Imperial Holdings' (IFT) CEO Antony Mitchell on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Emergent Capital, (EMG)

Imperial Holdings, Inc. (IFT) Q2 2014 Earnings Conference Call July 30, 2014 5:00 PM ET

Executives

David Sasso – Director of Investor Relations

Antony Mitchell – Chief Executive Officer

Richard S. O'Connell – Chief Financial Officer

Analysts

Scott J. Valentin – FBR Capital Markets & Co.

Merrill H. Ross – Wunderlich Securities, Inc

Operator

Good day, ladies and gentlemen and welcome to the Imperial Holdings Second Quarter 2014 Earnings 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 (Operator Instruction) as a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, David Sasso, Director of Investor Relations. Please go ahead.

David Sasso

Thank you, Sway. Good afternoon, everyone and thank you for joining the Imperial Holdings 2014 second quarter earnings conference call. With me today is Tony Mitchell, our Chief Executive Officer and Rory O’Connell, our CFO.

Our financial results press release for the second quarter 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.

Antony Mitchell

Thanks, David and good afternoon everyone. As we enter the second half of 2014, I'm pleased with the Company's performance to-date and look forward to the exciting opportunities that lie ahead. I would like to update you on some recent developments that we believe will have a positive impact on the company going forward.

On the capital deployment front, we are actively pursuing multiple opportunities within the life finance space. We are seeing a steady consistent flow of investment opportunities and we expect to begin deploying some proceeds as early as this quarter with additional deployment in the fourth quarter.

The opportunities we are seeing cover all aspects of the life settlement segment. They range from lending to outright purchases of portfolios to treasury trades as well as individual secondary market purchases. And the good news is all these investment opportunities offer very compelling IRRs. And we look forward to updating you on our next call as we begin to deploy the capital.

On the legal front, while we have a policy of not commenting on the specifics of pending litigation, I would like to point out that our motion to dismiss in the outstanding Sun Life litigation was recently granted by the court without prejudice. Our complaint against Sun Life continues. Whilst we expect Sun Life to file a second amended complaint, we remain pleased with the recent development and will continue to vigorously defend the company and its assets.

Finally, on an outstanding policy maturity of $2.1 million we had on balance sheet, I'm pleased to report that in arbitration we were awarded the full amount of policy proceeds plus interest and damages. We expect to collect on this outstanding receivable shortly as the carrier as already paid these benefits into court. It’s important to note after we collect on this receivable, Imperial will have no outstanding collection on policy maturities. We believe our balance sheet is further strengthened by these developments.

Now I would like to turn the call over to Rory, who will take a closer look at our financial performance. Ro.

Richard S. O’Connell

Thanks, Tony. Good afternoon everyone. Before delving into our financial results, I would like to remind everyone that the year-over-year comparisons we provide will appear a little lopsided this quarter. Our results one year ago were skewed by the change in fair value related to the acquisition of 422 policies, representing roughly $2 billion in debt benefit.

In the second quarter of 2014, we did not acquire any new policies. Although as Tony just mentioned, we expect to deploy capital for acquisitions in the coming periods, which will help drive future growth. Let aside a broader view of the past quarter will show a continued rise in our portfolio value of $21.4 million from the prior quarter. In particular, we benefited from receiving updated life expectancy reports indicating that several insured in our portfolio have deteriorating health.

Looking closer, for the second quarter total income from continuing operations was $9 million compared to $65.6 million in the second quarter of 2013. Total expenses from continuing operations were $19.5 million compared to $18.5 million incurred in the same quarter of 2013. We posted a net loss of $6.3 million or $0.29 per fully diluted share for the quarter compared to net income of $47.2 million or $2.22 per fully diluted share the second quarter of 2013.

In this quarter, the bulk of our loss can be attributed to the change of fair value of the derivative liability associated with our convertible notes of $4.7 million. This expense was a direct result of a raise in our stock price during the period. You may recall that because the company needed shareholder approval to exceed certain New York Stock Exchange limits for share issuance, associated with the conversion of the notes. The conversion option embedded in the notes was fair valued. Resulted in an embedded conversion derivative liability, which is essentially a note holder conversion option.

In the second quarter we did receive shareholder approval to exceed the NYSE limits, which means that beginning in Q3 we will no longer reported derivative liability. This liability was reclassified to additional paid-in-capital, along with certain unamortized transaction costs and net of the related tax impact of $8.8 million at the end of Q2. Taking a look at our life settlements portfolio in greater detail, we saw a gain in the change of fair value of the company’s investments in life settlements of $9 million for the quarter.

While we did not experience, any maturities during the quarter, the raise in fair value was primarily they result of our receiving new life expectancy reports on certain insured who’s health had notably deteriorating. The weighted average discount rate applied to our portfolio was 18.92% for the quarter. Our discount rate as come down slightly again, mostly as a result of strong market demand in the asset class as well as less risk associated with the company’s assets.

As of June 30, we owned 593 policies with an estimated fair value of $336.8 million, compared to 620 policies with the fair value of $265.8 million at June 30, 2013, an increase of $71 million or 27%. As of June 30, 2014, the aggregate debt benefit of the company’s investments in life settlements was $2.9 billion. During the quarter, we sold eight policies for $1.2 million and on average sales prices were well above cost and at or near our carrying value.

Looking at our revolving credit facility, the estimated fair value of this debt was $148.8 million and the outstanding principle balance was $154.3 million at quarter end. The discount rate applied to this debt, during the quarter was 23.74%. As a remainder the two maturities representing six policies that we announced on the last conference call have been collected and in July we are applied to our outstanding debt balance, which will be reflected in our next quarter re-filing. Also as Tony mentioned earlier we expect in Q3 to collect on a $2.1 million receivable representing our only outstanding maturity.

Turning to cash as of June 30, 2014, the company had $82.4 million in cash and cash equivalents. The company’s book value was $9.83 per share at quarter end. Lastly, I wanted to acknowledge our appreciation for the shares purchase by members of the Board of Directors and Management during the quarter, which we view as an endorsement of our growth step strategy.

With that, we have concluded our prepared remarks, and I prepare to open the call to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Scott Valentin from FBR and Company. Please go ahead.

Scott J. Valentin – FBR Capital Markets & Co.

Good evening, everybody. Thanks for taking my question. Just with regard to the earlier investments I think you mentioned third quarter you’re going to start maybe using some capital and cash to make investments. Is that a reflection of just the market that’s just now it’s a one side of market where there aren’t that many buyers and you guys are one of the few guys with capital?

Antony Mitchell

No, I don’t think, so I think that there is a lot of product to look at, but there are a lot of buyers out there and it’s as Tony said we are very pleased at the deal flow we are seeing, but it is a bit of shifting process, we’re looking for asset that compliments our existing portfolio and we are certainly looking for outsized IRRs so it’s a bit of shifting process.

Scott J. Valentin – FBR Capital Markets & Co.

And when you think about the assets you are looking at would it generally accretive to IRRs the portfolio or about inline with what you would expect from the portfolio?

Richard S. O'Connell

We expect them to be accretive.

Scott J. Valentin – FBR Capital Markets & Co.

Okay. And then on – some update guess is tomorrow the deadline for file of amendment?

Antony Mitchell

Scott, this is Antony. The deadline was actually Monday, we have been having a dialogue with them and we actually expect them to file something later today or tomorrow at the latest.

Scott J. Valentin – FBR Capital Markets & Co.

Okay. And is there any update on the IRS tax issue?

Antony Mitchell

Not update, Scott it’s again we continue to fully cooperate with the IRS but as of late it’s been very quite on that front.

Scott J. Valentin – FBR Capital Markets & Co.

Okay, and then with regards to some of the cash expenses, legal I know it’s hard to forecast, but would you say this is a decent level going forward for legal expense or do you think it to move around quite a bit?

Antony Mitchell

Scott I think legal is a little bit higher than – well its certainly higher than we would like and hopefully higher than we should look to see going forward, we've had a couple of results that I think are very good for the company and that’s actually reflected in the legal expense. So hopefully it will go down overtime.

Scott J. Valentin – FBR Capital Markets & Co.

Okay. Thanks very much.

Antony Mitchell

Thanks Scott.

Operator

Thank you and our next question Merrill Ross from WSI. Please go ahead.

Merrill H. Ross – Wunderlich Securities, Inc

Just looking again at the acquisitions and the deployment of capital that you are look to, are you looking at any portfolios, are these any are they more one-off policies, who are the seller and can you talk about what their expectations might be?

Antony Mitchell

Good afternoon Merrill. Merrill we initially we were going out looking for portfolios to lend against Merrill, but very pleasantly surprised that we are seeing product really all across the life element spectrum to literally everything, from portfolios to lend against to portfolios to buy, to retain debt benefit deal, to treasury trades and the seller are obviously they are individual selling life, individual life policies and retain death benefits and there is anywhere from family offices to hedge funds on the portfolio trades.

Merrill H. Ross – Wunderlich Securities, Inc

Great. When you look at the balance of unpledged investment in my settlements at what level does that become interesting to pull together and pledged to further lever your operations?

Richard S. O'Connell Jr.

Merrill this Rory, Hi.

Merrill H. Ross – Wunderlich Securities, Inc

Hi.

Richard S. O'Connell Jr.

I just want to make sure I understand the question. Are you asking about those – our balance sheets that are not financed and as we add assets at what level would we consider adding some leverage to that?

Merrill H. Ross – Wunderlich Securities, Inc

Right. I mean is there like a bite size that’s suitable for the market or you could look at it that way?

Antony Mitchell

Merrill what is Rory is thinking we continue to monitor that there is a lot of interest in the life settlement space, management team and Board of Director view those interesting assets where our blended discount rate right now is 18% and we would expect that to come down overtime. So we certainly don’t want to do anything where we don’t recognize full value for those assets.

Merrill H. Ross – Wunderlich Securities, Inc

Sure. It makes sense. All right thank you.

Antony Mitchell

Thank you Merrill.

Operator

(Operator Instructions) I’m not showing any further question. I would like to turn it back to management for any further remark.

Antony Mitchell

Okay. We would like to thank you everybody for participating today and we look forward to the Q3 call later in the year. Thank you.

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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