Wieffering: This business may look grim, but it plans to reap big profits

GWG Holdings makes money when its customers die, and as the prospectus for its $250 million debt sale makes clear, sooner is better than later.

It's an offering document unlike any I've ever read because the assets are, in a very real sense, 172 human beings. Their average age is 80.62; the average estimated life expectancy is eight years, and 24 percent suffer from cardiovascular disease. The average face value on their life insurance policies, which Minneapolis-based GWG owns, is $2.7 million.

Since GWG cashes in when they check out, you can't read the vital statistics for each of the 172 policyholders without thinking that the longer they live, the worse GWG or its investors do.

Some investors might find that troubling, but even those who don't might wonder about a couple of other things.

Such as, what happens to GWG Holdings if the trustee in the Tom Petters bankruptcy wins a $137 million "clawback" action that includes GWG's top executives, Jon and Steve Sabes, who are brothers and its largest shareholders.

Or, how confident should you feel about entrusting your money with professional investors who seemed oblivious to the Petters Ponzi scheme in the first place?

Question No. 1 is addressed on page 25 of GWG's prospectus, which includes the standard warning about the possibility of material adverse effects for investors. I wanted to pose the second question directly to either Jon or Steve Sabes, but the company did not make either available for interviews on Tuesday.

Doug Kelley, the trustee in the Petters bankruptcy, declined to comment on the status of the lawsuits against the Sabeses, including their father, Robert, or its potential impact on GWG Holdings.

GWG itself has not been named in Kelley's lawsuit, but it invested $1 million with Opportunity Finance, a specialty finance company led by Jon Sabes that provided hundreds of millions of dollars in short-term loans to Petters.

When federal investigators shut Petters down, Opportunity claimed that Petters still owed it $15 million. But Kelley's lawsuit maintains that the Sabeses made much more money than they lost on their short-term, high-interest rate loans to Petters, and he has suggested that he might seek to recover even more money from Sabes family members if he can establish that they knew about the Petters fraud.

The Sabeses have insisted they did nothing wrong, and that they too were victimized by Petters.

As much as the "we didn't know what was going on" defense could complicate GWG's efforts to sell "death bonds" on Main Street, it's unlikely to derail it.

Death, after all, offers the certainty that investors crave.

That may sound ghoulish, but Wall Street firms have been investing in and profiting off of life insurance policies for decades. The monthly premiums are a steady source of cash and, best of all, an estimated 7 percent of policyholders cancel their policies each year, before they die.

It was only a matter of time before financial engineers figured out how to squeeze out even more money from someone's death.

Here's how it works. You're in your 70s or 80s and no longer need or can't afford a $1 million life insurance policy. Instead of allowing it to lapse, you sell it to GWG for $225,000. GWG continues to make the premium payments. When you die, GWG gets the $1 million.

It's all perfectly legal and growing quickly. From 2002 through 2008, the life settlement industry more than quadrupled in size, to $11 billion in face value of life insurance policies sold in the secondary market.

Tighter regulations have helped curb many of the abuses that marked the early days of the industry, such as companies recruiting elderly people and lending them money to take out new, costly policies. Many states also have enacted waiting periods between the time a person can take out a policy and when he or she can sell it. In Minnesota, it's four years.

GWG has been in business since 2006, and it previously bought and sold policies with a face value of $1 billion. Now, however, the company wants to buy and hold the policies for itself. Its current portfolio has a face value of $472 million, and it's trying to raise money from small investors to buy more policies.

The offering is being marketed through small broker-dealers to retail investors willing to invest a minimum of $25,000. For that they'll get a debenture -- an unsecured corporate bond -- that pays higher interest rates than government securities or bank certificates of deposit. The initial interest rate on a six-month bond, for example, is 4.75 percent.

It may sound like a sure bet but in death, as in comedy, timing is everything. Through the first nine months of last year, GWG had collected $10.5 million less than anticipated because those seniors were living a little bit longer than the mortality curve predicted.

Not to worry, though. Everyone dies eventually, which means investors should expect "greater cash flows later in the portfolio's servicing period."

ericw@startribune.com • 612-673-1736