Greetings, welcome to the Abacus Life Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Garrett Edson of ICR. Thank you, Garrett. You may begin.
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 filed today on Form 8-K with the SEC 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. Forward-looking statements include, but are not limited to, Abacus Life's expectation or 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, which, if they materialize, could materially affect results, and such forward-looking statements do not guarantee performance, and Abacus Life gives 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.
Thank you to everyone listening today for your interest in Abacus. Welcome to our first earnings call as a public company. With me today is our Chief Financial Officer, Bill McCauley. After our remarks, we'll open it up to your questions. Our strong second quarter results continue to validate Abacus's differentiated business model and further contributes to our long track record of sustainable and profitable growth. In addition to our continued progress, we are very pleased to have successfully completed our public listing post quarter end, a milestone for our long-term growth ambitions. Our proven business model, expert team, wealth of data, and innovative technology positions us well to execute on our strategic initiatives, take advantage of the many exciting opportunities that lie ahead, and ultimately create long-term value for our shareholders.
Since this is our first call as a public company, and some of you may be hearing our story for the first time, I wanted to spend a few minutes to walk through our compelling business model, our value proposition, and why we are so excited for the opportunities we see to profitably and sustainably grow our business and deliver shareholder value over the long term. Over the last 19 years, we have built a vertically integrated alternative asset manager and origination company specializing in insurance products, financial management, and technology. We are a leader in the space with strong market share in a market with high barriers to entry, with a seasoned and strong management team, each of whom has 20+ years of expertise.
Crucially, Abacus already generates solid and growing revenue in a $13 trillion market with 19 consecutive years of GAAP profitability and with very attractive margins. In short, our core business is helping clients understand that a life insurance policy is personal property, and selling it for a fair market value is a legitimate, safe, and viable choice, which helps them create more financial options for their future. Life insurance is often a senior citizen's largest asset and one that can be used to alleviate retirement challenges, but they rarely treat it that way. Instead, most people treat their life insurance like debt, not equity. They have it on the wrong side of their ledger. We aid clients in shifting that mindset to creating value and optionality for themselves.
We operate in a massive and relatively untapped addressable market of over $200 billion annually, providing us with outsized, long-term growth potential. If you take anything away from our remarks today, it should be this: Life insurance is one of the largest markets globally, $13 trillion in the United States alone. That's two and a half times America's residential real estate market, a market where more than nine out of 10 life insurance policies, or 90%, will never pay a claim. Institutional investors love our product, as it's an asset that has a low correlation to other assets, and we also have a very strong institutional investment-grade counterparties. Abacus sits at the heart of the life settlement industry, and our highly efficient origination platform drives all of our economics, which we believe leads to outside growth potential for Abacus and our shareholders.
Once we identify potential policies for purchase, we ultimately have them go through our origination platform, we have multiple product offerings to drive top-line growth. We can sell the policies directly to our capital providers and book gains. We can place them in our inventory to strategically trade the asset. In fact, we've traded over $1 billion in the last three years. We can hold the asset on our balance sheet, taking advantage of our asset management portfolio and servicing platform to simply service the assets that remain on our book. Additionally, we can also build separately managed accounts for third-party investors and institutions or purchase the policies in our investment funds. We have raised over $40 million in new capital in this product line over the last six months and anticipate adding more funds to this product line in the coming year.
Along with our origination and asset management platforms, we have a proprietary risk technology platform that helps us assess the risk of and manage these life insurance contracts so that we can build our portfolio tranches and balance sheet quickly, which provides additional liquidity through our active portfolio management. Let's turn to the counterparty. Our policy counterparties are generally high-quality, investment-grade insurance companies. Typically, 95% of all the carriers in our portfolio have an A rating or better from AM Best. The underlying credit that they issue is the life insurance policy, which sits in the cash stack higher than any senior debt or equity that they issue. Moreover, this product is highly regulated at the point of inflection. In fact, we are unaware of a single life insurance policy issued that did not pay at mortality due to illiquidity of the carrier.
As such, the asset itself is incredibly stable. We believe the real pain point we are helping to solve is that investors cannot find enough life insurance policies to purchase. In addition to counterparty quality, this is an asset class that has a low correlation to the market as a whole. What do I mean by that? This is an effectively equivalent to a mortality-driven zero coupon bond. It's going to appreciate in value as you get closer to the maturity date, regardless of the equity or bond market conditions or volatility. To simplify, let's assume we buy a contract on an 80-year-old male. Three years later, that gentleman will be 83, which means the contract is that much closer ultimately to the maturity date, and you receive an increase in value of the underlying contract as the insured ages.
Not only is it a great counterparty, but the contract also appreciates in value over time, regardless of market conditions. Abacus has proudly partnered with over 30,000 financial professionals, and we continue to drive a majority of our policy origination from this channel. However, our fastest-growing origination channel is our direct-to-consumer channel. We are very excited about this channel and the opportunity for long-term growth that it offers us. We have been building this channel over several years. What's great about the direct-to-consumer channel is our ability to directly reach and educate the policy owner in terms of his or own liquidity option. We expect to continue our television and digital campaigns to further expand our market share and drive industry awareness.
Along with our marketing initiatives to drive, to drive our top line, our real underlying asset, asset is the wealth of technology we've built and longevity data we've accumulated over the years. Anchored by years of aggregated data and analytics, Abacus is also a data technology company that uses its proprietary data to drive the decision process to acquire policies and leverages it to complement several other products and processes. We've been a technology innovator within our own industry by building our own underlying insurance and data tables to help us make better investment decisions, issue new insurance products, and innovate the wealth planning industry. We believe our longevity data and technology, managed by our subsidiary, Longevity Market Technologies, can positively impact several industries. First, with our digital origination platform, known as the Abacus Marketplace.
Advisors and their clients can have a complete end-to-end digital purchase process of their life insurance policy. We also expect to innovate how life insurance is issued and underwritten at the time of issuance. We are currently advancing a partnership with a life insurance carrier to issue new lifespan-based products. Additionally, we expect to launch innovative investment portfolio allocations for retail investors utilizing their personal lifespan, calculated using agingiq.com, our leading online life expectancy calculator with selfie and facial analytics technology. This would allow investors to use their personal lifespan as a primary driver of portfolio allocation. With respect to our processes, we've invested significantly to have a better understanding of risk and how to properly and quickly measure it on these contracts. We've built our proprietary risk rating platform, which measures risk similar to a risk-related FICO score.
This risk score is based on several factors, including duration and extension risk, which we measure against the future carry costs of the contract. We use our wealth of data to analyze the underlying contract to quickly assess where the contract is and to ultimately drive Abacus' purchase and valuation process. Additionally, we use our proprietary data analytics to increase origination and awareness by creating what we call our instant policy value calculator. This is an easy-to-use online tool where we only need four pieces of data: gender, age, face value, and policy type, to generate an instant indicative policy valuation that we provide to advisors and consumers so that they can quickly access the current value of their policy. Offering this data and educating consumers will help us bridge the gap on this $233 billion in life insurance policies that lapse every year.
We believe the life settlement market is going to continue to expand with a significant tailwind, driven by efforts to educate clients about the value of their policies. Our industry currently only has about a 2% market penetration of a $200 billion+ opportunity, with a significant financial incentive to the seniors selling their policy. That's a massive gap that is in our wheelhouse. We are confident we can close this gap as Abacus sits at the heart of this industry. Our financial metrics illustrate this benefit. We have generated consistent growth year-over-year, specifically in origination capital deployment, net earnings, and return on equity. That has continued into 2023, and as we delivered once again on growth and profitability in the second quarter, which Bill will touch on in a second, we've reviewed our historical trends.
We have thoughtfully evaluated expected origination growth, looked at our revenue streams and corresponding expenses to operate this business, and prudently applied it to our public company. With that, I will now hand it over to our CFO, Bill McCauley, to discuss the specifics on our Q2 results and financials.
Thanks, Jay, and hello, everyone. As Jay mentioned, we delivered another strong quarter of growth and profitability across our business. While we were not yet public and merged into our current entity during the second quarter, I will discuss second quarter results pro forma as if we were, as this will provide you the best apples-to-apples comparison moving forward. The key driver of our business performance is our highly efficient origination platform. In the second quarter of 2023, origination capital deployed increased by approximately 88% to $59.7 million, compared to $31.9 million in the prior period, driven by larger face value policy acquisitions, while maintaining a 4% growth in policy originations to 141, compared to 135 in the prior year period.
Total revenue in the second quarter of 2023 grew by 30% to $18.3 million, compared to $14.1 million in the prior period. This increase was primarily due to strong performance in our Active Management segment as we deployed more capital to drive growth and originations. Active Management revenue increased by approximately 38% to $11 million, compared to $8 million in the prior year period. The increase was primarily attributable to maturities of policies accounted for under the investment method. As of June 30th, 2023, Abacus holds 167 policies, of which 121 are accounted for under the fair value method, and 46 are accounted for using the investment method, which is cost plus premiums paid. Policies recorded under the investment method represent those policies purchased by Abacus with the intent to sell within the next 12 months.
Revenue from our Portfolio Servicing segment was $0.4 million, which is roughly comparable to the prior year period. Turning to expenses, total operating expenses, excluding unrealized gains and losses and change in fair value for the second quarter of 2023, were approximately $4.3 million, compared to $4.6 million in the prior year period. Adjusted EBITDA for the quarter grew by approximately 33% to $8.8 million, compared to $6.6 million in the prior year period. The increase was primarily attributable to the strong revenue growth. Adjusted EBITDA margin improved 140 basis points to 48.4% for the quarter, compared to 47% in the prior year period.
Net income increased by approximately 40% to $6.4 million, compared to $4.6 million in the prior year period, driven by strong top-line performance and managing costs efficiently. Now, focusing our attention to our balance sheet metrics. On an annualized basis, return on equity and return on invested capital for the three-month period ended June 30, 2023, were 16% and 28.5%, respectively, reflecting our highly profitable business model. As of June 30, 2023, the company had cash and cash equivalents of $20.6 million, balance sheet policy assets of $66.5 million, and outstanding long-term debt at fair value of $66.2 million. In summary, we are very pleased with our strong results this quarter, and we continue to deliver double-digit growth on bottom - on both the top and bottom lines.
While we are not currently providing specific guidance, we are excited about the growth opportunities ahead, and we are very well positioned to execute on our long-term plans. Note that in the coming days, we will be releasing our 2022 quarterly income statement numbers for your reference. I will now turn it back to our CEO, Jay Jackson, for our closing comments.
Thanks, Bill. To sum up, we believe Abacus Life is extremely well positioned to capitalize on a massive market opportunity within a dynamic sector today. Very few other business models offer 19 years of consecutive net income, a $200 billion target market that we expect to see increase every year in new growth verticals led by our longevity data and technology. We are proud to be a growth company that has generated consistent profitability, and we expect to continue doing so over the long term, creating value for our shareholders. I'd like to thank all of you for joining us today, and we appreciate your interest in Abacus Life. We will now field any questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions.
The first question comes from the line of Jim Morrow with Callodine. Please proceed with your question.
Yeah, thanks. Jay, could you dig in a little bit more on the data, that you talked about and, and how that plays a role in the industry, and how you can use the data you're collecting, over time?
Sure. Sure. Thank you, Jim. You know, the, the data we've aggregated is, if data is the new gold rush, we're standing on a mountain of it. The reason why, over the last 19 years, we've been aggregating data in relationship to medical files and lifespan data per policyholder that we acquire these policies from. What we've been able to do now is consider how we utilize this data to make not only our process more efficient, because most importantly, we wanna make this a strong benefit to the consumer. Meaning that if we can make our process more efficient, and then we can provide this data back to them, how else could it be used? Here's a quick example. We built a program called Med Scout.
What Med Scout does is, is that when we go and retrieve medical files, which can be from several physicians, several hundred pages long, this will reorganize that entire med file, put it in chronological order with the physicians, and then it will utilize AI technology and actually pull all that data and scan and read it, and then give you probability of diagnosis, as well as ICD codes for that person. In our current business, where that applies is, is that now we can underwrite a case in literally minutes, instead of what would take an individual hours to read and sift through.
Now you take that data and you say, "Okay, how could this apply to, let's say, the healthcare industry and utilizing this type of speed of access to information?" If you're a physician, you're sitting in an emergency room, you can quickly diagnose someone and click on that simple link of that diagnosis, which is probability of diagnosis, and immediately identify in 500 pages of medical files where that diagnosis exists, how many times, and what's the severity of that diagnosis. Then we take that lifespan data, because we aggregate the medical files, interpret that into someone's new projected lifespan, and bring that really into personal finance, where we'll be rolling out very shortly, how you utilize lifespan in financial planning.
Specifically around really innovating how target date funds are utilized today, where each person could literally have their own target date fund based upon their lifespan and data. You know, as we use the data initially to build on our current programs, you know, all the way down to now, our next program will be where there's a massive industry in the life tracking business. We do that to track insurers and policyholders once we acquire and own the policy, utilizing Med Scout for better understanding underwriting and quickly being able to access, access someone's underwriting. That could apply to life insurance carriers and, and the healthcare industry. Lastly, in the financial services industry, which we'll be talking about shortly, how you can personalize someone's financial plan specifically related to their lifespan.
That data is gonna add into different verticals, but more importantly or even more so, add to our currently core business of being able to understand and underwrite our own policyholders even better.
That's great. Thanks, Jay.
As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. The next question comes from the line of David Bastian with Kingdom Capital Advisors. Please proceed with your question.
Hey, guys. Thanks for taking my question. I was curious if you could comment on the recent significant increase in interest rates, and how you guys are able to stay profitable despite what I imagine will be pretty significant decreases in the discounted future cash flows on your policies.
Sure. Thank you for asking that. You know, our industry itself is, is essentially uncorrelated as an investment, in the sense that it, it's a mortality-driven contract and not affected by movements in relationship to fixed income or equity. However, where interest rates can in fact impact us is in relationship to our own cost of capital, and it speaks to why we went public in the first place, to help mitigate some of that risk. Being public gives us the opportunity to, over the long term, lower our, our capital costs, so that we can manage that more effectively. What we see today is. I think that this is such an important piece to our business. You know, we do sit at the, the heartbeat of our industry. What does that really mean?
We're, we're effectively the market makers, and we originate new contracts every month to the tune of $15 million-$20 million per month of new capital that we could deploy. That was reflective in our second quarter results. When we talk about the growth of 88% on capital deployed, that's what we saw quarter-over-quarter. A high interest rate environment, from our perspective, actually puts us in a little bit of a sweet spot. Here's why: policyholders in this environment are seeking liquidity, and now they're coming to us and understanding that their life insurance policy is an effective liquid option now for them that they maybe didn't realize before, so our originations go up.
In addition to that, as an alternative asset manager within our own portfolio, being that it's an uncorrelated asset, essentially, there are significant amounts of institutional capital that is trying to access this asset to get, you know, double-digit type of discount rates and returns, even in this interest rate environment, because the underlying asset itself is uncorrelated. From an interest rate perspective and volatility market perspective, where Abacus sits as the market maker is truly a sweet spot, and I think that's reflective in what our second quarter was like. When you, when you look at the growth in earnings, you look at the growth in net income, and you look at the growth of originations.
Got it. That's really helpful. Thank you. Then related to that, you know, you guys have these warrants sitting out here. Do you guys view those as a source of capital that you're hoping to get exercised, or are you hopeful that you'll be able to use the terms in there to be able to kind of force the cashless exercise and remove them before their expiration date a few years from now?
Yeah, we're, we're, we're open to both options. you know, our premise was, you know, we, we wanted to see how, you know, let's have a couple of earnings calls, let's, let's get everyone very comfortable with our business model. I think first and foremost, it's an education process on, on who Abacus is, what we do, people understanding this data that we have and how we're applying it to not just life insurance, but other areas. From there, assess what's the best plan of action for the warrants. Either is suitable for us. you know, assuming that the warrants fall into the money and that rewards the shareholders who have stayed, stayed with us in this process, terrific.
If there's a plan that makes sense to where we would strategically purchase those or, or try to acquire those off back and buy those off the balance sheet, we will certainly consider that as well. We're you know. I think in addition to the warrants, you know, we're looking at the float very, very closely, and we realize that. That's the issue with, with anybody who goes public via a SPAC, is that you might have a smaller float. In the same mindset of the warrants, we're thinking about when and, and, and how a secondary might look for us in the near future. You know, for us, it's just a matter of getting our information out first, getting investors very comfortable with our story, and then exploring all those options sooner rather than later.
Okay. Given the market size, do you feel like if you got the $150 million+ from the warrants, that you'd be able to quickly deploy that? You know, what kind of time would you be looking at, given how much of.
Sure
increase that would be to your capital base?
Yeah, that's a great question, and the answer is yes, we would be able to deploy that very, very quickly. Again, if you look at the origination capital deploy just in the second quarter, keep in mind that was with our own capital, right? Imagine what we could do with another $100 million or $150 million. If you just look at that number, that means we're deploying arguably about $20 million a month in the second quarter. You know, so then you can kind of extend that math, that if, if we stayed at that pace, right, which I think that we would probably increase that, but even at that pace, would take us less than six months to get that deployed. You know, what you touch on is something super important that everybody should understand.
What's our use of funds for that? It's to buy this asset, right? We're, we're not here trying to, you know, hire more employees and to do these things and to put into this growth model that doesn't produce revenue or income. We're gonna put it right back into the asset that we're buying and put those assets on our balance sheet, right? Effectively owning policies. I think that should be music to your ears in how we deploy that capital, what it would be used for, which would ultimately, ultimately lead to the growth of our business and company, grow revenues, grow income.
Yep, that makes sense. Thank you so much.
There are no further questions at this time. I'd now like to turn the floor back over to Jay Jackson for any closing comments.
Well, thank you again to everyone for taking the time to listen in today. We are excited to continue to share our story, and our story that has 19 consecutive years of positive net income, terrific ROIC, great ROE, and we're a growth company with a massive addressable market that we're just beginning to tap into, with data and technology that gives us the opportunity to tap into these other verticals that you're going to start to see over the next six months. We'll continue to make this story easier and easier to tell for you, your investors. As investors and shareholders, we thank you for joining this journey with us. The second quarter results we're very excited about, and we look forward to future earnings calls with you.
Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.