Imperial Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Emergent Capital, Inc. (EMG)
by: SA Transcripts

Imperial Holdings, Inc. (IFT) Q4 2013 Earnings Conference Call March 10, 2014 5:00 PM ET

Executives

David Sasso - Director, Investor Relations

Tony Mitchell - Chief Executive Officer

Rory O’Connell - Chief Financial Officer

Analysts

Scott Valentin - FBR Capital Markets

Justin Wohler - Candlewood

Operator

Good day, ladies and gentlemen and welcome to the Imperial Holdings Fourth Quarter and Year End 2013 Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

I’d now like to turn the call over to your host, David Sasso, Director of Investor Relations. Please go ahead.

David Sasso - Director, Investor Relations

Thank you, Patrick. Good afternoon, everyone and thank you for joining the Imperial Holdings 2013 fourth quarter and year end earnings conference call. With me today is Tony Mitchell, our Chief Executive Officer; and Rory O’Connell, our Chief Financial Officer.

Our financial results press release for the quarter and last 12 months was issued after the close of market today and is posted in the Investor Relations section of our website at imperial.com.

Before we begin, I would like to remind everyone that some of the comments made on today’s call may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC, including the company’s most recent 10-K filing. We encourage you to read the company’s latest 10-K filing in its entirety.

With that, I would like to turn the call over to Tony Mitchell. Tony?

Tony Mitchell - Chief Executive Officer

Thanks, David and good afternoon everyone. Thank you for joining us today. Apologies in advance, I have picked up a little laryngitis, but hopefully it won’t interrupt too much. 2013 was truly transformative for us. We completely rebooted our business and are now poised to continue to build upon our success. We increased the size of our balance sheet by 117% and almost tripled our life settlement portfolio by bringing on balance sheet some 398 policies.

Additionally, we greatly mitigated our premium obligations with a $300 million 15-year revolving credit facility, which pays the ongoing premiums for the majority of the life settlement assets that made by locking in tremendous long-term value for our shareholders. Further, we simplified our business model with the sale of our Structured Settlement business segment for $12 million. And together, these transactions transformed our organization and paved the way for us to complete our recent $70.7 million capital raise, which now allows us to focus on growing the business.

We transitioned from being defensive and having to shore up the balance sheet to being on the offensive developing a clear path to grow book value and leverage our expertise in the life settlement space. We believe the capital raise, which I should note included overwhelming participation by our shareholders is an important endorsement of our business strategy, management team and Board of Directors. We anticipate using most of the proceeds within the life settlement space before year end.

And our primary objective for the use of proceeds is to lend to existing portfolio owners. We expect to leverage our industry expertise and offer portfolio owners an alternative to asset sales whilst keeping the majority of their portfolio value. For Imperial, we expect it will result in a meaningful increasing book value by year end and provide cash flows in 2015 helping us bridge to our longer term cash flows. We look forward to providing additional information throughout the coming year.

In the fourth quarter of last year, we settled all shareholder and related litigation achieving yet another milestone. I must say compared to where we were 24 months ago or even just 12 months ago, we have moved from a company with an uncertain future leading cash to a lean and focused organization poised for growth.

And with that, I’d like to turn the call over to Rory who will go through the fourth quarter and year end financial results in greater detail. Ro?

Rory O’Connell - Chief Financial Officer

Thanks, Tony and good afternoon everyone. Overall, we are very pleased with our financial results for the fourth quarter and for the full year 2013. For the quarter, total income from continuing operations was $6.5 million compared to $3.1 million during the same period in 2012, an increase of $3.4 million. This increase resulted primarily from an improvement in the fair value of the company’s investments in life settlements. There has been a steady improvement in our blended share value discount rate to 19.14% from 19.63% at the end of the third quarter of 2013 and 24.01% at the end of 2012. The decrease in the discount rate results from a combination of an improved macro environment for life settlements and improved market sentiment for the company’s life settlement assets in particular.

For full year 2013, total income from continuing operations was $89.1 million as compared to $5.1 million for 2012. Total expenses from continuing operations were $2.6 million for the fourth quarter compared to $7.3 million during the same three months period in 2012. The decrease in expenses was primarily driven by a reduction in the fair value of our outstanding notes payable of $4.1 million and lower legal fees of $2.2 million. This was offset by a $1.6 million increase in interest expense from our revolving credit facility. We expect legal expenses in 2014 to remain at a relatively high level due to ongoing indemnification obligations, though lower than those of 2012 and 2013.

The company is committed to expense control and overall excluding legal, we expect to reduce operating expenses by at least 10% over the next 12 months. For fourth quarter the company reported net income from continuing operations of $3.9 million or $0.18 per fully diluted share compared to a net loss of $4.2 million or a loss of $0.20 per fully diluted share for the same period in 2012. For the year ended 2013 we had net income from continuing operations of $51.8 million or $2.44 per fully diluted share compared to a net loss of $42 million or a loss of $1.98 per fully diluted share for 2012.

Turning to the balance sheet, we are pleased to have more than doubled our total assets from $160.3 million at the end of 2012 to over $348.1 million at the end of 2013. At year end, the estimated fair value of the company’s 612 life insurance policies was $303 million compared to 214 life insurance policies valued at $113 million at December 31, 2012. The aggregate face value of the company’s portfolio was approximately $3 billion at December 31, 2013. The company experienced one maturity during the fourth quarter in the amount of $6 million we collected the full amount in December. The maturity occurred in our credit facility and we applied the $6 million to the note outstanding balance in the first quarter of 2014.

Looking further at our credit facility at year end, the estimated fair value of our debt was $123.8 million. The outstanding principal balance was $133.2 million. The discount rate applied to the debt during the quarter was 24.04%. The lower estimated fair value of the debt relative to its outstanding principal balance at quarter’s end was driven in part by a raise in duration equivalent risk free rates during the period and internal and external assessments of the limited liquidity of the debt facility.

Turning to our non-finance policies on balance sheet, we sold six policies for $4 million during the quarter. They priced significantly above our cost basis and right at our carrying value before broker fees. For the year the company collected $12 million in policies that matured and sold eight policies for a gross amount of $5.8 million. Additionally, the company lapsed or surrendered 22 polices of little or no economic value that it had acquired as part of the buy out and financing transactions of last April.

We are currently undertaking a strategic review of the remaining life settlement assets we own that are not financed in the credit facility. Over the past few quarters, we have opportunistically sold some policies and lapsed a few others, which did not meet our investment objectives. We are reviewing all options, including selling the entire portfolio or potentially entering into a financing arrangement, which would eliminate our ongoing premium burden. We expect to reach a final decision in the next one to two quarters. Rest assured, our decision will reflect the best combination of return on capital and best meeting the company’s liquidity needs.

Turning to cash, as of December 31, the company had $22.7 million of cash and cash equivalents and $13.5 million in restricted cash. The restricted cash reflected in our Q4 results has since been used to payoff all liabilities associated with the class and derivative actions in Q1 of 2014. Taking into account the recent capital raise and this payout of restricted cash, the company had approximately $84.9 million in cash as of March 1. At year end, the company’s book value was $9.11 per share.

Now, I would like to turn the call back to Tony for some closing comments. Tony?

Tony Mitchell - Chief Executive Officer

Thank you, Rory. Finally, now that we have completed our successful offering, we have been active in preparation for our capital deployment program, which I discussed earlier. We see deployment proceeds of our new capital raise during the second half of 2014 and we have already begun to lay the groundwork with extensive due diligence preparation and underwriting.

As Rory alluded to earlier, this capital raise has significantly alleviated our liquidity issues, particularly as we expect to generate cash flow from our institutional lending program next year. At the same time, we will continue to managing our expenses to support our leaner business model. We are very well positioned to grow shareholder value in 2014. That concludes our remarks and we invite you to ask questions. Patrick?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Valentin with FBR Capital Markets. Your line is open.

Scott Valentin - FBR Capital Markets

Good evening. Thanks for taking my question. Just to focus on the expense line, just trying to figure out what the cash expense that I mentioned reducing kind of operating expense by 10% actual yield throughout the course of the year? Just fourth quarter, can you just kind of summarize what the cash expenses were? Is it everything but the fair value adjustment on the debt?

Rory O’Connell

For the fourth quarter did you say, Scott?

Scott Valentin - FBR Capital Markets

Yes, Rory, fourth quarter.

Rory O’Connell

Alright, give me a sec here, Scott.

Scott Valentin - FBR Capital Markets

Sure, sure. I will ask another question while you are working on that. And then the policy decline from quarter-over-quarter, I think there was 622 total policies at September 30, now it’s 612 and now you said you sold I think six policies, with at least four lapsed during the quarter?

Rory O’Connell

Yes, we had mortality.

Scott Valentin - FBR Capital Markets

Okay. So that would leave three lapses during the quarter?

Rory O’Connell

That’s right, Scott. Yes.

Scott Valentin - FBR Capital Markets

Okay. And then the mortality the amount of that event?

Rory O’Connell

It was $6 million policy, Scott.

Scott Valentin - FBR Capital Markets

And have you guys received the proceeds yet for that or no?

Rory O’Connell

We have. We have received them in December.

Scott Valentin - FBR Capital Markets

Okay, okay. And then is there an update on the IRS situation?

Tony Mitchell

Yes, Scott. The update there is we have been in active dialog with the IRS, where giving what’s called rolling production, they have sent information or document requests and we are providing them information. And we have always said and we continue to say that we fully cooperate with their investigation and we hope to resolve it as quickly as we possibly can.

Scott Valentin - FBR Capital Markets

Okay. It is focused on Structured Settlements business, correct?

Tony Mitchell

That’s correct.

Scott Valentin - FBR Capital Markets

Okay, alright. That’s all I had. Thanks very much.

Tony Mitchell

Thank you, Scott.

Operator

(Operator Instructions) Our next question comes from Justin Wohler with Candlewood. Your line is open.

Justin Wohler - Candlewood

Hi guys, I was just hoping you could clarify the total proceeds in your recent bond issuance, I heard $70.7 million, was that from the greenshoe and is that net of fees or if you could just break out your math there?

Tony Mitchell

Yes, thanks Justin. So the total offering size as we have disclosed is $70.7 million, Justin that includes the greenshoe and the net proceeds to Imperial just here under $68 million to $67.9 million.

Justin Wohler - Candlewood

Great, thank you very much. That’s all I had.

Tony Mitchell

You’re welcome Justin. Thank you.

Operator

Thank you. I will turn it back to management for closing remarks.

Tony Mitchell - Chief Executive Officer

Okay. Well, I appreciate the lack of questions. It’s easier on the voice. We look forward to – we have got the Q1 conference call coming up in six to seven weeks and we look forward to updating our shareholders at that point. Thanks for everybody’s participation today and have a good afternoon.

Operator

Ladies and gentlemen, thanks for participating in today’s program. This concludes the program. You may all disconnect.

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