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GWG Holdings Inc (NASDAQ: GWGH)
Q4Â 2019 Earnings Call
Mar 31, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Dan Callahan -- Director, Investor Relations & Communications
Good afternoon, everybody. We are going to give a one minute warning now to get everybody on that we can possibly get on, we've had a lot of interest in this call. So we'll be back in about a minute to start the webinar. Thanks for tuning in and we'll be right back with you.
All right. Thank you. Good afternoon, everybody. My name is Dan Callahan, Director of Communication at GWG Holdings. Welcome to the Fourth Quarter and Full-Year 2019 Earnings Webcast. Just as a note, we are all in the same predicament that much of our listeners, I'm sure are, where we are in separate locations, dialing in and you may have to bear with us, with background noise and maybe audio that may not be perfect, but we're in it all in this together and we'll get through this.
On the webcast with me today are Murray Holland, our President and Chief Executive Officer; and Tim Evans, our Chief Financial Officer. Following our remarks, we'll be happy to take some questions. We've been doing that through the registration process and we've got a very good variety of questions that we think will give you a lot of more information. If we don't get to one of yours, or if you have other questions out of this, feel free to contact us. There'll be a contact slide at the end of the presentation and you can email us or you can call us and we'll get you an answer.
Some statements on the webcast today along with any projected financial results include forward-looking statements. They are subject to certain risks and uncertainties. Any forward-looking statements made on this webcast are made based on assumptions as of today and we make no obligation to update them as a result of new information or future events. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our earnings release and in our most recent 10-K and 10-Q reports. Everyone, but the participants are in listen-only mode. The webcast is being recorded and will be available on our website at gwh -- gwgh.com through the Investor Relations tab.
So with that, I'll turn it over to our President and Chief Executive Officer, Murray Holland. Murray?
Murray T. Holland -- President & Chief Executive Officer
Dan, thank you very much and welcome everybody to this webcast through the difficult times and circumstances. And just a warning about my technology. I'm on the East Texas at a lake house that I've got one bar cell service and there is no Internet service because it's been flooded with everybody trying to get on the Internet, so nobody get on.
In any event, welcome to our webcast for the fourth quarter and full year of 2019. The first order of business is go over our agenda. That agenda is an overview of our business continuity strategy during these times, corporate events update, GWG's role in non-correlated defensive investment portfolio, details of the consolidation of GWG and that happened on December 31, financial metrics for the year ended 12/31 and then we'll have a questions-and-answer session.
So as everybody has endured this last month or so of business disruption, we have worked very hard to make sure that we can continue business as usual is -- close as we can. Most executives and most technology people and our operating homes, Beneficient business operations areas, so we don't have many people doing any upset of operations close by other people. So we continue -- we are now positioned where -- as usual processing all of the financial instruments and making check [Indecipherable] cannot guarantee that the mail services will be running on time, but our approach will be timely and there'll be no [Technical Issues].
During the fourth quarter we took control of Beneficient's Board of Directors, which created an event that cause consolidation of our financial statements, which is a significant benefit to both companies. The employees of both companies as of 12/31 had become consolidated under Beneficial and these are for operational efficiencies. There are a number of those who benefit of both of our companies. As a result of that transaction GWG became profitable for the first time since it was publicly traded in 2014. There has been a substantial reduction in the GWG debt ratio. GWG this last year benefited from a significant increase in life insurance maturities, we had a 76% increase over 2018. We expect to continue that through 2020, continue an increase.
We've had continued success in raising capital through our L Bond product and just yesterday, we filed a registration statement for $2 billion of new L Bonds, that are under identical terms to the existing L Bonds. We've added two new sales territories to serve our growing group of broker dealers and RIAs who offer our investment products. And those are major corporate events.
Next slide. There have been considerable number of questions on the non-correlation of GWG assets to the current economic environment. And the two major assets are our portfolio of life insurance policies and these are completely non-correlated to the financial markets being financial equity markets. It provides these returns that they -- that portfolio provides are totally independent and not affected by economic indicators or market themselves. So as the markets hit this wave of massive volatility, our portfolio is unaffected by that.
Next slide please. On the consolidation of Ben and GWG Holdings, there have been three significant improvements to -- three significant constituencies. The first are the employees of GWG and Ben. As a result of the transaction, we've combined all employees for operational efficiencies in the one work structure that's headquartered in Dallas, Texas. For investors and shareholders, the consolidated company has a considerably stronger balance sheet and reduced debt ratios. And for potential clients of Ben products, these are people who own alternative assets that need liquidity. We are in a stronger position to provide yield and liquidity products for those [Indecipherable] customers.
Next slide please. GWG's balance sheet has changed dramatically. We have total assets of $3.6 billion, with total debt and I don't have my slide is different from the slide that you guys are seeing, I think it's $1.6 billion in total debt. And we've got $600 million in stockholders' equity.
Next slide please. These -- this is a slide of Ben's loan portfolio collateral. So this the collateral supporting all their loans and how it's diversified in industry sectors, investment strategy -- types of investment strategies and geography. And these are provided now in our 10-K that we just filed and so rather than going through them in detail, I will let you all do that individually, but suffice it to say that the strategy of Ben is to fully diversify and what's called in endowment model that is full diversification along the lines of the industry segments as a proportion of GDP. And this diversification is what provides stability of earnings and safety in the asset.
Next slide please. So the core strategy of Beneficient is to provide liquidity for owners of all these alternative assets. The markets for these assets has grown significantly over the last 20 years. Individuals and smaller institutions, which is the market for Ben, here in the United States have a hold about $2 trillion of these assets and they include private equity fund, typical leveraged buyout venture capital fund of funds and secondary funds, credit funds, various types of real estate funds, which include now real estate the natural resources and infrastructure projects and hedge funds. And hedge funds come in as you all know as [Indecipherable] professionals and hundreds of shapes and sizes and investment strategies, etc.
So just as the market has grown here in the United States for alternative assets, it has worldwide too. In the worldwide market it is now approximately $9 trillion of invested capital into these alternative assets. And the graph here on the right hand side depicts the various types of strategies held by these assets, and that's the market Ben is going to address. So the combined company GWG and Ben, our business is to provide liquidity for life changes for high net worth individuals small institutions. And that includes significant life events such as college funding, divorce, retirement and medical needs, most individuals -- wealthy individuals United States have made it themselves to small businesses that need investment capital from time to time and those owners would look to liquidity for their alternative asset investments for use in their business. And then for state planning. Liquidity is needed for various aspects of the state planning. And those are the principal drivers of our market that Ben is going into.
And so at this point, I'd like to hand it to Tim Evans, our Chief Financial Officer to take a review of our 2019 financial statements. Tim?
Timothy L. Evans -- Chief Financial Officer & Treasurer
Thanks, Murray, and thanks everyone for joining us on the call today. I have four items that I'm going to go over with everyone, and we'll start on the next slide here, with our 2019 financial metrics review. We'll then take a look at our balance sheet, changes to the balance sheet and liquidity. Our security sales and then finally as discussion of the status of our Life Insurance portfolio.
So let's start with the 2019 financial metric summary. As you can see from the top line, our gross revenue in 2019 was $92.3 million, significantly greater than our 2018 revenue, which was negative $0.39 million. If we look down at the bottom left, we can see that the increase in revenue was really driven by one primary factor and that being the 2018 change in valuation methodology that we implemented for our Life Insurance portfolio. As a result of that change in methodology $87 million charge and so that's driving the majority of the difference in our revenue.
For expenses, we see about $53 million of additional expenses in 2019. And if we look at the bottom right, we can see the big drivers for that include higher interest rate which are driven by the increase in L Bonds that we have outstanding, higher employee compensation of about $10.9 million and higher legal and other professional fees of $7.3 million. That $10.9 million we think is -- should come back and decrease in 2020. In 2019, we had series of events related to employee compensation, including a transfer of senior management, a relocation of a number of personnel and the departure of some other personnel that were in our Minneapolis office before they moved to Dallas, which all impacted our employee compensation. So in 2020, we would expect that that should [Technical Issues].
Our net income for fiscal year 2019 was $91.2 million and we can see really that's driven in large part by the gain on consolidation of equity-method investment. Let's take a second to discuss that line. The gain on consolidation is a gain that was recognized as part of our existing interest in Ben. So, the value of the equity that we already owned in Ben increased because of the 12/31 transaction that Murray mentioned earlier. Prior to December of 2019, our interest in Ben were non-control. After the December transaction, we gained the right to appoint a majority of Ben's Board of Directors, and as a result our ownership interest is now controlling interest. And the value of the -- those interest increase reflecting a net $250 million gain. As a result of that gain you will see we had a $58 million income tax liability and expense that we reported for 2019. So we had ultimate net income of $91.2 million with earnings per share -- positive earnings per share of $2.65. So the first time that we've had positive earnings per share, I believe since inception of the company.
So we can go ahead and take a look now at the balance sheet and our liquidity position. As you can see from the chart at the bottom, we had a significant growth in both the assets and the equity of the company. As Murray mentioned, our total assets on a consolidated basis are now $3.6 billion. $2.4 billion of that is goodwill and that goodwill is the excess of the value Ben's business which was determined by a third party valuation firm over the fair value of Ben's net assets. And we booked that on the consolidated financials as a result again of that change of control transaction in December. We also had total equity including redeemable non-controlling interests of $1.8 billion and as Murray mentioned earlier, our stockholders' equity alone was $600 million.
On the right side we can see our liquidity on a consolidated basis which includes cash, restricted cash and receivables include our totals $150 million -- yes, $150 million at 12/31/19, so we continue to hold strong cash reserves. And as we have been for number of quarters now redirecting that capital toward the higher yielding alternative assets to Ben's business.
Taking a look at our investment sales, we continue to raise capital through our L Bond program which offers attractive yields. And earlier, the non-correlated assets behind it. And particularly in this low interest rate environment that we have right now the current L Bond yields between 5.5% to 8.5% offer what we believe is a very attractive interest rate for these investments. We often get asked about the each of those interest rates, what's going to happen to those L Bond yields, as of right now, there's no decision and there has been no decision to change those yields, but it's certainly something that we are continually assessing. When we look at the sales mix by quarter, for Q4 2019, we can see that it falls in line with the prior periods. No significant changes there. And it's consistent sales mix that we're happy to see.
Finally, we can talk about the Life Insurance portfolio. We still have about $2 billion of [Indecipherable] value in the portfolio and over $300 million of that are for policy benefits for insurers over the age of 90. So we continue to see a seasoning of the portfolio. In 2019 in part due to that seasoning, we had over $125 million of benefit come off of the portfolio, which was a record year. And as was mentioned earlier that exceeds full year 2018 by 76%. The nice thing about the record benefits that we are experiencing now is that as you can see in the chart at the bottom on the trailing 12 months benefits versus premiums, the asset is certainly able to support itself. The amount of benefits coming off of the asset, exceed the cost of the premiums of the asset by 166% for 2019 on the trailing 12 months.
If we look at the next slide, we'll see that the breakdown of the policy benefits by age of insured SKUs again to the 80 and older crowd, and is the age 85 and plus represents more than 40% the total face value of benefits for about $870 million. On the counterparty risk, we continue to be very happy with the counterparty risk of the carriers that we have. High credit rating on those carriers including A minus and A plus ratings, and we continue to be very happy with the risk exposure that we have in our portfolio.
So with that discussion, I'm going to turn it back to Murray for a talk about our path forward.
Murray T. Holland -- President & Chief Executive Officer
Thank you, Tim. So we have concluded what we think is a very successful year in the development of GWG and with the consolidation with Ben. We are now in a much stronger position to go after the market that Ben is focused on which are high net worth individuals and smaller institutions need for liquidity from their alternative investments -- alternative asset investments. I think it is now very well positioned to go after that market.
At this time Dan, I think we're ready to take questions.
Questions and Answers:
Dan Callahan -- Director, Investor Relations & Communications
Thanks Muray. In the registration process we did ask people to submit questions which gave us a very good mix of questions. There was a lot of interest as I said. Here's one that we'll start off with. Murray where are the opportunities for GWG in a persistent low interest rate low growth environment?
Murray T. Holland -- President & Chief Executive Officer
Okay. Thanks, Dan. The strategy of GWG combined with Ben is to provide liquidity to owners of alternative assets. These are professionally managed alternative assets that I reviewed earlier, and that market is unaffected by the interest rate environment. So that is the market we're going after and I'll make one comment about that market in today's environment. In today's dramatic equity markets environment, we anticipate that the need for liquidity from these assets will be significant. And we are there to provide that liquidity and expect to see considerable growth as a result of that market change.
Dan Callahan -- Director, Investor Relations & Communications
Thanks, Murray. We have one from an L Bond holder, who also must own stock and he asks, I need to be concerned about losing my principle during these troubling times.
Murray T. Holland -- President & Chief Executive Officer
Okay. That's a good question. Nobody can guarantee 100% that you're always going to get paid back and paid your interest on your bonds. So look to our assets, which is a big company. Our portfolio of life insurance policies is completely unaffected by the equity markets and that's why we use the term that does not correlate. Our returns are -- as Tim went over our return on the payments by most essential [Phonetic] all investment grade counterparties to these insurance policies and that's who we look to for payment upon maturity. Consequently, that is a significant relief or should be a good relief for you as an investor to know that those policies there. On the Ben side, Ben's strategy is a complete diversification of assets and while the market itself has seen significant declines, not all industries have in market value. And so that diversification is what keeps the safety of Ben's at a high level. And then again Ben is loaning money, 75% to 77% of the net asset value of the assets. So it's like a bank in that disgard. And of course all new transactions that Ben enters into after today, we anticipate will be at very, very good rates in very good loan to value.
Dan Callahan -- Director, Investor Relations & Communications
Thanks, Murray. Here's one. Can you discuss the expected impact on alt valuations and what's in place to mitigate risk on future purchases with regards to those valuations?
Timothy L. Evans -- Chief Financial Officer & Treasurer
Hey, Dan, this is Tim. I can take that one. On the valuation of alternatives and looking at the net asset values of those, Ben's underwriting, as Murray just mentioned, well it's performing it's underwriting, it's looking to finance transactions at a discount to the net asset value. And so, as part of that underwriting process, what it does already is look at different economic factors that needs to take into account when setting that advance rate or that discount to the NAV. There is normally going to be a some sort of discount put in place just for the economic factors and certainly in times like we're experiencing now those discounts are going to be even to people.
Additionally, when Ben is looking at it's underwriting process, it's also considering the date of the net asset value. So for example, Ben might look at the net asset value put out in December of last year, much differently than it might put out -- then it might look at it net asset value you put out at the end of March or at the end of June, because that will -- those NAV should already capture the current market condition. So we would expect that all of those factors would be put into play when considering the net asset value of those alternative assets that it's underwriting or its financing.
Dan Callahan -- Director, Investor Relations & Communications
Thanks, Tim. We've got many questions around the rates and you did address that, but maybe just address that directly. Do you know the rates for L Bonds at five and seven years? That's the question that came in.
Timothy L. Evans -- Chief Financial Officer & Treasurer
Sure. The current rates are I believe 7.5%, 8.5% on those maturities of L Bonds. I would expect, we -- like I said before, we have not made any decisions to change any of those interest rates at this time, but as I say, every time I say that also we are constantly undertaking to be sure that we have those rate set at the appropriate amount. So no plans to change right now. The decision is to plan, but we continue to [Technical Issues].
Dan Callahan -- Director, Investor Relations & Communications
Question about the Ben portfolio. Does Ben have exposure to healthcare, which is obviously in reference to what we're currently going through?
Murray T. Holland -- President & Chief Executive Officer
Yes. Ben does have exposure in healthcare. Roughly 20% to 25% of their portfolio is healthcare in a number of different areas in healthcare. And the charts that have been provided in the 10-K and here in this presentation should show you that diversification.
Dan Callahan -- Director, Investor Relations & Communications
Thanks, Murray. One last question. Could you share a high level overview of how the recent reduction in fed funds rates impacts the critical aspects of GWG?
Murray T. Holland -- President & Chief Executive Officer
Sure. The GWG and Ben operate totally independently, unlike a lot of businesses, totally independently, the general market rates and the environment. Ben's business is a function of loans against alternative assets, and those loans are set a significantly higher interest rates typical banks, because for a number of reasons. But basically uncorrelated to the Fed funds or other market rates. Just like GWG's principal assets are once being the life policies are uncorrelated to the interest rates. They just return an uncorrelated return.
Dan Callahan -- Director, Investor Relations & Communications
Well, thank you, Murray. Thank you, Tim. And I want to thank everyone who tuned in today and of course, we want to thank you for your support of the company. If you have more questions, you can email them to us at invest at gwgh.com. We are happy to address any issues that come up from the call. We hope that you stay safe and we thank you again for tuning in. Have a great rest of your afternoon.
Duration: 28 minutes
Call participants:
Dan Callahan -- Director, Investor Relations & Communications
Murray T. Holland -- President & Chief Executive Officer
Timothy L. Evans -- Chief Financial Officer & Treasurer
