Logo of jester cap with thought bubble.

Image source: The Motley Fool.

GWG Holdings Inc (NASDAQ:GWGH)
Q1 2020 Earnings Call
May 18, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Dan Callahan -- Director of Communication

Thank you and good afternoon, everybody. My name is Dan Callahan, Director of Communication at GWG Holdings. Welcome to our First Quarter of 2020 Earnings Webcast. As a note, we're all remote here so bear with us as the rest of the country has been through this pandemic. 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 today, we'll be happy to take submitted questions. Through the registration process, we've gotten a good variety of questions that we think will give you more information. But, if we don't get to one of yours, or if you have questions as a result of anything we present today, there'll be a context slide at the end of the presentation. You can email us and call us and we'll get you an answer.

Some statements on the webcast today along with any projected financial results including forward-looking statements, they're 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.

Our 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. [Operator Closing Remarks] The webcast is being recorded and will be available on our website at gwgh.com through the Investor Relations tab.

So, with that I will turn it over to our President and Chief Executive Officer, Murray Holland. Murray?

Murray T. Holland -- President and Chief Executive Officer

Well, Dan, thank you for that introduction today and welcome everybody to our first quarter 2020 earnings report. Today, we want to cover a number of items regarding development of the company during the first quarter of 2020. And, the first is to give you a COVID-19 update on the company in performance. Then we'll go through the corporate events updates for the quarter, GWG's role as a non-correlated defensive investment. And then Tim Evans, our Chief Financial Officer will go through all the financial metrics and results of operations and after, we'll have a questions-and-answer period.

As all of you know at the end of last year, we entered into a series of transactions with BENeficient to consolidate the two companies and that consolidation that was effective 12/31 and resulted in a significantly grown balance sheet and this quarter will be the first quarter of consolidated earnings with the two companies. As a result of the consolidation, we have a considerably strengthened financial statement, we have significant increase in investor interest and liquidity and yield and combined, the company is very well-positioned for future growth.

COVID-19 has had a dramatic impact on all businesses in this country and around the world and the impact on the company combined GWG-BENeficent has primarily been through operations. The portfolio of life policies and BEN investments both remains strong. As you all know, the life insurance portfolio is non-correlated. It is not affected by whatever the equity markets or economy does as a whole. Our portfolio is based on life insurance policies and when there is a maturity, we look to the credit of the underlying insurance companies which are all high investment grade companies that are family known names.

Next, on the health and safety of our employees. We have done a considerable amount of work on keeping everybody safe during this period of time and most employees are operating from their homes. We developed all the technology necessary to keep us connected in a seamless manner and we are performing essentially all of our operations. So, we continue to raise capital. We pay and receive interest income and dividends. We receive insurance policy benefits and otherwise meet all of our ongoing obligations. Since the middle of March, most employees have operated from home and we are now officially operating the company in this manner. But, we're looking to opening up business in Texas, it's coming here in the near term.

During the first quarter, we had relatively strong L Bond sales in face of this pandemic. We do not anticipate any impact on the insurance policies portfolio from COVID-19 this year. We've had a number of corporate events since our biggest consolidation of December 31 of 2019. First is, we reported strong performance from our life insurance portfolio with the total of $25.5 million in maturities in the first quarter. We've had continued success raising L Bonds during this period with $111 million raised in the first quarter. We filed a registration statement for a $2 billion L Bond offering.

We currently have about $60 million left in this current registration statement before it is sold out. And consequently, we expect effectiveness and offering under the new bonds here in the near future. We signed a term sheet that will amend the senior and subordinated credit agreements extended maturities from June of 2020 to April of 2021. And, BEN has submited a revised charter application with this Texas State Department of Banking as an agreed method of going forward with their charter application.

Next, I'd like to talk, so everybody understands the value of our non-correlated assets. Non-correlation means that investors do not move in locksteps with the direction of the overall equity markets or with the economy as a whole. Our life insurance policies portfolio is non-correlated. It provides returns independent of anything that happens in the market or other economic indicators. Consequently, the equity market, which has been hit significantly has not had an effect on our portfolio values, that should be a comforting fact for all investors.

At the end of our year, last year we reported that the consolidation of the companies and that consolidation brought our assets up currently as of March 31 to $3.68 billion of total assets. We have a total debt of $1.8 billion, total equity and non-controlling interest of $1.84 billion, and stockholders' equity of $600 million.

Now, I'd like to turn it over to Tim Evans, our Chief Financial Officer, to report on first quarter earnings and other financial metrics. Tim?

Timothy L. Evans -- Chief Financial Officer and Treasurer

Thanks, Murray and thanks everybody for joining us on the call today. Happy to bring you our Q1 results. So, we'll walk through a few items here. First, we'll go over the Q1 2020 financial metrics review, discuss our balance sheet and liquidity positions, our security sales, our life insurance portfolio and because Q1 is the first quarter where we're really capturing BEN's income and expenses, we will also talk about the BEN collateral portfolio at the very end of my presentation, so let's get started.

So, here we're looking at a summary of our metrics comparing Q1 of 2020 versus Q1 of 2019. And, we'll just take a look down the variance side here and see that we had $8.4 million more in gross revenue this period, than we did a year ago. We also had $86.2 million more in expenses, than, we did a year ago. Most of that's attributable to one non-cash item. We'll talk about that in more detail here in a moment.

We also had a $14.1 million income tax benefit, real quick second on that, that is a income tax benefit from our state income taxes after we moved the operations from Minnesota to Texas, there was a significant tax advantage from doing that and we're recognizing that benefit now for the first time in Q1 2020. Overall, we have a $62.9 million net loss variance here so, greater loss this quarter over quarter a year ago. Again, primarily driven by that one non-cash item and earnings per share of negative variance of $1.05. So, let's break into these numbers a little bit.

On the revenue side, as I mentioned overall, we were up $8.4 million, that's broken down into a few items. First, among those is, that we had lower net gain on life insurance policies. A lot of that can be contributed to the fact that as we've now transitioned to investing in BEN rather than in life insurance policies and we are not recognizing gains on life insurance policies, like we did a year ago. So, that accounts for that $7 million negative difference.

On the other hand, we are recognizing more income now from the interest income earned by BEN and the trust services revenue that BEN earns. So, just to review, BEN's core business is to make loans to an ExAlt Plan, the ExAlt Plan purchases alternative assets with those loans and uses the cash from those assets to repay those loans to BEN. So, BEN earns interest on those loans, which we're seeing here, and it also earns administrative fees for servicing those loans. And so we see their trust services revenue. So overall, we're seeing an uptick in income for this quarter from our investment in BEN.

On the expenses side, we did have higher interest of $8.9 million because we have more L Bonds outstanding, than we did a year ago. We also have higher employee compensation at $72.6 million. Now $68.9 million of that is a non-cash item that is related to a equity compensation at BEN and that equity compensation again, non-cash item relates to restricted equity units, that were granted to BEN employees over a four-year vesting [Phonetic] period.

Number of BEN employees have been at BEN for a few years and the grants were just made in this first quarter. So, those employees, many of whom are getting in excess of 40% some even up to 100% of vesting because of their prior service at BEN, even though they are only branded here at the first quarter, that significant vesting is what led to the significant expense during this quarter.

We don't expect to have that quarter anymore, because it's basically a catch-up of everyone's vesting over time and we spent a lot of time in the queue this period discussing this expense and giving an idea of what we think about future quarters. So, I'd encourage you to look at the Q, obviously we're expecting much lower expenses in future quarters, based on vesting now just happening quarter-over-quarter. We also had $4.7 million in additional legal and other expenses. This quarter's a lot of that is just catch up from the 12/31 transaction.

On the balance sheet side, as you will recall 12/31, '19, we begin consolidating BEN's financials, particularly the balance sheet there, we were able to consolidate their balance sheet at 12/31 '19 and so we saw a significant increase and the asset in equities at Q4 '19. Here in Q1, we did have another small increase and we expect to see that continuing to grow.

Our liquidity side, you can see that we have almost record, if not record liquidity, on a consolidated basis between the two companies. So, we continue to hold strong cash reserves over $180 million between the two at the end of March, and obviously, we're redirecting that liquidity toward our investment in BEN which we think will give us higher earnings on their alternative asset business.

On investment sales, continue to bring in L bond sales, despite a slight slowdown due to COVID-19. We think that's in large part because we have attractive yields on our L Bonds and because of the non-correlated aspect of the life policies that Murray mentioned earlier. Our L Bond rates are still 5.5% to 8.5% depending on the maturity of the bond.

On the right side here, talking about the maturity of the bond, one point I wanted to note here is that, our 84 month or seven year L Bonds, we saw a nice uptick to 40.3% of total sales for Q1, which we enjoy seeing investors coming in and believing in GWG and the coupons that we offer on those L Bonds, so nice to see, just a continued attractive maturity profile here and an increase in those seven year L Bonds.

So, let's talk about the life insurance portfolio. Still have $3 billion in face amount of our portfolio. We have $332 million at the end of March for policy benefits on insured's over the age of 90. At the end of 2019, that was $318 million. So again, we're continuing to see that portfolio seasons, part of that seasoning means that we have consistent benefits. So in Q1, 2020, we had $25.5 million of maturities off of the portfolio. And again, we're consistently covering our premiums. If we look at the chart, our benefits versus premiums on a trailing 12 months basis, just shows that the asset continues to pay for itself in terms of the premiums required to maintain the asset, very well covered there over 100%. So, encouraging to see that trend continue.

Here we see the life insurance portfolio broken down by age. You can see that the greatest single group is the 85 to 89 and in fact, if we look at all iinsured's over the age of 85 you can see that, that totals 43.8% of the benefits, about $876 million in face and again our carriers, counterparties on these policies, very strong, very high credit rating, very comfortable with our insurance carrier counterparts.

Now, let's take a turn and look at BEN for a moment. This is a new addition to our earnings release. Again, this is the first quarter, we're picking up BEN's income and again as a reminder, BEN makes allowance to the ExAlt Plan. The ExAlt Plan buys alternative assets, uses cash and use assets to repay the loans to BEN. Currently, procuring value on BEN's Q1 statements and on our consolidated statements would be $219 million of loans receivable, as you want to translate that into earning is, you should think that was launched, generally have a stated interest rate of about 15%. They also earn 2.8% on an annual basis and administrative basis.

Behind those loans, so the alternative assets purchased by the ExAlt wins, currently, that's a 118 different funds with 350 different investments. As BEN continues to originate, loan receivables will increase, the earnings off those loan receivables will increase and the diversification that we see here on the right side of the slide will continue to change. So right now, you can see that about 60% of the alternative assets are in North America. If you look at the industry sector, we have about 40% in healthcare, pharma, biotech and then you can see the breakdown by sector.

From there on exposure type, 38% late stage, 22% growth and then again, you can see buyout, early stage and the other exposure types, we have in the BEN collateral portfolio there. So again, this is something we'd like to see over time, see that loan receivable growth, so that we have more earning assets on the BEN side and then see the diversification on the right side of the slide, continue to better diversify into more of a optimal, collateral portfolio over time. So, we're excited for that in Q2 and going forward.

Dan, with that, I'll turn it over to you for any questions.

Questions and Answers:

Dan Callahan -- Director of Communication

Thanks, Tim. We allowed people to submit questions during registration and we received a number of questions, the most popular was the COVID-19 question. The question was about the impact of it on earnings, on the BEN portfolio, on GWG in general. Murray, can you give us a sense of that.

Murray T. Holland -- President and Chief Executive Officer

Sure. So, as I talked about earlier, our portfolio of life insurance policies is non-correlated, which means it's not affected at all by all the market turmoil and consequently, we do not expect any negative or positive impact on our portfolio as a result of the COVID-19.

Dan Callahan -- Director of Communication

A question from David who asks, how our staff members and the executive team and their families, doing.

Murray T. Holland -- President and Chief Executive Officer

Well, David. Thank you for asking that question. Everybody is good and healthy. We were very upfront with all of our actions and planning for dealing with this COVID virus situation and for the last, little over six weeks now, everybody has been operating from their homes, except for just a few staff members, such as IT, etc. And, we don't believe we have any COVID cases at all, inside the company. And so, it's been a successful move on our part to have everybody operate from home.

Dan Callahan -- Director of Communication

A question from Philip. Since the bonds are not backed by any agency, what are the best points to access them other than saying there is an X amount of surplus in the company. Murray?

Murray T. Holland -- President and Chief Executive Officer

Sure, Philip. Thanks for that question. As all issuers of bonds, the investors in those bonds have to look to the enterprise and the enterprise value of the issuer and obviously bonds are investment today that are paid back in the future. And so, the future expectations of the issuer and the value of the issuer and the ability of these issuer, when we pay those bonds in the future, is the investment analysis that should be made by an investor here.

Dan Callahan -- Director of Communication

Another question from Nilosh who asks, what was the fiscal year 2019 IRR for the health of the PE positions in aggregate, outside of insurance, all the PE funds have reported 2019 results. Tim, can you handle that one?

Timothy L. Evans -- Chief Financial Officer and Treasurer

Sure, happy to. So, as we talked about, BEN doesn't own the underlying alternative assets. They have made loans to the ExAlt Plan, the ExAlt Plan owns the alternative assets. So, what we focus more on is not the returns to the ExAlt Plan from their holdings of the alternative assets, we look at the interest rates earned by BEN on the loans and so, again that's a stated interest rate generally at 15% on those loans.

Now, certainly we care about the collateral, of the loans. And if you look at the Q1, you'll see that on the allowance for loan loss, I believe there is just $700,000 of loan loss taken on a $220 million of total receivable. So, we're happy with that for now and I think that, that shows a strong collateral portfolio behind BEN's loans receivable.

Dan Callahan -- Director of Communication

And finally, we have a question that we often get. Will the interest rate remain at 8.5% on the seven year as stated on the schedule?

Murray T. Holland -- President and Chief Executive Officer

What they're talking about, in existing L Bonds, that certainly, it's going to stay at that 8.5% and then also for any L Bonds that are being sold right now, same answer. But, we're still at the 5.5% to 8.5% coupons and you'll note that in the amended S-1 that we just filed for an ExAlt bond offering we had the same rates listed in there. So, no current plans to change those rates.

Dan Callahan -- Director of Communication

Thank you, Tim. Thank you, Murray. With that we will bring it to a close. Again, if you did not get your question answered, we will be happy to get back to you offline. You can call us or email us through the information that's up on the screen, now. I want to thank everybody for taking time to hear about our first quarter and the prospects we have, going forward and hope you have a great rest of the day. Thank you all very much.

Duration: 20 minutes

Call participants:

Dan Callahan -- Director of Communication

Murray T. Holland -- President and Chief Executive Officer

Timothy L. Evans -- Chief Financial Officer and Treasurer

More GWGH analysis

All earnings call transcripts

AlphaStreet Logo