GWG Holdings Inc (NASDAQ:GWGH)
Q1 2016 Earnings Conference Call
April 28, 2016 04:30 PM ET
Rose Reifsnyder - SVP of Marketing
Jon Sabes - CEO
Bill Acheson - CFO
Michael Freedman - President
William Gibson - ROTH Capital
Sarkis Sherbetchyan - B. Riley and Company
Kyle Mowery - GrizzlyRock Capital
Jeff Nord - Premium Legacy
Scott Berman - Independent Life
Welcome to GWG Holdings First Quarter 2016 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 9:00 p.m. Eastern Standard Time. [Operator Instructions] Now, first, I'd like to turn the call over to Ms. Rose Reifsnyder, Senior Vice President of Marketing. Please go ahead, Ms. Reifsnyder.
Thank you, Jody. I want to thank everyone for joining us today to discuss GWG Holdings' financial results for the first quarter ended March 31, 2016. If you've not received a copy of our press release, it is available on our website at www.gwglife.com. With me today from management are Jon Sabes, Chief Executive Officer; Bill Acheson, Chief Financial Officer; and Michael Freedman, President.
Before we begin, I want to remind you that today's discussion, along with any projected financial results, includes forward-looking statements. And these forward-looking statements are predictions subject to certain risks and uncertainties. We caution that these forward-looking statements may differ from our actual results. You can find a more thorough discussion of the many factors that could affect our business in GWG's most recent annual report on Form 10-K. And it may be supplemented from time to time in our other filings with the SEC. Please also note that today's conference call is being recorded, and a recording will be available through next Thursday, May 5. Replay details are available on our website at gwglife.com.
I would now like to turn the call over to our CEO, Jon Sabes.
Thank you, Rose, and thank you for joining us on our call this afternoon. We continue to rain purple here in Minneapolis, both figuratively and literally, as we celebrate Minnesota's, one of Minnesota's own greats. And we're also celebrating our own ten-year anniversary of being in business this quarter. We're pleased to celebrate this significant milestone with the continued positive momentum of a profitable first quarter and the strengthening of our leadership position in the life insurance secondary market.
We've come a long way since we've founded this company ten years ago and so, too, has the market we participate in. The market has grown from a highly fragmented and under-regulated environment, often characterized as the Wild, Wild West, to a better understood, highly regulated and valuable financial planning tool for seniors owning life insurance. And yet, this market is still virtually untapped. At the same time, we've seen many marginal players go by the wayside and an increasing awareness by financial professionals and consumers of the value this market provides.
Today, we are proud to be one of a handful of companies that directly serves this very large market opportunity. Over time, our company's role has evolved from working with a large institutional banking partner to developing our own large investor base to build and finance a portfolio of life insurance acquired through our own proprietary origination platform, all in an effort to fulfill our mission of creating a vibrant life insurance secondary market.
This quarter, in addition to being profitable on a GAAP basis, I'm happy to report that our life insurance portfolios surpassed the $1 billion mark as measured by the face value of policy benefits, moving us ever forward towards the actuarial diversity and predictability we seek. Our non-correlated yield investment products are now offered through a nationwide network of over 3,500 independent financial advisers who, this quarter, raised us over $35 million from our L Bond and redeemable preferred stock sales. And our proprietary origination platform continues to make significant progress with our Appointed Agent Program and Policy Acquisition Center, both of which enable us to source and service life insurance policies directly from financial advisers and insurance professionals efficiently and competently. In sum, I'm pleased to report that after 10 years of hard work, GWG is well positioned to lead the development of a vibrant life insurance secondary market.
I want to take this opportunity to thank all of the team members and the GWG extended family of broker-dealers, financial advisers, and investors, who have worked and supported us to get where we are at today. And I'd like to make a special note that GWG is happy to welcome back both Merriah Harkins and Matthew Paine to our business development and key accounts team. These two key members of our team, we expect, will make a significant difference in our growth trajectory going forward. With that, we look forward to the next ten years and beyond of working with the entire GWG extended family to do well by doing good.
I'll now turn the call over to our Chief Financial Officer, Bill Acheson, for a more detailed information regarding our key metrics and financial results for the quarter. Bill?
Thanks very much, Jon. We had a really good quarter here at GWG. We're very pleased with the progress we made against our key operating metrics, and we're very happy with our position as we look forward to the balance of 2016. We track several, in fact, 10 key metrics to measure our performance, and I'll walk you through those briefly now.
Number one, as Jon mentioned, growing and servicing our nationwide network of financial advisers is a key strategy for GWG. And in the first quarter of 2016, we significantly increased the total number of advisers approved to sell the company's investment products to over 3,500, which is more than double the number from last year's first quarter.
Number two, as Jon mentioned also, capital raise. The ability to consistently raise capital is critical to reaching our primary goal of originating a large and actuarially diverse portfolio of life insurance policies. And during the first quarter, we raised $35 million in capital from the sale of our $1 billion L Bond and our new redeemable preferred stock offering combined. This is another quarter of strong demand for our non-correlated investment products.
Metric number three is portfolio growth, and we had an excellent quarter on that front. As we grow the portfolio, its ability to produce consistent cash flows and earnings and, ultimately, value for our shareholders improved. And so, this is obviously a key objective for us. As Jon mentioned, the company's portfolio of life insurance surpassed the $1 billion mark during the first quarter of this year and, at quarter-end, covered 419 unique lives. This represents sequential growth, net of maturities, of $83 million from the fourth quarter of 2015 and $273 million from the quarter ended one year ago. This translates into a year-over-year growth rate of 36% when measured by the face amount of the policies and 59% when measured by the number of policies.
Metric number four is where we get the life insurance policies we call our life insurance policy origination channel. We continue to leverage our unique financial services distribution platform by enabling financial professionals to directly source life insurance policies for us. We've expanded the number of financial advisers that are enrolled in our unique Appointed Agent Program and currently have over 2,500 advisers that are able to directly source life insurance policies for us in addition to selling the company's high-yield non-correlated investment products. During the quarter, 13% of the policies that we acquired were sourced from this Appointed Agent Program. We also have a growing pipeline of policies from this unique policy origination channel that our President, Michael Freedman, will discuss further in his remarks.
Another thing we look at is the portfolio yield spread, which is the spread between the yield on the portfolio and our cost of financing as this is the key driver of shareholder value. We look at this yield spread and its impact on our business in two ways.
Metric number six is our blended internal rate of return. We have, in the past, reported our blended internal rate of return, or IRR, on the portfolio, which is the weighted average of what we've attained on the policies that have matured and the IRR we expect to earn on our current portfolio. We use this non-GAAP measure to assess the reasonableness of our yield expectation of the portfolio over time. However, realized IRRs on policies that mature within a short period of time after purchase can cause fluctuations in the blended internal rate of return calculation, greatly reducing its effectiveness in characterizing long-term yield expectations. This was the case in the first quarter of 2016, which why we are currently not disclosing this measure. However, the returns on all of our matured policies, 42 policies for a total of $92.5 million, continue to validate our low to mid-teens long-term portfolio yield expectations, which was the purpose of the blended IRR measure in the first place.
Another way to look at portfolio yield spread is our severance metric on non-GAAP net asset value. Another way to measure the expected yield spread in our portfolio is to calculate the net asset value of our company by discounting the cash flows from our portfolio of life insurance and our weighted average cost of financing, which stood at 6.91% at quarter end, and adding cash and policy benefits receivable and deducting the sum of the company's interest-bearing debt and preferred stock.
At quarter-end, our non-GAAP net asset value was $92.5 million or $15.50 per basic share. This compares favorably to our closing stock price today of $6.45. Please note that this number was erroneously reported as $76.6 million or $12.89 per basic share in our earnings release sent out this morning. We have since included a corrected press release in an 8-K filing earlier today.
Okay, picking up on our additional metrics, number eight, portfolio maturities, which is really the measure of the cash flow from the receipt of policy benefits which is obviously a very key metric. During the first quarter of 2016, and one of the reasons that we're optimistic and happy with where we stand today, is we recognized $19 million in policy benefits. Now this is compared to a record quarter a year ago in which we received $29 million of policy benefits. We are encouraged by our performance, the portfolio performance in the first quarter, and are optimistic regarding our future cash flows from the portfolio. As at quarter-end, 35% or $362 million of face amount of policy benefits was associated with insurers aged 85 years or greater.
Number nine, our GAAP results. For the first quarter ended 3/31/16, as Jon mentioned, we were profitable. Total revenue was $17.9 million, up 6% from the prior year. Net income attributable to common shareholders was $1.4 million or $0.24 and $0.18 per basic and fully diluted share, respectively. This compares to a net income of $3.6 million attributable to common shareholders or $0.62 and $0.46 per basic and fully diluted shares, respectively, for the first quarter of 2015. The decline in the first quarter of 2016 was driven by lower realized gains associated with the receipt of life insurance benefits as compared to the year-earlier period, partially offset by higher unrealized gains associated with new life insurance policy purchases during the quarter ended 3/31/16. We report a total liquidity position of just under $67 million as of March 31, 2016, which includes cash, cash equivalents, restricted cash and our amounts available under our senior credit facility.
Finally, our last metric is our adjusted non-GAAP income. We calculate income, of course, on a GAAP basis and as well as on a non-GAAP basis. We do this to measure the economic value of the policy over time, which generally increases with the increase in probability of mortality as time passes. This is calculated by recognizing the actuarial gain accruing within our portfolio at our expected internal rate of return using our full cost basis or our investment in the portfolio without regard to GAAP fair value. We net this actuarial gain against our adjusted cost during the same period to calculate this adjusted net income. Our adjusted non-GAAP income for the first quarter of 2016 was $13.4 million or $2.26 per basic share.
As I mentioned at the beginning of my remarks, we had a really good quarter. We made significant progress against our key operating metrics and we are very happy with our position as we look forward to the balance of 2016. We believe that if we continue to perform against these and other metrics that we will ultimately achieve consistent GAAP profitability. We are, however, in a growth mode, and our portfolio of life insurance policies has not yet reached its sufficient size to produce consistent cash flows and earnings. Additionally, we are making and expect to continue to make infrastructure investments necessary to position the company to capitalize on the significant opportunity that exists in the secondary market for life insurance over the next several years.
I will now turn the call over to our President, Michael Freedman, for his remarks.
Thank you, Bill. I'm going to discuss two main topics. First, an update on the life insurance secondary market; and then an overview of GWG's success in establishing state of the industry direct origination platform for sourcing and purchasing life insurance policies in a cost- and time-efficient manner.
First, a brief market update. As I previously reported, the secondary market continues to show signs of growth and opportunity. As would be expected with the steady influx of capital that the market is experiencing, we are now seeing more and different initiatives by market players in educating and soliciting seniors as well as financial professionals to participate in the secondary market life insurance market. New market brokers and lead generation companies have become operational recently, which reflects the demand for policies by investors. These entities are engaged in various B2B and B2C marketing and advertising strategies, which is reflected in increased consumer and professional awareness and a growing acceptance of this financial service offering.
Increased consumer awareness is benefiting us in several ways. Obviously, it helps with increased policy flow for GWG and other market participants, but it also triggers a welcome embrace of the secondary market opportunity. For instance, just over the last past eight months, the Wall Street Journal has published three articles chronicling how universal life insurance policies become unaffordable particularly for seniors. These journal articles specifically referenced that the sale of a policy is an option to the lapse or surrender of these policies.
Of significant note is how increased awareness and acceptance of our market is driving public policy. Just two days ago, the state of Georgia enacted a new law that protects life insurance agents who advise and assist their clients with a life settlement from retaliation by the insurance companies. Think about it, a state law was enacted to protect licensed insurance producers from being punished, including being terminated, when the agent tells their client facts and options about their about-to-lapse policy that would benefit that policy owner. At the signing ceremony, the major insurance agent associations were on stage with the governor in support of this new law. This is obviously a significant development and a milestone in the second market as we expect more states to come to the defense and protection of consumers who seek to sell rather than surrender their life insurance policy and to the advisers who help them.
One interesting observation about the secondary market is the continued consolidation of the market and the contraction in a number of licensed buyers in the secondary market. This has not impacted the growth of the market, but reflects a shift by investors to control this cost of acquisition by owning their own set of state insurance licenses in order to purchase policies. This recent development, however, is not new to GWG which has, since its inception, held its own licenses. We view this trend as validating our business model and making our business even more valuable.
Moving on to GWG's direct origination platform. We continue to make great strides in our ability to source, process, purchase, and manage life insurance policies in a cost and time-efficient manner. As has already been highlighted, for Q1, GWG purchased 75 new life insurance policies with a total face amount of benefits of $102 million. This was more than half the total number of policies purchased and more than half the total amount of policy benefits purchased in all of 2015 and is a result of both our successful capital raise and our capacity and capability to originate and purchase policies directly. We're looking forward to building on this success in the coming quarters.
The key driver of our direct policy origination strategy has been the further development of our Appointed Agent Program, which is a proprietary network of insurance and financial advisors who source life insurance policies for GWG. We partner with financial advisors who already sell GWG's investments to educate, train, and support them to help their clients access the value of their life insurance policies through GWG. At the end of the first quarter, of the more than 3,500 financial advisers in our GWG selling group, over 2,200 or 64% have been authorized or approved to source policies for GWG.
In addition, we have also begun partnering with independent insurance agents. Our Appointed Agent Program reaches out to these agents, educating them about the secondary market, about the value to their clients and the advantages of working directly with GWG in delivering that value to their clients. Led by our team at GWG West, we now have more than 2,700 insurance agents in our network who receive information, updates, and training about sourcing policies for GWG.
Our pipeline of life insurance policies continues to reflect the success of the Appointed Agent Program. For Q1, 23% of all life insurance policies in GWG's pipeline and 13% of the policies purchased were directly originated via GWG's Appointed Agent Program. These figures are consistent with Q4 of 2015. However, we note that as more policies are working their way through the pipeline, the Appointed Agent Program is already responsible for 34% of the policies purchased in Q2 to date.
And finally, as part of our overall growth, we continue to improve on the processing and purchasing of policies and the management of our growing portfolio. Over the past year, we knew that in order to effectively address the broad and untapped market, we needed to implement efficiencies in every aspect of policy acquisition. GWG's policy operations team in our Minneapolis headquarters and GWG West's Policy Acquisition Center are able to process every policy and policy lead from any source and obtain the medical information to medically underwrite these insurers, to obtain financial information on the policies, to price and make competitive offers on the policies to those policy owners and, once an offer is accepted, to manage the closing of the purchase of those policies.
We've also initiated two new projects that will make our closing process even more consumer-friendly and time-efficient via digital contracting and allow us to manage the portfolio of purchased policy even more efficiently. We're setting a new standard for policy origination and policy acquisition. We look forward to reporting our continued developments in policy origination and acquisition and our overall portfolio growth and diversification in the coming months and years.
I will now turn it back to Jon Sabes, our CEO, for closing remarks.
I think we're going to break for Q&A. So, operator, we're ready for our questions.
[Operator Instructions] Your first question comes from the line of William Gibson from ROTH Capital. Your line is open.
Thank you. One of the notable things I saw in the quarter was the sale of nearly $1 million. This is the first quarter of your redeemable preferred. Could you give us a sense or the color behind that, what kind of ramp you expect? And does that take share from the L Bonds? Or how does the two relate to each other?
Yes, Bill. This is Bill Acheson, thanks for the question, a very good question. So the redeemable preferred is a brand-new offering for us. We just began closing DTC. We just celebrated our second DTC closing, which for those of you who don't know, will make this product much easier to sell to a wider range of broker-dealers, which is why we pursue it. And so, as Bill mentioned, we closed $1 million through the end of the quarter and, really, the question is what do we expect going forward? And although we don't give you, we don't issue specific guidance, we do expect that over time, and really as part of our balance sheet strategy, that the redeemable preferred will become a more prominent piece of our capital raise and will begin to take some of the place of the L Bond. So we're very optimistic about it, we think it's a product that really fits well with our distribution, both in terms of how it's structured and the DTC closing. And we do, Bill, think that, over time, it will become a bigger proportion of our capital raise.
Good. Just a couple of questions on the income statement. I noticed that legal and placement fees were up sequentially quite a bit as well as employee compensation. Are these good levels to build on going forward? Or was there something extra in each of those categories?
Yeah, Bill, I would say, in conjunction with the redeemable preferred issue stock offering, we had a fair amount of legal fees in there. But broadly speaking, as Jon mentioned, with the hires and the return of Matt Payne and Merriah Harkins, as well as other hires that we've been making to service and grow the advisor base as well as our group of life insurance professionals that we're targeting, I would say these are generally pretty good rates to build off of as we look forward. I don't expect our SG&A to move up significantly from the run rate we're currently at, but neither can I say it was all onetime. So I'd say that's a pretty good base to start with.
Okay, good. And then just a couple of items to come up with the net settlement number, what did you pay in premiums and fees in the quarter? And what was the policy maturities number?
I don't really have it right with me, Bill, I'm sorry, I don't have the premium number. The policy maturity number was $19.2 million that we recognized. I don't have the gain for you on that, I'm sorry. I can certainly follow up with you on that after the call.
Oh, that would be good. Thank you.
Happy to do so.
Your next question comes from the line of Ian Corydon from B. Riley and Company. Your line is open.
This is actually Sarkis stepping in for Ian. So, I guess, first question here. What internal rates of return are you using to underwrite and acquire your policies?
Well, Ian, it's a great question, and it really depends on the channel that we buy it in, whether we're buying it through brokers, which tends to be a little more competitive or whether we're getting policies directly as Michael and Jon described. A good rule of thumb would be low to kind of mid-teens, a little bit lower on that, on the N2 brokers and a little higher on the N2 direct as we have other costs to recoup through that channel. It's a little more expensive to operate. So let's call it low to mid-teens, and that's where we were this quarter. And we've really been there and thereabouts for the last several quarters.
Okay, understood. And then with regards to acquiring policies, how many policies per quarter do you think you can acquire without any capital constraints?
Well, this is Michael Freedman. We obviously believe and know that the market opportunity is quite significant and, again, largely untapped that as we saw with the Georgia law and as we see through all the things that are happening in the market, more acceptance of the market and awareness of the market, so we're going to see more policy flow, we see it happening. And quite frankly, the way we're structured as a company and the way we built up the operation, it's really not constrained but for capital.
Understood. And then how large does your portfolio have to be where you could be profitable on a GAAP basis consistently, right, regarding also kind of the infrastructure that you're putting into the business?
Yes, it's a great question, Ian. This is Bill. There isn't really a -- there isn't a number that you can take because it obviously depends on the makeup of the portfolio and the life expectancies within there. But to kind of get a guide, we look towards life settlement securitization guidelines that have been published. So, A.M. Best, for instance, does one. They talk about actuarial stability with as low as 300 policies. S&P has a similar set of guidelines out there. They talk about 1,000. And so, although, I guess, I don't have a number for you we are more on the S&P side. I think we probably need to double a little bit more from where we are to – as we project our cash flows to get a cash, get cash flows up to the point where you're consistently covering your operating cost base.
Understood. Thanks for taking my questions and good luck.
Your next question comes from the line of Kyle Mowery from GrizzlyRock Capital. Your line is open.
Good afternoon. And many of my questions have been asked by previous callers. Maybe we could break down current industry appetite for policies into both traditional sized and then small policies. You guys obviously have been doing a good job acquiring small policies by number of policies acquired.
Hi, Kyle, this is Jon Sabes. The industry, I would say, in large has been trending to smaller faced policies. I don't know that there's a particular appetite per se one for the other. The industry started with advisers who really specialized in larger faced policies. They were more advanced planning insurance agents and financial planners. And as the market is broadening, it's of no surprise that we are seeing a decrease in the average policy face, both at what we're seeing in our pipeline and purchasing. And that comes from all channels. And I think, in general, investors are happy with this trend as it leads to greater actuarial diversification for the same dollars being applied towards that portfolio built.
So as you built out GWG West and you're working on acquiring and servicing those, would it be fair to say that over time the team just would continue to get more efficient? I mean, in the small faced market, this is something where industry knowledge only continues to grow. Is that -- am I on the right track here?
Yeah, I think you're tracking -- we are building GWG West as a scalable operation and so all of the processes and procedures by which we are organizing and approaching the market contemplate pretty large scale operational activity. So I think you're on the right track, if I'm answering correctly.
You certainly answered the question. Congrats on your first decade and wish you guys all the best.
Your next question comes from the line of Jeff Nord from Premium Legacy. Your line is open.
Hi, how are you doing, Jon, Mike, Bill? Whatever you can answer, credit facilities, did we pay any of that down this quarter? Whatever comment you can make on future credit facilities. And that's pretty much all I have for you today.
Yes, hi, Jeff, it's Jon. The credit facility in Q1 stayed consistent. And I'll just say that we are working as we always are, looking at evaluating our options for longer term dated credit facilities that help expand our business and result in a more permanent nature of our capital structure. So we're hoping to make significant progress on that. And when we do, we will report it.
[Operator Instructions] Your next question comes from line of Scott Berman from Independent Life. Your line is open.
Thank you and good afternoon. How many cases can an agent or adviser submit with GWG? And what percentage of those cases, policies bought entirely, the entire benefit or a partial benefit?
Scott, thanks for the question, it's Michael Freedman. I think our program of appointed agent is a way in which we can partner with financial advisers and insurance agents and other professionals to bring policies to GWG for evaluation and purchase and there's no limit per se on the number of policies that an agent or adviser wants to source into GWG. The second part of your question was --
I think it was relative to purchasing all or some of the benefit. And I would just add that we have seen a very large trend in terms of offering what we refer to as retained death benefit. But we partner with our clients and agents and allow the owner of the policy to retain a portion of their benefit without having any future premium obligation going forward. We see that as a pretty exciting trend that's occurring within the marketplace today.
And Michael, are UL and term the best policies for this program?
Yes, Universal Life and term that is convertible are attractive to us, yes.
What about regular term, just flat term?
Typically not. Right now, I don't think we're buying regular term. It's less convertible still.
How close to the end of the policy does the conversion have to be? I mean, are you looking at something a couple of years out?
Yes. It's pretty close to the conversion period just because of the age of the insured.
And I had to take a cell phone call from a client during this, so I missed some of the metric discussion. Was this recorded, and can I get a link on it?
Yes. The call is being recorded. It's going to be posted tonight and be available for a week on our website.
Which is gwg.com?
Right, I'm very new to this. Thank you very much.
There are no further questions in the queue at this time. Mr. Sabes, I turn the call back over to you.
Thank you. In closing, I'd like to make you aware of our ongoing investor relation activity. We have been and will continue to be an active presenter in numerous investor and financial adviser conferences. To that end, the company will be presenting at the B. Riley Company Investor Conference in Los Angeles, May 25 and 26. If you are attending, we look forward to seeing you there. Or if you'd like to schedule a time with any of us on the call to talk about our business, our investment products, our Appointed Agent Program and how we're making positive impacts with the clients we serve, please do not hesitate to call or e-mail us.
Again, thank you all for your interest and continued support of GWG. We look forward to speaking with you again very soon. Have a great day.
This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!