GWG Holdings, the parent company of GWG Life, has taken a novel approach to the growing industry of life insurance settlement contracts, which are the sales of life policies by their owners in need of cash.
While its subsidiary, GWG Life, has been buying life settlement contracts, at prices that exceed the surrender value of those contracts since its inception in 2006, GWG Holdings is also selling high-yield unrated bonds and preferred stocks to investors in search of yields that top those in the public bond and stock markets. The proceeds of those sales are used to finance the life settlement purchases.
A two-year unrated GWG “L” bond, for example, currently has a yield of 5.5%, while a 3-year L bond is yielding 6.25% and a 5-year bond 8.5%. The firm’s redeemable preferred stock, with a convertible option, is paying a 7% dividend.
Investors can also purchase the firm’s common stock (GWGH), which trades on the Nasdaq and is up over 29% year-to-date and 15% for the year, as of mid-day trading on Wednesday at $8.35 a share.
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While the firm’s shares are liquid assets, its L bonds and preferred shares are not. They are “alternative investments fit for extra yield if you can live with the tradeoff” of illiquidity, says Bill Acheson, the firm’s CFO.
Another attraction of these investments: They are not correlated with other financial markets unlike other alternative investments, according to GWGH officials. “REITs and BDs [business development companies] tend to be highly correlated to real estate and high yield [respectively],” says Acheson. “Life insurance isn’t.”
“Investors are lending us the money to create a portfolio of policies,” says Acheson, noting that the firm’s portfolio of policies is “north of 500, heading to 1,000 or more.” Those policies cumulatively have assets of $1.15 billion, according to GWG Life President Michael Freedman.