OREANDA-NEWS. GWG Holdings, Inc. (Nasdaq:GWGH), a specialty finance company and a leading purchaser in the life insurance secondary market, today announced its financial results for the second quarter ended June 30, 2016.

Highlights for the Three Months Ended June 30, 2016

  • GAAP Financial Information
    • Total revenue of $20.8 million, up nearly 250% from the prior year
    • Net income of $1.9 million, or $0.32 per basic and $0.29 per fully diluted share, respectively
  • Non-GAAP Financial Information1
    • Adjusted Non-GAAP net income of $6.4 million, or $1.07 per basic share2
    • Non-GAAP net asset value of $18.72 per basic share as of June 30, 20163
  • Increased the number of financial advisors able to source life insurance policies through GWG’s Appointed Agent Program to 2,875
  • Raised a record $48.2 million of capital from GWG’s investment product offerings
  • Purchased $136.8 million in face value of policy benefits, of which approximately one third of all life insurance policies purchased during the quarter came from GWG’s direct origination
  • Recognized $9.8 million in policy benefits from six life insurance policies
  • The Company’s portfolio of life insurance stood at $1.15 billion in face value of policy benefits covering 493 unique lives; a net sequential growth of $127.0 million
  • Closed the sale of short term L Bonds (< 2 years) and reset interest rates on mid and long-term L Bonds to reflect the growth and maturation of the life insurance portfolio4
  • Maintained a total liquidity position of $58.4 million5

(1) See non-GAAP Financial Measures below.
(2) Our credit facility requires us to maintain positive net income calculated on an adjusted non-GAAP basis. We calculate adjusted non-GAAP net income by recognizing the actuarial gain accruing within our life insurance policies at the expected internal rate of return of the policies we own without regard to fair value measurements required by GAAP. We net this actuarial gain against our adjusted costs during the same period to calculate adjusted non-GAAP net income.
(3) Net asset value per share is calculated as present value of the Company’s portfolio of life insurance policies using a discount rate of 6.91% (equal to the Company’s weighted average interest rate paid on interest bearing debt) plus cash on hand and policy benefits receivable, if any, less the sum of the Company’s interest bearing debt and preferred stock, divided by the number of basic shares outstanding.
(4) Changes announced August 2, 2016 and are effective September 1, 2016.
(5) Includes cash, cash equivalents, restricted cash, policy benefits receivable, and amounts available, if any, on the senior credit facility.

“GWG continues to achieve record results across our key operating and financial metrics,” said Jon Sabes, GWG Holdings’ Chief Executive Officer. “The value of the financial services we provide are clearly beginning to resonate as we seek to create a vibrant life insurance secondary market.” 

Sabes added, “We know seniors owning life insurance are benefiting – as we have returned over $357 million to seniors for life insurance they no longer wanted, needed or could afford – this compares to the $22 million in surrender value offered by insurance carriers.  We know investors are seeking positive yields derived from our non-correlated assets – as we raised over $48 million this quarter and worldwide interest rates continued to decline. We also know financial advisors can help their clients with the services we offer – as we continue to grow our community of progressive and forward thinking financial advisors. The culmination of these factors point to significant growth potential for GWG – as we continue to meet the needs of markets that benefit from the services we offer.”   

Second Quarter 2016 Financial Summary

Total revenue for the second quarter ended June 30, 2016 was $20.8 million, as compared to $8.6 million for the same period in 2015. Realized gain from policy benefits for the second quarter was $8.1 million, as compared to $0.6 million for the same period in 2015. The Company recognized $9.8 million of life insurance policy benefits in the second quarter, as compared to $0.8 million in the same period of 2015. Total revenue from new policy purchases during the second quarter was $9.8 million, as compared to $4.5 million for the same period in 2015. Additionally, we recognized $5.1 million of unrealized gain associated with the adoption of the Society of Actuaries 2015 Valuation Basic Tables during the second quarter.

Total operating expenses for the second quarter of 2016 were $17.1 million, as compared to $12.0 million for the same period in 2015. The increase was due to additional interest expense as a result of higher debt balances outstanding and greater spending across all of our functional areas as we continue to rapidly grow our financial services distribution platform and our direct life insurance policy origination and acquisition capabilities.

“Recently we made important changes to our L Bond investment product, which has been a primary means of funding our portfolio of life insurance,” said William Acheson, GWG Holdings’ Chief Financial Officer. “These changes included closing the sale of our short term (less than 2 years) L Bonds and reducing the interest rates offered on our mid and long-term L Bonds. The resulting lower cost of funds and improved asset/liability profile of GWG’s balance sheet creates immediate value and reduces risk for all our investors.” Acheson continued, “Additionally, the rapid acceptance of our Redeemable Preferred Stock offering is paving the way for our planned migration from debt to equity financing, positioning GWG for further growth.”

Gain on Life Insurance Policies

      Three Months Ended     Six Months Ended  
      June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
                           
Change in est. probabilistic cash flows   $ 11,308,000   $ 21,429,000   $ 20,559,000   $ 19,434,000  
Premiums and other fees paid     (8,995,000 )   (6,172,000 )   (17,440,000 )   (12,466,000 )
Fair value of matured policies     (5,637,000 )   (14,130,000 )   (12,417,000 )   (14,760,000 )
Change in life expectancy evaluation     5,119,000     (373,000 )   5,951,000     (936,000 )
Change in discount rates     629,000     2,591,000     838,000     3,229,000  
Unrealized gain on acquisitions     9,822,000     4,511,000     17,841,000     5,123,000  
Realized gain on maturities     8,137,000     618,000     22,765,000     25,632,000  
Gain on life insurance policies   $ 20,383,000   $ 8,474,000   $ 38,097,000   $ 25,256,000  

Life Insurance Origination and Acquisition

  • Second consecutive quarterly record of life insurance policy purchases – by face amount of benefits and number of policies
  • Purchases in the first half of 2016 exceeded the full year of 2015 – by face amount of benefits and number of policies
  • Purchased a record 28 life insurance policies through GWG direct origination programs, representing 32% of total acquisitions for the quarter
  • Continued implementation of streamlined policy acquisition process and automation to improve service times and resource efficiency
  • GWG Life, LLC obtained three new state life settlement provider licenses (NJ, MT, NH), for a total of 38 licenses nationally

“GWG’s life insurance policy portfolio growth is being driven by our continued focus on direct policy origination and acquisition activities,” said Michael Freedman, GWG Holdings’ President. “We have been successfully enlisting more insurance agents and financial advisors to source life insurance policies for GWG through our Appointed Agent Program. Furthermore, through our Policy Acquisition Center, we have continued to expand the capacity and improve the efficiency of our case processing so that GWG is evaluating and purchasing more direct policy submissions in less time.”

Life Insurance Portfolio Summary

Total portfolio face value of policy benefits   $ 1,154,798,000  
Average face value per policy   $ 2,111,000  
Average face value per insured life   $ 2,342,000  
Weighted average age of insured (yrs.)     82.1  
Weighted average life expectancy estimate (yrs.)     6.8  
Total number of life insurance policies     547  
Number of unique lives     493  
Demographics  73% Males; 27% Females  
Number of smokers 18  
Largest policy as % of total portfolio     0.87 %
Average policy as % of total portfolio     0.18 %
Average annual premium as % of face value     3.25 %

Distribution of Policies and Policy Benefits by Current Age of Insured

                      Percentage of Total  
Min Age   Max Age   Policies   Policy Benefits     Wtd. Avg. Life
Expectancy
(yrs.)		   Number of
Policies		   Policy
Benefits
 
90   95   43   $ 81,533,000     2.4     7.9 %     7.1 %
85   89   141   $ 296,388,000     4.7     25.8 %     25.7 %
80   84   148   $ 396,632,000     6.8     27.0 %     34.3 %
75   79   101   $ 226,984,000     8.9     18.5 %     19.7 %
70   74   75   $ 103,093,000     9.7     13.7 %     8.9 %
65   69   39   $ 50,168,000     10.7     7.1 %     4.3 %
Total        547   $ 1,154,798,000     6.8     100.0 %     100.0 %

Life Insurance Portfolio Activity

      Three Months Ended     Six Months Ended  
      June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
                           
Total policy benefits purchased   $ 136,806,000   $ 52,082,000   $ 239,020,000   $ 56,550,000  
Total life insurance policies purchased     88     22     163     30  
Average policy benefit purchased   $ 1,555,000   $ 2,367,000   $ 1,466,000   $ 1,885,000  
Direct policy benefits purchased   $ 16,146,000   $ 6,780,000   $ 19,555,000   $ 7,748,000  
Direct insurance policies purchased     28     6     38     9  

Trailing 12 Month Policy Benefits Recognized and Premiums Paid

Quarter End Date     Portfolio
Face Amount		       12-Month
Trailing Policy
Benefits Collected		     12-Month
Trailing Policy
Premiums Paid		     12-Month
Trailing
Benefits/Premium
Coverage Ratio
June 30, 2014     784,652,000       6,300,000     22,598,000     27.9 %
September 30, 2014     787,964,000       4,300,000     23,121,000     18.6 %
December 31, 2014     779,099,000       18,050,000     23,265,000     77.6 %
March 31, 2015     754,942,000       46,675,000     23,786,000     196.2 %
June 30, 2015     806,274,000       47,125,000     24,348,000     193.6 %
September 30, 2015     878,882,000       44,482,000     25,313,000     175.7 %
December 31, 2015     944,844,000       31,232,000     26,650,000     117.2 %
March 31, 2016     1,027,821,000       21,845,000     28,771,000     75.9 %
June 30, 2016     1,154,798,000       30,924,000     31,891,000     97.0 %

 

About GWG Holdings, Inc.

GWG Holdings, Inc. (Nasdaq:GWGH) is a specialty finance company and a leader in the life insurance secondary market. GWG is dedicated to creating a vibrant life insurance secondary market for the economic benefit of seniors with life insurance who are seeking post-retirement financial solutions, investors seeking yield derived from non-correlated assets, financial advisors seeking value-added products and services for their clients, and shareholders seeking to gain from the realization of this marketplace. As of June 30, 2016, GWG’s growing portfolio consisted of over $1.1 billion in face value of policy benefits. Since 2006, GWG has purchased over $2 billion in life insurance policy benefits and paid seniors $357 million for their life insurance.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this press release regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "would," "target" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about our estimates regarding future revenue and financial performance. We may not actually achieve the expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the expectations disclosed in the forward-looking statements we make. More information about potential factors that could affect our business and financial results is contained in our filings with the Securities and Exchange Commission. Additional information will also be set forth in our future quarterly reports on Form 10-Q, annual reports on Form 10-K and other filings that we make with the Securities and Exchange Commission. We do not intend, and undertake no duty, to release publicly any updates or revisions to any forward-looking statements contained herein.

GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

    June 30, 2016
(unaudited)		     December 31, 2015  
A S S E T S
Cash and cash equivalents   $ 17,379,350     $ 34,425,105  
Restricted cash     11,160,793       2,341,900  
Investment in life insurance policies, at fair value     431,820,437       356,649,715  
Secured MCA advances     4,328,317       -  
Life insurance policy benefits receivable     6,829,022       -  
Other assets     3,510,443       2,461,045  
TOTAL ASSETS   $ 475,028,362     $ 395,877,765  
                 
L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y
LIABILITIES                
Revolving Senior Credit Facility   $ 77,475,992     $ 63,279,596  
Series I Secured Notes     17,965,653       23,287,704  
L Bonds     327,322,906       276,482,796  
Accounts payable     2,529,206       1,517,440  
Interest payable     13,323,746       12,340,061  
Other accrued expenses     1,355,266       1,060,786  
Deferred taxes, net     4,670,715       1,763,968  
TOTAL LIABILITIES   $ 444,643,484     $ 379,732,351  
                 
STOCKHOLDERS’ EQUITY                
                 
CONVERTIBLE PREFERRED STOCK                
(par value $0.001; shares authorized 40,000,000; shares outstanding 2,737,698 and 2,781,735; liquidation preference of $20,533,000 and $20,863,000 on June 30, 2016 and December 31, 2015, respectively)     20,445,320       20,784,841  
                 
REDEEMABLE PREFERRED STOCK                
(par value $0.001; shares authorized 100,000; shares outstanding 12,222 on June 30, 2016)     12,212,767       -  
                 
MCA PREFERRED STOCK                
(par value $0.001; shares authorized 2,000,000; shares outstanding 7,155 on June 30, 2016)     71,555       -  
                 
COMMON STOCK                
(par value $0.001: shares authorized 210,000,000; shares issued and outstanding 5,974,790 and 5,941,790 on June 30, 2016 and December 31, 2015)     5,975       5,942  
Additional paid-in capital     16,488,390       17,149,391  
Accumulated deficit     (18,839,129 )     (21,794,760 )
TOTAL STOCKHOLDERS’ EQUITY     30,384,878       16,145,414  
                 
TOTAL LIABILITIES & EQUITY   $ 475,028,362     $ 395,877,765  

GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS

    Three Months Ended   Six Months Ended
      June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015
REVENUE                        
Gain on life insurance policies, net   $ 20,383,347   $ 8,473,886   $ 38,097,059   $ 25,257,295
MCA income     223,255     -     368,216     -
Interest and other income     170,880     90,380     216,100     139,676
TOTAL REVENUE     20,777,482     8,564,266     38,681,375     25,396,971
                         
EXPENSES                        
Interest expense     10,365,581     7,322,347     20,025,966     14,498,881
Employee compensation and benefits     3,071,507     2,144,725     5,537,705     3,872,642
Legal and professional fees     1,304,353     642,931     2,510,481     1,166,184
Other expenses     2,332,685     1,881,321     4,744,845     3,415,060
TOTAL EXPENSES     17,074,126     11,991,324     32,818,997     22,952,767
                         
INCOME (LOSS) BEFORE INCOME TAXES     3,703,356     (3,427,058 )   5,862,378     2,444,204
INCOME TAX EXPENSE (BENEFIT)     1,822,030     (1,176,643 )   2,906,747     1,432,728
                         
NET INCOME (LOSS)   $ 1,881,326   $ (2,250,415 ) $ 2,955,631   $ 1,011,476
                         
Loss attributable to preferred shareholders     429,760     344,847     772,722     698,003
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS   $ 2,311,086   $ (1,905,568 ) $ 3,728,353   $ 1,709,478
NET INCOME (LOSS) PER SHARE                        
Basic   $ 0.32   $ (0.38 ) $ 0.50   $ 0.29
Diluted   $ 0.29   $ (0.38 ) $ 0.46   $ 0.21
                           
WEIGHTED AVERAGE SHARES OUTSTANDING                        
Basic     5,967,098     5,876,618     5,954,944     5,873,423
Diluted     8,081,895     5,876,618     8,036,501     7,987,923

Non-GAAP Financial Measures

GWG uses non-GAAP financial measures for evaluating financial results, planning and forecasting, and maintaining compliance with covenants contained in borrowing agreements. The application of current GAAP standards during a period of significant growth in the Company’s business, in which period the Company is building a large and actuarially diverse portfolio of life insurance, results in current period operating performance that may not be reflective of the Company’s long-term earnings potential. Management believes that the Company’s non-GAAP financial measures permit investors to better focus on this long-term earnings performance without regard to the volatility in GAAP financial results that can occur during this phase of growth.

Non-GAAP financial measures disclosed by GWG are provided as additional information to investors in order to provide an alternative method for assessing our financial condition and operating results. These non-GAAP financial measures are not in accordance with GAAP and may be different from non-GAAP measures used by other companies, including other companies within our industry. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for comparable amounts prepared in accordance with GAAP. A reconciliation of GAAP to the non-GAAP financial measures described above can be found below.

Adjusted Non-GAAP Net Income. Our credit facility requires us to maintain a positive net income calculated on an adjusted non-GAAP basis. We calculate the adjusted net income by recognizing the actuarial gain accruing within our life insurance policies at the expected internal rate of return of the policies we own without regard to fair value. We net this actuarial gain against our adjusted costs during the same period to calculate our net income on a non-GAAP basis.

      Three Months Ended     Six Months Ended  
      June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
REVENUE                          
GAAP net income   $ 1,881,326   $ (2,250,415 ) $ 2,955,631   $ 1,011,476  
Unrealized fair value (gain) loss (1)     (21,241,376 )   (14,028,327 )   (32,772,929 )   (12,134,482 )
Adjusted cost basis increase (2)     16,372,918     12,413,852     31,739,965     24,643,053  
Accrual of unrealized actuarial gain (3)     9,391,032     7,974,447     17,570,007     12,215,892  
Total adjusted non-GAAP income (4)     6,403,900     4,109,557     19,492,674     25,735,939  
Adjustments to income     429,760     344,847     772,722     698,003  
Non-GAAP income attributable to common shareholders     6,833,660     4,454,404     20,265,396     26,433,942  
Non-GAAP net income per share:                          
Basic     1.07     0.70     3.27     4.38  
Diluted     0.85     0.76     2.52     3.31  
Average shares outstanding:                          
Basic     5,967,098     5,876,618     5,954,944     5,873,423  
Diluted     8,081,895     5,876,618     8,036,501     7,987,923  

(1) Reversal of unrealized fair value gain of life insurance policies for current period.
(2) Adjusted cost basis is increased to include those acquisition and servicing expenses which are not capitalized under GAAP.
(3) Accrual of actuarial gain at expected internal rate of return based on the non-GAAP investment cost basis for the period.
(4) We must maintain an annual positive consolidated net income, calculated on a non-GAAP basis, to maintain compliance with our revolving credit facility with DZ Bank/Autobahn.

Non-GAAP Net Asset Value. The non-GAAP net asset value attempts to measure the economic value of the Company’s common equity by netting interest-bearing debt and the redemption value of the Company’s outstanding preferred stock against the value of the Company’s portfolio of life insurance (discounted at the weighted average interest paid on interest bearing indebtedness) and cash and cash equivalents at the end of the measurement period. Management believes this is a useful way to view the common equity value attributable to the current yield spread in the Company’s portfolio of life insurance.

    As of June 30,       As of December 31,  
    2016       2015  
Life insurance portfolio policy benefits $ 1,154,798,000     $ 944,844,000  
Discount rate of future cash flows   6.91 %     6.98 %
Net present value of life insurance policy benefits $ 535,915,000     $ 435,738,000  
Cash and cash equivalents $ 28,540,000     $ 36,767,000  
Policy benefits receivable $ 6,829,000     $ -  
Interest bearing debt $ (435,008,000 )   $ (370,760,000 )
Preferred stock redemption value $ (24,418,000 )   $ (22,949,000 )
Net asset value $ 111,858,000     $ 78,796,000  
Per share $ 18.72     $ 13.26  
Shares outstanding (basic)   5,974,790       5,941,790  

The discount rate used in this calculation is our weighted-average cost of financing and is separate and distinct from the discount rate used to determine the GAAP fair value of the portfolio of life insurance policies as described in our most recent form 10-Q.

The following table illustrates the impact on the non-GAAP net asset value of different discount rates (discounted at our weighted-average interest rate paid on indebtedness) as of June 30, 2016.

Discount rate of future cash flows       5.91 %       6.91 %       7.91 %       8.91 %
Net asset value   $   143,307,000     $   111,858,000     $   83,164,000     $   56,915,000  
Per share   $   23.99     $   18.72     $   13.92     $   9.53