,427,509

Other accrued expenses

3,272,758

3,730,723

TOTAL LIABILITIES

754,749,298

685,184,431

STOCKHOLDERS’ EQUITY

REDEEMABLE PREFERRED STOCK

(par value $0.001; shares authorized 100,000; shares outstanding 97,534 and 98,611; liquidation preference of $98,103,000 and $99,186,000 as of September 30, 2018 and December 31, 2017, respectively)

86,920,335

92,840,243

SERIES 2 REDEEMABLE PREFERRED STOCK

(par value $0.001; shares authorized 150,000; shares outstanding 148,444 and 88,709; liquidation preference of $149,310,000 and $89,208,000 as of September 30, 2018 and December 31, 2017, respectively)

129,147,704

80,275,204

SERIES B CONVERTIBLE PREFERRED STOCK

(par value $0.001; stated value $10; shares authorized and outstanding 5,000,000)

50,000,000

-

COMMON STOCK

(par value $0.001; shares authorized 210,000,000; shares issued and outstanding 5,980,124 as of September 30, 2018 and 5,813,555 as of December 31, 2017)

5,980

5,813

Additional paid-in capital

-

-

Accumulated deficit

(84,916,584

)

(39,449,517

)

TOTAL STOCKHOLDERS’ EQUITY

181,157,435

133,671,743

TOTAL LIABILITIES & EQUITY

$

935,906,733

$

818,856,174

GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

Three Months Ended

Nine Months Ended

September 30,
2018

September 30,
2017

September 30,
2018

September 30,
2017

REVENUE

Gain on life insurance policies, net

$

15,721,513

$

14,421,353

$

52,930,008

$

45,117,438

Interest and other income

931,145

275,690

2,579,270

1,335,535

TOTAL REVENUE

16,652,658

14,697,043

55,509,278

46,452,973

EXPENSES

Interest expense

17,514,962

13,275,407

50,726,149

38,765,647

Employee compensation and benefits

5,548,771

3,792,096

12,527,139

10,696,455

Legal and professional fees

1,421,964

1,657,090

3,751,321

3,934,027

Other expenses

2,688,970

2,799,196

8,262,324

9,340,617

TOTAL EXPENSES

27,174,667

21,523,789

75,266,933

62,736,746

INCOME (LOSS) BEFORE INCOME TAXES

(10,522,009

)

(6,826,746

)

(19,757,655

)

(16,283,773

)

INCOME TAX EXPENSE (BENEFIT)

-

(2,764,243

)

-

(6,481,917

)

NET INCOME (LOSS)

(10,522,009

)

(4,062,503

)

(19,757,655

)

(9,801,856

)

Preferred stock dividends

4,313,542

3,548,165

12,356,513

7,447,022

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

(14,835,551

)

$

(7,610,668

)

$

(32,114,168

)

$

(17,248,878

)

NET INCOME (LOSS) PER SHARE

Basic

$

(2.52

)

$

(1.31

)

$

(5.50

)

$

(2.96

)

Diluted

$

(2.52

)

$

(1.31

)

$

(5.50

)

$

(2.96

)

WEIGHTED AVERAGE SHARES OUTSTANDING

Basic

5,894,639

5,797,800

5,840,880

5,829,808

Diluted

5,894,639

5,797,800

5,840,880

5,829,808

Non-GAAP Financial Measures

We use non-GAAP (generally accepted accounting principles) financial measures for evaluating financial results, planning and forecasting, and maintaining compliance with covenants contained in our borrowing agreements. The application of current GAAP standards during a period of significant growth in our business, in which period we are building a large and actuarially diverse portfolio of life insurance policies, results in current period operating performance that may not be reflective of our long-term earnings potential. Management believes that our non-GAAP financial measures permit investors to better focus on this long-term earnings performance without regard to the volatility in GAAP financial results that can occur during this phase of growth.

Non-GAAP financial measures disclosed by us are provided as additional information to investors in order to provide an alternative method for assessing our financial condition and operating results. These non-GAAP financial measures are not in accordance with GAAP and may be different from non-GAAP measures used by other companies, including other companies within our industry. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for comparable amounts prepared in accordance with GAAP. A reconciliation of GAAP to the non-GAAP financial measures described above can be found below.

Adjusted Non-GAAP Net Income. We calculate the adjusted net income by recognizing the actuarial gain accruing within our life insurance policies at the expected internal rate of return of the policies we own without regard to fair value. We net this actuarial gain against our adjusted costs during the same period to calculate our net income on a non-GAAP basis.

Three Months Ended
September 30,
(unaudited)

Nine Months Ended
September 30,
(unaudited)

2018

2017

2018

2017

GAAP net loss attributable to common shareholders

$

(14,836,000

)

$

(7,611,000

)

$

(32,114,000

)

$

(17,249,000

)

Unrealized fair value gain (1)

(24,840,000

)

(20,182,000

)

(56,058,000

)

(49,301,000

)

Adjusted cost basis increase (2)

29,704,000

24,207,000

83,154,000

68,667,000

Accrual of unrealized actuarial gain (3)

9,325,000

9,032,000

20,898,000

21,448,000

Total adjusted non-GAAP net income attributable to common shareholders

$

(647,000

)

$

5,446,000

$

15,880,000

$

23,565,000

Non-GAAP net income per share:

Basic

(0.11

)

0.94

2.72

4.04

Diluted

(0.11

)

0.69

2.20

2.88

Average shares outstanding:

Basic

5,894,639

5,797,800

5,840,880

5,829,808

Diluted

5,894,639

9,264,817

7,880,678

9,000,574

  1. Reversal of unrealized GAAP fair value gain on life insurance policies for current period.

  2. Adjusted cost basis is increased to include interest, premiums and servicing fees that are expensed under GAAP (non-GAAP Investment Cost Basis).

  3. Accrual of actuarial gain at the expected internal rate of return based on the non-GAAP Investment Cost Basis for the applicable period.