IPO Preview: GWG Holdings

Aug.13.14 | About: GWG Holdings (GWGH)

Summary

Provides financial solutions to consumers in the emerging secondary market for life insurance assets.

The price-to-book is 3.6. No clear competitive advantage.

P/E ratio is -5.1, which means the cash burn rate relative to the market cap is high.

Based in Minneapolis, MN, GWG Holdings (Pending:GWGH) scheduled a $20 million IPO on the Nasdaq with a market capitalization of $110 million at a price range midpoint of $12.50 for the week of August 11, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Co-Managers: MLV & Co. LLC

Summary

GWGH provides financial solutions to consumers in the emerging secondary market for life insurance assets.

Losing money.

Valuation

Glossary

Accumulated deficit ($mm)

-$10

Per share dilution

-$9.12

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Q1 '14

GWG Holdings

$39

1.8

-5.1

3.6

3.7

52%

Click to enlarge

Conclusion

The rating is neutral.
The price-to-book is 3.6.
No clear competitive advantage.

P/E ratio is -5.1, which means the cash burn rate relative to the market cap is high.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

GWGH provides financial solutions to consumers in the emerging secondary market for life insurance assets.

GWGH targets its financial solution offerings toward consumers owning life insurance who can benefit from realizing the actuarial value of their life insurance policy.

GWGH believes the value proposition of its services to the consumers GWGH serves is compelling, and these consumers represent the fastest growing demographic in the United States according to the U.S. Census Bureau.

To address this growing need, GWGH recently has expanded its services by offering consumers a range of options to access the actuarial value of their life insurance, including purchasing (I) all or a portion of their life insurance policy for cash, (II) all or a portion of their life insurance policy in exchange for a different asset, and (III) all or a portion of their life insurance policy in an installment sale that provides the selling consumer with a stream of cash flow.

All of GWGH's services involve its purchase or financing of life insurance assets from consumers in the secondary market at a discount to the face value of the life insurance asset GWGH obtains. In cases where GWGH purchases a life insurance policy, GWGH continues paying the policy premiums until maturity, in order to collect the policy benefit upon the insured's mortality.

In this way, GWGH hopes to profit from the difference between its cost of obtaining and financing a life insurance asset, and the policy benefit GWGH ultimately receives upon the mortality of the insured.

In addition to its goal of providing consumers with value-added services based upon the actuarial value of their life insurance policies, GWGH seeks to build a profitable and large portfolio of life insurance assets that are well diversified in terms of insurance carriers, mortality profiles and the medical conditions of insureds.

GWGH believes that successfully diversifying its assets will lower its overall risk exposure and provide its portfolio of life insurance assets with greater actuarial stability and more reliable returns.

To obtain the growth and diversification it seeks, GWGH has raised capital through a variety of financing efforts that have included the private and public offerings of structured debt securities, private offerings of preferred stock, and the use of a senior secured revolving credit facility. This offering of common stock is an extension of that strategy.

According to the American Council of Life Insurers Fact Book 2013 (ACLI), individuals owned over $11.22 trillion of face value of life insurance policies in the United States in 2012.

This figure includes all types of policies, including term and permanent insurance known as whole life, universal life, variable life, and variable universal life.

The ACLI reports that the lapse and surrender rate of individual life insurance policies for 2012 was 5.9%, over $661 billion in face value of policy benefits in 2012 alone.

These figures do not include group-owned life insurance, such as employer-provided life insurance, the market for which totaled over $8.01 trillion of face value of life insurance policies in the United States in 2012, and the policies of which exhibit similar lapse and surrender rates, according to the ACLI.

Consumers owning life insurance generally allow policies to lapse or surrender the policies for a variety of reasons, including: (i) the life insurance is no longer needed; (ii) unrealistic original earnings assumptions made when the policy was purchased; increasing premium payment obligations as the insured ages; (iv) changes in financial status or outlook which cause the insured to no longer require life insurance; (v) other financial needs that make the insurance unaffordable; or (vi) a desire to maximize the policy's investment value.

Dividend Policy

No dividends are planned.

Competition

GWGH encounters significant competition in the life insurance purchasing and financing business from numerous companies, including hedge funds, investment banks, secured lenders, specialty life insurance finance companies and life insurance companies themselves.

Many of these competitors have greater financial and other resources than GWGH does and may have significantly lower cost of funds because they have greater access to insured deposits or the capital markets.

Moreover, some of these competitors have significant cash reserves and can better fund shortfalls in collections that might have a more pronounced impact on companies such as GWGH.

They also have greater market share. In the event that the life insurance companies make a significant effort to compete against the business, GWGH would experience significant challenges with its business model.

5% stockholders

Jon R. Sabes 53.2%

Steven S. Sabes 52.0%

Use of proceeds

GWGH intends to use the $18 million in proceeds from its IPO as follows:

promote and advertise the opportunities for consumers owning life insurance and investors to profit from participating in the secondary market for life insurance policies;

purchase additional life insurance policies in the secondary market;

pay premiums on life insurance policy assets GWGH owns; and

fund its portfolio operations and for working capital purposes.

Disclaimer: This GWGH IPO report is based on a reading and analysis of GWGH's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.