UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549 

 

FORM 10-Q

 

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

or

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

For the transition period from _________ to ________

 

Commission File Number: None

 

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   26-2222607
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

220 South Sixth Street, Suite 1200

Minneapolis, MN 55402

(Address of principal executive offices, including zip code)

 

(612) 746-1944

(Registrant’s telephone number, including area code) 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

  Large accelerated filer  Accelerated filer 
  Non-accelerated filer  Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No

 

As of November 10, 2016, GWG Holdings, Inc. had 5,980,190 shares of common stock outstanding.

 

 

 

 
 

 

GWG HOLDINGS, INC.

 

Index to Form 10-Q

for the Quarter Ended September 30, 2016

 

    Page No.
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
  Condensed Consolidated Balance Sheets as of September 30, 2016, and December 31, 2015 1
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 2
  Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 and 2015 3
  Consolidated Statement of Changes in Stockholders’ Equity 5
  Notes to Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 4. Controls and Procedures 54
     
PART II. OTHER INFORMATION  
   Item 1A. Risk Factors 55
Item 5. Other Information  56
Item 6. Exhibits 56
     
SIGNATURES 57

  

 
 

  

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30,
2016

(unaudited)

    December 31,
2015
 
A S S E T S
Cash and cash equivalents   $ 18,773,828     $ 34,425,105  
Restricted cash     15,688,025       2,341,900  
Investment in life insurance contracts, at fair value     477,585,100       356,649,715  
Secured MCA advances     6,113,831       -  
Life insurance contract benefits receivable     6,129,022       -  
Other assets     3,131,107       2,461,045  
TOTAL ASSETS   $ 527,420,913     $ 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                
Senior Credit Facilities   $ 63,699,385     $ 63,279,596  
Series I Secured Notes     17,553,307       23,287,704  
L Bonds     379,858,737       276,482,796  
Accounts payable     2,442,449       1,517,440  
Interest payable     13,633,640       12,340,061  
Other accrued expenses     645,343       1,060,786  
Deferred taxes, net     3,242,586       1,763,968  
TOTAL LIABILITIES   $ 481,075,447     $ 379,732,351  
                 
STOCKHOLDERS’ EQUITY                
                 
CONVERTIBLE PREFERRED STOCK                
(par value $0.001; shares authorized 40,000,000; shares outstanding 2,649,665 and 2,781,735; liquidation preference of $19,872,000 and $20,863,000 on September 30, 2016 and December 31, 2015, respectively)     19,772,931       20,784,841  
                 
REDEEMABLE PREFERRED STOCK                
(par value $0.001; shares authorized 100,000; shares outstanding 33,201; liquidation preference of $33,176,600 on September 30, 2016)     33,176,600       -  
                 
COMMON STOCK                
(par value $0.001: shares authorized 210,000,000; shares issued and outstanding 5,980,190 and 5,941,790 on September 30, 2016 and December 31, 2015)     5,980       5,942  
Additional paid-in capital     15,226,449       17,149,391  
Accumulated deficit     (21,836,494 )     (21,794,760 )
TOTAL STOCKHOLDERS’ EQUITY     46,345,466       16,145,414  
                 
TOTAL LIABILITIES & EQUITY   $ 527,420,913     $ 395,877,765  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  1  
 

 

 GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 
REVENUE                        
Gain on life insurance contracts, net   $ 13,509,755     $ 8,189,261     $ 51,606,815     $ 33,446,556  
MCA income     286,225       -       654,441       -  
Interest and other income     124,998       93,841       341,098       233,516  
TOTAL REVENUE     13,920,978       8,283,102       52,602,354       33,680,072  
                                 
EXPENSES                                
Interest expense     11,983,968       8,650,149       32,009,934       23,149,030  
Employee compensation and benefits     2,912,463       2,308,246       8,450,168       6,180,886  
Legal and professional fees     586,830       822,077       3,097,312       1,988,261  
Other expenses     2,863,212       2,231,341       7,608,057       5,646,402  
TOTAL EXPENSES     18,346,473       14,011,813       51,165,471       36,964,579  
                                 
INCOME (LOSS) BEFORE INCOME TAXES     (4,425,495 )     (5,728,711 )     1,436,883       (3,284,507 )
INCOME TAX EXPENSE (BENEFIT)     (1,428,130 )     (2,097,633 )     1,478,617       (664,905 )
                                 
NET LOSS   $ (2,997,365 )     (3,631,078 )   $ (41,734 )   $ (2,619,602 )
                                 
Loss attributable to preferred shareholders     421,026       343,644       1,103,896       1,041,648  
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS   $ (2,576,339 )     (3,287,434 )   $ 1,062,162     $ (1,577,954 )
NET INCOME (LOSS) PER SHARE                                
Basic   $ (0.50 )     (0.61 )   $ (0.01 )   $ (0.44 )
Diluted   $ (0.50 )     (0.61 )   $ 0.13     $ (0.44 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING                                
Basic     5,978,322       5,937,320       5,962,938       5,894,956  
Diluted     5,978,322       5,937,320       8,092,196       5,894,956  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  2  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES                        
Net loss   $ (2,997,365 )   $ (3,631,078 )   $ (41,734 )   $ (2,619,602 )
Adjustments to reconcile net loss to net cash flows from operating activities:                                
Gain on life insurance contracts     (21,073,226 )     (14,516,881 )     (53,846,155 )     (26,651,363 )
Amortization of deferred financing and issuance costs     2,765,743       1,933,776       6,077,905       1,891,772  
Deferred income taxes     (1,428,130 )     (1,916,686 )     1,478,617       (664,905 )
Preferred stock dividends payable     333,565       173,993       663,614       509,225  
(Increase) decrease in operating assets:                                
Life insurance contract benefits receivable     700,000       2,142,986       (6,129,022 )     1,392,986  
Other assets     419,836       (417,990 )     (617,630 )     (774,539 )
Increase (decrease) in operating liabilities:                                
Due to related party     (80,949 )     -       (182,730 )     -  
Accounts payable and other accrued expenses     (3,216,990 )     2,534,269       (2,024,234 )     3,836,715  
            NET CASH FLOWS USED IN OPERATING ACTIVITIES     (24,577,516 )     (13,697,611 )     (54,621,369 )     (23,079,711 )
                                 
CASH FLOWS FROM INVESTING ACTIVITIES                                
Investment in life insurance contracts     (25,770,326 )     (13,626,842 )     (74,470,362 )     (23,850,860 )
Carrying value of matured life insurance contracts     1,078,889       80,000       7,381,132       3,822,983  
Investment in Secured MCA advances     (1,965,896 )     -       (7,613,310 )     -  
Proceeds from Secured MCA advances     220,911       -       1,246,703       -  
             NET CASH FLOWS USED IN INVESTING ACTIVITIES     (26,436,422 )     (13,546,842 )     (73,455,837 )     (20,027,877 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES                                
Net borrowings on (repayments of) Senior Credit Facilities     (10,761,048 )     -       6,238,952       (7,150,000 )
Payments for redemption of Series I Secured Notes     (541,275 )     (890,586 )     (6,264,018 )     (4,508,130 )
Proceeds from issuance of L Bonds     64,350,430       37,122,127       135,477,090       87,620,483  
Payments for issuance and redemption of L Bonds     (14,373,447 )     (19,363,047 )     (37,036,922 )     (32,376,104 )
Proceeds from (increase in) restricted cash     (4,527,232 )     651,630       (13,346,126 )     (2,975,507 )
Issuance of common stock     31,515       -       244,185       582,000  
Proceeds from issuance of preferred stock     20,786,332       -       31,287,541       -  
Payments for issuance and redemption of preferred stock     (2,556,859 )     (21,187 )     (4,174,773 )     (295,185 )
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     52,408,416       17,498,937       112,425,929       40,897,557  
                                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     1,394,478       (9,745,516 )     (15,651,277 )     (2,210,031 )
                                 
CASH AND CASH EQUIVALENTS                                
BEGINNING OF PERIOD     17,379,350       38,198,189       34,425,105       30,662,704  
END OF PERIOD   $ 18,773,828     $ 28,452,673     $ 18,773,828     $ 28,452,673  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  3  
 

 

 GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED

(unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                        
Interest and preferred dividends paid   $

11,516,000

    $ 5,385,000     $

28,683,000

    $ 18,529,000  
Premiums paid   $ 11,785,000     $ 6,603,000     $ 29,225,000     $ 19,069,000  
Stock-based compensation   $ 162,000     $ 176,000     $ 213,000     $ 208,000  
NON-CASH INVESTING AND FINANCING ACTIVITIES                                
Series I Secured Notes:                                
Conversion of accrued interest and commissions payable to principal   $ 47,000     $ 61,000     $ 234,000     $ 188,000  
L Bonds:                                
Conversion of accrued interest and commissions payable to principal   $ 854,000     $ 491,000     $ 1,515,000     $ 929,000  
Issuance of Series A Preferred Stock in lieu of cash dividends   $ 170,000     $ 172,000     $ 509,000     $ 507,000  
Investment in life insurance contracts included in accounts payable   $ 1,603,000     $ 559,000     $ 1,603,000     $ 559,000  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  4  
 

 

 GWG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

    Preferred Stock     Preferred     Common    

Common

Stock

   

Additional

Paid-in

    Accumulated     Total  
    Shares     Stock     Shares     (par)     Capital     Deficit     Equity  
                                           
Balance, December 31, 2014     2,738,966     $ 20,527,866       5,870,193     $ 5,870     $ 16,257,686     $ (14,401,486 )   $ 22,389,936  
                                                         
Net loss     -       -       -       -       -       (7,393,274 )     (7,393,274 )
                                                         
Issuance of common stock     -       -       60,000       60       581,940       -       582,000  
                                                         
Series A Preferred Stock conversion to common stock     (15,463 )     (115,973 )     11,597       12       115,961       -       -  
                                                         
Issuance of preferred stock     58,232       372,948       -       -       -       -       372,948  
                                                         
Issuance of stock options     -       -       -       -       193,804       -       193,804  
Balance, December 31, 2015     2,781,735     $ 20,784,841       5,941,790     $ 5,942     $ 17,149,391     $ (21,794,760 )   $ 16,145,414  
                                                         
Net income     -       -       -       -       -       (41,734 )     (41,734 )
                                                         
Issuance of common stock     -       -       36,450       36       244,149       -       244,185  
                                                         
Redemption of Series A Preferred Stock     (204,848 )     (1,521,358 )     1,950       2       19,498       -       (1,501,858 )
                                                         
Issuance of Series A Preferred Stock     72,778       509,448       -       -       -       -       509,448  
                                                         
Issuance of redeemable preferred stock     33,201       33,176,600       -       -       (2,399,219 )     -       30,777,381  
                                                         
Issuance of stock options     -       -       -       -       212,630       -       212,630  
Balance, September 30, 2016     2,682,866     $ 52,949,531       5,980,190     $ 5,980     $ 15,226,449     $ (21,836,494 )   $ 46,345,466  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  5  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(1)   Nature of Business and Summary of Significant Accounting Policies

 

Nature of Business – Through its wholly owned subsidiaries, GWG Holdings, Inc. owns a portfolio of life insurance contracts. As of the date of this report, our portfolio had an aggregate fair value of $477.6 million. We earn income from changes in the fair value of our portfolio and through the benefits we receive from the life insurance contracts we own. We are also involved in other lines of business, including a business that collects commissions for facilitating the conversion of term life insurance contracts into universal, or permanent, life insurance, and a business that participates in the merchant cash advance industry by advancing sums to merchants and lending money to businesses that advance sums to merchants. Operating results for the three- and nine-month periods included in this report are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

GWG Holdings, Inc. and all of its subsidiaries are incorporated and organized in Delaware. Unless the context otherwise requires or we specifically so indicate, all references in these footnotes to “we,” “us,” “our,” “our Company,” “GWG,” or the “Company” refer to GWG Holdings, Inc. and its subsidiaries collectively and on a consolidated basis. References to the full names of particular entities, such as “GWG Holdings, Inc.” or “GWG Holdings,” are meant to refer only to the particular entity referenced.

 

Use of Estimates – The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue during the reporting period. The Company regularly evaluates estimates and assumptions, which are based on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. The most significant estimates with regard to these consolidated financial statements relate to (1) the determination of the assumptions used in estimating the fair value of our investments in life insurance contracts, and (2) the value of our deferred tax assets and liabilities.

 

Cash and Cash Equivalents – We consider cash in demand deposit accounts and temporary investments purchased with an original maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial institutions. The balances in our bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate the risk of exceeding insured levels and may transfer funds as we deem appropriate.

 

Life Insurance Contracts – ASC 325-30, Investments in Insurance Contracts (“ASC 325-30”), permits a reporting entity to account for its investments in life insurance contracts using either the investment method or the fair value method. We elected to use the fair value method to account for our life insurance contracts. Under the fair value method, we recognize our initial investment at the purchase price. At each subsequent reporting period, we re-measure the investment at fair value in its entirety and recognize the change in fair value as revenue in the current period net of premiums paid. We use the term “life insurance contracts” to have the same meaning as “life insurance policies.”

 

We also recognize realized gain (revenue) from a life insurance contract upon one of the two following events: (1) our receipt of notice or verified mortality of the insured; or (2) our sale of the contract, filing of change-of-ownership forms and receipt of payment. In the case of mortality, the gain (or loss) we recognize is the difference between the contract benefits and the carrying values of the contract once we receive notice or verify the mortality of the insured. In the case of a contract sale, the gain (or loss) we recognize is the difference between the sale price and the carrying value of the contract on the date of our receipt of sale proceeds.

 

In a case where our acquisition of a contract is not complete as of a reporting date, but we have nonetheless advanced direct costs and deposits for the acquisition, those costs and deposits are recorded as “other assets” on our balance sheet until the acquisition is complete and we secured title to the contract. On September 30, 2016 and December 31, 2015, a total of $34,000 and $31,000, respectively, of our “other assets” comprised direct costs and deposits that we advanced for contract acquisitions. 

Other Assets – GWG acquired the exclusive option to license “DNA Methylation Based Predictor of Mortality” technology from the University of California, Los Angeles (UCLA). The technology was discovered by Dr. Steven Horvath and is featured in the September 2016 edition of Aging. In 2013, Dr. Horvath reported that human cells have a mechanism that records biological aging progression based on DNA methylation that is independent from chronological aging progression. In 2016, Dr. Horvath discovered a specific set of DNA methylation-based bio-markers that are highly predictive of all-cause mortality. The discovery was made through a statistical analysis of bio-markers found in DNA samples from over 13,000 individuals whose health had been studied for decades. The implications of Dr. Horvath’s discovery are simple and profound: A biostatistician can review a specific set of identified bio-markers and develop a highly predictive analytical model of an individual’s lifespan. The cost of entering into this exclusive option agreement is listed as “other assets”.

 

  6  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Deferred Financing and Issuance Costs – Loans advanced to us under our senior credit facilities, as described in Notes 5 and 6, are reported net of financing costs, which are amortized using the straight-line method over the term of the facility.  The Series I Secured Notes and L Bonds, as respectively described in Notes 7 and 8, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of those borrowings. The Series A Preferred Stock, as described in Note 9, is reported net of issuance costs, sales commissions (including the fair value of warrants issued) and other direct expenses, all of which were fully amortized using the interest method as of December 31, 2015. Selling and issuance costs of Redeemable Preferred Stock and MCA Preferred Stock, described in Notes 10 and 11, are netted against additional paid-in-capital.

 

Earnings (loss) per Share – Basic earnings (loss) per share attributable to non-redeemable interests are calculated using the weighted-average number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential dilutive impact of our outstanding Series A Preferred Stock, Redeemable Preferred Stock, warrants and stock options.

 

Recently Adopted Pronouncements On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), as part of its simplification initiative. ASU 2015-03 changes the presentation of debt issuance costs by presenting those costs in the balance sheet as a direct deduction from the related debt liability. Amortization of the costs is reported as interest expense. We adopted ASU 2015-03 effective January 1, 2016, as required for public reporting entities.

 

Reclassification Certain 2015 amounts have been reclassified to conform to ASU 2015-03, and that adoption reduced our assets, together with a corresponding reduction to our liabilities, by approximately $2,288,000 as of December 31, 2015. There was no impact on our statements of operations in 2015, and these reclassifications had no effect on our reported consolidated net income or loss for prior periods.

  

(2)       Restrictions on Cash

 

Under the terms of our senior credit facilities (discussed in Notes 5 and 6), we are required to maintain collection and escrow accounts that are used to fund the acquisition of contracts, pay annual contract premiums, pay interest and other charges under the facility, and collect contract benefits. The agent for the lender authorizes the disbursements from these accounts. At September 30, 2016 and December 31, 2015, there was a balance of $15,688,000, and $2,342,000, respectively, in these restricted cash accounts.

 

(3)      Investment in Life Insurance Contracts

 

Life insurance contracts are valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these contracts are recorded as gain or loss on life insurance contracts, net of cash premiums paid on those contracts, in our consolidated statements of operations. Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions derived from reports obtained from widely accepted life expectancy providers, assumptions relating to cost-of-insurance (premium) rates and other assumptions. The discount rate we apply incorporates current information about discount rate applied by other reporting companies owning portfolios of life insurance contracts, the discount rates observed in the life insurance secondary market, market interest rates, our credit exposure to the insurance companies that issued the life insurance contracts and management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. As a result of management’s analysis, discount rates of 11.07% and 11.09% were applied to our portfolio as of September 30, 2016 and December 31, 2015, respectively.

 

  7  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) 

 

We recog n i zed life i nsurance benef it s of $5,300,000 and $357,000 dur i ng the three months ended September 30 , 2016 and 2015, respec t i v e l y, r e l a t ed t o contracts wi t h a carry i ng va l ue of $1,078,000 a nd $80,000, respec t i v e l y, and as a result recorded realized gains of $4,221,000 and $277,000. We recognized life insurance benefits of $34,367,000 and $29,732,000 during the nine months ended September 30, 2016 and 2015, respectively, related to contracts with a carrying value of $7,381,000 and $3,823,000, respectively, and as a result recorded realized gains of $26,986,000 and $25,909,000.

 

Reconciliation of gain on life insurance contracts:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2016     2015     2016     2015  
Change in fair value   $ 21,073,000     $ 14,517,000     $ 53,846,000     $ 26,651,000  
Premiums and other fees     (11,784,000 )     (6,605,000 )     (29,225,000 )     (19,114,000 )
Contract maturities     4,221,000       277,000       26,986,000       25,909,000  
Gain on life insurance contracts, net   $ 13,510,000     $ 8,189,000     $ 51,607,000     $ 33,446,000  

  

We currently estimate that premium payments and servicing fees required to maintain our current portfolio of life insurance contracts in force for the next five years, assuming no mortalities, are as follows:

 

Years Ending December 31,   Premiums     Servicing     Premiums and Servicing Fees  
Three months ending December 31, 2016   $ 10,449,000     $ 188,000     $ 10,637,000  
2017     43,155,000       750,000       43,905,000  
2018     46,847,000       750,000       47,597,000  
2019     50,813,000       750,000       51,563,000  
2020     56,633,000       750,000       57,383,000  
2021     63,222,000       750,000       63,972,000  
    $ 271,119,000     $ 3,938,000     $ 275,057,000  

 

Management anticipates funding the premium payments estimated above with proceeds from our senior credit facilities, proceeds from additional debt and equity financing, and proceeds from maturities of life insurance contracts. The proceeds of these capital sources may also be used for the purchase, financing, and maintenance of additional life insurance contracts. 

 

  8  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(4)       Fair Value Definition and Hierarchy

 

ASC 820, Fair Value Measurement (“ASC 820”), establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Assets and liabilities with readily available and actively quoted prices, or for which fair value can be measured from actively quoted prices in an orderly market, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions about how market participants price an asset or liability developed based on the best available information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

  Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

  Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

  Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including, for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for assets and liabilities categorized in Level 3.

 

Level 3 Valuation Process

 

The estimated fair value of our portfolio of life insurance contracts is determined on a quarterly basis by our portfolio management committee, taking into consideration changes in discount rate assumptions, estimated premium payments and life expectancy estimate assumptions, as well as any changes in economic and other relevant conditions. The discount rate incorporates (i) current information about discount rate applied by other reporting companies owning portfolios of life insurance contracts, (ii) the discount rates observed in the life insurance secondary market, (iii) market interest rates, (iv) our credit exposure to the insurance company that issued the life insurance contract and (v) management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole.

 

These inputs are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System probabilistic portfolio price model, which estimates the cash flows using various mortality probabilities and scenarios. The valuation process includes a review by senior management as of each valuation date. We also engage a third-party expert to independently test the accuracy of the valuations using the inputs we provide on a quarterly basis. See Exhibit 99.1 filed herewith.

 

The following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance contracts for the periods ended September 30, as follows:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
    2016     2015     2016     2015  
Beginning balance   $ 431,820,000     $ 301,499,000     $ 356,650,000     $ 282,883,000  
Purchases     25,770,000       13,626,000       74,470,000       23,851,000  
Maturities (carrying value)     (1,078,000 )     (80,000 )     (7,381,000 )     (3,823,000 )
Net change in fair value     21,073,000       14,517,000       53,846,000       26,651,000  
Ending balance (September 30)   $ 477,585,000     $ 329,562,000     $ 477,585,000     $ 329,562,000  

 

  9  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

We periodically update the independent life expectancy estimates on the insured lives in our portfolio, other than insured lives covered under small face amount contracts (i.e., $1 million in face value benefits or less), on a continuous rotating three-year cycle.  Accordingly, we update life expectancies for approximately one-twelfth of our portfolio each quarter.

 

The following table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance contracts:

 

   

As of 
September 30,
2016

   

As of
December 31,
2015

 
Weighted-average age of insured, years     81.8       82.6  
Weighted-average life expectancy, months     81.8       79.3  
Average face amount per contract   $ 2,035,000     $ 2,386,000  
Discount rate     11.07 %     11.09 %

 

These assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. For example, if the life expectancy estimates were increased or decreased by four and eight months on each outstanding contract, and the discount rates were increased or decreased by 1% and 2%, while all other variables were held constant, the fair value of our investment in life insurance contracts would increase or (decrease) as summarized below:

 

Change in Fair Value of the Investment in Life Insurance Contracts

 

    Change in life expectancy estimates  
    minus 8 months     minus 4 months     plus  4 months     plus  8 months  
                         
September 30, 2016   $ 64,713,000     $ 32,215,000     $ (31,450,000 )   $ (62,258,000 )
December 31, 2015   $ 48,339,000     $ 24,076,000     $ (23,501,000 )   $ (46,482,000 )

 

    Change in discount rate  
    minus 2%     minus 1%     plus 1%     plus 2%  
                         
September 30, 2016   $ 50,097,000     $ 23,990,000     $ (22,096,000 )   $ (42,492,000 )
December 31, 2015   $ 35,024,000     $ 16,786,000     $ (15,485,000 )   $ (29,803,000 )

 

Other Fair Value Considerations

 

The c a r ry i ng va l ue of r e ce i v ab l e s, p r e pa i d expe n ses, a ccoun t s pa y ab l e and accrued expe n s e s approx im a t e fa i r va l ue due t o t h e i r sh o r t - t e r m m a t ur i t i es and l ow cred i t r i sk. Using the income-based valuation approach, the es t im a t ed fa i r va l ue of our Ser i es I Se c ured N o t es a n d L Bon d s, having a combined aggregate face value of $402,416,000 as of September 30, 2016, i s a p prox i m a t e l y $414,023,000 based on a w e i gh t ed-average m arket i n t e r e s t ra t e o f 6.36%. T h e car r y i ng v a l ue of t he senior credit facilities ref l ec t s i n t erest ch a r g ed at t he co mm erc i a l pap e r ra t e or 12-month LIBOR, as applicable, p l u s an a p p l i cab l e m arg i n. T he m a r g i n represen t s our cred i t r i sk, and t he s t reng t h of t he p o r t fo l i o of li fe i nsurance contracts co l l a t era l i z i ng t he d eb t . The overa l l ra t e ref l ec t s m arke t , and t h e carry i ng va l ue of t he facility approx im a t es fa i r va l ue.

 

Our wholly owned subsidiary GWG MCA Capital, Inc. (“GWG MCA”) participates in the merchant cash advance by directly advancing sums to merchants and lending money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these advances and loans, and determine if an impairment reserve is necessary. At September 30, 2016, one of our secured loans to Nulook Capital LLC was potentially impaired. The secured loan to Nulook Capital LLC had an outstanding balance of $3,215,000 and a loan loss reserve of $400,000 at September 30, 2016. We deem fair value to be the estimated collectible value on each loan or advance made from GWG MCA. Where we estimate the collectible amount to be less than the outstanding balance, we record a reserve for the difference. 

 

  10  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following table summarizes outstanding warrants as of September 30, 2016:

 

Month issued   Warrants issued     Fair value per share     Risk free
rate
    Volatility     Term  
December 2011     68,937     $ 0.22       0.42 %     25.25 %     5 years  
March 2012     38,130     $ 0.52       0.38 %     36.20 %     5 years  
June 2012     161,840     $ 1.16       0.41 %     47.36 %     5 years  
July 2012     144,547     $ 1.16       0.41 %     47.36 %     5 years  
September 2012     2,500     $ 0.72       0.31 %     40.49 %     5 years  
September 2014     16,000     $ 1.26       1.85 %     17.03 %     5 years  
      431,954                                  

 

(5)       Credit Facility – Autobahn Funding Company LLC

 

Through our subsidiaries GWG DLP Funding II, LLC (“DLP II”) and GWG DLP Funding III, LLC (“DLP III”), we are party to a $105 million revolving senior credit facility with Autobahn Funding Company LLC (“Autobahn”), with a maturity date of June 30, 2018. The facility is governed by a Credit and Security Agreement (the “Agreement”), and DZ Bank AG Deutsche Zentral-Genossenschaftsbank (“DZ Bank”) acts as the agent for Autobahn under the Agreement. On September 14, 2016, we paid off the revolving senior credit facility in full with funds received from a new senior secured term loan with LNV Corporation as described in Note 6.

 

Advances under the facility bear interest at a commercial paper rate of the lender at the time of the advance, or at the lender’s cost of borrowing plus 4.25%. We make interest payments on a monthly basis. The effective rate of interest was 5.42% at September 14, 2016 and 5.58% at December 31, 2015. The weighted-average effective interest rate, after excluding an unused line fee, was 5.46% and 5.42% for the three months ended September 30, 2016 and 2015, respectively, and 5.54% and 5.81% for the nine months ended September 30, 2016 and 2015, respectively.

 

The amount outstanding under this facility was $0 and $65,011,000 at September 30, 2016 and December 31, 2015, respectively. GWG Holdings is a performance guarantor of the various obligations of GWG Life, LLC (“GWG Life”), as servicer, under the Agreement. Obligations under the facility are secured by our pledge of ownership in our life insurance contracts to DZ Bank through an arrangement under which Wells Fargo serves as a securities intermediary.

 

The Agreement has certain financial (as described below) and non-financial covenants, and we were in compliance with these covenants at September 30, 2016 and December 31, 2015.

  

We have agreed to maintain (i) a positive consolidated net income on a non-GAAP basis (as defined and calculated under the Agreement) for each complete fiscal year, (ii) a tangible net worth on a non-GAAP basis (again, as defined and calculated under the Agreement) of not less than $45 million, and (iii) maintain cash and eligible investments of $15 million or above. Consolidated non-GAAP net income and non-GAAP tangible net worth as of and for the four quarters ended September 30, 2016, as calculated under the Agreement, was $33,877,000 and $149,361,000, respectively.

 

Total funds available for additional borrowings under the facility at December 31, 2015, was $39,989,000. At September 30, 2016, the amount outstanding was $0 and there were no policies pledged to the facility.

 

(6)       Credit Facility – LNV Corporation

 

On September 14, 2016, we entered into a senior secured term loan with LNV Corporation (“LNV”) as lender through our subsidiary GWG DLP Funding IV, LLC (“DLP IV”) as borrower. The facility is governed by a Loan and Security Agreement (the “Loan Agreement”), with CLMG Corp. (“CLMG”) acting as administrative agent on behalf of the lender under the Loan Agreement. The Loan Agreement makes available a total of up to $172,300,000 in credit with a maturity date of September 14, 2026. Additional quarterly advances are available under the Loan Agreement. Interest will accrue on amounts borrowed under the agreement at an annual interest rate, determined as of each date of borrowing, equal to (A) the greater of 12-month LIBOR or the federal funds rate (as defined in the agreement) plus one-half of one percent per annum, plus (B) 5.75% per annum. Interest payments are made on a quarterly basis.

 

At September 30, 2016, the amount outstanding under this facility was $71,250,000 and total funds available for additional borrowing, net of required reserve, was $76,629,000.

 

  11  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Obligations under the facility are secured by a security interest in DLP IV’s assets, for the benefit of the lenders under the Loan Agreement, through an arrangement under which Wells Fargo serves as security intermediary.

 

The Loan Agreement requires DLP IV to maintain a reserve account in an amount sufficient to pay 12 months of servicing, administrative and third party expenses identified under the Loan Agreement, and 12 months of debt service as calculated under the Loan Agreement. As of November 10, 2016, the amount set aside in the reserve account is $27,500,000.

 

The Agreement has no financial covenants and certain non-financial reporting covenants, and we were in compliance with these covenants at September 30, 2016.

 

(7)       Series I Secured Notes

 

Series I Secured Notes (“Notes”) are legal obligations of GWG Life and were privately offered and sold from August 2009 through June 2011. The Notes are secured by the assets of GWG Life and are subordinate to obligations under our senior credit facilities (see Notes 5 and 6). We are party to a Third Amended and Restated Note Issuance and Security Agreement dated November 1, 2011, as amended, under which GWG Life is obligor, GWG Holdings is guarantor, and Lord Securities Corporation serves as trustee of the GWG Life Trust (“Trust”). This agreement contains certain financial and non-financial covenants, and we were in compliance with these covenants at September 30, 2016 and December 31, 2015.

 

The Notes were sold with original maturity dates ranging from six months to seven years, and with fixed interest rates varying from 5.65% to 9.55% depending on the term of the Note. The Notes have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Effective September 1, 2016, we no longer anticipate renewing the Notes.

 

Interest on the Notes is payable monthly, quarterly, annually or at maturity depending on the election of the investor. At September 30, 2016 and December 31, 2015, the weighted-average interest rate of our Notes was 8.63% and 8.47%, respectively. The principal amount of Notes outstanding was $17,830,000 and $23,578,000 at September 30, 2016 and December 31, 2015, respectively. The difference between the amount outstanding on the Notes and the carrying amount on our balance sheet is due to netting of unamortized deferred issuance costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $82,000 and $275,000 for the three and nine months ended September 30, 2016 and $49,000 and $260,000 for the three and nine months ended September 30, 2015. Future expected amortization of deferred financing costs is $277,000 in total over the next six years.

 

Future contractual maturities of Notes payable and future amortization of their deferred financing costs at September 30, 2016 are as follows: 

 

Years Ending December 31,   Contractual Maturities     Amortization of Deferred Financing Costs  
Three months ending December 31 ,2016   $ 1,177,000     $ 5,000  
2017     10,522,000       88,000  
2018     2,401,000       49,000  
2019     1,023,000       22,000  
2020     1,766,000       55,000  
Thereafter     941,000       58,000  
    $ 17,830,000     $ 277,000  

 

  12  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)  

 

(8)       L Bonds

 

Our L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by GWG Life, as a guarantor, and are subordinate to the obligations under our senior credit facilities (see Notes 5 and 6). We began publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures.” These debt securities were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration statement permitting us to sell up to $1.0 billion in principal amount of L Bonds. We are party to an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor, and Bank of Utah serves as indenture trustee. The Indenture contains certain financial and non-financial covenants, and we were in compliance with these covenants at September 30, 2016 and December 31, 2015.

 

Effective September 1, 2016, we discontinued the sales of 6-month and 1-year L Bonds. In addition, effective September 1, 2016, the L Bond interest rates changed to 5.50%, 6.25%, 7.50% and 8.50% for the 2-, 3-, 5- and 7-year L Bonds, respectively. The bonds have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Interest is payable monthly or annually depending on the election of the investor.

 

At September 30, 2016 and December 31, 2015, the weighted-average interest rate of our L Bonds was 7.16% and 7.18%, respectively. The principal amount of L Bonds outstanding was $384,586,000 and $282,171,000 at September 30, 2016 and December 31, 2015, respectively. The difference between the amount of outstanding L Bonds and the carrying amount on our balance sheets is due to netting of unamortized deferred issuance costs and cash receipts for new issuances in process. Amortization of deferred issuance costs was $2,073,000 and $5,362,000 for the three and nine months ended September 30, 2016 and $1,892,000 and $4,232,000 for the three and nine months ended September 30, 2015. Future expected amortization of deferred financing costs as of September 30, 2016 is $11,622,000 in total over the next eight years.

 

Future contractual maturities of L Bonds, and future amortization of their deferred financing costs, at September 30, 2016 are as follows: 

 

Years Ending December 31,   Contractual Maturities     Amortization of Deferred Financing Costs  
Three months ending December 31, 2016   $ 23,548,000     $ 115,000  
2017     112,987,000       1,708,000  
2018     101,130,000       3,106,000  
2019     78,098,000       3,222,000  
2020     19,291,000       784,000  
Thereafter     49,532,000       2,687,000  
    $ 384,586,000     $ 11,622,000  

 

(9)       Convertible Preferred Stock

 

From July 2011 until September 2012, we privately offered shares of Series A Preferred Stock (“Series A”) of GWG Holdings at $7.50 per share. In the offering, we sold an aggregate of 3,278,000 shares for gross consideration of $24,582,000. Holders of Series A are entitled to cumulative dividends at the rate of 10% per annum, paid quarterly. Dividends on the Series A are included as interest expense in the statements of operations. Under certain circumstances described in the Certificate of Designation for the Series A, additional Series A shares may be issued in lieu of cash dividends at the rate of $7.00 per share.

 

Holders of Series A are entitled to a liquidation preference equal to the stated value of their preferred shares (i.e., $7.50 per share) plus accrued but unpaid dividends. Holders of Series A may presently convert each share of their Series A into 0.75 shares of our common stock at the rate of $10.00 per share.

 

As of September 30, 2016, we issued an aggregate of 447,000 shares of Series A in satisfaction of $3,129,000 in dividends on the Series A, and an aggregate of 696,000 shares of Series A were converted into 522,000 shares of our common stock. As of September 30, 2016, we had 2,650,000 Series A shares outstanding with respect to which we incurred aggregate issuance costs of $2,838,000, all of which is included as a component of additional paid-in capital.

  

  13  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Purchasers of Series A in our offering received warrants to purchase an aggregate of 431,954 shares of our common stock at an exercise price of $12.50 per share. The grant date fair value of these warrants was $428,000. As of September 30, 2016 and December 31, 2015, none of these warrants were exercised, and the weighted-average remaining life of these warrants was 0.68 and 1.43 years, respectively.

 

In September 2012, we completed a public offering of our common stock and, as a result, the Series A was reclassified from temporary equity to permanent equity. We may redeem Series A shares under the Certificate of Designation at a price equal to 110% of their liquidation preference ($7.50 per share) at any time. As of September 30, 2016, we have redeemed an aggregate of 277,000 shares of Series A.

 

(10)       Redeemable Preferred Stock

 

Beginning November 30, 2015, we began publicly offering up to 100,000 shares of Redeemable Preferred Stock (“RPS”) at $1,000 per share. Holders of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS are included as interest expense in the statements of operations. Under certain circumstances described in the Certificate of Designation for the RPS, additional shares of RPS may be issued in lieu of cash dividends.

 

The RPS ranks senior to our common stock and pari passu with our Series A, and entitles its holders to a liquidation preference equal to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS may presently convert their RPS into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited to 15% of the stated value of RPS originally purchased by such holder from us and still held by such holder.

 

Holders of RPS may request that we redeem their RPS at a price equal to their liquidation preference at a price equal to their stated value plus accrued but unpaid dividends, less an applicable redemption fee, if any. Nevertheless, the Certificate of Designation for RPS permits us to decline requests for redemption in certain circumstances. Subject to certain restrictions and conditions, we may also redeem shares of RPS without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, after one year from the date of original issuance, we may, at our option, call and redeem shares of RPS at a price equal to their liquidation preference.

 

As of September 30, 2016, we had sold 33,201 shares of RPS for aggregate gross consideration of $33,177,000, and incurred approximately $2,399,000 of selling costs related to the sale of those shares.

 

(11)       GWG MCA Capital, Inc - 9% Preferred Stock

Beginning March 31, 2016, GWG MCA began privately offering up to 2,000,000 shares of GWG MCA 9% Preferred Stock (“MCA Preferred”) at $10.00 per share. Holders of MCA Preferred are entitled to cumulative dividends at a rate of 9% per annum, paid monthly. Dividends on the MCA Preferred are included as interest expense in the statements of operations. As of September 30, 2016, a total of 7,155 shares of MCA Preferred had been sold for aggregate gross consideration of $72,000 and approximately $7,000 of selling costs related to the sale of these shares were incurred.

 

Holders of MCA Preferred were redeemed as of September 30, 2016 at the stated value of their shares plus accrued but unpaid dividends.

 

  14  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(12)       Income Taxes

 

We had a current income tax liability of $0 as of both September 30, 2016 and December 31, 2015. The components of current and deferred income tax expense for the three and nine months ended September 30, 2016 and 2015, respectfully, consisted of the following:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2016     2015     2016     2015  
Income tax provision (benefit):                        
Current:                        
Federal   $ -     $ (141,000 )   $ -     $ -  
State   $ -     $ (40,000 )   $ -     $ -  
Total current tax expense (benefit)     -       (181,000 )     -       -  
Deferred:                                
Federal   $ (1,082,000 )   $ (1,488,000 )   $ 1,121,000     $ (504,000 )
State   $ (346,000 )   $ (429,000 )   $ 358,000     $ (161,000 )
Total deferred tax expense (benefit)     (1,428,000 )     (1,917,000 )     1,479,000       (665,000 )
Total income tax expense (benefit)     (1,428,000 )     (2,098,000 )     1,479,000       (665,000 )

 

We provided a valuation allowance against the deferred tax asset related to a note receivable, which was charged-off for financial reporting purposes, because we believe that, when realized for tax purposes, it will result in a capital loss that will not be utilized because we have no expectation of generating a capital gain within the applicable carryforward period. Therefore, we do not believe that it is “more likely than not” that the deferred tax asset will be realized.

 

We a l so prov i ded a va l ua ti on a l l o w a n ce aga i nst t he d e f e r red t ax asset re l a t ed t o a t ax b as i s cap it al l oss ge n e r a t ed wit h respect t o o ur se t tl e m ent a nd subseq u ent d i sposal of an ear l i er i nves t m e n t i n A t he n a S t ru c t ured F u nds PLC. A s w e ha v e no exp e c t a ti on of gen e r a t i ng cap i t a l ga i ns wi t h t he a pp l i ca b l e carryfor w ard per i od, w e d o n o t be l i e v e t hat i t i s m ore l i ke l y t h an n ot” t hat t he defer r ed asset w i l l be rea l i z ed.

 

The primary differences between the September 30, 2016 effective tax rate and the statutory federal rate are the accrual of non-deductible preferred stock dividend expense of $2,153,000, state taxes, and other non-deductible expenses. The most significant temporary differences between GAAP net income and taxable net income are the treatment of interest costs with respect to the acquisition of the life insurance contracts and revenue recognition with respect to the mark-to-market of our life insurance portfolio.

 

(13)       Common Stock

 

In September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common stock at $12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts and expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the ticker symbol “GWGH.”

 

On June 24, 2015 we issued 60,000 restricted common shares at $9.70 per share, determined by the closing market price on the date of grant, to a vendor as payment for services to be rendered over three years. The cost of these shares is amortized over a 12-month period. On March 17, 2016, we issued an additional 6,500 restricted common shares at an average price of $7.16 per share, determined by the closing market price on the date of grant, to this same vendor for additional services provided to us. On April 25, 2016, we issued 25,000 restricted shares of common stock at $6.25 per share, determined by the closing market price on the date of grant, to a vendor as a form of payment for services the vendor is providing to us, which is expensed in the current period.

 

  15  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(14)       Stock Incentive Plan

 

We adopted our GWG Holdings 2013 Stock Incentive Plan in March 2013. The Compensation Committee of our Board of Directors administers the plan. Incentives under the plan may be granted incentive stock options and non-statutory stock options; stock appreciation rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible participants include officers and employees of GWG Holdings and its subsidiaries, members of our Board of Directors, and consultants. 2,000,000 common shares are presently issuable under the plan.

 

Stock Options – Through September 30, 2016, we issued stock options for 1,237,000 shares of common stock to employees, officers, and directors under the plan. Options for 687,000 shares have vested, and the remaining options are scheduled to vest over three years. The options were issued with an exercise price between $6.35 and $10.18 for those beneficially owning more than 10% of our common stock, and between $6.00 and $10.25 for all others, which is equal to the estimated market price of the shares on the date of grant using Black-Scholes binomial option pricing model. The expected annualized volatility used in the Black-Scholes model valuation of options issued during the period was 25.5%. The annual volatility rate is based on the standard deviation of the average continuously compounded rate of return of five selected comparable companies over the previous 52 weeks. A forfeiture rate of 15% is based on historical information and expected future trend. As of September 30, 2016, stock options for 415,000 shares were forfeited and stock options for 28,000 shares were exercised.

 

Outstanding stock options:

 

    Vested     Un-vested     Total  
Balance as of December 31, 2014     314,288       685,813       1,000,101  
Granted during the year     79,500       273,700       353,200  
Vested during the year     238,999       (238,999 )     -  
Exercised during the year     (27,667 )     -       (27,667 )
Forfeited during the year     (121,417 )     (150,602 )     (272,019 )
Balance as of December 31, 2015     483,703       569,912       1,053,615  
Granted during the year     22,500       239,948       262,448  
Vested during the year     187,473       (187,473 )     -  
Forfeited during the year     (6,676 )     (72,824 )     (79,500 )
Balance as of September 30, 2016     687,000       549,563       1,236,563  

 

Compensation expense related to un-vested options not yet recognized is $420,000. We expect to recognize this compensation expense over the next three years ($14,000 in 2016, $240,000 in 2017, $109,000 in 2018, and $57,000 in 2019).

 

Stock Appreciation Rights (SARs) - On September 19, 2016 we issued SARs for 145,388 shares of the common stock to employees. The strike price of the SARs was $8.76, which was equal to the market price of the common stock at the close of business on September 19, 2016. 56,358 of the SARs were vested as of September 30, 2016, on which date the market price of the common stock was $8.82. A forfeiture rate of 15% was used in calculating our liability for the SARs.

Outstanding Stock Appreciation Rights:

 

    Vested     Un-vested     Total  
Balance as of December 31, 2015     -       -       -  
Granted during the year     56,358       89,030       145,388  
Vested during the year     56,358       89,030       145,388  
Forfeited during the year     -       -       -  
Balance as of September 30, 2016     56,358       89,030       145,388  

 

A liability for Stock Appreciation Rights - Compensation Expense was recorded on September 30, 2016 in the amount of $3,381 and Compensation Expense was charged for the same amount.

 

(15)       Net Income per Common Share

 

We have outstanding Series A, as described in Note 9. The Series A are dilutive to our net income per common share calculation for the nine-month period ended September 30, 2016. They are anti-dilutive for the three-month period ended September 30, 2016 and for both three and nine-month periods ended September 30, 2015. We also issued warrants to purchase common stock in conjunction with the sale of Series A (see Note 9). Both those warrants and our vested stock options are anti-dilutive for both three and nine-month periods ended September 30, 2016 and 2015 and have not been included in the fully diluted net loss per common share calculation. We issued RPS (see Note 10). The RPS is dilutive for the nine-month period ended September 30, 2016 and anti-dilutive for the three-month period ended September 30, 2016.

 

  16  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(16)       Commitments

 

We are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment to our original lease that expanded the leased space to 17,687 square feet and extended the term through August 31, 2025. Under the amended lease, we are obligated to pay base rent plus common area maintenance and a share of building operating costs. Rent expenses under these lease arrangements were $102,000 and $71,000 for the three months ended September 30, 2016 and 2015, respectively, and $306,000 and $193,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

Minimum lease payments under the amended lease are as follows:

 

Three months ending December 31, 2016   $ 44,000  
2017     178,000  
2018     185,000  
2019     191,000  
2020     198,000  
2021     204,000  
2022     210,000  
2023     217,000  
2024     223,000  
2025     230,000  
2026     38,000  
    $ 1,918,000  

 

(17)       Contingencies

 

Litigation – In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on our financial position, results of operations or cash flows.

 

(18)       Guarantee of L Bonds

 

We are publicly offering and selling L Bond under a registration statement declared effective by the SEC, as described in Note 8. Our obligations under the L Bonds are secured by substantially all the assets of GWG Holdings, a pledge of all the common stock held individually by our largest stockholders, and by a guarantee and corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds. Substantially all of GWG’s life insurance contracts are held by wholly owned subsidiaries of GWG Life: DLP III, DLP IV and the Trust. GWG Life’s equity ownership in these subsidiaries serves as collateral for the L Bond obligation. The life insurance contracts held by DLP III and DLP IV are not direct collateral for the L Bond obligations but do serve as direct collateral for the senior credit facilities.

 

The consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantor and issuer because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of GWG Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as provided herein. A majority of insurance contracts we own are subject to a collateral arrangement with LNV described in Note 6. Under this arrangement, collection and escrow accounts are used to fund premiums for the insurance contracts and to pay interest and other charges under the senior credit facility.

 

The following represents consolidating financial information as of September 30, 2016 and December 31, 2015, with respect to the financial position, and for the three and nine months ended September 30, 2016 and 2015, with respect to results of operations and cash flows of GWG Holdings and its subsidiaries. The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment in DLP III, DLP IV and the Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries, including DLP III, DLP IV and the Trust.

 

  17  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Balance Sheets 

  

September 30, 2016   Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
                               
A S S E T S
                               
Cash and cash equivalents   $ 13,312,751     $ 4,372,845     $ 1,088,232     $ -     $ 18,773,828  
Restricted cash     -       4,438,025       11,250,000       -       15,688,025  
Investment in life insurance contracts, at fair value     -       -       477,585,100       -       477,585,100  
Secured MCA advances     -       -       6,113,831       -       6,113,831  
Life insurance contract benefits receivable     -       -       6,129,022       -       6,129,022  
Other assets     4,706,121       1,224,386       54,726       (2,854,126 )     3,131,107  
Investment in subsidiaries     422,185,881       429,441,035       -       (851,626,916 )     -  
                                         
TOTAL ASSETS   $ 440,204,753     $ 439,476,291     $ 502,220,911     $ (854,481,042 )   $ 527,420,913  
                                         
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  (D E F I C I T)  
                                         
LIABILITIES                                        
Senior credit facilities   $ -     $ -     $ 63,699,385     $ -     $ 63,699,385  
Series I Secured Notes     -       17,553,307       -       -       17,553,307  
L Bonds     379,858,737       -       -       -       379,858,737  
Notes payable to related parties     -       -       2,700,000       (2,700,000 )     -  
Accounts payable     699,507       99,705       1,643,237       -       2,442,449  
Interest payable     9,798,735       3,588,954       400,077       (154,126 )     13,633,640  
Other accrued expenses     259,722       351,896       33,725       -       645,343  
Deferred taxes, net     3,242,586       -       -       -       3,242,586  
TOTAL LIABILITIES     393,859,287       21,593,862       68,476,424       (2,854,126 )     481,075,447  
                                         
STOCKHOLDERS’ EQUITY (DEFICIT)                                        
Member capital     -       417,882,429       433,744,487       (851,626,916 )     -  
Convertible preferred stock     19,772,931       -       -       -       19,772,931  
Redeemable preferred stock     33,176,600       -       -       -       33,176,600  
Common stock     5,980       -       -       -       5,980  
Additional paid-in capital     15,226,449       -       -       -       15,226,449  
Accumulated deficit     (21,836,494 )     -       -       -       (21,836,494 )
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)     46,345,466       417,882,429       433,744,487       (851,626,916 )     46,345,466  
                                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   $ 440,204,753     $ 439,476,291     $ 502,220,911     $ (854,481,042 )   $ 527,420,913  

  18  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Balance Sheets (continued)

 

December 31, 2015   Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
                               
A S S E T S
                               
Cash and cash equivalents   $ 32,292,162     $ 1,982,722     $ 150,221     $ -     $ 34,425,105  
Restricted cash     -       2,102,257       239,643       -       2,341,900  
Investment in life insurance contracts, at fair value     -       -       356,649,715       -       356,649,715  
Other assets     1,742,074       688,071       30,900       -       2,461,045  
Investment in subsidiaries     269,886,254       291,295,951       -       (561,182,205 )     -  
                                         
TOTAL ASSETS   $ 303,920,490     $ 296,069,001     $ 357,070,479     $ (561,182,205 )   $ 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  (D E F I C I T)  
                                         
LIABILITIES                                        
Senior credit facilities   $ -     $ (1,000,000 )   $ 64,279,596     $ -     $ 63,279,596  
Series I Secured Notes     -       23,287,704       -       -       23,287,704  
L Bonds     276,482,796       -       -       -       276,482,796  
Accounts payable     280,988       157,217       1,079,235       -       1,517,440  
Interest payable     8,529,959       3,544,626       265,476       -       12,340,061  
Other accrued expenses     717,365       343,421       -       -       1,060,786  
Deferred taxes, net     1,763,968       -       -       -       1,763,968  
TOTAL LIABILITIES     287,775,076       26,332,968       65,624,307       -       379,732,351  
                                         
STOCKHOLDERS’ EQUITY (DEFICIT)                                        
Member capital     -       269,736,033       291,446,172       (561,182,205 )     -  
Convertible preferred stock     20,784,841       -       -       -       20,784,841  
Common stock     5,942       -       -       -       5,942  
Additional paid-in capital     17,149,391       -       -       -       17,149,391  
Accumulated deficit     (21,794,760 )     -       -       -       (21,794,760 )
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)     16,145,414       269,736,033       291,446,172       (561,182,205 )     16,145,414  
                                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   $ 303,920,490     $ 296,069,001     $ 357,070,479     $ (561,182,205 )   $ 395,877,765  

 

  19  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations

 

For the nine months ended
September 30, 2016
  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
REVENUE                              
Origination and servicing income   $ -     $ 13,417     $ -     $ (13,417 )   $ -  
Gain on life insurance contracts, net     -       -       51,606,815       -       51,606,815  
MCA income     -       -       654,441       -       654,441  
Interest and other income     181,828       31,137       282,259       (154,126 )     341,098  
TOTAL REVENUE     181,828       44,554       52,543,515       (167,543 )     52,602,354  
                                         
EXPENSES                                        
Origination and servicing fees     -       -       13,417       (13,417 )     -  
Interest expense     25,477,320       1,856,909       4,829,831       (154,126 )     32,009,934  
Employee compensation and benefits     4,894,006       3,151,107       405,055       -       8,450,168  
Legal and professional fees     1,642,252       1,308,959       146,101       -       3,097,312  
Other expenses     4,241,825       2,197,133       1,169,099       -       7,608,057  
 TOTAL EXPENSES     36,255,403       8,514,108       6,563,503       (167,543 )     51,165,471  
                                         
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES     (36,073,575 )     (8,469,554 )     45,980,012       -       1,436,883  
                                         
 EQUITY IN INCOME OF SUBSIDIARY     37,510,458       46,497,731       -       (84,008,189 )     -  
                                         
INCOME BEFORE INCOME TAXES     1,436,883       38,028,177       45,980,012       (84,008,189 )     1,436,883  
                                         
INCOME TAX EXPENSE     1,478,617       -       -       -       1,478,617  
NET INCOME (LOSS)   $ (41,734 )   $ 38,028,177     $ 45,980,012     $ (84,008,189 )   $ (41,734 )

 

For the nine months ended
September 30, 2015

  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
REVENUE                              
Origination and servicing income   $ -     $ 2,022,774     $ -     $ (2,022,774 )   $ -  
Gain on life settlements, net     -       -       33,446,556       -       33,446,556  
Interest and other income     38,944       61,694       132,878       -       233,516  
TOTAL REVENUE     38,944       2,084,468       33,579,434       (2,022,774 )     33,680,072  
                                         
EXPENSES                                        
Origination and servicing fees     -       -       2,022,774       (2,022,774 )     -  
Interest expense     18,011,890       1,984,356       3,152,784       -       23,149,030  
Employee compensation and benefits     4,671,183       1,509,703       -       -       6,180,886  
Legal and professional fees     1,427,388       560,873       -       -       1,988,261  
Other expenses     3,251,606       2,297,063       97,733       -       5,646,402  
                                         
 TOTAL EXPENSES     27,362,067       6,351,995       5,273,291       (2,022,774 )     36,964,579  
                                         
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES     (27,323,123 )     (4,267,527 )     28,306,143       -       (3,284,507 )
                                         
 EQUITY IN INCOME OF SUBSIDIARY     24,038,616       28,305,979       -       (52,344,595 )     -  
                                         
NET INCOME (LOSS) BEFORE INCOME TAXES     (3,284,507 )     24,038,452       28,306,143       (52,344,595 )     (3,284,507 )
                                         
INCOME TAX BENEFIT     (664,905 )     -       -       -       (664,905 )
NET INCOME (LOSS)   $ (2,619,602 )   $ 24,038,452     $ 28,306,143     $ (52,344,595 )   $ (2,619,602 )

  20  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations (continued)

 

For the three months ended

September 30, 2016

  Parent     Guarantor Subsidiary    

Non-

Guarantor Subsidiaries

    Eliminations     Consolidated  
REVENUE                              
Gain on life insurance contracts, net     -       -       13,509,755       -       13,509,755  
MCA income     -       -       286,225       -       286,225  
Interest and other income     75,808       30,126       83,313       (64,249 )     124,998  
TOTAL REVENUE     75,808       30,126       13,879,293       (64,249 )     13,920,978  
                                         
EXPENSES                                        
Interest expense     9,747,128       554,938       1,746,151       (64,249 )     11,983,968  
Employee compensation and benefits     1,718,683       1,038,058       155,722       -       2,912,463  
Legal and professional fees     263,917       297,804       25,109       -       586,830  
Other expenses     1,464,498       803,106       595,608       -       2,863,212  
 TOTAL EXPENSES     13,194,226       2,693,906       2,522,590       (64,249 )     18,346,473  
                                         
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES     (13,118,418 )     (2,663,780 )     11,356,703       -       (4,425,495 )
                                         
 EQUITY IN INCOME OF SUBSIDIARY     8,692,923       11,361,329       -       (20,054,252 )     -  
                                         
INCOME (LOSS) BEFORE INCOME TAXES     (4,425,495 )     8,697,549       11,356,703       (20,054,252 )     (4,425,495 )
                                         
INCOME TAX BENEFIT     (1,418,130 )     -       -       -       (1,428,130 )
NET INCOME (LOSS)   $ (2,997,365 )   $ 8,697,549     $ 11,356,703     $ (20,054,252 )   $ (2,997,365 )

For the three months ended

September 30, 2015

  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
REVENUE                              
Origination and servicing income   $ -     $ 1,004,024     $ -     $ (1,004,024 )   $ -  
Gain on life settlements, net     -       -       8,189,261       -       8,189,261  
Interest and other income     13,922       54,813       25,106       -       93,841  
TOTAL REVENUE     13,922       1,058,837       8,214,367       (1,004,024 )     8,283,102  
                                         
EXPENSES                                        
Origination and servicing fees     -       -       1,004,024       (1,004,024 )     -  
Interest expense     6,980,132       525,391       1,144,626       -       8,650,149  
Employee compensation and benefits     1,759,589       548,657       -       -       2,308,246  
Legal and professional fees     598,530       223,547       -       -       822,077  
Other expenses     1,195,417       995,026       40,898       -       2,231,341  
                                         
TOTAL EXPENSES     10,533,668       2,292,621       2,189,548       (1,004,024 )     14,011,813  
                                         
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES     (10,519,746 )     (1,233,784 )     6,024,819       -       (5,728,711 )
                                         
 EQUITY IN INCOME OF SUBSIDIARY     4,791,035       6,024,762       -       (10,815,797 )     -  
                                         
NET INCOME (LOSS) BEFORE INCOME TAXES     (5,728,711 )     4,790,978       6,024,819       (10,815,797 )     (5,728,711 )
                                         
INCOME TAX BENEFIT     (2,097,633 )     -       -       -       (2,097,633 )
NET INCOME (LOSS)   $ (3,631,078 )   $ 4,790,978     $ 6,024,819     $ (10,815,797 )   $ (3,631,078 )

  21  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Cash Flows 

For the nine months ended
September 30, 2016
  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
CASH FLOWS FROM OPERATING ACTIVITIES                              
Net income   $ (41,734 )   $ 38,028,177     $ 45,980,012     $ (84,008,189 )   $ (41,734 )
Adjustments to reconcile net income to net cash flows from operating activities:                                        
(Equity) of subsidiaries     (37,510,459 )     (46,497,730 )     -       84,008,189       -  
Gain on life insurance contracts     -       -       (53,846,155 )     -       (53,846,155 )
Amortization of deferred financing and issuance costs     5,982,802       (1,364,614 )     1,459,717       -       6,077,905  
Deferred income taxes     1,478,617       -       -       -       1,478,617  
Preferred stock dividends payable     663,614       -       -       -       663,614  
(Increase) in operating assets:                                        
Life insurance contract benefits receivable     -       -       (6,129,022 )             (6,129,022 )
Other assets     (114,885,990 )     (92,168,163 )     -       206,436,523       (617,630 )
Increase (decrease) in operating liabilities:                                        
Due to related party     (2,867,225 )     (15,505 )     2,700,000       -       (182,730 )
Accounts payable and accrued expenses     2,396,503       2,889,525       (7,310,262 )     -       (2,024,234 )
NET CASH FLOWS USED IN OPERATING ACTIVITIES     (144,783,872 )     (99,128,310 )     (17,145,710 )     206,436,523       (54,621,369 )
                                         
CASH FLOWS FROM INVESTING ACTIVITIES                                        
Investment in life insurance contracts     -       -       (74,470,362 )     -       (74,470,362 )
Carrying value of matured life insurance contracts     -       -       7,381,132       -       7,381,132  
Investment in Secured MCA advances     -       -       (7,613,310 )     -       (7,613,310 )
Proceeds from Secured MCA advances     -       -       1,246,703       -       1,246,703  
NET CASH FLOWS USED IN INVESTING ACTIVITIES     -       -       (73,455,837 )     -       (73,455,837 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES                                        
Net borrowings on Senior Credit Facilities     -       -       6,238,952       -       6,238,952  
Payments for redemption of Series I Secured Notes     -       (6,264,018 )     -       -       (6,264,018 )
Proceeds from issuance of L Bonds     135,477,090       -       -       -       135,477,090  
Payments for redemption and issuance of L Bonds     (37,036,922 )     -       -       -       (37,036,922 )
Proceeds from (increase in) restricted cash     -       (2,335,768 )     (11,010,358 )     -       (13,346,126 )
Issuance of common stock     244,185       -       -       -       244,185  
Proceeds from issuance of preferred stock     31,215,986       -       71,555       -       31,287,541  
Payments for issuance and redemption of preferred stock     (4,095,878 )     -       (78,895 )     -       (4,174,773 )
Issuance of member capital     -       110,118,219       96,318,304       (206,436,523 )     -  
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     125,804,461       101,518,433       91,539,558       (206,436,523 )     112,425,929  
                                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (18,979,411 )     2,390,123       938,011       -       (15,651,277 )
                                         
CASH AND CASH EQUIVALENTS                                        
BEGINNING OF THE PERIOD     32,292,162       1,982,722       150,221       -       34,425,105  
                                         
END OF THE PERIOD   $ 13,312,751     $ 4,372,845     $ 1,088,232     $ -     $ 18,773,828  

 

  22  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Consolidating Statements of Cash Flows (continued)

 

For the nine months ended
September 30, 2015
  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
CASH FLOWS FROM OPERATING ACTIVITIES                              
Net income (loss)   $ (2,619,602 )   $ 24,038,452     $ 28,306,143     $ (52,344,595 )   $ (2,619,602 )
Adjustments to reconcile net income to net cash flows from operating activities:                                        
(Equity) of subsidiaries     (24,038,617 )     (28,305,978 )     -       52,344,595       -  
Gain on life settlements     -       -       (26,651,363 )     -       (26,651,363 )
Amortization of deferred financing and issuance costs     2,832,487       260,455       (1,201,170 )     -       1,891,772  
Deferred income taxes     (664,905 )     -       -       -       (664,905 )
Convertible, redeemable preferred dividends payable     509,225       -       -       -       509,225  
(Increase) decrease in operating assets:                                        
Policy benefits receivable     -       -       1,392,986               1,392,986  
Other assets     (40,145,769 )     (26,745,888 )     -       66,117,118       (774,539 )
Increase (decrease) in operating liabilities:                                        
Accounts payable and accrued expenses     4,503,624       123,222       (790,131 )     -       3,836,715  
NET CASH FLOWS USED IN OPERATING ACTIVITIES     (30,425,246 )     (30,629,737 )     1,056,465       66,117,118       (23,079,711 )
                                         
CASH FLOWS FROM INVESTING ACTIVITIES                                        
Investment in life settlements     -       -       (23,850,860 )     -       (23,850,860 )
Carrying value of matured life insurance contracts     -       -       3,822,983       -       3,822,983  
NET CASH FLOWS USED IN INVESTING ACTIVITIES     -       -       (20,027,877 )     -       (20,027,877 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES                                        
Repayment of senior credit facilities     -       -       (7,150,000 )     -       (7,150,000 )
Payments for redemption of Series I Secured Notes     -       (4,508,130 )     -       -       (4,508,130 )
Proceeds from issuance of L Bonds     87,620,483       -       -       -       87,620,483  
Payments for redemption and issuance of L Bonds     (32,376,104 )     -       -       -       (32,376,104 )
Payments from restricted cash     -       (2,306,300 )     (669,207 )     -       (2,975,507 )
Issuance of common stock     582,000       -       -       -       582,000  
Payments for redemption preferred stock     (295,185 )     -       -       -       (295,185 )
Issuance of member capital     -       39,176,335       26,940,783       (66,117,118 )     -  
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     55,531,194       32,361,905       19,121,576       (66,117,118 )     40,897,557  
                                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (4,092,363 )     1,732,168       150,164       -       (2,210,031 )
                                         
CASH AND CASH EQUIVALENTS                                        
BEGINNING OF THE PERIOD     30,446,473       216,231       -       -       30,662,704  
                                         
END OF THE PERIOD   $ 26,354,110     $ 1,948,399     $ 150,164     $ -     $ 28,452,673  

  23  
 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating Statements of Cash Flows (continued)

For the three months ended
September 30, 2016
  Parent     Guarantor Subsidiary     Non-Guarantor Subsidiaries     Eliminations     Consolidated  
                               
CASH FLOWS FROM OPERATING ACTIVITIES                              
Net income   $ (2,997,365 )   $ 8,697,549     $ 11,356,703     $ (20,054,252 )   $ (2,997,365 )
Adjustments to reconcile net loss to net cash flows from operating activities:                                        
(Equity) of subsidiaries     (8,692,924 )     (11,361,328 )     -       20,054,252       -  
Gain on life insurance contracts     -       -       (21,073,226 )     -       (21,073,226 )
Amortization of deferred financing and issuance costs     2,072,879       81,849       611,015       -       2,765,743  
Deferred income taxes     (1,428,130 )     -       -       -       (1,428,130 )
Preferred stock dividends payable     333,565       -       -       -       333,565  
(Increase) in operating assets:                                        
Life insurance contract benefits receivable     -       -       700,000       -       700,000  
Other assets     (54,428,152 )     (54,272,589 )     -       109,120,577       419,836  
Increase (decrease) in operating liabilities:                                        
Due to related party     (64,249 )     (16,700 )     -       -       (80,949 )
Accounts payable and other accrued expenses     155,980       2,172,227       (5,545,197 )     -       (3,216,990 )
NET CASH FLOWS USED IN OPERATING ACTIVITIES     (65,048,396 )     (54,698,992 )     (13,950,705 )     109,120,577       (24,577,516 )
                                         
CASH FLOWS FROM INVESTING ACTIVITIES                                        
Investment in life insurance contracts     -       -       (25,770,326 )     -       (25,770,326 )
Carrying value of matured life insurance contracts     -       -       1,078,889       -       1,078,889  
Investment in Secured MCA advances     -       -       (1,965,896 )             (1,965,896 )
Proceeds from Secured MCA advances     -       -       220,911       -       220,911  
NET CASH FLOWS USED IN INVESTING ACTIVITIES     -       -       (26,436,422 )     -       (26,436,422 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES                                        
Net repayment of Senior Credit Facilities     -       -       (10,761,048 )             (10,761,048 )
Payments for redemption of Series I Secured Notes     -       (541,275 )     -       -       (541,275 )
Proceeds from issuance of L Bonds     64,350,430       -       -       -       64,350,430  
Payments for redemption and issuance of L Bonds     (14,373,447 )     -       -       -       (14,373,447 )
Proceeds from (increase in) restricted cash     -       486,283       (5,013,515 )     -       (4,527,232 )
Issuance of member capital     -       52,304,345       56,816,232       (109,120,577 )     -  
Issuance of common stock     31,515       -       -       -       31,515  
Proceeds from issuance of preferred stock     20,786,332       -       -       -       20,786,332  
Payments for issuance and redemption of preferred stock     (2,485,304 )     -       (71,555 )     -       (2,556,859 )
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     68,309,526       52,249,353       40,970,114       (109,120,577 )     52,408,416  
                                         
NET INCREASE IN CASH AND CASH EQUIVALENTS     3,261,130       (2,449,639 )     582,987       -       1,394,478  
                                         
CASH AND CASH EQUIVALENTS                                        
BEGINNING OF THE PERIOD     10,051,621       6,822,484       505,245       -       17,379,350  
                                         
END OF THE PERIOD   $ 13,312,751     $ 4,372,845     $ 1,088,232     $ -     $ 18,773,828  

  24  
 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating Statements of Cash Flows (continued)

 

For the three months ended
September 30, 2015
  Parent     Guarantor Sub     Non-Guarantor Sub     Eliminations     Consolidated  
                               
CASH FLOWS FROM OPERATING ACTIVITIES                              
Net income (loss)   $ (3,631,078 )   $ 4,790,978     $ 6,024,819     $ (10,815,797 )   $ (3,631,078 )
Adjustments to reconcile net loss to net cash flows from operating activities:                                        
(Equity) of subsidiaries     (4,791,035 )     (6,024,762 )     -       10,815,797       -  
Gain on life settlements     -       -       (14,516,881 )     -       (14,516,881 )
Amortization of deferred financing and issuance costs     1,103,312       49,339       781,125       -       1,933,776  
Deferred income taxes     (1,916,686 )     -       -       -       (1,916,686 )
Convertible, redeemable preferred stock dividends payable     173,993       -       -       -       173,993  
(Increase) decrease in operating assets:                                        
Policy benefits receivable     -       -       2,142,986       -       2,142,986  
Other assets     (22,146,946 )     (15,631,849 )     -       37,360,805       (417,990 )
Increase (decrease) in operating liabilities:                                        
Accounts payable and other accrued expenses     2,010,129       (105,418 )     629,558       -       2,534,269  
NET CASH FLOWS USED IN OPERATING ACTIVITIES     (29,198,311 )     (16,921,712 )     (4,938,393 )     37,360,805       (13,697,611 )
                                         
CASH FLOWS FROM INVESTING ACTIVITIES                                        
Investment in life settlements     -       -       (13,626,842 )     -       (13,626,842 )
Carrying value of matured life insurance contracts     -       -       80,000       -       80,000  
NET CASH FLOWS USED IN INVESTING ACTIVITIES     -       -       (13,546,842 )     -       (13,546,842 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES                                        
Payments for redemption of Series I Secured Notes     -       (890,586 )     -       -       (890,586 )
Proceeds from issuance of L Bonds     37,122,127       -       -       -       37,122,127  
Payments for redemption and issuance of L Bonds     (19,363,047 )     -       -       -       (19,363,047 )
Proceeds (payments) from restricted cash     -       (2,203,800 )     2,855,430       -       651,630  
Issuance of member capital     -       21,730,944       15,629,861       (37,360,805 )     -  
Payments for redemption preferred stock     (21,187 )     -       -       -       (21,187 )
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     17,737,893       18,636,558       18,485,291       (37,360,805 )     17,498,937  
                                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (11,460,418 )     1,714,846       56       -       (9,745,516 )
                                         
CASH AND CASH EQUIVALENTS                                        
BEGINNING OF THE PERIOD     37,814,528       233,553       150,108       -       38,198,189  
                                         
END OF THE PERIOD   $ 26,354,110     $ 1,948,399     $ 150,164     $ -     $ 28,452,673  

 

  25  
 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(19)       Concentrations

 

We purchase life insurance contracts written by life insurance companies having investment grade ratings by independent rating agencies. As a result, there may be concentrations of contracts with certain life insurance companies. The following summarizes the face value of insurance contracts with specific life insurance companies exceeding 10% of the total face value held by us.

 

Life insurance company   September 30,     December 31,  
    2016     2015  
AXA Equitable     14.3 %     14.0 %
John Hancock     13.0 %     12.7 %
Lincoln National     11.5 %     *  
Transamerica     10.1 %     *  

 

* percentage does not exceed 10% of the total face value.

 

The following summarizes the number of insurance contracts insuring the lives of persons living in specific states exceeding 10% of the total face value held by us:

 

State of Residence   September 30,     December 31,  
    2016     2015  
California     21.1 %     25.2 %
Florida     19.0 %     20.0 %

 

(20)       Subsequent events

 

Subsequent to September 30, 2016, two policies covering two individual matured. The life insurance contract benefits of these policies were $3,240,000 and we recorded realized gains of $2,539,000 on these policies.

 

Subsequent to September 30, 2016, we have issued approximately $6,911,000 in additional principal amount of L Bonds, and 7,350 shares of RPS for gross consideration of approximately $7,350,000.

 

On October 28, 2016, DLP IV completed the closing of the second of two initial advances contemplated under a Loan and Security Agreement with LNV. At this closing, a total of $92,900,000 in loan proceeds were obtained by DLP IV, of which approximately $16,250,000 was used to fund a reserve account required under the Loan and Security Agreement.

 

  26  
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report. This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management.

 

Risk Relating to Forward-Looking Statements

 

This report contains forward-looking statements that reflect our current expectations and projections about future events. Actual results could differ materially from those described in these forward-looking statements.

 

The words “believe,” “could,” “possibly,” “probably,” “anticipate,” “estimate,” “project,” “expect,” “may,” “will,” “should,” “seek,” “intend,” “plan” or “consider,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements.

 

Such factors include, but are not limited to: 

 

changes in the secondary market for life insurance;
our limited operating history;
the valuation of assets reflected on our financial statements;
the reliability of assumptions underlying our actuarial models;
our reliance on debt financing;
risks relating to the validity and enforceability of the life insurance contracts we purchase;
our reliance on information provided and obtained by third parties;
federal, state and FINRA regulatory matters;
competition in the secondary market of life insurance;
the relative illiquidity of life insurance contracts;
our ability to satisfy our debt obligations if we were to sell our entire portfolio of life insurance contracts;
life insurance company credit exposure;
cost-of-insurance (premium) increases on our life insurance contracts;
general economic outlook, including prevailing interest rates;
performance of our investments in life insurance contracts;
financing requirements;
risks associated with our recent entry into the merchant cash advance business;
litigation risks; and
restrictive covenants contained in borrowing agreements.

 

We caution you that the foregoing list of factors is not exhaustive. Forward-looking statements are only estimates and predictions, or statements of current intent. Actual results, outcomes or actions that we ultimately undertake, could differ materially from those anticipated in the forward-looking statements due to risks, uncertainties or actual events differing from the assumptions underlying these statements.

 

JOBS Act

 

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. This means that an “emerging growth company” can make an election to delay the adoption of certain accounting standards until those standards would apply to private companies. We have elected to delay such adoption of new or revised accounting standards and, as a result, we may not comply with new or revised accounting standards at the same time as other public reporting companies that are not “emerging growth companies.” This exemption will apply for a period of five years following our first sale of common equity securities under an effective registration statement or until we no longer qualify as an “emerging growth company” as defined under the JOBS Act, whichever is earlier.

 

  27  
 

 

Overview

 

GWG Holdings, Inc. is a financial services company participating in the life insurance secondary market. We create opportunities for consumers owning life insurance to obtain significant value for their contracts as compared to the traditional options offered by insurance companies. We also create opportunities for investors to participate in the life insurance alternative investment asset class, not correlated to traditional financial markets. In so doing, we enable investors to take advantage of financial opportunities dominated by banks prior to the 2008 credit crisis.

 

We seek to build a profitable and large portfolio of life insurance assets that are well diversified in terms of insurance companies and insureds. We believe that diversification is a key risk mitigation strategy to provide consistent cash flows and reliable investment returns from our portfolio. To grow our portfolio and achieve diversification, we offer investors the opportunity to participate in the yield potentially generated by our portfolio of life insurance assets through a variety of financings and securities offerings. We believe we are well positioned to continue providing investors with yield participation opportunities from the life insurance alternative asset class. 

 

Critical Accounting Policies

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements in accordance with the Generally Accepted Accounting Principles (GAAP) requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates, and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. Actual results could differ materially from these estimates. We evaluate our judgments, estimates, and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates, and assumptions involved in valuing our investments in life insurance contracts have the greatest potential impact on our consolidated financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with these estimates as well as certain other critical accounting policies.

 

Ownership of Life Insurance Contracts—Fair Value Option

 

W e ac c ount f o r t he purc h ase of l i fe i ns u r a n ce contracts i n acc o r d a nce w i t h A SC 32 5 - 3 0, Inv e s tm en t s i n I n s u r a nce C on t r a c t s , w h i ch requ i res us t o use e i t her t he i nv e s tm ent m e t hod o r t he fa i r va l u e m e t hod. We have e l ec t ed t o accou n t for all of our l i fe i nsurance contracts us i ng t he fa i r va l ue m e t h od.

 

The fair value of our life insurance contracts is determined as the net present value of the life insurance portfolio’s future expected cash flows (contract benefits received and required premium payments) that incorporates current life expectancy estimates and discount rate assumptions.

 

We initially record our purchase of life insurance contracts at the transaction price, which is the amount paid for the contract, inclusive of all external fees and costs associated with the acquisition. The fair value of our investment in our portfolio of insurance contracts is evaluated at the end of each subsequent reporting period. Changes in the fair value of our portfolio are based on periodic evaluations and are recorded in our consolidated and combined statement of operations as changes in fair value of life insurance contracts. 

 

Fair Value Components – Medical Underwriting

 

Unobservable inputs, as discussed below, are a critical component of our estimate for the fair value of our investments in life insurance contracts. We currently use a probabilistic method of estimating and valuing the projected cash flows of our portfolio, which we believe to be the preferred and most prevalent valuation method in the industry. In this regard, the most significant assumptions we make are the life expectancy estimates of the insureds and the discount rate applied to the expected future cash flows to be derived from our portfolio.

 

The Society of Actuaries recently finalized the 2015 Valuation Basic Table (“2015 VBT”). The 2015 VBT is based on a much larger dataset of insured lives, face amount of contracts and more current information compared to the dataset underlying the 2008 Valuation Basic Table. The new 2015 VBT dataset includes 266 million contracts compared to the 2008 VBT dataset of 75 million. The experience data in the 2015 VBT dataset includes 2.55 million claims on contracts from 51 insurance carriers. Life expectancies implied by the 2015 VBT are generally longer for male and female nonsmokers between the ages of 65 and 80, while smokers and insureds of both genders over the age of 85 have significantly lower life expectancies. We adopted the 2015 VBT in our valuation process in June 2016.

 

  28  
 

 

In September 2015, Equitable Life Insurance Company (“AXA”) announced pending cost-of-insurance rate increases for certain universal life contracts which were effected on March 1, 2016.  We identified 14 affected contracts in our portfolio. In April 2016, we received updated contract illustrations from AXA and calculated the change in the fair value of our portfolio resulting from the increased premiums to be a reduction of $2,395,000. This reduction was reflected in our balance sheet as of March 31, 2016. Our review of AXA’s cost-of-insurance rate increases is complete as of September 30, 2016.

  

We are aware of additional pending cost of insurance increases affecting approximately 1.1% of our portfolio by face amount of benefits. We will adjust our premium schedules and resultant valuation when we have received the required information from the related carriers.

 

Fair Value Components – Required Premium Payments

 

We must pay the premiums on the life insurance contracts within our portfolio in order to collect the contract benefit. The same probabilistic model and methodologies used to generate expected cash inflows from the life insurance contract benefits over the expected life of the insured are used to estimate cash outflows due to required premium payments. Premiums paid are offset against revenue in the applicable reporting period.

 

Fair Value Components – Discount Rate

 

A discount rate is used to calculate the net present value of the expected cash flows. The discount rate represents the internal rate of return we expect to earn on investments in a contract or in the portfolio as a whole at the stated fair value. The discount rate used to calculate fair value of our portfolio incorporates the guidance provided by ASC 820, Fair Value Measurements and Disclosures .

 

The table below provides the discount rate used to estimate the fair value of our portfolio of life insurance contracts for the period ending:

 

  September 30, 2016   December 31, 2015  
  11.07%   11.09%  

 

The change in the discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance contracts, discount rates observed by us in the life insurance secondary market, market interest rates, credit exposure to the issuing insurance companies, and our estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio of life insurance contracts. Because we use the discount rate to arrive at the fair value of our portfolio, the rate we choose necessarily assumes an orderly and arms-length transaction (i.e., a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction). The carrying value of contracts acquired during each quarterly reporting period are adjusted to their current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date. 

 

We engaged Model Actuarial Pricing Systems (“MAPS”), to prepare a calculation of our life insurance portfolio. MAPS owns and maintains the portfolio pricing software we use. MAPS processed contract data, future premium data, life expectancy estimate data, and other actuarial information to calculate a net present value for our portfolio using the specified discount rate of 11.07%. MAPS independently calculated the net present value of our portfolio of 625 contracts to be $477.6 million and furnished us with a letter documenting its calculation. A copy of such letter is filed as Exhibit 99.1 to this report.

 

Deferred Income Taxes

 

Under ASC 740, Income Taxes , deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established for deferred tax assets that are not considered more likely than not to be realized. Realization of deferred tax assets depends upon having sufficient past or future taxable income in periods to which the deductible temporary differences are expected to be recovered or within any applicable carryback or carryforward periods. After assessing the realization of the net deferred tax assets, we believe that it is “more likely than not” that we will be able to realize all of our deferred tax assets other than those which are expected to result in a capital loss.

 

  29  
 

 

Deferred Financing and Issuance Costs

 

Financing costs incurred under the senior credit facilities were capitalized and are amortized using the straight-line method over the term of the senior credit facilities. The Series I Secured Note obligations are reported net of issuance costs, sales commissions, and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The L Bonds are reported net of issuance costs, sales commissions, and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The Series A, as described in Note 9, was reported net of issuance costs, sales commissions, including the fair value of warrants issued, and other direct expenses, which were amortized using the interest method as interest expense over a three-year redemption period. As of December 31, 2015, these costs have been fully amortized.  Selling and issuance costs of RPS and MCA Preferred Stock, described in Notes 10 and 11, are netted against additional paid-in-capital.

 

Principal Revenue and Expense Items

 

We earn revenues from the following three primary sources.

 

Life Insurance Contract Benefits Realized . We recognize the difference between the face value of the contract benefits and carrying value when an insured’s mortality event occurs. We generally collect the face value of the life insurance contract benefit from the insurance company within 45 days of recognizing the revenue.

 

Change in Fair Value of Life Insurance Contracts . We value our portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which includes the expected payment of premiums for future periods as shown in our consolidated financial statements net premium costs.

 

Sale of a Life Insurance Contract . In the event of a sale of a contract, we recognize gain or loss as the difference between the sale price and the carrying value of the contract on the date of the receipt of payment on such sale.

  

Our main components of expense are summarized below.

 

Selling, General and Administrative Expenses . We recognize and record expenses incurred in our business operations, including operations related to the purchasing and servicing of life insurance contracts. These expenses include salaries and benefits, sales, marketing, occupancy and other expenditures.

 

Interest and Dividends . We recognize and record interest expenses associated with the costs of financing our life insurance portfolio for the current period. These expenses include interest paid to our senior lender under our senior credit facilities, interest paid on our L Bonds and other outstanding indebtedness such as our Series I Secured Notes, and dividends on our Series A and our RPS. When we issue debt, we amortize the issuance costs associated with such indebtedness over the outstanding term of the financing, and classify it as interest expense.

 

  30  
 

 

Results of Operations — Three and Nine Months Ended September 30, 2016 Compared to the Same Periods in 2015  

 

The following is our analysis of the results of operations for the periods indicated below.  This analysis should be read in conjunction with our consolidated financial statements and related notes.

 

Revenue

 

    Three Months Ended September 30,    

Nine Months Ended September 30,

 
    2016     2015     2016     2015  
Revenue recognized from the receipt of contract benefits   $ 4,221,000     $ 277,000     $ 26,986,000     $ 25,909,000  
Revenue (expense) recognized from the change in fair value of life insurance contracts, net of premiums and carrying costs (1)     9,289,000       7,912,000       24,621,000       7,538,000  
Gain on life insurance contracts, net   $ 13,510,000     $ 8,189,000     $ 51,607,000     $ 33,447,000  
Number of contracts matured     4       1       16       8  
The change in fair value related to new contracts acquired   $ 11,668,000     $ 7,423,000     $ 29,509,000     $ 12,546,000  

 

(1) The discount rate applied to estimate the fair value of the portfolio of life insurance contracts we own was 11.07% as of both September 30, 2016 and September 30, 2015.  The carrying value of contracts acquired during each quarterly reporting period is adjusted to current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date (see Note 4 to our condensed consolidated financial statements).

 

Expenses .

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2016     2015     Increase (Decrease)     2016     2015     Increase  
Employee compensation and benefits (1)   $ 2,912,000     $ 2,308,000     $ 604,000     $ 8,450,000     $ 6,181,000     $ 2,269,000  
Interest expense (including amortization of deferred financing costs and preferred stock dividends) (2)     11,984,000       8,650,000       3,334,000       32,010,000       23,149,000       8,861,000  
Legal and professional expenses (3)     587,000       822,000       (235,000 )     3,097,000       1,988,000       1,109,000  
Other expenses (4)     2,863,000       2,232,000       631,000       7,608,000       5,646,000       1,962,000  
Total expenses   $ 18,346,000     $ 14,012,000     $ 4,334,000     $ 51,165,000     $ 36,964,000     $ 14,201,000  

  

(1) We hired additional members to our sales, marketing, legal and information technology teams.  At the end of 2015 we employed approximately 50 employees, and at September 30, 2016 we employed approximately 67 employees.
(2) The increase in the current period was due to the increase in our average debt outstanding.
(3) Increase is due to SEC filings and other costs related to securities offerings and on-going compliance.
(4) Increase is due to increased public relations, sales and marketing costs associated with growing and servicing our network of independent financial advisors.

 

  31  
 

 

Income Tax Expense.

 

The following table reconciles our income tax expense at the statutory federal tax rate to our actual income tax expense: 

  

    Three Months Ended     Nine Months Ended  
    September 30, 2016     September 30, 2015     September 30, 2016     September 30, 2015  
Statutory federal income tax (benefit)   $ (1,561,000 )     34.0 %   $ (1,948,000 )     34.0 %   $ 489,000       34.0 %   $ 1,117,000       34.0 %
State income taxes (benefit), net of federal benefit     (227,000 )     4. 9%     (334,000 )     5.8 %     240,000       16.7 %     (105,000)       3.2 %
Series A preferred stock dividends     354,000       (7.7 )%     175,000       (3.1 )%     732,000       51.0 %     526,000       16.0 %
Other permanent differences     15,000       (0.3 )%     9,000       (0.1 )%     18,000       1.3 %     31,000       1.0 %
Total income tax expense (benefit)   $ (1,419,000 )     30.9 %   $ (2,098,000 )     36.6 %   $ 1,479,000       102.9 %   $ 665,000       20.2 %

 

The most significant temporary differences between GAAP net income and taxable net income are the treatment of interest costs with respect to the acquisition of the life insurance contracts and revenue recognition with respect to the fair value of life insurance portfolio.

 

The primary permanent difference between our effective tax rate and the statutory federal rate are the accrual of preferred stock dividend expense, state income taxes, and other non-deductible expenses. The dividends charged to interest expense were $1.0 million and $0.5 million during the three months ended September 30, 2016 and 2015, respectively, and $2.2 million and $1.5 million during the nine months ended September 30, 2016 and 2015, respectively.

 

Liquidity and Capital Resources

 

We finance our business through a combination of life insurance contract benefit receipts, origination fees, equity offerings, debt offerings, and our senior credit facilities. We have used our debt offerings and our senior credit facilities primarily for contract acquisition, contract servicing, and portfolio-related financing expenditures including paying principal and interest.

 

As of September 30, 2016 and December 31, 2015, we had approximately $117.2 million and $74.4 million, respectively, in combined available cash, cash equivalents, policy benefits receivable, if any, and available borrowing base surplus capacity, if any, under our senior credit facilities for the purpose of purchasing additional life insurance contracts, paying premiums on existing contracts, paying portfolio servicing expenses, and paying principal and interest on our outstanding financing obligations.

 

Debt Financings Summary

 

We had the following outstanding debt balances as of September 30, 2016 and December 31, 2015:

 

    As of September 30, 2016     As of December 31, 2015  
Issuer/Borrower  

Principal Amount

Outstanding

   

Weighted Average

Interest Rate

   

Principal Amount

Outstanding

   

Weighted Average

Interest Rate

 
GWG Holdings, Inc. – L Bonds   $ 384,586,000       7.16 %   $ 282,171,000       7.18 %
GWG Life, LLC – Series I Secured Notes     17,830,000       8.63 %     23,578,000       8.47 %
Credit Facility – Autobahn Funding Company LLC (See Note 5 to our consolidated financial statements)     -       -       65,011,000       5.58 %
Credit Facility – LNV Corporation (See Note 6 to our consolidated financial statements)     71,250,000       6.45 %     -       -  
Total   $ 473,666,000       7.10 %   $ 370,760,000       6.98 %

  

Our total senior credit facilities and other indebtedness balance as of September 30, 2016 and December 31, 2015 was $473.7 million and $370.8 million, respectively. At September 30, 2016, the total outstanding face amount of our Series I Secured Notes outstanding was $17.8 million, less unamortized selling costs of $0.3 million, resulting in a carrying amount of $17.5 million. At December 31, 2015, the total outstanding face amount of our Series I Secured Notes outstanding was $23.6 million, less unamortized selling costs of $0.3 million, resulting in a carrying amount of $23.3 million. At September 30, 2016, the total outstanding face amount of L Bonds was $384.6 million plus $6.9 million of subscriptions in process, less unamortized selling costs of $11.6 million resulting in a carrying amount of $379.9 million. At December 31, 2015, the total outstanding face amount of L Bonds was $282.2 million plus $3.0 million of subscriptions in process, less unamortized selling costs of $8.2 million resulting in a carrying amount of $277.0 million.

 

  32  
 

 

The weighted-average interest rate of our outstanding Series I Secured Notes as of September 30, 2016 and December 31, 2015 was 8.63% and 8.47%, respectively, and the weighted-average maturity at those dates was 1.31 and 1.06 years, respectively. The Series I Secured Notes have renewal features. Since we first issued our Series I Secured Notes, we experienced $165.1 million in maturities, of which $125.0 million renewed for an additional term as of September 30, 2016. This provided us with an aggregate renewal rate of approximately 76% for investments in these securities. Effective September 1, 2016, we no longer renew the Series I Secured Notes.

 

The weighted-average interest rate of our outstanding L Bonds as of September 30, 2016 and December 31, 2015 was 7.16% and 7.18%, respectively, and the weighted-average maturity at those dates was 2.10 and 2.02 years, respectively. Our L Bonds have renewal features. As of September 30, 2016, $252.4 million in aggregate principal amount of our L Bonds had matured since issuance, of which $168.3 million renewed for an additional term. The aggregate renewal rate is approximately 67% for investments in these securities. 

 

Future contractual maturities of Series I Secured Notes and L Bonds at December 31, 2016 are:

 

Years Ending December 31,   Series I Secured Notes     L Bonds     Total  
2016   $ 1,177,000     $ 23,548,000     $ 24,725,000  
2017     10,522,000       112,987,000       123,509,000  
2018     2,401,000       101,130,000       103,531,000  
2019     1,023,000       78,098,000       79,121,000  
2020     1,766,000       19,291,000       21,057,000  
Thereafter     941,000       49,532,000       50,473,000  
    $ 17,830,000     $ 384,586,000     $ 402,416,000  

 

The L Bonds and Series I Secured Notes are secured by all of our assets, and are subordinate to our senior credit facilities. The L Bonds and Series I Secured Notes are pari passu with respect to a security interest in our assets pursuant to an intercreditor agreement (see Notes 7 and 8 to our consolidated financial statements). 

 

We maintain a $105 million revolving senior credit facility with Autobahn/DZ Bank through DLP III. The revolving senior credit facility is used to pay the premium expenses related to our portfolio of life insurance contracts. As of September 30, 2016 and December 31, 2015, we had approximately $0 million and $65.0 million, respectively, outstanding under the revolving senior credit facility, and maintained an available borrowing base surplus of $76.6 million and $40.0 million, respectively.

 

On September 14, 2016, we entered into a $172 million senior secured term loan with LNV Corp. through GWG Funding DLP IV. We intend to use the proceeds from this facility primarily to grow and maintain our portfolio of life insurance contracts, for liquidity and for general corporate purposes. As of September 30, 2016 we had approximately $71.2 million outstanding under the senior credit facility.

  

Capital expenditures have historically not been material and we do not anticipate making material capital expenditures in 2016 or beyond.

 

Corporate Financing History

 

In November 2009, our wholly owned subsidiary GWG Life offered Series I Secured Notes in a private placement to accredited investors only. This offering was closed in November 2011. As of September 30, 2016 and December 31, 2015, we had approximately $17.8 million and $23.6 million, respectively, in principal amount of Series I Secured Notes outstanding.

 

In September 2011, we concluded a private placement offering of Series A, having received an aggregate $24.6 million in subscriptions for our Series A. These subscriptions consisted of $14.0 million in conversions of outstanding Series I Secured Notes and $10.6 million of new investments. As of September 30, 2016 and December 31, 2015, respectively, we had approximately $19.8 million and $20.8 million stated value of Series A outstanding.

 

  33  
 

 

In January 2012, we began publicly offering up to $250.0 million in debt securities (initially named “Renewable Secured Debentures” and subsequently renamed “L Bonds”) that was completed in January 2015.

 

In September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common stock at $12.50 per share and net proceeds of approximately $8.6 million after the deduction of underwriting commissions, discounts and expense reimbursements.

 

In January 2015, we began publicly offering up to $1.0 billion of L Bonds as a follow-on offering to our earlier $250.0 million public debt offering. Through September 30, 2016, the total amount of these L Bonds sold, including renewals, was $637.1 million. As of September 30, 2016 and December 31, 2015, respectively, we had approximately $384.6 million and $282.2 million, respectively, in principal amount of L Bonds outstanding.

 

In October 2015, we began publicly offering up to 100,000 shares of our RPS at a per-share price of $1,000. As of September 30, 2016 we had issued approximately $33.2 million stated value of RPS.

 

Portfolio Assets and Secured Indebtedness  

 

At September 30, 2016, the fair value of our investments in life insurance contracts of $477.6 million plus our cash balance of $18.8 million, our restricted cash balance of $15.7 million and our life insurance contract benefits receivable of $6.1 million, totaled $518.2 million, representing an excess of portfolio assets over secured indebtedness of $44.5 million. At December 31, 2015, the fair value of our investments in life insurance contracts of $356.6 million plus our cash balance of $34.4 million and our restricted cash balance of $2.3 million, totaled $393.3 million, representing an excess of portfolio assets over secured indebtedness of $22.5 million. The L Bonds and Series I Secured Notes are secured by all of our assets and are subordinate to our senior credit facilities. The L Bonds and Series I Secured Notes are pari passu with respect to a security interest in our assets pursuant to an intercreditor agreement.

  

The following forward-looking table seeks to illustrate the impact of the sale of our portfolio of life insurance assets at various discount rates in order to satisfy our debt obligations as of September 30, 2016. In all cases, the sale of the life insurance assets owned by DLP III and DLP IV will be used first to satisfy all amounts owing under the respective senior credit facilities. The net sale proceeds remaining after satisfying all obligations under the senior credit facilities would be applied to L Bonds and Series I Secured Notes on a pari passu basis.

 

Portfolio Discount Rate   10%   11%   12%   13%   14%
Value of portfolio   $ 503,331,000     $ 479,200,000     $ 456,979,000     $ 436,470,000     $ 417,501,000  
Cash, cash equivalents and life insurance contract benefits receivable     40,591,000       40,591,000       40,591,000       40,591,000       40,591,000  
Total assets     543,922,000       519,791,000       497,570,000       477,061,000       458,092,000  
Revolving senior credit facility     71,250,000       71,250,000       71,250,000       71,250,000       71,250,000  
Net after revolving senior credit facility     472,672,000       448,541,000       426,320,000       405,811,000       386,842,000  
Series I Secured Notes and L Bonds     402,416,000       402,416,000       402,416,000       402,416,000       402,416,000  
Net after Series I Secured Notes and L Bonds     70,256,000       46,125,000       23,904,000       3,395,000       (15,574,000 )
Impairment to Series I Secured Notes and L Bonds    

No impairment

     

No impairment

     

No impairment

      No impairment       Impairment  

 

The table illustrates that our ability to fully satisfy amounts owing under the L Bonds and Series I Secured Notes would likely be impaired upon the sale of all of our life insurance assets at a price equivalent to a discount rate of approximately 13.18% or higher. At December 31, 2015, the impairment occurred at a discount rate of approximately 12.58% or higher. The discount rates used to calculate the fair value of our portfolio were 11.07% and 11.09% as of September 30, 2016 and December 31, 2015, respectively.

 

The table does not include any allowance for transactional fees and expenses associated with a portfolio sale (which expenses and fees could be substantial), and is provided to demonstrate how various discount rates used to value our portfolio could affect our ability to satisfy amounts owing under our debt obligations in light of our senior secured lender’s right to priority payments. You should read the above table in conjunction with the information contained in other sections of this report, including our discussion of discount rates included under the “Critical Accounting Policies — Fair Value Components – Discount Rate” caption above. This discussion and analysis is based on the beliefs of our management, as well as significant assumptions made by, and information currently available to, our management.

 

  34  
 

  

Cash Flows

 

The payment of premiums and servicing costs to maintain life insurance contracts represents our most significant requirement for cash disbursement. When a contract is purchased, we are able to calculate the minimum premium payments required to maintain the contract in-force. As the insured ages, premium payments increase (see Note 3 to our consolidated financial statements). Nevertheless, the probability of actually needing to pay the premiums decreases as the probability of mortality increases. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling. Beyond premiums, we incur contract servicing costs, including annual trustee, tracking costs, and debt servicing costs, including principal and interest payments, all of which are excluded from our internal rate of return calculations. Until we receive a stable amount of proceeds from the contract benefits, we intend to pay these costs from our senior credit facilities, when permitted, and through the issuance of debt securities, including the L Bonds, and equity securities including our RPS.

 

The amount of payments for anticipated premiums and servicing costs (excluding debt servicing costs) that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below.

 

Years Ending December 31,   Premiums     Servicing     Premiums and Servicing Fees  
Three months ending December 31, 2016   $ 10,449,000     $ 188,000     $ 10,637,000  
2017     43,155,000       750,000       43,905,000  
2018     46,847,000       750,000       47,597,000  
2019     50,813,000       750,000       51,563,000  
2020     56,633,000       750,000       57,383,000  
2021     63,222,000       750,000       63,972,000  
    $ 271,119,000     $ 3,938,000     $ 275,057,000  

 

For the quarter-end dates set forth below, the following table illustrates the total amount of face value of contract benefits owned, and the trailing 12 months of life insurance contract benefits collected and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the ratio of contract benefits received to premiums paid over the trailing 12-month period from our portfolio of life insurance contracts.

 

Quarter End Date  

Portfolio

Face Amount

   

12-Month

Trailing

Benefits Collected

   

12-Month

Trailing Premiums Paid

   

12-Month

Trailing

Benefits/
Premium

Coverage
Ratio

 
December 31, 2013     740,648,000       16,600,000       21,733,000       76.4 %
March 31, 2014     771,940,000       12,600,000       21,930,000       57.5 %
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 %
September 30, 2016     1,272,078,000       35,867,000       37,055,000       96.8 %

 

We believe that the portfolio cash flow results set forth above are consistent with our general investment thesis: that the life insurance contract benefits we receive will continue to increase over time in relation to the premiums we are required to pay on the remaining polices in the portfolio. Nevertheless, we expect that our portfolio cash flow results on a period-to-period basis will remain inconsistent until such time as we achieve our goal of acquiring a larger, more diversified portfolio of life insurance contracts. As our receipt of life insurance contract benefits increases, we expect to increasingly use these cash flows to begin paying down our outstanding indebtedness and purchase additional life insurance contracts. 

 

  35  
 

 

Inflation

 

Changes in inflation do not necessarily correlate with changes in interest rates. We presently do not foresee any material impact of inflation on our results of operations in the periods presented in our consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

GWG Holdings is party to an office lease with U.S. Bank National Association as the landlord. Effective September 1, 2015, GWG Holdings entered into a second amendment to the lease with U.S. Bank National Association (Second Amendment to Lease). The Second Amendment to Lease increases the office space area to 17,687 square feet and extends the lease expiration date by approximately ten years (see Note 16 to our consolidated financial statements).

 

Credit Risk

 

We review the credit risk associated with our portfolio of life insurance contracts when estimating its fair value. In evaluating the contracts’ credit risk, we consider insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We attempt to manage our credit risk related to life insurance contracts by generally purchasing life insurance contracts issued only from companies with an investment-grade credit rating by Standard & Poor’s, Moody’s, or A.M. Best Company. See “Portfolio Credit Risk Management” below.

 

Interest Rate Risk

 

Our senior credit facilities are floating-rate financing. In addition, our ability to offer interest rates that attract capital (including in our continuous offering of L Bonds) is generally impacted by prevailing interest rates. Furthermore, while our other indebtedness provides us with fixed-rate financing, our debt coverage ratio is calculated in relation to our total cost of financing. Therefore, rising interest rates could materially impact our business by increasing our borrowing costs, and reducing availability under our debt financing arrangements. Furthermore, we calculate our portfolio earnings based upon the spread generated between the return on our life insurance portfolio and the cost of our financing. As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance contracts.

 

Non-GAAP Financial Measures

 

Non-GAAP financial measures disclosed by management 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. This 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. Please see our financial statements and related notes contained herein.

  

We use non-GAAP financial measures for maintaining compliance with covenants contained in our borrowing agreements and for planning and forecasting purposes. The application of current GAAP standards during a period of significant growth in our business, in which period we are building a large and actuarially diverse portfolio of life insurance, results in current period operating performance that may not be reflective of our long-term earnings potential. Management believes that our 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.

  

Therefore, in contrast to a GAAP fair valuation (mark-to-market), we seek to measure the accrual of the actuarial gain occurring within the portfolio of life insurance contracts at our expected internal rate of return based on statistical mortality probabilities for the insureds (using primarily the insured’s age, sex, health and smoking status). The expected internal rate of return tracks actuarial gain occurring within the contracts according to a mortality table as the insureds’ age increases. By comparing the actuarial gain accruing within our portfolio of life insurance contracts against our adjusted costs during the same period, we can estimate, manage and evaluate the overall financial profitability of our business without regard to mark-to-market volatility. We use this information to balance our life insurance contract purchasing and manage our capital structure, including the issuance of debt and utilization of our other sources of capital, and to monitor our compliance with borrowing covenants. We believe that these non-GAAP financial measures provide information that is useful for investors to understand period-over-period operating results separate and apart from fair value items that could have a disproportionately positive or negative impact on GAAP results in any particular period.

 

  36  
 

 

Our senior credit facility with Autobahn/DZ Bank requires us to maintain a “positive net income” and “tangible net worth,” each of which are calculated on an adjusted non-GAAP basis using the method described above, without regard to GAAP-based fair value measures. In addition, our revolving senior credit facility with Autobahn/DZ Bank requires us to maintain an “excess spread,” which is the difference between (i) the weighted average of our expected internal rate of return of our portfolio of life insurance contracts and (ii) the weighted average of our senior credit facility’s interest rate. These calculations are made using non-GAAP measures in the method described below, without regard to GAAP-based fair value measures.

 

In addition, the Indenture governing our L Bonds and the note issuance and security agreement governing our Series I Secured Notes require us to maintain a “debt coverage ratio” designed to ensure that the expected cash flows from our portfolio of life insurance contracts is able to adequately service our total outstanding indebtedness. This ratio is calculated using non-GAAP measures in the method described below, again without regard to GAAP-based fair value measures.

 

Adjusted Non-GAAP Net Income . Our senior credit facility with Autobahn/DZ Bank 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 contracts at the expected internal rate of return of the contracts 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

September 30,

   

Nine Months Ended

September 30,

 
    2016     2015     2016     2015  
GAAP net income (loss)   $ (2,997,000 )   $ (3,631,000 )   $ (42,000 )   $ (2,620,000 )
Unrealized fair value gain (1)     (21,073,000 )     (14,517,000 )     (53,846,000 )     (26,651,000 )
Adjusted cost basis increase (2)     19,948,000       13,345,000       51,689,000       37,988,000  
Accrual of unrealized actuarial gain (3)     11,769,000       9,201,000       29,339,000       21,417,000  
Total adjusted non-GAAP net income (4)   $ 7,647,000     $ 4,398,000     $ 27,140,000     $ 30,134,000  

 

(1) Reversal of unrealized GAAP fair value gain of life insurance contracts for current period.
(2) Adjusted cost basis is increased to include interest, premiums and servicing fees which are not capitalized under GAAP (non-GAAP cost basis).
(3) Accrual of actuarial gain at expected internal rate of return based on the non-GAAP 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 Autobahn/DZ Bank.

 

Adjusted Non-GAAP Tangible Net Worth . Our revolving senior credit facility with Autobahn/DZ Bank requires us to maintain a tangible net worth in excess of $45 million calculated on an adjusted non-GAAP basis. We calculate the adjusted tangible net worth by recognizing the actuarial gain accruing within our life insurance contracts at the expected internal rate of return of the contracts we own without regard to fair value. We net this actuarial gain against our adjusted costs during the same period to calculate our tangible net worth on a non-GAAP basis.

 

    As of September 31, 2016     As of December  31, 2015  
GAAP net worth   $ 46,345,000     $ 16,145,000  
Less intangible assets (1)     (20,320,000 )     (11,562,000 )
GAAP tangible net worth     26,025,000       4,583,000  
Unrealized fair value gain (2)     (247,889,000 )     (194,043,000 )
Adjusted cost basis increase (3)     230,532,000       190,645,000  
Accrual of unrealized actuarial gain (4)     140,693,000       111,355,000  
Total adjusted non-GAAP tangible net worth   $ 149,361,000     $ 112,540,000  

 

(1) Unamortized portion of deferred financing costs and pre-paid insurance.
(2) Reversal of cumulative unrealized GAAP fair value gain on life insurance contracts.
(3) Adjusted cost basis is increased to include interest, premiums and servicing fees, which are not capitalized under GAAP.
(4) Accrual of cumulative actuarial gain at expected internal rate of return based the non-GAAP cost basis.

 

  37  
 

 

Excess Spread . Our revolving senior credit facility with Autobahn/DZ Bank requires us to maintain a 2.00% “excess spread” between our weighted-average expected internal rate of return of our portfolio of life insurance contracts and the revolving senior credit facility’s interest rate. The expected internal rate of return on the portfolio is the rate of return the portfolio would earn if all future cash flows occurred over time in proportion to the likelihood of their projected occurrence.  Expected future cash flows represent the size of each potential payment (premiums and contract benefits), multiplied by the probability of that particular payment occurring.  This calculation is known as the “probabilistic expectation” and it is based on actuarial estimations of life expectancy.  For instance, a required premium payment of $10,000 might be projected for a given contract at a date five years from now.  If there is a 50% chance of survival for the next five years, then that particular expected cash-outflow is calculated at $5,000.  Similarly, if the contract benefit amount on the same contract is $1 million, then during the next five years, the probable expected cash-inflow of contract benefits will total $500,000 with the other $500,000 projected to occur over the remaining life of the insured. The rate of return generated by the net of all such future expected cash flows for the portfolio is thus the expected IRR for the portfolio.

 

A presentation of our excess spread and our total excess spread is set forth below. Management uses the “total excess spread” to gauge expected profitability of our investments, and uses the “excess spread” to monitor compliance with our borrowing.

 

   

As of

September 30, 2016

   

As of

December 31, 2015

 
Weighted-average expected IRR (1)     11.65 %     11.11 %
Weighted-average senior credit facility interest rate (2)     6.45 %     5.58 %
Excess spread     5.20 %     5.53 %
Total weighted-average interest rate on indebtedness for borrowed money (3)     7.10 %     6.98 %
Total excess spread (4)     4.55 %     4.13 %

 

(1) This represents the weighted-average expected internal rate of return of the life insurance contracts as of the measurement date based upon our non-GAAP cost basis of the insurance contracts and the expected cash flows from the life insurance portfolio.

 

Investment Cost Basis  

As of

September 30, 2016

   

As of

December 31, 2015

 
GAAP fair value   $ 477,585,000     $ 356,650,000  
Unrealized fair value gain (A)     (247,889,000 )     (194,043,000 )
Adjusted cost basis increase (B)     230,532,000       190,645,000  
Investment cost basis (C)   $ 460,228,000     $ 353,252,000  

 

(A) This represents the reversal of cumulative unrealized GAAP fair value gain of life insurance contracts.
(B) Adjusted cost basis is increased to include interest, premiums and servicing fees which are not capitalized under GAAP.
(C) This is the non-GAAP cost basis in life insurance contracts from which our expected internal rate of return is calculated.

 

(2) This is the weighted-average interest rate for both senior credit facilities as of the measurement date.

 

  38  
 

 

(3) Represents the weighted-average interest rate paid on all interest-bearing indebtedness as of the measurement date, determined as follows:

 

Indebtedness  

As of

September 30, 2016

   

As of

December 31, 2015

 
Senior credit facilities   $ 71,250,000     $ 65,011,000  
Series I Secured Notes     17,830,000       23,578,000  
L Bonds     384,586,000       282,171,000  
Total   $ 473,666,000     $ 370,760,000  

 

Interest Rates on Indebtedness      
Senior credit facilities     6.45 %     5.58 %
Series I Secured Notes     8.63 %     8.47 %
L Bonds     7.16 %     7.18 %
Weighted-average interest rates paid on indebtedness     7.10 %     6.98 %

 

(4) Calculated as the weighted-average expected IRR (1) minus the weighted-average interest rate on interest-bearing indebtedness (3).

 

Debt Coverage Ratio and Subordination Ratio. Our L Bond and Series I Secured Notes borrowing covenants require us to maintain a “debt coverage ratio” of less than 90%. The “debt coverage ratio” is calculated by dividing the sum of our total interest-bearing indebtedness by the sum of our cash and cash equivalents and the net present value of the life insurance portfolio. The “subordination ratio” for our L Bonds is calculated by dividing the total interest-bearing indebtedness that is senior to L Bonds and Series I Secured Notes by the sum of the company’s cash and cash equivalents and the net present value of the life insurance portfolio. The “subordination ratio” must be less than 50%. For purposes of both ratio calculations, the net present value of the life insurance portfolio is calculated using a discount rate equal to the weighted average interest rate paid on all indebtedness. As of the date of this report, the subordination ratio provisions under the Indenture have expired.

 

   

As of

September 30, 2016

   

As of

December 31, 2015

 
Life insurance portfolio contract benefits   $ 1,272,078,000     $ 944,844,000  
Discount rate of future cash flows     7.10 %     6.98 %
Net present value of Life insurance portfolio contract benefits   $ 586,332,000     $ 435,738,000  
Cash and cash equivalents     34,462,000       36,767,000  
Life insurance contract benefits receivable     6,129,000       -  
Total Coverage     626,923,000       472,505,000  
                 
Senior credit facilities     71,250,000       65,011,000  
Series I Secured Notes     17,830,000       23,578,000  
L Bonds     384,586,000       282,171,000  
Total Indebtedness   $ 473,666,000     $ 370,760,000  
                 
Debt Coverage Ratio     75.55 %     78.47 %
Subordination Ratio     11.36 %     13.76 %

  

As of September 30, 2016, we were in compliance with both the debt coverage ratio and the subordination ratio.

 

  39  
 

 

Non-GAAP Expected Portfolio Internal Rate of Return at Purchase. The non-GAAP expected portfolio internal rate of return (IRR) at purchase is calculated as the weighted average (by face amount of contract benefits) of the IRR expected at the time of purchase for all life insurance contracts in the portfolio. This non-GAAP measure isolates our IRR expectation at purchase and utilizes our underwriting life expectancy assumptions at the time. This measure does not change with the passage of time as compared to our non-GAAP cost basis that increases with the payment of premiums, financing costs, and the effective life expectancy which changes over time, both of which are used to calculate our expected portfolio IRR.  

 

    As of September 30,     As of December 31,  
    2016     2015  
Life insurance portfolio contract benefits   $ 1,272,078,000     $ 944,844,000  
Total number of polices     625       396  
                 
Non-GAAP Expected Portfolio Internal Rate of Return at Purchase     15.70 %     15.71 %

 

We have in the past reported non-GAAP net asset value among our other non-GAAP financial measures. We have determined, however, to cease reporting this measure primarily because we do not believe that it is sufficiently additive to our existing non-GAAP measures in aiding users of our financial statements and disclosures to measure and evaluate our financial condition or operating results. Moreover, we are not aware of other reporting companies in our industry that use this measure to evaluate their financial condition or operating results.


  40  
 

  

Portfolio Information

 

Our portfolio of life insurance contracts, owned by our subsidiaries as of September 30, 2016, is summarized below:

 

Life Insurance Portfolio Summary

 

Total portfolio face value of contract benefits   $ 1,272,078,000  
Average face value per contract   $ 2,035,000  
Average face value per insured life   $ 2,263,000  
Weighted average age of insured (yrs.)*     81.8  
Weighted average life expectancy estimate (yrs.)*     6.8  
Total number of contracts     625  
Number of unique lives     562  
Demographics     73%  Males; 27% Females  
Number of smokers     24  
Largest contract as % of total portfolio     0.79 %
Average contract as % of total portfolio     0.16 %
Average annual premium as % of face value     3.33 %

 

* Averages presented in the table are weighted averages.

 

Our portfolio of life insurance contracts, owned by our wholly owned subsidiaries as of September 30, 2016, organized by the insured’s current age and the associated number of contracts and contract benefits, is summarized below:

 

  Distribution of Contracts and Contract Benefits by Current Age of Insured

 

                        Percentage of Total  
Min Age   Max Age   Contracts     Contract Benefits     Wtd. Avg.
Life
Expectancy (yrs.)
  Number of
Contracts
    Contract
Benefits
 
90   96     55     $ 105,815,000     2.4     8.8 %     8.3 %
85   89     155     $ 331,989,000     4.8     24.8 %     26.1 %
80   84     152     $ 385,904,000     6.7     24.3 %     30.3 %
75   79     115     $ 251,466,000     9.2     18.4 %     19.8 %
70   74     87     $ 120,791,000     9.8     13.9 %     9.5 %
65   69     61     $ 76,113,000     10.1     9.8 %     6.0 %
Total         625     $ 1,272,078,000     6.8     100.0 %     100.0 %

   

Our portfolio of life insurance contracts, owned by our wholly owned subsidiaries as of September 30, 2016, organized by the insured’s estimated life expectancy estimates and associated contract benefits, is summarized below:

 

Distribution of Contracts by Current Life Expectancies of Insured

 

                    Percentage of Total
Min LE (Months)   Max LE (Months)   Contracts     Contract
Benefits
    Number of
Contracts
  Contract
Benefits
 
6   47     160     $ 275,036,000     25.6%     21.6 %
48   71     145       300,501,000     23.2%     23.6 %
72   95     112       249,118,000     17.9%     19.6 %
96   119     97       223,012,000     15.5%     17.6 %
120   143     63       134,822,000     10.1%     10.6 %
144   202     48       89,589,000     7.7%     7.0 %
Total         625     $ 1,272,078,000     100.0%     100.0 %

 

  41  
 

 

We track concentrations of pre-existing medical conditions among insured individuals within our portfolio based on information contained in life expectancy reports. We track these medical conditions within the following ten primary disease categories: (1) cancer, (2) cardiovascular, (3) cerebrovascular, (4) dementia, (5) diabetes, (6) multiple, (7) neurological disorders, (8) no disease, (9) other, and (10) respiratory diseases. Our primary disease categories are summary generalizations based on the ICD-9 codes we track on each insured individuals within our portfolio. ICD- 9 codes, published by the World Health Organization, are used worldwide for medical diagnoses and treatment systems, as well as morbidity and mortality statistics. Currently, the only primary disease category within our portfolio that represents a concentration of over 10% is cardiovascular, which constitutes 21.25% of the value of our portfolio.

 

Portfolio Credit Risk Management

 

We rely on the payment of life insurance contract benefit claims by life insurance companies as our most significant source of cash flow. The life insurance assets we own represent obligations of third-party life insurance companies to pay face value of the life insurance contract benefits. As a result, we manage this credit risk exposure by generally purchasing contracts issued by insurance companies with investment-grade ratings from Standard & Poor’s, and diversifying our portfolio among a number of insurance companies.

 

As of September 30, 2016, 97.0% of our life insurance contracts, by face value benefits, were issued by insurance companies that maintained an investment-grade rating (BBB- or better) by Standard & Poor’s. Our largest life insurance company credit exposures and their respective Standard & Poor’s credit rating of their respective financial strength and claims paying ability is set forth below:

 

Rank   Contract Benefits    

Percentage

of Contract

Benefit Amount

    Insurance Company   Ins. Co. S&P Rating
1   $ 182,494,000       14.3 %   AXA Equitable Life Insurance Company   A+
2   $ 165,255,000       13.0 %   John Hancock Life Insurance Company (U.S.A.)   AA-
3   $ 145,721,000       11.5 %   Lincoln National Life Insurance Company   AA-
4   $ 129,116,000       10.1 %   Transamerica Life Insurance Company   AA-
5   $ 89,806,000       7.1 %   Metropolitan Life Insurance Company   A+
6   $ 57,250,000       4.5 %   Massachusetts Mutual Life Insurance Company   AA+
7   $ 50,975,000       4.0 %   American General Life Insurance Company   A+
8   $ 48,095,000       3.8 %   Pacific Life Insurance Company   A+
9   $ 45,300,000       3.6 %   Reliastar Life Insurance Company   A
10   $ 44,990,000       3.5 %   West Coast Life Insurance Company   AA-
      959,002,000       75.4 %        

 

The yield to maturity on bonds issued by life insurance carriers reflects, among other things, the credit risk (risk of default) of such insurance carrier.  We track the yields on certain publicly traded life insurance company bonds as this information is part of the data we consider when valuing our portfolio of life insurance contracts for our financial statements according to GAAP.  Also we believe that these yields provide investors a market-based perspective on the financial strength of the largest life insurance companies backing our portfolio.

 

Name of Bond   Maturity     YTM     Duration (Years)    

Bond

S&P Rating

AXA 7.125%     12/15/2020       1.54 %     4.2     BBB
Manulife Finl 4.15%     3/4/2026       2.83 %     9.4     A
Lincoln National Corp Ind 3.35%     3/9/2025       3.05 %     8.7      A-
Amer Intl Grp 4.875%     6/1/2022       2.48 %     5.7      A-
Protective Life 7.375%     10/15/2019       2.18 %     3.0      A-
Metro Life Gbl Fd1 4.75%     9/17/2021       3.01 %     5.0      AA-
Prudential Finl Inc Mtns Book 4.5%     5/15/2024       2.97 %     7.9     A
Average yield on insurance bonds             2.58 %     6.3      

 

The table above indicates the current yields to maturity (YTM) for the senior bonds of selected life insurance carriers with durations, on average, that are similar to our life insurance portfolio.  The average yield to maturity of these bonds was 3.02%, which, we believe, reflects in part the financial market’s judgement that credit risk is low with regard to these carriers’ financial obligations. It should be noted that the obligations of life insurance carriers to pay life insurance contract benefits is senior in rank to any other obligation.  This “super senior” priority is not reflected in the yield to maturity in the table and, if considered, would result in a lower yield to maturity all else being equal. As such, as long as the respective premium payments have been made, it is highly likely that the owner of the life insurance contract will collect the insurance contract benefit upon the mortality of the insured.

 

  42  
 

 

The complete detail of our portfolio of life insurance contracts, owned by our wholly owned subsidiaries as of September 30, 2016, organized by the current age of the insured and the associated contract benefits, sex, estimated life expectancy, issuing insurance carrier, and the credit rating of the issuing insurance carrier, is set forth below.

   

Life Insurance Portfolio Detail

(as of September 30, 2016)

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.) 
(2)
  Insurance Company   S&P Rating
1   $ 1,100,000     Male   96   17   Reliastar Life Insurance Company   A
2   $ 184,000     Male   95   38   Reliastar Life Insurance Company   A
3   $ 219,000     Male   95   38   Reliastar Life Insurance Company   A
4   $ 8,000,000     Female   95   14   Massachusetts Mutual Life Insurance Company   AA+
5   $ 4,000,000     Male   95   25   Metropolitan Life Insurance Company   A+
6   $ 1,500,000     Female   95   24   Accordia Life and Annuity Company   A-
7   $ 3,200,000     Male   95   15   West Coast Life Insurance Company   AA-
8   $ 1,000,000     Female   94   22   Transamerica Life Insurance Company   AA-
9   $ 250,000     Male   94   23   North American Company for Life and Health Insurance   A+
10   $ 264,000     Female   94   11   Lincoln Benefit Life Company   BBB+
11   $ 125,000     Female   94   6   Lincoln National Life Insurance Company   AA-
12   $ 3,500,000     Male   93   29   Reliastar Life Insurance Company   A
13   $ 500,000     Male   93   7   John Hancock Life Insurance Company (U.S.A.)   AA-
14   $ 2,000,000     Female   93   7   Pruco Life Insurance Company   AA-
15   $ 500,000     Female   93   41   Sun Life Assurance Company of Canada (U.S.)   AA-
16   $ 250,000     Male   93   7   Transamerica Life Insurance Company   AA-
17   $ 1,682,773     Female   92   40   Hartford Life and Annuity Insurance Company   BBB+
18   $ 572,429     Female   92   26   Reliastar Life Insurance Company   A
19   $ 3,000,000     Male   92   31   West Coast Life Insurance Company   AA-
20   $ 500,000     Female   92   55   John Hancock Life Insurance Company (U.S.A.)   AA-
21   $ 5,000,000     Female   92   43   American General Life Insurance Company   A+
22   $ 400,000     Female   92   59   Principal Life Insurance Company   A+
23   $ 5,000,000     Female   92   23   John Hancock Life Insurance Company (U.S.A.)   AA-
24   $ 1,000,000     Female   92   26   Lincoln National Life Insurance Company   AA-
25   $ 300,000     Female   92   17   West Coast Life Insurance Company   AA-
26   $ 3,845,000     Female   92   36   Pacific Life Insurance Company   A+
27   $ 500,000     Male   91   40   Massachusetts Mutual Life Insurance Company   AA+
28   $ 5,000,000     Male   91   23   John Hancock Life Insurance Company (U.S.A.)   AA-
29   $ 500,000     Female   91   15   Lincoln National Life Insurance Company   AA-
30   $ 3,500,000     Female   91   62   John Hancock Life Insurance Company (U.S.A.)   AA-
31   $ 3,100,000     Female   91   25   Lincoln Benefit Life Company   BBB+
32   $ 1,500,000     Female   91   54   Lincoln National Life Insurance Company   AA-
33   $ 3,000,000     Female   91   25   Lincoln National Life Insurance Company   AA-
34   $ 5,000,000     Female   91   31   Reliastar Life Insurance Company   A
35   $ 5,000,000     Female   91   12   Lincoln National Life Insurance Company   AA-
36   $ 500,000     Male   91   41   Reliastar Life Insurance Company   A
37   $ 1,000,000     Male   91   7   Voya Retirement Insurance and Annuity Company   A
38   $ 1,203,520     Male   91   33   Columbus Life Insurance Company   AA
39   $ 1,350,000     Female   91   27   Lincoln National Life Insurance Company   AA-
40   $ 600,000     Female   91   15   Columbus Life Insurance Company   AA
41   $ 5,000,000     Female   90   38   Massachusetts Mutual Life Insurance Company   AA+
42   $ 2,500,000     Female   90   38   American General Life Insurance Company   A+
43   $ 2,500,000     Male   90   45   Pacific Life Insurance Company   A+
44   $ 1,000,000     Female   90   40   United of Omaha Life Insurance Company   AA-
45   $ 375,000     Male   90   33   Lincoln National Life Insurance Company   AA-
46   $ 1,103,922     Female   90   51   Sun Life Assurance Company of Canada (U.S.)   AA-

 

  43  
 

 

    Face Amount     Gender   Age (ALB)
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
47   $ 1,000,000     Female   90   54   Transamerica Life Insurance Company   AA-
48   $ 250,000     Female   90   54   Transamerica Life Insurance Company   AA-
49   $ 500,000     Female   90   34   Transamerica Life Insurance Company   AA-
50   $ 2,500,000     Female   90   4   AXA Equitable Life Insurance Company   A+
51   $ 2,500,000     Female   90   4   AXA Equitable Life Insurance Company   A+
52   $ 500,000     Female   90   27   Nationwide Life and Annuity Insurance Company   A+
53   $ 715,000     Female   90   45   Lincoln National Life Insurance Company   AA-
54   $ 2,225,000     Female   90   74   Transamerica Life Insurance Company   AA-
55   $ 3,500,000     Female   90   32   Lincoln National Life Insurance Company   AA-
56   $ 1,000,000     Female   89   45   Metropolitan Life Insurance Company   A+
57   $ 248,859     Female   89   25   Lincoln National Life Insurance Company   AA-
58   $ 500,000     Female   89   57   Sun Life Assurance Company of Canada (U.S.)   AA-
59   $ 250,000     Male   89   60   Metropolitan Life Insurance Company   A+
60   $ 4,000,000     Female   89   61   Transamerica Life Insurance Company   AA-
61   $ 5,000,000     Male   89   42   AXA Equitable Life Insurance Company   A+
62   $ 1,200,000     Male   89   42   Massachusetts Mutual Life Insurance Company   AA+
63   $ 1,200,000     Male   89   42   Massachusetts Mutual Life Insurance Company   AA+
64   $ 1,050,000     Male   89   34   John Hancock Life Insurance Company (U.S.A.)   AA-
65   $ 3,000,000     Male   89   85   Transamerica Life Insurance Company   AA-
66   $ 1,000,000     Male   89   44   AXA Equitable Life Insurance Company   A+
67   $ 500,000     Male   89   52   Lincoln National Life Insurance Company   AA-
68   $ 4,785,380     Female   89   32   John Hancock Life Insurance Company (U.S.A.)   AA-
69   $ 1,803,455     Female   89   55   Metropolitan Life Insurance Company   A+
70   $ 1,529,270     Female   89   55   Metropolitan Life Insurance Company   A+
71   $ 800,000     Male   89   54   Lincoln National Life Insurance Company   AA-
72   $ 5,000,000     Male   89   41   John Hancock Life Insurance Company (U.S.A.)   AA-
73   $ 500,000     Female   89   41   Transamerica Life Insurance Company   AA-
74   $ 400,000     Female   89   41   Lincoln Benefit Life Company   BBB+
75   $ 3,000,000     Female   89   70   Massachusetts Mutual Life Insurance Company   AA+
76   $ 200,000     Male   89   40   Lincoln Benefit Life Company   BBB+
77   $ 4,445,467     Male   89   47   Penn Mutual Life Insurance Company   A+
78   $ 1,500,000     Male   89   35   Union Central Life Insurance Company   A+
79   $ 7,500,000     Male   89   39   Lincoln National Life Insurance Company   AA-
80   $ 3,600,000     Female   89   54   AXA Equitable Life Insurance Company   A+
81   $ 3,000,000     Male   89   33   Lincoln National Life Insurance Company   AA-
82   $ 2,000,000     Male   89   36   John Hancock Life Insurance Company (U.S.A.)   AA-
83   $ 100,000     Female   89   46   American General Life Insurance Company   A+
84   $ 100,000     Female   89   46   American General Life Insurance Company   A+
85   $ 396,791     Male   89   26   Lincoln National Life Insurance Company   AA-
86   $ 1,500,000     Male   89   93   Transamerica Life Insurance Company   AA-
87   $ 1,000,000     Male   88   45   John Hancock Life Insurance Company (U.S.A.)   AA-
88   $ 2,000,000     Male   88   45   John Hancock Life Insurance Company (U.S.A.)   AA-
89   $ 5,000,000     Male   88   41   Lincoln National Life Insurance Company   AA-
90   $ 5,000,000     Female   88   27   Transamerica Life Insurance Company   AA-
91   $ 3,000,000     Male   88   36   Transamerica Life Insurance Company   AA-
92   $ 1,200,000     Male   88   62   Transamerica Life Insurance Company   AA-
93   $ 6,000,000     Female   88   46   Sun Life Assurance Company of Canada (U.S.)   AA-
94   $ 250,000     Male   88   40   Wilton Reassurance Life Insurance Company   N/A
95   $ 330,000     Male   88   60   AXA Equitable Life Insurance Company   A+
96   $ 175,000     Male   88   60   Metropolitan Life Insurance Company   A+
97   $ 335,000     Male   88   60   Metropolitan Life Insurance Company   A+
98   $ 3,000,000     Male   88   65   AXA Equitable Life Insurance Company   A+
99   $ 2,000,000     Female   88   40   Beneficial Life Insurance Company   N/A
100   $ 250,000     Female   88   40   John Hancock Life Insurance Company (U.S.A.)   AA-
101   $ 1,000,000     Female   88   30   New York Life Insurance Company   AA+
102   $ 1,250,000     Male   88   27   Columbus Life Insurance Company   AA
103   $ 300,000     Male   88   27   Columbus Life Insurance Company   AA
104   $ 10,000,000     Female   88   61   West Coast Life Insurance Company   AA-
105   $ 2,500,000     Male   88   37   Transamerica Life Insurance Company   AA-
106   $ 8,500,000     Male   88   68   Massachusetts Mutual Life Insurance Company   AA+

 

  44  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.) 
(2)
  Insurance Company   S&P Rating
107   $ 1,000,000     Female   88   41   West Coast Life Insurance Company   AA-
108   $ 2,000,000     Female   88   41   West Coast Life Insurance Company   AA-
109   $ 500,000     Female   88   45   Beneficial Life Insurance Company   N/A
110   $ 800,000     Male   88   44   National Western Life Insurance Company   A
111   $ 1,269,017     Male   88   25   Hartford Life and Annuity Insurance Company   BBB+
112   $ 5,000,000     Male   88   68   Lincoln National Life Insurance Company   AA-
113   $ 4,513,823     Female   88   18   Accordia Life and Annuity Company   A-
114   $ 2,000,000     Male   88   78   Security Life of Denver Insurance Company   A
115   $ 2,000,000     Male   88   78   Security Life of Denver Insurance Company   A
116   $ 2,000,000     Male   88   78   Security Life of Denver Insurance Company   A
117   $ 309,000     Male   88   27   Transamerica Life Insurance Company   AA-
118   $ 2,000,000     Female   88   64   U.S. Financial Life Insurance Company   A+
119   $ 1,365,000     Female   87   82   Transamerica Life Insurance Company   AA-
120   $ 1,000,000     Female   87   76   Security Life of Denver Insurance Company   A
121   $ 200,000     Female   87   75   Lincoln National Life Insurance Company   AA-
122   $ 1,000,000     Male   87   38   Sun Life Assurance Company of Canada (U.S.)   AA-
123   $ 1,000,000     Male   87   29   Massachusetts Mutual Life Insurance Company   AA+
124   $ 1,000,000     Female   87   19   State Farm Life Insurance Company   AA-
125   $ 2,000,000     Male   87   85   Transamerica Life Insurance Company   AA-
126   $ 209,176     Male   87   81   Lincoln National Life Insurance Company   AA-
127   $ 2,328,547     Male   87   34   Metropolitan Life Insurance Company   A+
128   $ 2,000,000     Male   87   34   Metropolitan Life Insurance Company   A+
129   $ 1,000,000     Male   87   23   Transamerica Life Insurance Company   AA-
130   $ 500,000     Male   87   69   Metropolitan Life Insurance Company   A+
131   $ 750,000     Female   87   71   Lincoln National Life Insurance Company   AA-
132   $ 1,500,000     Female   87   71   Lincoln National Life Insurance Company   AA-
133   $ 400,000     Female   87   71   Lincoln National Life Insurance Company   AA-
134   $ 1,250,000     Female   87   71   Lincoln National Life Insurance Company   AA-
135   $ 2,000,000     Male   87   50   Lincoln National Life Insurance Company   AA-
136   $ 3,000,000     Female   87   54   Transamerica Life Insurance Company   AA-
137   $ 347,211     Male   87   30   Pruco Life Insurance Company   AA-
138   $ 1,800,000     Male   87   41   John Hancock Life Insurance Company (U.S.A.)   AA-
139   $ 2,000,000     Male   87   51   AXA Equitable Life Insurance Company   A+
140   $ 1,750,000     Male   87   51   AXA Equitable Life Insurance Company   A+
141   $ 4,000,000     Male   87   41   Metropolitan Life Insurance Company   A+
142   $ 2,000,000     Male   87   25   Transamerica Life Insurance Company   AA-
143   $ 1,425,000     Male   87   63   John Hancock Life Insurance Company (U.S.A.)   AA-
144   $ 1,500,000     Male   87   48   AXA Equitable Life Insurance Company   A+
145   $ 1,500,000     Male   86   27   Transamerica Life Insurance Company   AA-
146   $ 1,500,000     Female   86   96   Lincoln Benefit Life Company   BBB+
147   $ 3,750,000     Male   86   63   AXA Equitable Life Insurance Company   A+
148   $ 2,000,000     Male   86   43   Metropolitan Life Insurance Company   A+
149   $ 3,000,000     Male   86   43   Metropolitan Life Insurance Company   A+
150   $ 1,000,000     Male   86   29   John Hancock Life Insurance Company (U.S.A.)   AA-
151   $ 2,000,000     Female   86   73   AXA Equitable Life Insurance Company   A+
152   $ 1,000,000     Male   86   43   Security Life of Denver Insurance Company   A
153   $ 3,000,000     Female   86   71   Sun Life Assurance Company of Canada (U.S.)   AA-
154   $ 125,000     Male   86   53   Jackson National Life Insurance Company   AA
155   $ 1,500,000     Male   86   66   AXA Equitable Life Insurance Company   A+
156   $ 1,000,000     Male   86   45   AXA Equitable Life Insurance Company   A+
157   $ 5,000,000     Male   86   75   Security Life of Denver Insurance Company   A
158   $ 1,500,000     Male   86   38   Reliastar Life Insurance Company   A
159   $ 1,500,000     Male   86   38   Reliastar Life Insurance Company   A
160   $ 5,000,000     Male   86   60   Security Life of Denver Insurance Company   A
161   $ 500,000     Male   86   31   Genworth Life Insurance Company   BB
162   $ 1,980,000     Male   86   40   New York Life Insurance Company   AA+
163   $ 1,000,000     Male   86   36   John Hancock Life Insurance Company (U.S.A.)   AA-
164   $ 500,000     Male   86   39   New England Life Insurance Company   AA-
165   $ 4,000,000     Female   86   41   Reliastar Life Insurance Company   A
166   $ 284,924     Male   86   51   Transamerica Life Insurance Company   AA-
167   $ 5,000,000     Female   86   80   American General Life Insurance Company   A+

 

  45  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.) 
(2)
  Insurance Company   S&P Rating
168   $ 500,000     Female   86   25   Transamerica Life Insurance Company   AA-
169   $ 3,500,000     Female   86   95   Lincoln Benefit Life Company   BBB+
170   $ 800,000     Male   86   40   Metropolitan Life Insurance Company   A+
171   $ 5,000,000     Female   85   88   AXA Equitable Life Insurance Company   A+
172   $ 1,000,000     Female   85   71   John Hancock Life Insurance Company (U.S.A.)   AA-
173   $ 6,000,000     Female   85   98   American General Life Insurance Company   A+
174   $ 5,000,000     Male   85   53   AXA Equitable Life Insurance Company   A+
175   $ 1,433,572     Male   85   44   Security Mutual Life Insurance Company of NY   N/A
176   $ 2,000,000     Male   85   42   National Life Insurance Company   A
177   $ 1,000,000     Female   85   34   Metropolitan Life Insurance Company   A+
178   $ 2,147,816     Female   85   107   John Hancock Life Insurance Company (U.S.A.)   AA-
179   $ 4,200,000     Female   85   105   Transamerica Life Insurance Company   AA-
180   $ 750,000     Male   85   75   West Coast Life Insurance Company   AA-
181   $ 4,000,000     Male   85   26   John Hancock Life Insurance Company (U.S.A.)   AA-
182   $ 1,000,000     Male   85   65   John Hancock Life Insurance Company (U.S.A.)   AA-
183   $ 2,000,000     Female   85   86   Lincoln Benefit Life Company   BBB+
184   $ 2,000,000     Female   85   62   New York Life Insurance Company   AA+
185   $ 5,000,000     Male   85   62   Lincoln National Life Insurance Company   AA-
186   $ 2,400,000     Male   85   27   Genworth Life Insurance Company   BB
187   $ 3,000,000     Male   85   80   Transamerica Life Insurance Company   AA-
188   $ 8,500,000     Male   85   93   John Hancock Life Insurance Company (U.S.A.)   AA-
189   $ 600,000     Male   85   88   AXA Equitable Life Insurance Company   A+
190   $ 7,600,000     Female   85   85   Transamerica Life Insurance Company   AA-
191   $ 250,000     Male   85   18   Midland National Life Insurance Company   A+
192   $ 250,000     Male   85   41   Transamerica Life Insurance Company   AA-
193   $ 2,500,000     Female   85   58   American General Life Insurance Company   A+
194   $ 2,500,000     Male   85   47   AXA Equitable Life Insurance Company   A+
195   $ 3,000,000     Male   85   47   Lincoln National Life Insurance Company   AA-
196   $ 2,000,000     Male   85   73   Pacific Life Insurance Company   A+
197   $ 7,600,000     Male   85   89   Transamerica Life Insurance Company   AA-
198   $ 3,000,000     Female   85   36   AXA Equitable Life Insurance Company   A+
199   $ 250,000     Male   85   68   Voya Retirement Insurance and Annuity Company   A
200   $ 1,800,000     Female   85   50   Lincoln National Life Insurance Company   AA-
201   $ 1,703,959     Male   85   58   Lincoln National Life Insurance Company   AA-
202   $ 3,000,000     Male   85   49   Metropolitan Life Insurance Company   A+
203   $ 500,000     Male   85   11   Great Southern Life Insurance Company   N/A
204   $ 2,247,450     Female   85   49   Transamerica Life Insurance Company   AA-
205   $ 1,000,000     Male   85   46   Hartford Life and Annuity Insurance Company   BBB+
206   $ 400,000     Male   85   39   Transamerica Life Insurance Company   AA-
207   $ 1,000,000     Male   85   81   Lincoln National Life Insurance Company   AA-
208   $ 1,000,000     Male   85   51   Metropolitan Life Insurance Company   A+
209   $ 3,500,000     Male   85   54   Pacific Life Insurance Company   A+
210   $ 2,500,000     Male   85   54   AXA Equitable Life Insurance Company   A+
211   $ 10,000,000     Male   84   116   Pacific Life Insurance Company   A+
212   $ 87,677     Female   84   47   Protective Life Insurance Company   AA-
213   $ 1,000,000     Male   84   51   Texas Life Insurance Company   N/A
214   $ 500,000     Male   84   92   Metropolitan Life Insurance Company   A+
215   $ 1,000,000     Male   84   57   Lincoln National Life Insurance Company   AA-
216   $ 3,000,000     Male   84   30   U.S. Financial Life Insurance Company   A+
217   $ 325,000     Male   84   53   Genworth Life and Annuity Insurance Company   BB
218   $ 175,000     Male   84   53   Genworth Life and Annuity Insurance Company   BB
219   $ 850,000     Male   84   48   American General Life Insurance Company   A+
220   $ 600,000     Male   84   61   Massachusetts Mutual Life Insurance Company   AA+
221   $ 1,900,000     Male   84   54   American National Insurance Company   A
222   $ 500,000     Male   84   35   New York Life Insurance Company   AA+
223   $ 500,000     Male   84   35   New York Life Insurance Company   AA+
224   $ 5,000,000     Male   84   46   AXA Equitable Life Insurance Company   A+
225   $ 385,000     Male   84   62   Metropolitan Life Insurance Company   A+
226   $ 500,000     Male   84   62   Metropolitan Life Insurance Company   A+
227   $ 75,000     Male   84   39   Fidelity and Guaranty Insurance Company   BBB-
228   $ 10,000,000     Male   84   62   Lincoln National Life Insurance Company   AA-

 

  46  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
229   $ 1,500,000     Male   84   67   Lincoln National Life Insurance Company   AA-
230   $ 250,000     Male   84   41   The Ohio State Life Insurance Company   N/A
231   $ 3,500,000     Female   84   77   AXA Equitable Life Insurance Company   A+
232   $ 1,000,000     Female   84   89   West Coast Life Insurance Company   AA-
233   $ 1,000,000     Female   84   66   American General Life Insurance Company   A+
234   $ 5,000,000     Female   84   65   Sun Life Assurance Company of Canada (U.S.)   AA-
235   $ 3,000,000     Female   84   57   Metropolitan Life Insurance Company   A+
236   $ 750,000     Male   84   67   John Hancock Life Insurance Company (U.S.A.)   AA-
237   $ 4,500,000     Male   84   61   AXA Equitable Life Insurance Company   A+
238   $ 1,250,000     Female   84   51   Columbus Life Insurance Company   AA
239   $ 2,275,000     Male   84   80   Reliastar Life Insurance Company   A
240   $ 10,000,000     Male   84   72   AXA Equitable Life Insurance Company   A+
241   $ 340,000     Female   84   75   Jackson National Life Insurance Company   AA
242   $ 2,300,000     Male   84   13   American General Life Insurance Company   A+
243   $ 3,500,000     Male   84   60   AXA Equitable Life Insurance Company   A+
244   $ 6,217,200     Female   84   94   Phoenix Life Insurance Company   B+
245   $ 2,500,000     Female   84   62   Reliastar Life Insurance Company   A
246   $ 5,000,000     Female   84   48   Massachusetts Mutual Life Insurance Company   AA+
247   $ 1,275,000     Male   84   44   General American Life Insurance Company   A+
248   $ 2,000,000     Female   84   86   Lincoln National Life Insurance Company   AA-
249   $ 1,000,000     Male   84   41   American General Life Insurance Company   A+
250   $ 750,000     Male   84   78   AXA Equitable Life Insurance Company   A+
251   $ 5,000,000     Male   84   71   Lincoln National Life Insurance Company   AA-
252   $ 3,000,000     Male   83   56   Protective Life Insurance Company   AA-
253   $ 1,500,000     Male   83   56   American General Life Insurance Company   A+
254   $ 2,000,000     Female   83   94   Transamerica Life Insurance Company   AA-
255   $ 1,500,000     Male   83   61   Pacific Life Insurance Company   A+
256   $ 2,000,000     Male   83   75   New York Life Insurance Company   AA+
257   $ 5,000,000     Male   83   97   American General Life Insurance Company   A+
258   $ 250,000     Male   83   132   Reliastar Life Insurance Company   A
259   $ 1,995,000     Female   83   69   Transamerica Life Insurance Company   AA-
260   $ 4,000,000     Male   83   46   Lincoln National Life Insurance Company   AA-
261   $ 10,000,000     Male   83   69   New York Life Insurance Company   AA+
262   $ 1,000,000     Male   83   59   Hartford Life and Annuity Insurance Company   BBB+
263   $ 1,000,000     Male   83   59   Jackson National Life Insurance Company   AA
264   $ 417,300     Male   83   90   Jackson National Life Insurance Company   AA
265   $ 5,000,000     Male   83   68   Transamerica Life Insurance Company   AA-
266   $ 2,000,000     Male   83   59   Ohio National Life Assurance Corporation   AA-
267   $ 1,000,000     Male   83   59   Ohio National Life Assurance Corporation   AA-
268   $ 500,000     Female   83   92   AXA Equitable Life Insurance Company   A+
269   $ 350,000     Male   83   26   Jackson National Life Insurance Company   AA
270   $ 5,000,000     Female   82   68   Security Mutual Life Insurance Company of NY   N/A
271   $ 5,000,000     Male   82   80   AXA Equitable Life Insurance Company   A+
272   $ 6,000,000     Male   82   96   Transamerica Life Insurance Company   AA-
273   $ 8,000,000     Male   82   73   AXA Equitable Life Insurance Company   A+
274   $ 850,000     Female   82   89   Zurich Life Insurance Company   AA-
275   $ 550,000     Male   82   106   Genworth Life Insurance Company   BB
276   $ 500,000     Male   82   54   West Coast Life Insurance Company   AA-
277   $ 1,680,000     Female   82   59   AXA Equitable Life Insurance Company   A+
278   $ 1,000,000     Female   82   86   Lincoln National Life Insurance Company   AA-
279   $ 1,250,000     Male   82   89   Metropolitan Life Insurance Company   A+
280   $ 3,000,000     Female   82   61   AXA Equitable Life Insurance Company   A+
281   $ 1,000,000     Male   82   55   AXA Equitable Life Insurance Company   A+
282   $ 1,250,000     Female   82   75   Principal Life Insurance Company   A+
283   $ 1,000,000     Male   82   47   AXA Equitable Life Insurance Company   A+
284   $ 1,500,000     Male   82   60   Lincoln Benefit Life Company   BBB+
285   $ 700,000     Male   82   91   Banner Life Insurance Company   AA-
286   $ 3,000,000     Male   82   88   John Hancock Life Insurance Company (U.S.A.)   AA-
287   $ 10,000,000     Male   82   60   Hartford Life and Annuity Insurance Company   BBB+
288   $ 1,750,000     Male   82   72   AXA Equitable Life Insurance Company   A+
289   $ 5,000,000     Male   82   62   AXA Equitable Life Insurance Company   A+
290   $ 300,000     Female   82   64   Hartford Life and Annuity Insurance Company   BBB+

 

  47  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
291   $ 250,000     Male   82   70   American General Life Insurance Company   A+
292   $ 3,500,000     Male   82   76   Metropolitan Life Insurance Company   A+
293   $ 2,502,000     Male   82   136   Transamerica Life Insurance Company   AA-
294   $ 10,000,000     Male   82   102   John Hancock Life Insurance Company (U.S.A.)   AA-
295   $ 250,000     Female   82   93   Accordia Life and Annuity Company   A-
296   $ 3,000,000     Male   82   115   Principal Life Insurance Company   A+
297   $ 1,700,000     Male   82   54   Lincoln National Life Insurance Company   AA-
298   $ 1,210,000     Male   82   56   Lincoln National Life Insurance Company   AA-
299   $ 3,000,000     Female   82   96   West Coast Life Insurance Company   AA-
300   $ 7,000,000     Male   82   76   Genworth Life Insurance Company   BB
301   $ 8,000,000     Male   81   118   Metropolitan Life Insurance Company   A+
302   $ 3,000,000     Male   81   81   Reliastar Life Insurance Company   A
303   $ 4,000,000     Male   81   72   Lincoln National Life Insurance Company   AA-
304   $ 500,000     Male   81   46   Genworth Life and Annuity Insurance Company   BB
305   $ 3,000,000     Male   81   136   Metropolitan Life Insurance Company   A+
306   $ 300,000     Female   81   90   Metropolitan Life Insurance Company   A+
307   $ 200,000     Male   81   64   Protective Life Insurance Company   AA-
308   $ 150,000     Male   81   64   Protective Life Insurance Company   AA-
309   $ 150,000     Male   81   64   Protective Life Insurance Company   AA-
310   $ 350,000     Male   81   64   Lincoln National Life Insurance Company   AA-
311   $ 1,187,327     Male   81   88   Transamerica Life Insurance Company   AA-
312   $ 5,000,000     Male   81   99   John Hancock Life Insurance Company (U.S.A.)   AA-
313   $ 800,000     Male   81   70   North American Company for Life And Health Insurance   A+
314   $ 2,000,000     Male   81   20   Metropolitan Life Insurance Company   A+
315   $ 1,000,000     Female   81   80   Lincoln Benefit Life Company   BBB+
316   $ 6,000,000     Male   81   113   AXA Equitable Life Insurance Company   A+
317   $ 320,987     Female   81   96   John Hancock Life Insurance Company (U.S.A.)   AA-
318   $ 130,000     Male   81   43   Genworth Life Insurance Company   BB
319   $ 5,500,000     Male   81   113   Metropolitan Life Insurance Company   A+
320   $ 1,000,000     Male   81   114   Protective Life Insurance Company   AA-
321   $ 2,000,000     Female   81   80   Pacific Life Insurance Company   A+
322   $ 4,000,000     Male   81   87   Lincoln National Life Insurance Company   AA-
323   $ 2,000,000     Male   81   74   Metropolitan Life Insurance Company   A+
324   $ 2,000,000     Male   81   74   Metropolitan Life Insurance Company   A+
325   $ 4,300,000     Female   81   101   American National Insurance Company   A
326   $ 200,000     Male   81   59   Kansas City Life Insurance Company   N/A
327   $ 2,000,000     Female   81   67   Transamerica Life Insurance Company   AA-
328   $ 1,500,000     Female   81   68   Protective Life Insurance Company   AA-
329   $ 1,000,000     Male   81   49   Pacific Life Insurance Company   A+
330   $ 200,000     Male   81   40   Pruco Life Insurance Company   AA-
331   $ 500,000     Male   81   40   Transamerica Life Insurance Company   AA-
332   $ 3,000,000     Male   80   35   Pacific Life Insurance Company   A+
333   $ 3,000,000     Male   80   35   Minnesota Life Insurance Company   A+
334   $ 3,000,000     Male   80   35   Pruco Life Insurance Company   AA-
335   $ 5,000,000     Male   80   89   Pacific Life Insurance Company   A+
336   $ 5,000,000     Male   80   89   Pacific Life Insurance Company   A+
337   $ 3,601,500     Male   80   85   Transamerica Life Insurance Company   AA-
338   $ 1,000,000     Male   80   87   Sun Life Assurance Company of Canada (U.S.)   AA-
339   $ 5,000,000     Male   80   80   John Hancock Life Insurance Company (U.S.A.)   AA-
340   $ 5,000,000     Male   80   120   Principal Life Insurance Company   A+
341   $ 150,000     Male   80   85   MetLife Insurance Company USA   A+
342   $ 1,009,467     Male   80   51   John Hancock Life Insurance Company (U.S.A.)   AA-
343   $ 7,000,000     Male   80   77   Lincoln Benefit Life Company   BBB+
344   $ 100,000     Male   80   57   North American Company for Life And Health Insurance   A+
345   $ 1,000,000     Male   80   108   Lincoln National Life Insurance Company   AA-
346   $ 5,000,000     Male   80   49   John Hancock Life Insurance Company (U.S.A.)   AA-
347   $ 6,799,139     Male   80   114   AXA Equitable Life Insurance Company   A+
348   $ 476,574     Male   80   64   Transamerica Life Insurance Company   AA-
349   $ 2,250,000     Male   80   85   Massachusetts Mutual Life Insurance Company   AA+
350   $ 775,000     Male   80   115   Lincoln National Life Insurance Company   AA-

 

  48  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
351   $ 1,000,000     Female   80   115   John Hancock Life Insurance Company (U.S.A.)   AA-
352   $ 6,000,000     Male   80   111   AXA Equitable Life Insurance Company   A+
353   $ 1,445,000     Female   80   97   AXA Equitable Life Insurance Company   A+
354   $ 1,500,000     Female   80   97   AXA Equitable Life Insurance Company   A+
355   $ 1,000,000     Male   80   78   Lincoln National Life Insurance Company   AA-
356   $ 200,000     Male   80   50   Lincoln National Life Insurance Company   AA-
357   $ 1,000,000     Male   80   102   Metropolitan Life Insurance Company   A+
358   $ 6,000,000     Male   80   98   AXA Equitable Life Insurance Company   A+
359   $ 5,000,000     Female   80   108   Reliastar Life Insurance Company   A
360   $ 750,000     Male   80   61   Lincoln National Life Insurance Company   AA-
361   $ 5,000,000     Male   80   170   West Coast Life Insurance Company   AA-
362   $ 3,000,000     Male   80   87   Principal Life Insurance Company   A+
363   $ 5,000,000     Male   79   129   Lincoln National Life Insurance Company   AA-
364   $ 3,000,000     Male   79   78   American General Life Insurance Company   A+
365   $ 5,000,000     Male   79   71   John Hancock Life Insurance Company (U.S.A.)   AA-
366   $ 500,000     Male   79   60   John Hancock Life Insurance Company (U.S.A.)   AA-
367   $ 1,000,000     Male   79   106   Metropolitan Life Insurance Company   A+
368   $ 1,250,000     Male   79   91   AXA Equitable Life Insurance Company   A+
369   $ 3,000,000     Female   79   81   New York Life Insurance Company   AA+
370   $ 4,000,000     Male   79   43   Metropolitan Life Insurance Company   A+
371   $ 2,500,000     Male   79   79   Massachusetts Mutual Life Insurance Company   AA+
372   $ 2,500,000     Male   79   79   Massachusetts Mutual Life Insurance Company   AA+
373   $ 500,000     Female   79   108   Columbus Life Insurance Company   AA
374   $ 4,000,000     Female   79   86   Transamerica Life Insurance Company   AA-
375   $ 4,000,000     Male   79   140   John Hancock Life Insurance Company (U.S.A.)   AA-
376   $ 325,000     Male   79   36   American General Life Insurance Company   A+
377   $ 1,750,000     Male   79   56   John Hancock Life Insurance Company (U.S.A.)   AA-
378   $ 5,000,000     Male   79   96   Transamerica Life Insurance Company   AA-
379   $ 3,750,000     Male   79   52   AXA Equitable Life Insurance Company   A+
380   $ 550,000     Male   79   72   Pruco Life Insurance Company   AA-
381   $ 300,000     Male   79   72   Pruco Life Insurance Company   AA-
382   $ 2,000,000     Female   79   50   Transamerica Life Insurance Company   AA-
383   $ 1,200,000     Female   78   126   Athene Annuity & Life Assurance Company   A-
384   $ 1,000,000     Male   78   98   Accordia Life and Annuity Company   A-
385   $ 2,840,000     Male   78   91   Transamerica Life Insurance Company   AA-
386   $ 750,000     Male   78   82   North American Company for Life and Health Insurance   A+
387   $ 1,000,000     Male   78   82   John Hancock Life Insurance Company (U.S.A.)   AA-
388   $ 500,000     Male   78   82   North American Company for Life and Health Insurance   A+
389   $ 50,000     Male   78   40   Lincoln National Life Insurance Company   AA-
390   $ 4,000,000     Male   78   62   Massachusetts Mutual Life Insurance Company   AA+
391   $ 1,000,000     Female   78   68   John Hancock Life Insurance Company (U.S.A.)   AA-
392   $ 1,000,000     Female   78   123   John Hancock Life Insurance Company (U.S.A.)   AA-
393   $ 2,000,000     Male   78   94   Lincoln National Life Insurance Company   AA-
394   $ 2,000,000     Male   78   94   Lincoln National Life Insurance Company   AA-
395   $ 5,000,000     Male   78   113   Lincoln National Life Insurance Company   AA-
396   $ 1,000,000     Male   78   115   Principal Life Insurance Company   A+
397   $ 2,000,000     Male   78   100   Genworth Life Insurance Company   BB
398   $ 6,250,000     Male   78   185   John Hancock Life Insurance Company (U.S.A.)   AA-
399   $ 490,620     Male   78   80   Ameritas Life Insurance Corporation   A+
400   $ 600,000     Male   78   77   Protective Life Insurance Company   AA-
401   $ 400,000     Male   78   113   John Hancock Life Insurance Company (U.S.A.)   AA-
402   $ 730,000     Male   77   96   Transamerica Life Insurance Company   AA-
403   $ 5,000,000     Male   77   142   Pruco Life Insurance Company   AA-
404   $ 300,000     Male   77   73   Penn Mutual Life Insurance Company   A+
405   $ 5,000,000     Male   77   131   AXA Equitable Life Insurance Company   A+
406   $ 3,000,000     Male   77   91   Pruco Life Insurance Company   AA-
407   $ 3,000,000     Female   77   101   John Hancock Life Insurance Company (U.S.A.)   AA-
408   $ 5,000,000     Male   77   136   Massachusetts Mutual Life Insurance Company   AA+
409   $ 5,000,000     Male   77   136   Massachusetts Mutual Life Insurance Company   AA+
410   $ 200,000     Female   77   139   West Coast Life Insurance Company   AA-
411   $ 1,100,000     Male   77   133   Accordia Life and Annuity Company   A-
412   $ 3,000,000     Male   77   97   Protective Life Insurance Company   AA-

 

  49  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating

413 

  $ 2,000,000     Female   77   113   Accordia Life and Annuity Company   A-
414   $ 10,000,000     Male   77   127   AXA Equitable Life Insurance Company   A+
415   $ 2,500,000     Male   77   134   John Hancock Life Insurance Company (U.S.A.)   AA-
416   $ 2,500,000     Male   77   134   John Hancock Life Insurance Company (U.S.A.)   AA-
417   $ 1,000,000     Male   77   98   Athene Annuity & Life Assurance Company of New York   A-
418   $ 7,000,000     Female   77   116   Pacific Life Insurance Company   A+
419   $ 100,946     Female   77   154   Genworth Life and Annuity Insurance Company   BB
420   $ 350,000     Male   77   106   AXA Equitable Life Insurance Company   A+
421   $ 600,000     Male   77   106   AXA Equitable Life Insurance Company   A+
422   $ 1,000,000     Male   77   77   Pacific Life Insurance Company   A+
423   $ 2,000,000     Male   77   113   Transamerica Life Insurance Company   AA-
424   $ 200,000     Male   77   111   Prudential Insurance Company of America   AA-
425   $ 2,000,000     Female   77   162   Lincoln National Life Insurance Company   AA-
426   $ 150,000     Male   77   99   Genworth Life Insurance Company   BB
427   $ 2,000,000     Male   77   58   Athene Annuity & Life Assurance Company   A-
428   $ 7,097,434     Male   77   153   Lincoln National Life Insurance Company   AA-
429   $ 5,000,000     Male   77   54   West Coast Life Insurance Company   AA-
430   $ 1,000,000     Male   76   122   Transamerica Life Insurance Company   AA-
431   $ 750,000     Male   76   107   Protective Life Insurance Company   AA-
432   $ 250,000     Male   76   98   Midland National Life Insurance Company   A+
433   $ 3,000,000     Male   76   51   Accordia Life and Annuity Company   A-
434   $ 200,000     Male   76   65   Reliastar Life Insurance Company   A
435   $ 500,000     Male   76   96   AXA Equitable Life Insurance Company   A+
436   $ 3,000,000     Male   76   108   John Hancock Life Insurance Company (U.S.A.)   AA-
437   $ 5,000,000     Male   76   108   John Hancock Life Insurance Company (U.S.A.)   AA-
438   $ 8,000,000     Male   76   94   Metropolitan Life Insurance Company   A+
439   $ 100,000     Male   76   53   AXA Equitable Life Insurance Company   A+
440   $ 4,000,000     Female   76   137   American General Life Insurance Company   A+
441   $ 500,000     Male   76   88   AIG Life Insurance Company   A+
442   $ 1,000,000     Male   76   155   Security Mutual Life Insurance Company of NY   N/A
443   $ 355,700     Male   76   103   Security Life of Denver Insurance Company   A
444   $ 5,000,000     Male   76   54   Lincoln Benefit Life Company   BBB+
445   $ 250,000     Male   76   135   West Coast Life Insurance Company   AA-
446   $ 1,000,000     Male   76   112   Transamerica Life Insurance Company   AA-
447   $ 2,000,000     Male   76   146   John Hancock Life Insurance Company (U.S.A.)   AA-
448   $ 7,500,000     Female   76   173   Security Life of Denver Insurance Company   A
449   $ 3,000,000     Female   76   110   General American Life Insurance Company   A+
450   $ 100,000     Male   76   67   Transamerica Life Insurance Company   AA-
451   $ 300,000     Female   76   133   Minnesota Life Insurance Company   A+
452   $ 250,000     Male   76   88   United of Omaha Life Insurance Company   AA-
453   $ 600,000     Male   75   69   United of Omaha Life Insurance Company   AA-
454   $ 500,000     Male   75   87   Protective Life Insurance Company   AA-
455   $ 1,000,000     Male   75   93   Security Life of Denver Insurance Company   A
456   $ 1,000,000     Male   75   96   Transamerica Life Insurance Company   AA-
457   $ 500,000     Male   75   89   AXA Equitable Life Insurance Company   A+
458   $ 500,000     Male   75   103   United of Omaha Life Insurance Company   AA-
459   $ 750,000     Male   75   27   North American Company for Life And Health Insurance   A+
460   $ 8,000,000     Female   75   131   West Coast Life Insurance Company   AA-
461   $ 250,000     Female   75   155   AXA Equitable Life Insurance Company   A+
462   $ 300,000     Male   75   36   Lincoln National Life Insurance Company   AA-
463   $ 172,245     Female   75   54   Symetra Life Insurance Company   A
464   $ 5,004,704     Male   75   133   American General Life Insurance Company   A+
465   $ 2,000,000     Male   75   119   Pruco Life Insurance Company   AA-
466   $ 190,000     Male   75   103   Protective Life Insurance Company   AA-
467   $ 100,000     Male   75   151   Protective Life Insurance Company   AA-
468   $ 5,000,000     Male   75   129   AIG Life Insurance Company   A+
469   $ 4,000,000     Male   75   108   Security Mutual Life Insurance Company of NY   N/A
470   $ 89,626     Female   75   117   Union Central Life Insurance Company   A+
471   $ 2,000,000     Male   75   94   American General Life Insurance Company   A+
472   $ 10,000,000     Female   75   134   Reliastar Life Insurance Company   A

 

  50  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
473   $ 1,000,000     Female   75   150   John Hancock Life Insurance Company (U.S.A.)   AA-
474   $ 500,000     Male   75   72   American General Life Insurance Company   A+
475   $ 250,000     Male   75   73   Genworth Life and Annuity Insurance Company   BB
476   $ 500,000     Male   75   95   Delaware Life Insurance Company   BBB+
477   $ 370,000     Female   75   125   Minnesota Life Insurance Company   A+
478   $ 500,000     Male   74   33   Midland National Life Insurance Company   A+
479   $ 3,000,000     Male   74   71   AXA Equitable Life Insurance Company   A+
480   $ 500,000     Male   74   61   William Penn Life Insurance Company of New York   AA-
481   $ 2,500,000     Male   74   103   John Hancock Life Insurance Company (U.S.A.)   AA-
482   $ 500,000     Male   74   134   Pruco Life Insurance Company   AA-
483   $ 8,600,000     Male   74   152   AXA Equitable Life Insurance Company   A+
484   $ 3,000,000     Male   74   103   Transamerica Life Insurance Company   AA-
485   $ 800,000     Male   74   122   John Hancock Life Insurance Company (U.S.A.)   AA-
486   $ 1,500,000     Male   74   126   Lincoln National Life Insurance Company   AA-
487   $ 1,500,000     Male   74   126   Lincoln National Life Insurance Company   AA-
488   $ 1,500,000     Male   74   126   Lincoln National Life Insurance Company   AA-
489   $ 2,500,000     Male   74   136   Banner Life Insurance Company   AA-
490   $ 400,000     Male   74   80   Protective Life Insurance Company   AA-
491   $ 10,000,000     Male   74   144   John Hancock Life Insurance Company (U.S.A.)   AA-
492   $ 1,784,686     Male   74   153   Transamerica Life Insurance Company   AA-
493   $ 250,000     Female   74   171   Protective Life Insurance Company   AA-
494   $ 500,000     Male   73   122   Ameritas Life Insurance Corporation   A+
495   $ 370,000     Male   73   122   Ameritas Life Insurance Corporation   A+
496   $ 750,000     Male   73   130   Security Life of Denver Insurance Company   A
497   $ 1,000,000     Female   73   120   United of Omaha Life Insurance Company   AA-
498   $ 500,000     Male   73   106   William Penn Life Insurance Company of New York   AA-
499   $ 250,000     Male   73   18   Security Life of Denver Insurance Company   A
500   $ 100,000     Male   73   110   Protective Life Insurance Company   AA-
501   $ 500,000     Male   73   128   Metropolitan Life Insurance Company   A+
502   $ 2,000,000     Male   73   120   Voya Retirement Insurance and Annuity Company   A
503   $ 1,500,000     Male   73   120   Voya Retirement Insurance and Annuity Company   A
504   $ 300,000     Male   73   114   Protective Life Insurance Company   AA-
505   $ 250,000     Male   73   68   American General Life Insurance Company   A+
506   $ 2,500,000     Male   73   104   American General Life Insurance Company   A+
507   $ 2,000,000     Male   73   131   John Hancock Life Insurance Company (U.S.A.)   AA-
508   $ 800,000     Male   73   84   Commonwealth Annuity and Life Insurance Company   A-
509   $ 267,988     Male   73   52   Minnesota Life Insurance Company   A+
510   $ 300,000     Male   73   111   New England Life Insurance Company   AA-
511   $ 1,167,000     Male   73   50   Transamerica Life Insurance Company   AA-
512   $ 1,500,000     Male   73   108   Metropolitan Life Insurance Company   A+
513   $ 1,000,000     Female   73   144   Reliastar Life Insurance Company   A
514   $ 10,000,000     Male   73   118   AXA Equitable Life Insurance Company   A+
515   $ 1,000,000     Male   72   130   AIG Life Insurance Company   A+
516   $ 2,500,000     Male   72   51   Transamerica Life Insurance Company   AA-
517   $ 400,000     Male   72   195   Protective Life Insurance Company   AA-
518   $ 3,000,000     Male   72   75   John Hancock Life Insurance Company (U.S.A.)   AA-
519   $ 2,000,000     Male   72   100   New York Life Insurance Company   AA+
520   $ 2,000,000     Male   72   100   New York Life Insurance Company   AA+
521   $ 5,000,000     Male   72   128   John Hancock Life Insurance Company (U.S.A.)   AA-
522   $ 250,000     Female   72   108   Protective Life Insurance Company   AA-
523   $ 2,500,000     Male   72   114   Lincoln National Life Insurance Company   AA-
524   $ 2,500,000     Male   72   114   John Hancock Life Insurance Company (U.S.A.)   AA-
525   $ 1,350,000     Male   72   100   Lincoln National Life Insurance Company   AA-
526   $ 230,000     Male   72   117   Transamerica Life Insurance Company   AA-
527   $ 139,398     Female   72   23   Lincoln National Life Insurance Company   AA-
528   $ 190,000     Female   72   191   Protective Life Insurance Company   AA-
529   $ 420,000     Male   72   131   Protective Life Insurance Company   AA-
530   $ 75,000     Female   72   102   American General Life Insurance Company   A+
531   $ 600,000     Male   72   84   AXA Equitable Life Insurance Company   A+
532   $ 4,000,000     Male   72   141   MONY Life Insurance Company of America   A+

 

  51  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.) 
(2)
  Insurance Company   S&P Rating
533   $ 420,000     Male   72   122   RiverSource Life Insurance Company   A+
534   $ 100,000     Male   72   137   Protective Life Insurance Company   AA-
535   $ 250,000     Male   71   50   Protective Life Insurance Company   AA-
536   $ 650,000     Female   71   72   Security Life of Denver Insurance Company   A
537   $ 500,000     Male   71   120   Ohio National Life Assurance Corporation   AA-
538   $ 232,000     Male   71   179   Protective Life Insurance Company   AA-
539   $ 185,000     Male   71   131   Genworth Life and Annuity Insurance Company   BB
540   $ 40,000     Male   71   31   Banner Life Insurance Company   AA-
541   $ 750,000     Male   71   125   Transamerica Life Insurance Company   AA-
542   $ 1,250,000     Male   71   99   West Coast Life Insurance Company   AA-
543   $ 1,500,000     Female   71   153   Pruco Life Insurance Company   AA-
544   $ 5,000,000     Male   71   91   Transamerica Life Insurance Company   AA-
545   $ 500,000     Male   71   92   Transamerica Life Insurance Company   AA-
546   $ 500,000     Male   71   92   North American Company for Life And Health Insurance   A+
547   $ 300,000     Male   71   195   John Hancock Life Insurance Company (U.S.A.)   AA-
548   $ 100,000     Male   71   44   Genworth Life and Annuity Insurance Company   BB
549   $ 150,000     Male   71   34   Protective Life Insurance Company   AA-
550   $ 150,000     Male   71   34   AXA Equitable Life Insurance Company   A+
551   $ 1,000,000     Male   71   54   John Hancock Life Insurance Company (U.S.A.)   AA-
552   $ 202,700     Male   71   117   Farmers New World Life Insurance Company   N/A
553   $ 5,000,000     Male   71   151   Metropolitan Life Insurance Company   A+
554   $ 250,000     Female   70   120   Ohio National Life Assurance Corporation   AA-
555   $ 2,000,000     Male   70   172   John Hancock Life Insurance Company (U.S.A.)   AA-
556   $ 400,000     Male   70   161   Lincoln National Life Insurance Company   AA-
557   $ 100,000     Male   70   101   Massachusetts Mutual Life Insurance Company   AA+
558   $ 92,000     Female   70   199   Protective Life Insurance Company   AA-
559   $ 175,000     Female   70   111   Lincoln National Life Insurance Company   AA-
560   $ 1,500,000     Male   70   71   Lincoln National Life Insurance Company   AA-
561   $ 250,000     Male   70   184   Lincoln National Life Insurance Company   AA-
562   $ 1,500,000     Male   70   105   Midland National Life Insurance Company   A+
563   $ 500,000     Male   70   111   Lincoln Benefit Life Company   BBB+
564   $ 700,000     Male   70   116   Massachusetts Mutual Life Insurance Company   AA+
565   $ 750,000     Male   69   134   North American Company for Life And Health Insurance   A+
566   $ 1,000,000     Male   69   191   AXA Equitable Life Insurance Company   A+
567   $ 1,200,000     Male   69   126   Massachusetts Mutual Life Insurance Company   AA+
568   $ 2,500,000     Male   69   161   Pruco Life Insurance Company   AA-
569   $ 2,500,000     Male   69   161   Pruco Life Insurance Company   AA-
570   $ 4,000,000     Male   69   133   MetLife Insurance Company USA   A+
571   $ 500,000     Male   69   42   Voya Retirement Insurance and Annuity Company   A
572   $ 1,000,000     Male   69   87   Protective Life Insurance Company   AA-
573   $ 2,000,000     Male   69   113   Transamerica Life Insurance Company   AA-
574   $ 1,000,000     Male   69   113   Genworth Life Insurance Company   BB
575   $ 250,000     Female   69   158   Protective Life Insurance Company   AA-
576   $ 1,000,000     Male   69   163   Accordia Life and Annuity Company   A-
577   $ 1,000,000     Male   69   61   Protective Life Insurance Company   AA-
578   $ 1,000,000     Male   69   131   Transamerica Life Insurance Company   AA-
579   $ 1,000,000     Male   69   131   Protective Life Insurance Company   AA-
580   $ 156,538     Female   69   107   New York Life Insurance Company   AA+
581   $ 2,000,000     Male   69   51   Metropolitan Life Insurance Company   A+
582   $ 2,000,000     Male   69   51   Metropolitan Life Insurance Company   A+
583   $ 1,000,000     Male   69   153   John Hancock Life Insurance Company (U.S.A.)   AA-
584   $ 400,000     Female   69   142   AXA Equitable Life Insurance Company   A+
585   $ 300,000     Male   69   90   Protective Life Insurance Company   AA-
586   $ 1,000,000     Male   68   138   Transamerica Life Insurance Company   AA-
587   $ 250,000     Female   68   75   Transamerica Life Insurance Company   AA-
588   $ 750,000     Male   68   161   Northwestern Mutual Life Insurance Company   AA+
589   $ 2,000,000     Male   68   173   John Hancock Life Insurance Company (U.S.A.)   AA-
590   $ 150,000     Male   68   117   Protective Life Insurance Company   AA-
591   $ 600,000     Male   68   88   William Penn Life Insurance Company of New York   AA-
592   $ 5,616,468     Male   68   180   John Hancock Life Insurance Company (U.S.A.)   AA-
593   $ 1,100,000     Male   68   156   John Hancock Life Insurance Company (U.S.A.)   AA-
594   $ 3,000,000     Male   68   193   John Hancock Life Insurance Company (U.S.A.)   AA-

 

  52  
 

 

    Face Amount     Gender   Age (ALB) 
(1)
  LE (mo.)
(2)
  Insurance Company   S&P Rating
595   $ 400,000     Male   67   191   Lincoln National Life Insurance Company   AA-
596   $ 3,000,000     Male   67   100   Reliastar Life Insurance Company   A
597   $ 2,000,000     Male   67   100   AXA Equitable Life Insurance Company   A+
598   $ 2,000,000     Male   67   100   AXA Equitable Life Insurance Company   A+
599   $ 1,000,000     Male   67   48   Lincoln National Life Insurance Company   AA-
600   $ 1,000,000     Male   67   78   Transamerica Life Insurance Company   AA-
601   $ 350,000     Female   67   85   Assurity Life Insurance Company   N/A
602   $ 5,000,000     Male   67   105   Athene Annuity & Life Assurance Company   A-
603   $ 1,000,000     Male   67   149   Sun Life Assurance Company of Canada (U.S.)   AA-
604   $ 800,000     Male   67   129   Lincoln National Life Insurance Company   AA-
605   $ 800,000     Male   67   129   Lincoln National Life Insurance Company   AA-
606   $ 229,725     Female   67   107   Hartford Life and Annuity Insurance Company   BBB+
607   $ 490,000     Male   67   97   AXA Equitable Life Insurance Company   A+
608   $ 220,581     Male   67   25   American General Life Insurance Company   A+
609   $ 1,000,000     Male   67   109   The Savings Bank Life Insurance Company of Massachusetts   A-
610   $ 320,000     Male   67   162   Transamerica Life Insurance Company   AA-
611   $ 250,000     Male   67   163   Pruco Life Insurance Company   AA-
612   $ 125,000     Male   67   50   Genworth Life and Annuity Insurance Company   BB
613   $ 250,000     Male   67   199   Zurich Life Insurance Company   AA-
614   $ 650,000     Male   67   185   Lincoln National Life Insurance Company   AA-
615   $ 400,000     Male   66   132   Jackson National Life Insurance Company   AA
616   $ 500,000     Female   66   171   Banner Life Insurance Company   AA-
617   $ 350,000     Male   66   97   RiverSource Life Insurance Company   A+
618   $ 200,000     Male   66   163   Prudential Insurance Company of America   AA-
619   $ 200,000     Male   66   163   Prudential Insurance Company of America   AA-
620   $ 750,000     Male   66   128   Pacific Life Insurance Company   A+
621   $ 500,000     Male   66   136   Transamerica Life Insurance Company   AA-
622   $ 500,000     Female   66   132   AIG Life Insurance Company   A+
623   $ 265,000     Male   65   159   Protective Life Insurance Company   AA-
624   $ 10,000,000     Male   65   65   Lincoln National Life Insurance Company   AA-
625   $ 540,000     Male   65   172   West Coast Life Insurance Company   AA-
      1,272,077,891                      

  

(1) Person’s age on last birthday (ALB)
(2) The insured’s life expectancy estimate, other than for a small face value insurance contract (i.e., a contract with $1 million in face value benefits or less), is the average of two life expectancy estimates provided by independent third-party medical-actuarial underwriting firms at the time of purchase, actuarially adjusted through the measurement date. Numbers in this column represent months.

   

  53  
 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

As of September 30, 2016, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 as amended, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2016 based on criteria for effective control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework in “ Internal Control—Integrated Framework .” Based on this assessment, our management concluded that, as of the evaluation date, we maintained effective internal control over financial reporting.

   

  54  
 

 

PART II – OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

 

Other than as noted below, there are no material changes to the risk factors disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Accuracy of the life expectancy estimates and mortality curves we use for small face contracts could have a material and adverse effect on our results of operation and financial condition.

 

As of September 30, 2016, we owned 306 “small face” life insurance policies (i.e., a contract with $1 million in face value benefits or less) having $164 million in face value of insurance benefits. The underwriting processes and mortality curves we use to evaluate, price and purchase small face contracts may be different from, and, as a result, may not be as reliable as, the processes we use for life insurance contracts with larger face values of benefits. While we obtain life expectancy reports from third-party evaluators based on medical evidence, the processes used to develop these life expectancy reports are less extensive than traditional methods. Although we have professional actuarial guidance in the use and application of mortality curves to price and value small face contracts, the application of these mortality curves may not be as reliable as or more subject to adjustment than the processes we use for larger face value of benefits. As the face value of our small face contracts increases relative to the size of our total portfolio, the accuracy with which we have estimated life expectancies and mortality curves for these contracts will become increasingly material to our business. Any shortcomings in the processes we have used to evaluate, price, purchase and value the small face contracts we own could have a material and adverse effect on our results of operation and financial condition. Any such outcomes would likely have a negative and possibly material effect on the price of our common stock and our ability to satisfy our debts.

 

We may in the future rely, in part, on new and unproven technology as part of our underwriting processes. If the mortality predictions we obtain through use of this technology proves inaccurate, our results of operation and financial condition could be materially and adversely affected.

 

We recently exercised our option to license, on an exclusive basis, new technology that we believe may be applied to assist us with the mortality predictions in the course of underwriting and valuing life insurance contracts. This technology, however, has not yet been commercially applied in the manner we envision, and it possible that we will be unable to elicit more accurate mortality predictions through its use. It is also possible that the mortality predictions we obtain through the use of this technology will prove inaccurate, and perhaps materially so. In such a case, our failure to accurately forecast mortalities could have a material and adverse effect on our results of operation and financial condition, which could in turn materially and negatively affect the price of our common stock and our ability to satisfy our debts.

 

The technology we license may subject us to claims of infringement or invalidity from third parties, and the magnitude of this risk to our business generally rises if and as we become more successful in employing and relying on the technology. Any such claims would be complex and costly, and adverse outcomes could undermine the competitive advantages we seek.

 

Our reliance on technology will subject us to the risk that other parties may assert, rightly or wrongly, that our intellectual property rights are invalid or violate the rights of those parties, as well as the risk that our intellectual property rights will be infringed upon by third parties. Any outcome that invalidates our intellectual property rights or that otherwise diminishes the competitive advantages obtained, at least in part, through the use of those rights could have a material and adverse effect on our competitive position and our prospects.

 

  55  

 

 

ITEM 5. OTHER INFORMATION

 

Origination, Underwriting and Technology

 

We focus on purchasing high quality life insurance assets through our origination practices and underwriting procedures. In general, these practices and procedures strive to meet published guidelines for rated securitizations of life insurance portfolios. At the same time, we seek innovative value-added tools, services, and methodologies to improve both the accuracy and efficiency with which we evaluate and acquire life insurance assets.

 

Since 2013, we have focused on developing our direct origination channels through which we may purchase life insurance policies without the involvement of a life settlement broker, thereby eliminating commission costs and timing delays in the acquisition. We expect to continue allocating considerable resources towards developing our direct origination channels, primarily by outreach and relationship building with financial advisors (who may also sell our investment securities), life insurance agents, and consumers.

 

Our success in direct origination has presented us with the opportunity to purchase a greater number of “small face” life insurance policies with a face value benefit of $1,000,000 or less. We believe this opportunity is meaningful since the majority of life insurance policies outstanding are small face policies, and policy diversification is critical in obtaining normalized actuarial performance. Historically, however, small face policies have not been available to purchasers of life insurance contracts because the secondary market industry participants have significantly relied on life settlement brokers who are paid a commission determined as a percentage of the face value benefit of the purchased policy, to present purchase opportunities. Not surprisingly, because larger commissions are associated with larger face value life insurance contracts, brokers have focused on larger contracts and the industry has developed origination practices and underwriting procedures to accommodate such practices. As a result, the industry’s traditional approaches to underwriting and purchasing life insurance assets are ill suited for small face policies. For example, procuring complete medical records, two separate life expectancy reports, and engaging in related activities, can be time consuming and expensive, and these same costs cannot be justified when purchasing smaller life insurance assets.

 

To more fully realize the potential of the direct origination channel we have built, we have developed what we believe to be an efficient, cost-effective, and reliable method of underwriting and purchasing small face policies. In sum, our method is focused on obtaining enough medical information to generate reliable life expectancy estimates, and thereby make informed purchase decisions. We expect to refine this process over time and, to the extent possible, use new technologies to enhance this process and our overall business.

 

To that end, we have recently announced the execution of our option to exclusively license “DNA Methylation Based Predictor of Mortality” technology from the University of California, Los Angeles (UCLA) and discovered by Dr. Steven Horvath. In 2013, Dr. Horvath reported that human cells have a mechanism that records “biological age” progression, based on DNA methylation that is independent from “chronological age.” In 2016, Dr. Horvath discovered a specific set of DNA methylation-based bio-markers that are highly predictive of all-cause mortality. The discovery was made through a statistical analysis of bio-markers found in DNA samples from over 13,000 individuals whose health was studied for decades. The implications of Dr. Horvath’s discovery are simple and profound: Individual lifespans can now be estimated with significantly greater precision. We intend to implement aspects of this technology in our underwriting protocols and to explore how this technology may have commercial value to the primary life insurance, long-term care, and annuity businesses.

 

ITEM 6. EXHIBITS

 

Exhibit    
31.1   Section 302 Certification of the Chief Executive Officer ( filed herewith ).
31.2   Section 302 Certification of the Chief Financial Officer ( filed herewith ).
32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( filed herewith ).
99.1   Letter from Model Actuarial Pricing Systems, dated October 14, 2016 ( filed herewith ).
101.INS   XBRL Instance Document ( filed herewith ).
101.SCH   XBRL Taxonomy Extension Schema Document ( filed herewith ).
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document ( filed herewith ).
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document ( filed herewith ).
101.LAB   XBRL Taxonomy Extension Label Linkbase Document ( filed herewith ).
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document ( filed herewith ).

 

  56  
 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GWG HOLDINGS, INC.
     
Date:  November 10, 2016 By:   /s/ Jon R. Sabes
    Chief Executive Officer
     
Date:  November 10, 2016 By:   /s/ William B. Acheson
    Chief Financial Officer

 

 

  57  
 

 

EXHIBIT INDEX

 

31.1   Section 302 Certification of the Chief Executive Officer
31.2   Section 302 Certification of the Chief Financial Officer
32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1   Letter from Model Actuarial Pricing Systems, dated October 14, 2016
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

58

 

 

GWG (NASDAQ:GWGH)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more GWG Charts.
GWG (NASDAQ:GWGH)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more GWG Charts.