GWG Holdings, Inc. (GWGH) CEO Murray Holland on Q1 2019 Results - Earnings Call Transcript

Aug. 13, 2019 8:49 PM ETGWG Holdings, Inc. (GWGHQ)
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GWG Holdings, Inc. (NASDAQ:GWGH) Q1 2019 Earnings Conference Call August 13, 2019 4:30 PM ET

Company Participants

Dan Callahan - Director, Investor Relations and Communications

Murray Holland - Chief Executive Officer

Bill Acheson - Executive Vice President, Chief Financial Officer

Brad Heppner - Chairman

Conference Call Participants

Dan Callahan

Thank you and good afternoon everyone. My name is Dan Callahan. I am Director of Communication at GWG Holdings. Welcome to our 2018 and First Quarter 2019 Earnings Webcast. On the webcast with me today are Murray Holland, our Chief Executive Officer, Bill Acheson, our Chief Financial Officer and Brad Heppner, Chairman of the Board and CEO of the Beneficient Company Group L.P.

Following our remarks, we will have a Q&A session from among questions we’ve been asked. You can submit your questions online through the webcast dashboard, look for the Question text box and type a question in.

Some statements made on the webcast today along with any projected financial results, include forward-looking statements that are subject to certain risks and uncertainties. Any forward-looking statements made on this webcast are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. A sample list of factors or risks that could cause actual results to be materially different from forward-looking statements can be found in our earnings release and in our most recent 10-K and 10-Q reports.

Please note that everyone that as participants are in listen-only mode. Again, questions can be submitted through dashboard text box. Today’s webcast is being recorded and will be available on our website at gwgh.com through the Investor Relations tab.

With that, I will turn it over to Murray Holland, Chief Executive Officer of GWG Holdings. Murray?

Murray Holland

Thank you Dan. Good afternoon everyone and welcome to the special earnings call. It’s been a while since we had an earnings call. We are appreciative for your patience during this time period. This is my first earnings call as CEO of GWG. I took over the job a little over three months ago after we had completed our strategic transaction with the Beneficient Company Group L.P.

We are pleased with to be back on track and talk to you about our business with all of you. The strategic transaction was been as an important milestone. Let me give you just a quick description of the highlights of Ben’s transaction impact on GWG.

As I said, I took over as CEO replacing the Co-Founder of GWG, Jon Sabes, who is moving over to our Insurtech subsidiary. Jon and his brother Steve sold their interest in GWG to Ben and Ben’s founder as an exchange for future cash payments, and founder’s shares in Ben. Brad Heppner the CEO of Ben is now Chairman of GWG Holdings.

The GWG Board of Directors was replaced by the members of Ben’s Board of Directors plus a special committee expanding the total Board to 14 members who represent a world-class group advisors. Brad will give you a little bit more color about the Board in his remarks.

A little bit about me. After graduating from the University of Virginia Business School and Washington and Lee University of Law School, I began my career in Corporate Finance as a lawyer with the Dallas-based law firm of Akin, Gump, Strauss, Hauer & Feld where I was a partner in the corporate security section of the firm.

In the mid-1980s, I was hired by First Boston, which is now known by everyone as Credit Suisse First Boston, as an investment banker and later Kidder, Peabody, both in the mergers and acquisitions groups. From 1993 through 2006, I served as the CEO of three technology-enabled firms that served diverse markets. These firms had combined revenue of over $3 billion with over 4,000 employees.

In 1999, I worked with Brad Heppner on a transaction where his firm bought a portfolio of alternative assets for $550 million and that was my first experience with Brad. In 2001, I was an original investor and advisor to a new investment bank MHT Partners, which specializes in rapidly growing middle market firms, and mergers and acquisitions and corporate finance.

MHT Partners was retained by Beneficient in 2014 to advice them regarding the formation of the company and its operations. We see the GWG Ben transaction as a win-win for everybody. We are building on t he strong base that Job Sabes and his team built. By joining with Beneficient, we have a market opportunity to provide liquidity beyond the life insurance secondary market to a much larger market of owners or professionally managed alternative assets.

It is clear that putting these two organizations together will offer great opportunities for both GWG and Ben.

With that, I will turn the call over to our CFO, Bill Acheson, who will discuss the financials. Bill?

Bill Acheson

Thank you, Murray, and welcome again everyone to our earnings call this afternoon. As I typically do, I’ll walk through some of our key metrics that we look at. The only difference being on this call is, I’ll do a little bit on the full year of 2018 and then we’ll look at – spend probably most of our time on Q1 of 2019. But given the length of time expenses we’ve been together we will take a look at 2018, as well.

Before I get into the financials and the metrics, there is a few themes that you’ll recognize going through here the presentation and things that we’ve talked about in the past and they really are three as decreasing margins in the Life Insurance business. We’ve been talking about this now for several quarters.

On our call variability in the mortality cash flows, although you’ll see some quite impressive improvements, they still vary period-to-period and three would be higher interest expense kind of across the board and when I think of the Ben transaction, the ones we’ve completed in 2018 and the expansion of our strategic relationship as of the second quarter in April, I really think of actions that we are taking to address those three issues.

So number one will be finding higher yielding alternative assets, number two would be lessening our reliance on the life insurance portfolio and number three would be using our bigger balance sheet and expanded access to capital markets to address our cost of funds and to eventually recapitalize the balance sheet. So, without further ado, we will look at 2018 and then we’ll look at Q1 of 2019.

From a top-line perspective, our revenue year-on-year here, this is 2018 over 2017 increased quite a bit really mainly due to a couple things.

Number one, what I call portfolio accretion which just means a larger portfolio which are accreting income on, and then kind of roughly offset with a lower amount of purchase gain through the lower margins in the purchase market, the life insurance, offset a little bit by – a little bit higher realizations of policy maturities in the year.

You can see in our interest and other line for the year, the presence of the Ben transactions which we closed, the first one in August of last year and the final one in the final closing was at the end of December. So you can see that show up in the interest and other line there.

Looking at expenses, the big item really year-on-year is what I mentioned just now is, higher interest expenses most of the increase in the line items year-on-year in the expense side. G&A was up a little bit, but not much.

We did invest a bit into our Insurtech around $4 million, but the lion share of that increase is due to increased interest expense due to higher debt balances outstanding as we’ve been growing the balance sheet.

Kind of looking down to dividends, those were a little bit higher than year-over-year as we had a full year in 2018 of our second offering which many of you will remember the redeemable preferred stock Series number two. So that was in there for the entire year.

Dropping into the balance sheet a little bit here and we will take a little closer look at this in a minute, but our total assets were up significantly. We’ve talked about that and telegraphed that. That’s really the two closings of the Ben transaction. Our investment sales year-on-year were up significantly.

That was a record number for GWG and I think reflects interest in the product, interest in the company, very attractive yields in a low rate environment, but also a lot of interest in the Beneficient transaction and what that can do for GWG and what that means for our balance sheet and for our prospects going forward.

Policy purchases, $441 million, that’s a strong year. We were aggressively buying really the drive through that 1000 policy mark which we did in the second quarter, early third quarter of 2018. We ended the year of 2018 with just over $2 billion in face and that represented about 1154 policies. Both of those numbers up significantly over their 12/31/17 benchmark.

From a benefits realized perspective, this would be mortality face amount of benefits, we recognized $71 million, which is cash, not income, $71 million versus $65 million in 2017 and I’ll say that the $71 million was somewhat lower than we had anticipated, which is one of those themes again that I mentioned at the top.

Now, kind of moving into 2019, Q1, kind of going in the same order here, looking at the revenue line, here we had a significantly higher, now this is Q1 2019 over Q1 2018, we had a significantly higher number revenue, $21.5 million and that’s largely driven by higher benefits realized during the quarter.

So, from a cash flow perspective, we recognized about $31 million of policy benefits in Q1, which was a record quarter in terms of the gross amount of benefits realized. Part of this income number is also a little bit lower – a little negative offset is a lower policy purchases which we’ll get into a minute, you can see our interest and other, that is the Ben commercial loan in place.

For those of you remember, we had something called an exchangeable note that went away at year end and that’s why in the previous slide you saw a quite high income number for interest in other and now what you see here is going to be a much more normalized number moving forward for our interest and other although that will grow as we make additional investments in Beneficient which we have done and planned to do.

Looking at expenses, similar story here is really interest expenses is the lion share of that increase about 10 of the 14. We did start to see and will probably see for the next quarter or so, some higher expenses relating to compensation and deal expenses and just some general – little higher G&A and I think it’s transient at least at the GWG level, but it did show up in Q1.

Looking down at our dividends, there is a much more normalized kind of runrate now that we have the full year or the full quarter of our PS dividends in there and you will see that number pretty flat quarter-over-quarter for the remainder of the year.

Looking on to our assets side, again same story, this one significantly higher assets, that’s the Beneficient transaction. Our policy sales during the quarter were very good for the same reasons that they were good in 2018 or at least in the second half of 2018 let’s say.

And you see policy purchases here, face amount purchase of $80 million, that compares to $94 million in the year ago period and we had several quarters as you’ll recall in calendar 2018 where we are over $100 million.

And this really represents kind of our, the beginning of our reallocating capital away from the life insurance business as we have a large portfolio and we are seeing the yields decline there. So you are really starting to see this happen in Q1 and you will see it certainly more so in Q2.

Ended the year at $2 billion. You already know that. Or, sorry, ended the quarter at just over $2 billion, 1194 policies and you will see $31 million of benefits recognized which was a twice what we recognized in the first quarter of 2018 and also a record for the company.

So, again those three themes are kind of present through all the financials as we drive a little bit deeper here, we will just look at each of the kind of primary things we take a look at. This is just simply looking at our asset and our equity growth. Our leverage, as measured by assets over equity is in the green line and you’ve seen the reasons that we’ve seen that since Q3 moving forward which is really the Ben deal.

When we take a look at the liquidity here, which we define as cash, restricted cash and benefits receivable. We’ve begun allocating some of our cash towards the Beneficient towards a broader array of alternative assets, we’ve also drawn some of our cash down as our L bonds have not been offered – were not offered on a three month period.

They are now relit live as of last week and we reported it in our 10-Q that we just filed last week as we had about just over $52 million in liquidity at the end of July.

Looking on to our investments sales side, again, very strong – continued strong growth that goes up through Q1 of 2019. Rates are still very low. In fact they’ve gotten significantly lower and this is our maturity profile as we just look to the right here in terms of where are the predominance of the sales coming in.

And you could see that Q1 had a significant uptick in the very long-term bonds, but as we look at the maturity mix and the cost at least, currently of the L bond mix, we are quite happy with that. So, we are excited that the L bond is back open and up and running and are looking forward to moving up our liquidity and continuing down the road.

Taking a look at the – our renewal rates, which is something that we track very closely, something it’s very important to us into the firm. We track the amount of L bonds that renew when they mature and you could see over the years, quarters here going back to early 2017, they’ve been pretty consistent and running anywhere between low 40 and high 60.

I think our ever-to-date average is right around 60, which is about what we plan for. Now as we go forward and we do more DTC settlements which a lot of you participate in, that will impact our reported rate because of the way that the DTC renewals are accounted for. But something that we keep a close eye on where we are managing our liquidity and planning out our cash.

Looking at the secondary life portfolio, here before, we get to the end of my stuff here is, basically this portfolio continues to season.

The yellow bar just shows you the amount of face amount on insureds aged 90 plus, which is now up to $283 million and this, the graph here that we are looking which are trailing 12 months benefits over premiums, which just simply look back at 12 month period, that’s how many benefits did you collect versus the premiums that you paid.

The idea being as you want the portfolio to pay for itself, as it relates to premiums and you can see that of course has been doing that for quite some time I refer to in the previous slide of our benefits realized in 2018 of $71 million, while we reported in our 10-Q that we had already realized through July 31st $61 million of benefits.

So we are very near where our total was for all of last year with about five months to go. So we are starting to see I think that portfolio of cash flow in bigger chunks which we are anticipating and that’s a very good thing for the firm.

So, we’ve seen these factors present, these themes I mentioned is the top of the house. I think we are taking the right actions to address those and the Beneficient part of it is a really key kind of to our future.

And on that note, I will flip it over to our Chairman, Brad Heppner for his remarks. Brad?

Brad Heppner

Thanks, Bill. And I want to thank everyone on this webcast and conference call. We are very excited about potential for our two companies. We see many synergies between us. But for today, let me give you some background on just Ben.

You may be asking what exactly does Ben do. Put simply, Ben is working to level the playing field for owners of alternative assets who have historically had limited access to liquidity. The company lends against alternative assets. We deliver structured liquidity for these assets and we provide the administrative services to holders of those alternative assets.

Ben seeks to provide these liquidity solutions to mid to high net worth individuals and small to mid-sized institutions across a variety of sub-asset classes of alternatives which include, institutional private equity, venture capital, real estate, non-traded REITs and BDCs and life settlements. We believe that the opportunity and the need for this service is significant.

Over the past ten years, an increasing number of investors have purchased alternative assets and while certain investors are able to monetize their investments in a timely way, there are a number of investors who are unable to access a market for their investment and end up holding the asset for a substantial amount of time.

That is because the market demand for liquidity from owners of alternative assets has historically been driven by large institutional investors. By contrast, mid to high net worth investors and small to mid-sized institutions have generally been unable to access early liquidity from their alternative investments for a variety of reasons including the lack of representation by intermediary brokers, contractual provisions and other liquidity constraints.

The alternative asset industry has experienced substantial growth. We expect this growth to continue with some estimates predicting that global alternative assets under management will equal approximately $14 trillion by 2023.

It is our belief that one of the factors that will contribute to this growth is the participation of individuals and small institutions in the market of alternative assets. These individuals include, entrepreneurs, business owners, and professionals and private practice. Right now, they do not have a way to get liquidity for their alternative illiquid assets.

That is where Ben comes in. Ben, through our subsidiaries plans to operate three lines of business which are all complementary and they focus on the opportunity that exists within the alternative asset investment space for both Ben and GWG.

The first provides that we believe what we believe to be a unique suite of private trust lending and liquidity products focused on bringing liquidity to owners of professionally managed alternative assets. Ben’s innovative liquidity solutions are designed to serve those mid to high net worth individuals with $5 million to $30 million net worth and small to mid-sized institutions which typically hold up to $1 billion in assets.

We believe that Ben’s liquidity solutions will provide an attractive option to this quickly growing group of investors who historically been unable to access early liquidity from their alternative asset investment. Second, Ben also plans to market retirement funds, custody and clearing of alternative assets and trustee and insurance services for covering the risks attendant to owning or managing alternative assets.

Third, Ben plans develop and deploy an online portal giving clients direct access to its financial services and products online. Ben’s existing and planned products and services are designed to support the tax and state planning objectives of our clients facilitate a diversification of their assets or simply provide administrative management and transparent reporting solutions tailored to their goal.

Importantly, Ben’s operating philosophy centers around robust risk management guidelines that anchor and drive its origination and underwriting strategies. Ben’s risk management group is responsible for managing its portfolio with a focus on concentration risk, total exposure, duration in liquidity. The efforts of Ben’s risk management process directly feeds into the work performed by our underwriting team.

Through Ben’s underwriting process, each alternative asset is assessed – is subject to both a fundamental, in other words, bottom up and a technical or a top down analysis for valuation. Ben’s originations team then takes the information they receive from the risk and underwriting teams and uses it to scope and direct Ben’s sales strategy.

The execution of Ben’s operating philosophy is overseen by its Board of Directors made up of 12 individuals with extensive experience in alternative assets and financial services. As mentioned, these 12 individuals have recently been appointed to the Board of GWG which will allow them to guide the strategic relationship between GWG and Ben.

These members represent a world-class collection of individuals and industry experience, knowledge and temperament. Among them include, Richard Fisher, the former President of the Federal Reserve Bank of Dallas and a well known commentator on U.S. and global capital markets and his policy.

Tom Hicks is a pioneer in this space who created one of the first private equity firms. Hick’s news takes him first. Michelle Caruso-Cabrera, the former Chief International Correspondent at CNBC and you will know her from shows on CNBC including Power Lunch and Squawk Box.

Bruce Zimmerman is the former Chief Investment Officer for the University of Texas Endowment which is the nation’s second largest endowment fund and currently he is a Chief Investment Officer for the Dalio Family Office and philanthropist.

David Glacier who recently retired as Chief Operating Officer of Bank of America Merrill Lynch’s Global Corporate and Investment Bank, and Roger Staubach, who you will all remember from his days playing for the Cowboys. However, Roger has more than 40 years of experience in global real estate portfolio management, financing and capital solutions.

Pete Cangany spent 37 years with Ernst & Young including 24 years as a partner of one of the nation’s largest four accounting firms. For the sake of time, I haven’t gone through the background on each of Ben’s directors.

But we are excited to be working with them as they each bring highly relevant and diverse experience from different facets of the alternative asset industry and broader capital markets that will be hugely valuable to both GWG and Ben.

You can find more information about Ben’s directors and our senior leadership team on the Ben website. We believe that the expanded strategic relationship between GWG and Ben will facilitate synergies between the two companies and deliver additional value to our shareholders and we look forward to providing further updates on this strategic relationship on future calls.

So with that, I’d like to turn the call over to Dan Callahan who will conduct the questions and answers session. Thank you.

Dan Callahan

Thanks, Brad. We have questions that we’ve gotten really since the last time we had our last earnings call and we wanted to highlight those. If you have a question, you can submit them and we will get you and answer or you can send it through invest@gwgh.com. But here, some of the questions that we’ve been getting, will GWG continue buying life insurance policies?

Murray Holland

Well, Dan, as I mentioned in my remarks and we saw in the first quarter, we’ve made the strategic decision to reduce capital allocated to the secondary market for life insurance and begin which we did in Q2 increasing the capital allocated towards a broader range of diversified alternative assets and funds for which Ben is working to access and provide liquidity. So, I think that trend will continue.

Dan Callahan

Another question, are there going to be changes in L bond terms and rates?

Murray Holland

Well, this is a question we get fairly frequently and at this point in time, we don’t have any plans to make any changes to the terms or the rates on each of those terms.

Dan Callahan

Given the Ben transaction, has there been any changes to the assets that back L bond?

Murray Holland

As in the past, with the exception of the assets pledged to our senior credit facility provider, all of the assets of the holding company of GWGH secured the L bonds. Now, as of the end of December, 2018, we closed the second Ben transaction.

Those assets now include a commercial loan to Beneficient, as well as an equity method investment in Beneficient. Now when we did that transaction, we also issued L bonds in conjunction with that. So, the pool of assets that back t he L bonds now includes life insurance, not pledged to senior credit facility, cash, as well as then our investments in Beneficient.

Dan Callahan

The Insurtech Holdings division, a new division, so what’s happening with that? And what’s the relationship with GWGH?

Murray Holland

Well, in our Insurtech business is a subsidiary, wholly-owned subsidiary of GWG and Jon Sabes who was our CEO is running the Insurtech business. They are doing what they have always been doing and what we’ve talked to you guys about several times is, trying to commercialize epigenetic technology for the life insurance industry for the benefit of the shareholders.

And they are going to continue to do that and we’ve made commitment to fund the Insurtech business up to $20 million over the next couple of years with our eventual hope and intention would be to spin them up as a separate company when they have succeeded with their commercialization efforts.

Dan Callahan

With the Ben transaction and everything that’s been going on, what do you see for the GWGH common stock?

Murray Holland

Well, that’s always a tough one to answer and you won’t be surprised that we believe the stock will be positively affected by our expanded relationship with Ben. We think that leads to better access to capital markets, greater institutional interest in the stock. We have actually been included now in the Russell 2000 as of July 1st which is a milestone for us.

All of this lead into a more liquid common stock. So, if you remember back 18 months ago, when we first announced the initial transaction with Beneficient creating a liquid company common stock with one of our three or four primary objectives in the transaction. I am not going to say we have accomplished that.

We still have lot of work to do. But we expect and believe that over the long-term, this relationship with Beneficient will be positive for the stock, again the inclusion in the Russell 2000 as of July 1st is really I think an indicator of at least where we are common maybe where we are headed.

Dan Callahan

Well, that’s all the questions we have right now. Again if you want to ask a question, feel free to submit on the portal or you can email us at invest@gwgh.com. And now I will turn it over to Murray Holland for final comments.

Question-and-Answer Session

End of Q&A

I want to thank everybody for being on this call and look forward to our next earnings call.

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