GWG Holdings, Inc. (GWGH) CEO Murray Holland on Q2 2019 Results - Earnings Call Transcript

Sep. 12, 2019 2:28 PM ETGWG Holdings, Inc. (GWGHQ)
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GWG Holdings, Inc. (GWGH) Q2 2019 Results Conference Call September 11, 2019 4:30 PM ET

Company Participants

Dan Callahan - Director of Communication

Murray Holland - President and Chief Executive Officer

Tim Evans - Chief Financial Officer

Dan Callahan

Hello, everyone. Thank you, and good afternoon. My name is Dan Callahan, Director of Communication at GWG Holdings. Welcome to our Second Quarter 2019 Earnings Webcast. On the webcast with me today are Murray Holland, our President and Chief Executive Officer; and Tim Evans, our Chief Financial Officer.

Following our remarks, we'll be happy to take some questions. You can submit them online through the webcast dashboard, looking for the question text box, type your question in. Again, we'll be taking questions at the end of the presentation.

Some statements made on the webcast today along with any projected financial results, including forward-looking statements, are subject to certain risks and uncertainties. Any forward-looking statements made on this webcast are made 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 and 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, but the participants are in listen-only mode. Again, questions can be submitted through dashboard text box, they will be answered at the end of the presentation. Today's webcast is being recorded and will be available on our website at and through the Investor Relations tab.

So with that, I will turn it over to our President and Chief Executive Officer, Murray Holland. Murray?

Murray Holland

Dan, thank you very much. And everybody welcome to our second quarter webinar. And today, as everybody is probably aware, is the 18th anniversary of the 9/11. And I would like to take a few moments to reflect upon the lives that were lost that day, and remember those lives, and also and thanks for the first responders at that tragedy.

Okay. Today, we have an agenda for everybody that includes an overview of GWG's business and the investment in Beneficent, second quarter corporate events updates, financial metrics and results and a path forward. We've previously released obviously the 10-Q on in earnings press release on the second quarter. And so rather than, rehashing the details of all those, we want to spend today talking about some of the higher level substance in those. Give me slide please.

GWG's business is providing liquidity for alternative assets. For consumers, we provide liquidity for life insurance assets and now through Beneficent for other illiquid alternative assets. For investors we offer an income producing alternative investment with defined liquidity. And for our shareholders, we are adding diversified assets to our balance sheet to reduce our debt to equity ratio.

Slide, please. The current portfolio of assets that are owned by GWG, include a little over 50% of the asset base as life insurance assets. 42% as investments in Beneficent, and almost 6% in cash and other assets. We have total asset base of $1.5 billion and stockholders equity of $233 million.

Slide. The liquidity that GWG provides is primarily for the life changes, life events that happen to people. These events include death, disability, distress, estate planning techniques and capital for use in investment and business opportunities.

Slide, please. So, as everybody knows, we've partnered with Beneficent for a number of reasons. And the primary reason is the diversification of asset investments into alternative assets. And so, in particular, what are these assets that BEN is targeting? The alternative asset classes BEN are targeting, include private equity and the major participants their LBO funds, venture capital funds, fund of funds the secondary funds, credit funds such as mezzanine structured credit special situations, real estate funds, real estate natural resource and infrastructure funds and other alternatives, including several hedge funds.

Now all these funds that BEN is focusing on are managed by professional managers. And the strategy of BEN's acquisitions is to diversify into an endowment model to completely diversify into industry, asset classes, vintage funds, geography and by manager. There are roughly 4,500 managers worldwide, professionally managed assets that are in our BEN's focus.

Next slide. So, the corporate events that happened during the second quarter of 2019 include, we closed the BEN transaction that has well described back on April 26. We completed a first quarter under a new auditor. We had the GWG's previous auditor had been Baker Tilly, and they audited through year-end in first quarter. And when we implemented a change to Whitley Penn, and the reason we did that change is because Whitley Penn had previously audited BEN and understood how the two companies worked together and understood all the accounting issues of both companies. And we determined that it was more efficient for us to use both -- concurred to use that Whitley Penn.

We got L Bonds restarted after a little over three months and a week or so of no sales. We hired Jenniffer Daigle. Jenniffer has an extensive background in alternative asset sales and distribution. She is going to be the Senior Vice President of our Business Development Group. We have been included as of July 1, we're included in the Russell 2000. And we named Tim Evans, as CFO. And Tim is going to be the next speaker. So Tim, I will hand it off to you.

Tim Evans

Thanks, Murray, and thanks everyone, who is joining us on the call today. I look forward to sharing with you our Q2 financial results here. Before I get into that, just wanted to give you a little bit of background about myself. I joined GWG in May of this year, as the Chief Integration Officer. I joined GWG form BEN, where I previously served, as the Chief of Staff, as well as the Vice President, Deputy General Counsel of BEN. And where I contributed significantly to BEN's legal and financial structure and also spend significant time working on BEN's audit and setting up BEN's accounting program, practices and other parts of the accounting group there.

Based on that experience, I was asked to join GWG to serve in the transition to help bring the companies closer together. And I'm looking forward to that opportunity to continue serving as Chief Financial Officer with the background with BEN that I have. Including that background, I've also served previously at the United States Securities and Exchange Commission for six years, where I served as a trial attorney and also as Counsel to the Director of Enforcement for the national enforcement program. Prior to joining the SEC, I have worked in private legal practice at Thompson & Knight in Dallas, Texas where my practice largely focused on SEC related matters and accounting and other financial matters. Prior to going law school, I worked as an accountant. And so most of my career has been focused on accounting and in the legal field.

Moving to the Q2 financials. I think we'll see that the -- we'll start with the 2019 Q2 financial metrics review. And then we'll move to a discussion of the balance sheet, followed by discussion of the investment sales and then the life summit portfolio that we have here at GWG. So let's start with the 2019 second quarter metrics.

Based on the nature of our portfolio at GWG, we look at our financials sequentially, so we look here Q2 versus Q1 2019. A couple of things to point out here is the variance in our revenue for Q2 over Q1, down about $1.2 million from the prior quarter. That's largely driven as you can see in the bottom left by lower purchase gains, we bought fewer and less frequent policies over the period, so that contributes to about $2.8 million of that variance. But cutting back against that significantly, or the higher returns that we were able to realize on the policies that were purchased during the second quarter, significant gains there of $1.2 million as opposed to over the prior quarter. Then we also had about $400,000 of additional income in Q2 that was not present in Q1.

On the expense side, we see significantly higher expenses in Q2 over Q1. A lot of those are in the transaction related costs we see, $4.8 million, which are largely constituted by legal insurance and other expenses. Also we see $1.6 million increased expenses in personnel, along with the transaction related expenses, a number of those expenses we do not see as recurring or the -- as continuing going forward expenses that we would see in future quarters. We also had additional interest expense of $1.5 million in the second quarter.

We'll turn now to take a look at BEN's balance sheet. On BEN's balance sheet, you can see here in the bottom left hand the graph in Q3 of 2018. We see a significant increase in the size of BEN's balance sheet and that's attributable to the BEN transaction that was closed in Q3 of 2018. As you, -- and this matches up to the chart, that we were looking at when Murray was speaking on the overall assets of BEN.

As to the liquidity, you'll note that there was a considerable drop in Q2 of 2019 on the liquidity, driven by three primary factors. Number one, the biggest one is that L Bond offering was paused for a little over three months. During that time, we were not offering L Bonds and so our liquidity certainly was affected by that pause. Second, we took a reduction in our senior line. We paid down our senior creditor by about $17 million in the quarter. And then the third item is that we made some additional investments that redirected some capital towards BEN, so that accounts for our liquidity difference there.

On the next slide, we'll see our investment sales. We continue to see strong and steady capital raise through our L Bond program. We attribute this primarily to the attractive yields that these L Bonds offer and the fact that they're largely non-correlated assets to the rest of the market. Again, we'll see that in Q2 of 2019, the quarter investment sales are far below what we've seen in prior quarters, but again, we were only selling L Bonds for one month of that quarter. So on a typical quarter, I think we would expect to see something more in line of what we had seen before.

One thing to note here is that, in the current environment of falling interest rates, our L Bond yields are still sitting at 5.5% to 8.5% yields and there are no current discussions on changing those at this time. In addition, we can go back just one more time to that slide please. On the right hand side, I just want point out the maturity profile. Again, even though we were only active one month in the quarter, you can see that even that one month of sales was pretty representative of past quarter sales and our current balance, so effectively we're seeing that, our L Bond sales are fairly consistent among the mix of sales by term, we're staying pretty consistent in that mix. Some work that we could do there to work on that mix, but overall, we're staying consistent on how that's been handled for the past few quarters.

Further on our investment sales. Two things we focus on a lot here are our renewal rates and just keeping an eye on our maturities. I think it's the last time I'll say this, but again for Q2 2019, we see that there's a big dip in the chart here on the bottom left on the renewals. Obviously if we're not offering the L Bonds, we were not able to renew the L Bonds, during those months that we were dark. So we will see something closer to the 20% renewal rate for Q2. If you look back though from our prior quarters, you'll see we were staying strong in 50% to 60% renewal rate and we expect to be back in that range as we've come back into the market in early August and have seen a successful relaunch of those renewals.

And then on the maturities here, you can see that, we're taking a look at what our maturities are going to be over the next few years. This is certainly something we keep our eye on as we are taking into account the future performance of the company, And we see that, we have through 2024 maturities marked out and then anything past that grouped together.

Let's turn now to the portfolio. As Murray said, the current portfolio accounts for about half -- just over a half of our balance sheet. We carried on our books at about $800 million, I think $799 million. And that's backed by a face amount of $2.1 billion of mature our policy. All those policies, we have about $300 million of those policy benefits are backed by insureds who are aged 90 or over. And I think that's indicative of the seasoning of the portfolio that we're going to see. And what's further evidence there is on the right hand chart, we see that we have more consistent benefits that are coming out of portfolio.

So this chart is showing, in the dark blue, we can see the benefits that are returned off for each 12 months -- trailing 12 month period for each quarter. And in the light blue, we can see the premiums that are required to support the policy. And as you can see, since Q4, 2016, we have had a strong ratio of benefits versus premiums, so the -- and it's been growing. And again, that just says more to the seasoning of the portfolio and the strong value that's being created there. And further reflected by the fact that for Q1 of 2019, our cash flows for that period as well as for year-to-date 2019 are both record numbers, stronger than we've seen in any prior year. And also happy to report that for the year-to-date 2019, we've exceeded our full year maturity for all of 2018, so every dollar we bring in now just puts us further ahead of last year.

Go to next slide here. And so we'll see through here that, we're going to bring up another chart that shows just more on the age of the policy. We saw in the last slide that the 90 plus insureds was right around $300 million. We can also see here that the 85 to 89 is running right at $600 million, so you have about $900 million of the portfolio rather, that's in 85 or older. So full 42.7% of our benefits are backed by insureds that are at or older than 85 years of age. So again, strong portfolio, and we see on the right that strong portfolio is supported by strong creditors. Over about half or -- right about half of our portfolio is supported by creditors whose obligation or, excuse me, whose S&P rating is A plus or higher, so strong portfolio with strong creditors.

That is my review of the Q2 financials. So at this time, I'll turn it back to Murray to discuss our path forward.

Murray Holland

Tim, thank you very much. The path forward includes continued alignment with GWG and BEN, and that will include a number of integration items that we're currently working on. Growth in alternative asset exposure, so we are -- plan and strategy is to diversify the portfolio further in continued diversification. And a number of balance sheet initiatives that are planned to reduce the debt-to-equity ratio in GWG today.

And with that, I will turn it over to Dan Callahan for some questions. Dan?

Question-and-Answer Session

A - Dan Callahan

Thank you, Murray. We've been getting questions, and we just have a few that we're going to get to. Again, if we don't get to your question, we will be responding by e-mail or a phone call. So feel free to send us your questions and we will get back to you. One -- it's a continuing question is, if GWG is going to continue to purchase insurance policies?

Murray Holland

The answer is yes. Provided we can get the yields on the policy, expected yield on the policy that we get with other investments in other alternative assets.

Dan Callahan

Another question is, the 27 million shares of stock that came on at the end of last year, if you have plans to market that stock?

Murray Holland

That 27 million shares is subject to an orderly marketing agreement, which requires us to enter into a broad distribution of stock. And currently, we are working on plans to implement that. It'll be done over an orderly marketing mechanism over a long period of time.

Dan Callahan

And BEN's portfolio, are you going to be giving investors more insight into what's in BEN's portfolio?

Tim Evans

Hi, I'll cover that one, Dan. The BEN's portfolio -- certainly we have information on what's in BEN's portfolio. And we are working with them to determine what is appropriate to disclose in public filings. So we're certainly continuing to work towards that. I guess, I'd add to that point as well that, as we previously announced, that we are working with BEN towards potential future transactions. Potentially among those transactions, there could be transactions that are closed that would consolidate the financial statements of the company. And so that could inform the process of disclosing more about the collateral portfolio behind BEN's assets, its financial [indiscernible].

Dan Callahan

So that answers one of the other questions we got about consolidation. So with that, I'm going to turn it over to Murray for some final thoughts.

Murray Holland

Yes. I want to thank everybody for joining us on this webinar. We're going to continue to be a very transparent company, and continue with the quarterly earnings calls. And that next earnings call will be sometime in November, so I look forward to talking to you all in November. Thank you for joining.

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