GWG Holdings, Inc. (GWGH) Q3 2019 Earnings Conference Call November 21, 2019 4:30 PM ET
Dan Callahan - Director of Communication
Murray Holland - President and CEO
Tim Evans - CFO
Conference Call Participants
Hello, everyone. Thank you, and good afternoon. My name is Dan Callahan, Director of Communication at GWG Holdings. Welcome to our Third 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, look 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 a listen-only mode. Again, questions can be submitted through the dashboard text box, it will be answered at the end of the presentation. Today's webcast is being recorded and will be available on the website at gwgh.com through the Investor Relations tab.
So with that, I'll turn it over to our President and Chief Executive Officer, Murray Holland. Murray?
Dan, thank you very much, and welcome everybody.
Today, I'd like to go over a number of items with you that involve the third quarter of 2019, including our business overview, the investment in Beneficient, various corporate events updates, financial metrics and results, and our path forward. The business of GWG is to provide liquidity for alternative assets owned by individuals who need liquidity for life events and investments.
Traditionally, GWG business has been purchasing life settlements out from individuals who need liquidity and we have furthered our strategy of diversification into these alternative assets by our investment in Beneficent. Today, we have a diversified portfolio of investments. About 52% of our investments are life insurance assets, 42% are investments in Beneficient, and we still retain about 5.5% of cash, for total consolidated assets of $1.5 billion, with shareholders equity of just over $200 million.
The Beneficient asset investment strategy provides a significant diversification of investments for GWG. Beneficient strategy is to invest in professionally managed funds, including private equity, credit funds, real estate funds, other alternatives such as hedge funds and that provides - our investment in Beneficient provides GWG this diversification as direct exposure into these assets.
A breakdown of global alternative assets in the class of investments that BEN will participate in are contained in the pie chart that's on the screen. The largest portions are hedge funds and private equity funds, real estate investments, private credit, infrastructure and natural resources. And again, these professionally managed funds are the type of investments that larger financial institutions such as pension funds, endowments and foundations have had access to over the last 25 years or 30 years that individuals are just now getting access to.
So the liquidity that BEN provides and the GWG provides are liquidity for primarily life changes of high net worth individuals, and these include a number of life events, traditionally events such as death or disability, divorce, and business needs. They're also used for state planning and other investment opportunities.
During the last quarter, we've had a number of events that have happened with GWG, including we've had maturities that exceeded in 2019 over 2018. We successfully restarted the L Bonds sales program in early August of 2019.
We hired five new sales executives with strong experience in alternative asset investments. We've been included in the Russell 2000 Index of small-cap stocks, and we have begun the separation of the Insurtech Subsidiaries, Life Epigenetics and YouSurance as we've disclosed to you over the last year or so.
And with that, I would like to hand it over to Tim Evans, our Chief Financial Officer of GWG. Tim?
Thank you, Murray, and thanks to everyone who is on the call.
I would like to go through a few different items today, beginning with our 2019 GWG Q3 financial metrics review; we then move on to GWG's balance sheet and our liquidity position; talk about our security sales, and then finish with continually strong news on our life insurance portfolio and the performance of the portfolio.
So let's begin with a summary of our metrics. As we always do at GWG, we look at our performance results quarter-over-quarter, and what we see looking at Q3 versus Q2 is that we've had very similar results quarter-over-quarter, which is really to be expected as the work that we've done in Q3 largely matches what was done in Q2 as we are preparing to see how the connection between GWG and its investment in BEN can be brought to a better fruition.
So what we see as far as our net income is that we had about $5 million less net income pre-tax in Q3, that driven really by two big factors. Number one, on the revenue side, lower purchase gain, both in rate and volume. This is to be expected as we've said for some time as we are allocating assets on capital away from the purchase of new policies.
We would expect to see lower purchase gains there, and that is further enhanced by lower expenses of about $2.4 million, most of that coming from lower personnel expenses in Q3 related to the completion of the transactions that were conducted in Q2. So very similar results quarter-over-quarter.
One thing - another thing that's similar as we go to our balance sheet is the size and strength of the balance sheet, still right under $1.6 billion, a lot of that value came in through Q3 of '18 with our transaction with BEN and we continue to see increased common equity and coverage from that transaction. We also see steady asset balance through our liquidity.
We reported at the end of Q3 about $90 million in liquidity and that number - in the earnings release that was later issued was year-to-date or at the time rather of $144 million. So we continue to hold strong cash reserves as we are preparing to send those investments into BEN in a way that is approved by our special committee going forward.
Moving on to our investment sales. We have had very strong sales since relating back in the early part of August and we attribute that to the attractive yields in a low interest rate environment. As we look at the chart at the bottom of the page, we can see that for Q3 of 2019, we had just under two-thirds of the quarter that where we were selling but we were already substantially close to where we were back in Q1 of '19 where there was a full quarter of sales.
So very happy about the investment sales there. Not only do we have good sales, but the mix by quarter is also very steady. So we have an attractive maturity profile of the 84-month coverage at 37.2% in Q3 where we liked having that longer-term debt and we see not only is it consistent there, but also consistent in the 36-month and across the Board a fairly consistent sales mix, which we are happy to see.
Then moving on to our life insurance portfolio. The total portfolio face amount still about $2 billion, and $321 million of that is in insureds over the age of 90. So we continue to see the seasoning of the portfolio and that supported by our more consistent benefits that we are earning off of those maturities from those life settlement.
Consistently covering our premiums, you can see at the chart in the bottom right now, for Q3 2019, our trailing 12 months of benefits versus premiums is in a great position and that is in large part due to a record year-to-date 2019 maturity profile where we've had over $108 million as of today, and this year to date 2019 exceeds our full-year of 2015 by 50%. So we're at 150% of full year 2018 already sitting here today in 2019, continued evidence of the seasoning of the portfolio and the strong maturities we expect to continue off of that.
In addition to the $321 million of policy benefits of insureds over the age of 90, we can see that for 44% of the face - of our policies is at 85 years of age or older. So its $909 million of the $2.1 billion that is in age 85 or older. And not only do we have the seasoning of the portfolio, but we have good credit risk. We've very highly rated obligors on the other side of those policies.
On the next slide, we see a discussion of path forward. Again, what we're to do is bring closer our - the alignment of GWG and BEN, and ensure that we're doing that in a way that increases GWG's growth in the alternative asset exposure and brings positive impacts to our balance sheet as a result of those transactions.
So with that, I think I'll turn it back to Dan for any questions or other items.
A - Dan Callahan
Thank you, Tim.
We've been getting some questions and we have a few that we're going to get to. Again, if we don't get - we don't get to your question, we will be responding by email or a phone call, so feel free to send us your questions, we'll get back to you.
Our first question is one that we have been getting for a little bit is the purchase of insurance policies. Is GWG going to continue to purchase insurance policies?
Dan, the answer to that is that we will purchase policies that can provide the yields equivalent to the yield we expect out of BEN investments.
We have another question from William Gibson, who is an analyst who covers us, who asks for the gross yield on Beneficient alternative assets?
That will range between 14% and 17%.
Another question from Bill is the timing of consolidation, has that been worked out yet?
Well, there is a, - the transactions between BEN and GWG are - they're pretty significant transactions that we've undertaken to date and we continue to work on further consolidation to companies. We spent a considerable amount of time over the last quarter preparing the special committee for a number of proposals that they're considering at this time and we need to respect the process and the considerable work the company is undertaking.
So we can't comment on the specific items at this time, until we're - until they're completed. But we are excited about the prospects and look forward to announcing those soon.
Another question we have is the types of investments you will be investing L Bonds proceeds with going forward?
Okay. Those are investments in the Beneficient, and as an earlier slide that I walked through, a peer talked about the type of investments, BEN will be providing liquidity for and those are professionally managed funds that are the - right now the focus of a lot of the major financial institutions in this country including pension funds, endowments and foundations that invest in these.
We have a question from David Simon, who asks about the spin-off of the Insurtech Business. Will GWG benefit from the successes of the Insurtech Business?
Yes, we will. The spin-off is done for a number of reasons, but we will have - today, we own 100% of the equity in that subsidiary and we will continue to own essentially all of the economics of the company even after the spin-off.
We have a couple of questions about life insurance policies. Some - give us some explanation for why fewer policies have been purchased? What are the dynamics of that?
As we have witnessed at GWG over the last five years, there has been a significant decline in yields on these policies. And the yield is critical to us, because we're obviously financing with debt instruments that have the yield of their own. And while that margin has been shrinking, we've had to be - we've had to look for alternative investments and Beneficient represents that avenue for us and the future of the company will be with Beneficient.
We have another question about the status of the trust charters that BEN has been seeking?
Okay. BEN has worked on those considerably obviously for a long time and is continuing to work with the State of Texas, those are state charters. They provided a number of rounds of questions and meetings. Their state has been up a number of times, two Beneficient event, attended some Beneficient Board meetings and the process is continuing.
We expect it to be near the end and we were hoping it would be - we would had them by now, but there is some continuing dialog, but nothing that I see that will - that will be an impediment to getting them issued soon.
And I believe this is final question. We love the income from the life insurance portfolio, but do you have a projection for when you could reach profitability?
Well, that I'm afraid we're going to have to answer after we show - after we can disclose the transactions that we're currently working on sometime in the near future.
So with that, we are going to close it out. Again, if you have questions, feel free to email us at email@example.com, and we will get you an answer. And with that, I'll turn it over to Murray for some final thoughts.
Yes, as we're approaching the holiday season, I want everybody to know that we'll be talking to you early next year in an earnings release and I wish everybody the greatest during the holiday season. Be safe and don't eat too much.