Abacus Global Management - Q2 2024

Transcript

Operator (participant)

Greetings. Welcome to Abacus Life's Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Garrett Edson of ICR. Thank you. You may begin.

Garrett Edson (Managing Director)

Good day, ladies and gentlemen. Thank you for standing by. Abacus Life refers participants on this call to the investor webpage, www.abacuslife.com/investors, for the press release, the investor information and filings with the SEC for a discussion of the risks that can affect the business. Abacus Life specifically refers participants to the presentation furnished today on Form 8-K with the U.S. Securities and Exchange Commission, and to remind listeners that some of the comments today may contain forward-looking statements and as such, will be subject to risks and uncertainties, which, if they materialize, could materially affect results. Reference is made to the section titled Forward-Looking Statements in the company's earnings press release for the second quarter of 2024, which is incorporated herein by reference.

We note forward-looking statements, whether written or oral, include but are not limited to Abacus, Abacus Life's expectational prediction of financial and business performance and conditions, as well as its competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties, and assumptions, including the risk factors set forth in Item 1A of our most recent 10-K, which, if they materialize, could materially affect results, and such forward-looking statements do not guarantee performance, and Abacus Life gives no such assurances. Abacus Life is under no obligation, and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, historical data pertaining to the operating results and other performance indicators applicable to Abacus Life are not necessarily indicative of results to be achieved in succeeding periods.

I will now turn the call over to Jay Jackson, Chief Executive Officer of Abacus Life.

Jay Jackson (Chairman and CEO)

Thank you to everyone joining us today for your interest in Abacus, and welcome to our Second Quarter 2024 Earnings Call. With me today is our Chief Financial Officer, Bill McCauley, and after our prepared remarks, we'll open it up to your questions. It was another quarter of excellent performance for Abacus Life as we continue to successfully execute on our key strategic initiatives and further solidifying our position as a leading market maker and global alternative asset manager, which will have nearly $3 billion in assets under management post-acquisitions.

For the second quarter of 2024, we more than doubled total revenue year-over-year to $29.1 million, and recorded strong earnings, growing Adjusted EBITDA by 83% year-over-year to $16.7 million, and generating a 75% year-over-year increase in Adjusted Net Income to $11.8 million or $0.18 per diluted share. Our second quarter performance underscores our thoughtful investments in marketing, which continue to yield excellent results by driving significant year-over-year increases in our direct-to-consumer originations. Meanwhile, the strength of our partnerships with carriers and reinsurers remains a key contributor to our strong performance in both revenue and Adjusted EBITDA. Bill will be along shortly to discuss our second quarter financial performance in further detail. In addition to our exceptional quarterly financial results, we also made substantial progress with respect to our long-term strategy.

As we outlined during our Investor Day in June, along with our core business of acquiring life insurance policies, we are focused on expanding our complementary lifespan-based financial products. Since our last earnings call, we achieved several key strategic milestones. In a pivotal moment for our ABL Wealth division, subsequent to the quarter end, we announced a definitive agreement to acquire Carlisle Management Company, a premier Luxembourg-based investment manager in the life settlement space, for approximately $200 million. This acquisition will add approximately $2 billion in assets under management and is fully aligned with our strategy to become a global alternative asset manager. In addition to being a great culture fit, Carlisle further enhances Abacus's offering to institutional investors seeking attractive, risk-adjusted returns with low correlation to other asset classes.

Carlisle has a most impressive and long-standing track record as a fund manager in the life settlement industry, and its geographically diverse client base stands to significantly complement our efforts to become a global financial leader. By incorporating Carlisle's expertise and robust portfolio into our offerings, we are strategically positioning ABL Wealth at the heart of our mission to deliver sophisticated investment solutions for the life settlement market. This acquisition highlights our dedication to providing exceptional value and expanding our capabilities to serve a wider range of investors. Along with Carlisle, last week, we entered into an agreement to acquire FCF Advisors, a New York-based asset manager and index provider specializing in free cash flow-focused investment strategies. FCF Advisors has a suite of core and thematic free cash flow equity strategies and offers over 50 customizable free cash flow index strategies covering 8 global equities allocations.

The deal will add approximately $600 million in assets under management and further accelerates the expansion of ABL Wealth with a diverse, lifespan-based suite of products. In late June, we successfully closed an oversubscribed public offering of 11.5 million shares of common stock, including full exercise of the underwriter's option, which further broadened our investor base and enhanced our liquidity position. Through this offering, we raised over $90 million in proceeds, which we have rapidly deployed into additional life settlement policies, as well as advancing our overall business strategy. Finally, during the quarter, we established a national distribution relationship with AIMCOR, one of the largest national insurance marketing organizations in the United States. This partnership will leverage AIMCOR's extension network of over 40 broker general agencies to offer protection and retirement solutions to thousands of financial professionals, institutional clients, and other distribution partners nationwide.

As a preferred partner for life settlement solutions, Abacus will provide its expertise to AIMCOR's affiliated member firms. This collaboration highlights our commitments to client-centric solutions and enhancing our ability to educate policyholders about the value of their policies and empowering them to make informed financial decisions. All of our achievements over the past few months clearly underscore our relentless commitment to constant innovation through our wealth of longevity data and actuarial technology, offering an incredible value proposition for our clients and firmly solidifying Abacus as a pioneering global alternative asset manager and market maker. Looking ahead, we're incredibly excited to build upon our success and capitalize on the vast growth opportunities before us. By continuing to leverage our successful business model, exceptional team of experts, and extensive proprietary data and technology, we are strategically positioned for sustainable and profitable growth, ensuring long-term value creation for our shareholders.

With that, I'll now hand it over to our Chief Financial Officer, Bill McCauley, to discuss the specifics of our second quarter results and financials.

Bill McCauley (CFO)

Thanks, Jay, and hello, everyone. As Jay mentioned, we delivered another strong quarter of top-line growth and profitability at Abacus. The key driver of our business performance continues to be our highly efficient origination platform, while we continue to build our other verticals that will contribute to our future earnings. In the second quarter of 2024, origination capital deployed was $104.7 million, compared to $59.8 million in the prior year period. While we grew policies purchased 95% to 275, compared to 141 in the prior year period. Total revenue in the second quarter of 2024 more than doubled to $29.1 million, compared to $11.4 million in the prior year period. The increase was primarily due to higher active management revenue.

As of June 30, 2024, Abacus held 458 policies, of which 452 are accounted for under the fair value method, and 6 are accounted for using the investment method, which is cost plus premiums paid. As a reminder, for all policies purchased after June 30, 2023, the company has elected to account for these under the fair value method going forward. For policies purchased before June 30, 2023, the company elected to use the fair value method or the investment method. Turning to expenses, total operating expenses, excluding unrealized and realized gains and losses, and the change in fair value of debt for the second quarter of 2024 were approximately $18.9 million, compared to $1.3 million in the prior year period.

We would note that second quarter 2024 total operating expenses included $6.2 million of non-cash stock compensation expense and $0.8 million of public company-related expenses, both of which did not occur in the prior year period. Beginning in the third quarter, we will anniversary these non-cash equity compensation and public company expenses. We also increased sales and marketing expenses by approximately $1.9 million compared to the prior year period, which assisted in accelerating our growth profile. The company typically realizes the benefit of marketing spend within 90-120 days. Adjusted EBITDA for the quarter grew 83% to $16.7 million, compared to $9.1 million in the prior year period. Adjusted EBITDA margin was 57.5% for the quarter, compared to 80.4% in the prior year period.

GAAP net income attributable to stockholders for the quarter was $0.8 million, compared to $6.8 million in the prior year period. On an adjusted basis, excluding non-cash stock compensation, business acquisition costs, amortization, and change in fair value of warrant liability, net income for the second quarter of 2024 grew 75% to $11.8 million, compared to $6.8 million in the prior year period. Now turning to our balance sheet metrics. On an annualized basis, Adjusted Return on Equity and Adjusted Return on Invested Capital for the three-month period ended June 30, 2024, were both 18%, reflecting our highly profitable business model.

As of June 30, 2024, the company had cash and cash equivalents of $91.3 million, balance sheet policy assets of $208.7 million, and outstanding long-term debt of $151.3 million. In summary, we are pleased with our strong results, delivering triple-digit growth on our top line, as well as solid profitability on an adjusted basis. We remain very excited about the growth opportunities ahead and are well-positioned to execute on our long-term plans. I will now turn it back to our Chief Executive Officer, Jay Jackson, for our closing comments.

Jay Jackson (Chairman and CEO)

Thanks, Bill. To sum up, we remain well-positioned to continue utilizing our deep expertise within the life planning space to further capitalize on a massive market opportunity.

... We are making steady progress on the path to becoming a global alternative asset manager, while our incredible wealth of longevity data is opening up many new doors into several new verticals, which should further charge our growth capabilities. We will continue to do this while ensuring that we sustain and grow our profitability, just as we've done over the last 20 years. I'd like to thank you all for joining us today, and we appreciate your interest in Abacus Life. We will now field any questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Crispin Love with Piper Sandler. Please proceed.

Crispin Love (Director and Senior Research Analyst)

Thanks, good morning, Jay. Good morning, Bill. Hope you're well. First, can you just talk a little bit about deployment and capacity? You raised $90 million plus in June, clearly put some of that to work pretty quickly based on the results. So can you just discuss when you expect to deploy that full amount and then capacity for deployment and opportunities going forward as you look to the back half of the year and into 2025?

Jay Jackson (Chairman and CEO)

Sure. Thanks, Crispin. When we thought about this, when we were even managing the follow-on investment, you know, when we talked about the deployment of that capital, was to make things both sustainable and profitable over time. And we're in a very, I think, exciting period for our industry in a sense that, you know, the broadening of the message has really certainly increased policy flow for us. And thus, you know, the deployment of capital, we absolutely were able to. We had some pent-up inventory and were able to put some of that capital to work right away, even before Q2, even though we closed on the follow-on June 20. So even in that short amount of time, we were able to get that capital deployed.

I think we you know, we had spoken, you know, prior. Specifically, you know, we expect to have a majority of that capital deployed before year-end, probably sooner than that. You know, it could be as early as Q3, which is exciting, right? That's what we wanted to do, get that capital deployed, get that ROE to work for all of our shareholders and investors, and the opportunity only continues to grow through this year and really through next year as well. We think it's also, when you think about rates and you think about the markets themselves, this is really a market that's designed for us, whether that's volatile or you know, different types of volatility or whether it's different types of interest rates.

We think that this is a great market for us.

Crispin Love (Director and Senior Research Analyst)

Thanks, Jay. All super helpful. And then just another one on Adjusted EBITDA. You've generated about $28 million in the first half of the year. Can you just talk a little bit about expectations for the full year as I kind of look at my model? Just simplistically, doubling that gets you to $56 million, but you did add the capital, also took advantage of some opportunities late in the second quarter, which might not recur. So just curious on how we should look at the cadence of EBITDA for the second half of the year.

Jay Jackson (Chairman and CEO)

Yeah, I think the cadence of the EBITDA... additional capital. So, when we look at Q3, Q4, you know, the way that we're looking at this is that, yes, we had a phenomenal Q2. We want to manage expectations in Q3, Q4. I think, you know, the numbers that you have put forth and other analysts, we think that we're tying out to those and everything looks very positive. Obviously, you can't predict everything that's going to happen in the future. But based upon the capital raise and based upon, like I said, the sustainability and profitability of the current business, you know, we feel very good about the numbers throughout the end of the year.

Crispin Love (Director and Senior Research Analyst)

Great. And then just one very quick one for housekeeping in my model. Can you share what originated face value was in the quarter?

Jay Jackson (Chairman and CEO)

Yeah, total originated face value in the quarter. I know Bill has that number, that exact number, which he'll get to you. One of the things that we did do, Crispin, that I just want to highlight is that when we think about origination, it can come in one of two areas. It can come direct from the policyholder, but there can also be opportunities where we see you know, other asset managers that are winding down their funds and they want to potentially opportunistically sell the remaining other assets so that they can return their capital back to their shareholders. And so we have, you know, been able to take advantage of that as well. And so when we look at discount rates on a go-forward-

Operator (participant)

Excuse me, Mr. Jackson, we are having a little trouble with your line. It keeps cutting out a little bit.

Jay Jackson (Chairman and CEO)

I don't know if that... Bill, if you would mind jumping on and just giving him the actual number, and then-

Bill McCauley (CFO)

Yeah, sure.

Jay Jackson (Chairman and CEO)

We can kind of tie out the rest of that.

Bill McCauley (CFO)

Yeah, sure. So, total originated face value for the quarter was $447 million. And what Jay was mentioning is that, before he cut out, is that we had opportunities to buy policies outside of just our origination platform, and that's what also contributed to the high volume in the quarter.

Crispin Love (Director and Senior Research Analyst)

Great. Thank you both. Appreciate you taking my questions.

Operator (participant)

As a reminder to star one on your telephone keypad if you would like to ask a question. Our next question is from Andrew Kligerman with TD Securities. Please proceed.

Andrew Kligerman (Managing Director)

Hey, good morning. Good to kick the week off with Abacus earnings. My first question is around active management and the revenue that came in. I mean, more than doubled. It's a big number at $27 million, a little more than we had anticipated. Could you help frame, you know, just sort of, is this sort of a base number now? How do you see that trending over the next year or two?

Jay Jackson (Chairman and CEO)

Yeah, hey, I don't know if my sound was repaired or not. Is that any better?

Andrew Kligerman (Managing Director)

That sounds good, Jay.

Jay Jackson (Chairman and CEO)

Great. Sure, Andrew, and thank you for the question. I think that you know, when we look at Q2, this is about being able to put some of the capital to work that we were able to expand from our follow-on investments. The way that I look at this is that you know, this is sustainable and profitable. And we are the... And one key indicator there is when you look at the return on equity, we didn't see a falloff on ROE. However, we also still have a significant higher cash balance sheet that we're putting money to work here in Q3 as well.

So you know, this is the type of business that when we look at discount rates and the opportunities that we have to buy, let's say, policies, it's incredibly accretive for us right now. And so without trying to pull out the crystal ball and go too far out in advance, I think the way that I would look at it is that from a modeling perspective and the way that we see this through the end of the year, I would expect us to maintain a lot of the things that a lot of the modeling numbers that you had laid out.

Andrew Kligerman (Managing Director)

Got it. Okay. And then with respect to M&A, yeah, 2 really nice acquisitions, and Carlisle being more of a pure play like settlements, and then FCF, which is a little more diverse. So as we kind of look forward, Jay, what are you thinking about M&As, and will they be more along the lines of FCF, or are there more Carlisle-type deals out there?

Jay Jackson (Chairman and CEO)

I think that Carlisle was a special opportunity for us. We had known them for so long, 15+ year track record. I don't think there's a lot of companies like Carlisle out there. I think from our focus is, let's look at that business that has $2 billion in assets under management, primarily from offshore investors, and continue to grow and expand that brand. And FCF is the same in the sense that FCF has got a great track record. We want to expand the idea of providing ETF models specifically related to someone's lifespan.

So you know, from our perspective, the way that we look at M&A is, let's make sure that, you know, we're integrating successfully the companies that we've been able to acquire, and drive profitability there, because I think that we've got best in class in both of those businesses right now, and if we're-

Operator (participant)

Jay, you have cut out again. Bill, could you maybe take up while I fix Jay's line?

Bill McCauley (CFO)

Yeah, absolutely. So I think, you know, Andrew, we'll continue to be opportunistic with regards to M&A. You know, as Jay mentioned, Carlisle was a pure life settlement play in our industry, made sense from an asset management side. FCF is a great fit for ABL Wealth model. And as we look to build out ABL Wealth, providing financial advice based on longevity, we think that's a great fit, and we'll continue to be strategic on the M&A side going forward.

Andrew Kligerman (Managing Director)

Got it. And, and one last one on the Abacus tech front. You know, I know you've outlined in the past that potential clients would be governments, insurance companies, pensions. It seems like pensions would be the big area, and maybe you could touch on progress to date, if, if you've had any wins and, you know, kind of where you see that going.

Operator (participant)

Okay. We are-

Bill McCauley (CFO)

Sure.

Operator (participant)

Still having trouble with Jay's line. I'm trying to get him reconnected in.

Bill McCauley (CFO)

I can take that one. So ABL Tech continues to grow. I mean, we're adding on new clients here now that we've deployed the service. And so, you know, we continue to see that as a growth opportunity for fee recurring earnings. So that is going as planned to date.

Andrew Kligerman (Managing Director)

Great. Thanks a lot.

Bill McCauley (CFO)

Thanks, Andrew.

Operator (participant)

Okay, Jay is back in with us, and we will move on to the next question, which is Matt Howlett with B. Riley Securities. Please proceed.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Oh, hi, Bill, and hi, Jay. Good morning. Hey, terrific results. I mean, I want to talk about the margins here. I mean, it's just it beat us and impressed again. What do you see, you know, what are you seeing out there in terms on the acquisition front? I mean, was there anything particular this quarter? Did you buy bigger policies? Was there a certain channel that was better than the others? Just give me what you're seeing out there in terms of margins and pricing.

Jay Jackson (Chairman and CEO)

Yeah. Hey, Matt, hopefully, y'all can hear me better now. Yes, the EBITDA margin went up, and we are seeing really interesting opportunities, and I kinda highlighted the two areas where we're being able to acquire directly from policyholders as well as institutionally. And I think, you know, on an institutional basis, where we're being able to acquire some very strategic opportunities related to other portfolios, we definitely saw some of that in Q2. You know, historically, we haven't seen as much opportunity there as we're seeing today, as some funds are starting to wind down some of their strategies, and they can't sell into the next one.

So you know, on a go-forward basis, we think that that's gonna continue to be a strategy that we want to expand in addition to our regular origination, which is directly to the policyholder. And I would also just add, too, when you add more origination, which is what we've done, we have focused specifically on educating consumers, educating financial advisors, broadening our origination from large financial firms. When you do that, you're able to get a broader set of policies to purchase at much better rates.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

And in terms of just the general market, I mean, with that, with your direct program, I realize you can go to these institutions and get low-hanging fruit when it's available, but the market size, the share size, you have obviously... Is it still as big as you thought it was gonna be?

Jay Jackson (Chairman and CEO)

It is, and I would argue it's even bigger, right? Like, we have pent-up demand, and there's specific segments of the market that we're absolutely thrilled about opportunistically, where I think that, you know, as more and more people are starting to really, you know, utilize this asset as something for their estate plan, I think that that's creating a significant amount of opportunity. So you know, for us, Matt, we see this continuing. I mean, you know, this is the type of, I think, opportunity that from a profit margin and a discount rate perspective, we haven't seen in years. And we should be putting more and more capital to work where the opportunities lie.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

It's incredible, and you're putting, obviously, more marketing dollars to work, and we'll see the impact of that. You know, like you said, every, you know, it's a sort of some lead time before you see more, more of that coming through that channel. Well, look, that's great, but it's amazing how quickly you put that capital to work from the raise. On the buyback, insurance buyback, it didn't seem there was any contribution this quarter. Did I see it right, or is that just lumpy every quarter, quarter to quarter?

Jay Jackson (Chairman and CEO)

Yeah, when you look at the buyback perspective, sometimes it's lumpy in a sense that it just depends on when transactions close, right?

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Right.

Jay Jackson (Chairman and CEO)

Like, you know, they're not always at the last few days of the month or the week. You know, sometimes you're building up inventory, to, to better structure those. And I like to point out is that even with or without that, buyback in place, we still had just a really strong quarter, and I think that, you know, that's the consistency that you're looking for, is, is that, yes, absolutely, you know, working with the life insurance companies and, and potentially reinsurers is a great opportunity, but we still have a phenomenal underlying business that generates great returns. And as that business continues to grow, that will just grow on top of this.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Yeah, that's where I was going. The margin would have been-

Jay Jackson (Chairman and CEO)

Yeah

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Stronger if that was involved this quarter. Okay, so and then the last thing is, you've raised the equity, you did the Carlisle deal, which was more equity than debt. I mean, when you look at... You've delivered a bit, and you've got your 28 note trading above par, and you got possibly interest rates coming down. Jay, what's the capacity to add more debt capital when it's available? Are you looking at things like structured finance?

Jay Jackson (Chairman and CEO)

Mm-hmm.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

I mean, just walk me through the balance sheet here. It just seems like it's,

Jay Jackson (Chairman and CEO)

Sure

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Really improved since the deal.

Jay Jackson (Chairman and CEO)

It has, and the balance sheet is really strong, and we're taking advantage, I think, of every opportunity that would present itself, specifically around capital. You know, assuming that here we've got this great inventory of contracts with this level of ROE that we should be purchasing. And even if you apply this to the M&A, you know, the M&A deals didn't really require much capital. A lot of, almost all of that was either through bond or through equity rollover.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

Right.

Jay Jackson (Chairman and CEO)

So, you know, we're deploying this capital into those assets, which now how do we best utilize that? Is it through potential, you know, adding some more debt to the balance sheet? Certainly taking a close look at that, particularly as we're watching closely what, what rates do. And if rates come down substantially, that'll be at the forefront of our mind. And you know, what does, what does equity look like going forward, too, right? Like, you know, although we had a very successful follow-on equity raise, in June, what we're hearing from shareholders and investors is that there's significantly more appetite, for additional equity to purchase. And so, you know, we're also taking that into consideration as well.

Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)

No, listen, but with the acquisitions you did, I mean, just, I mean, it seems like, you know, markets are willing to give you capital just given how the growth in the business. Really, congratulations, and look forward to the next quarter.

Jay Jackson (Chairman and CEO)

Awesome. Thank you.

Operator (participant)

We have reached the end of our question-and-answer session. I would like to turn the call back over to Jay for closing remarks.

Jay Jackson (Chairman and CEO)

Great. Thank you again, everyone. We are absolutely thrilled to highlight another strong and consistent and profitable quarter for Abacus. We are just as excited about our future and the opportunities that we have as our business and our company, and we look forward to continuing that journey with each and every one of you. I hope everyone has a great day today. If you have any follow-up or further questions that you would like have answered, please feel free to reach out to Bill and myself, and we're happy to schedule some additional time with you. Have a great day, everybody.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.