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Q2 2020 Earnings Call
Aug 17, 2020, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Dan Callahan

Thank you. Good afternoon, everybody. My name is Dan Callahan, director of communication at GWG Holdings. Welcome to our second 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 few questions, we think, will give you more information.

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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, 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 that 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.

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. The webcast is being recorded and will be available on our website at 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 Holland -- President and Chief Executive Officer

Dan, thank you very much, and welcome everybody to our second-quarter release conference. Today, I have a number of items that we're going to cover in this broadcast. And the first item is a number of corporate events that transpired during the second quarter of 2020 and subsequent events happened at the end of the quarter. We have -- are going to talk about the launch of Ben liquidity products for individual investors, COVID-19 update.

We're going to give you some financial metrics and results of operations from the second quarter. And then, we'll take questions and answers after that. So we have a number of corporate events to go over with you all, and the first is we recorded some strong performance in our life portfolio of 39.9 million in maturities, a substantial increase over the same quarter of 2019. We've had continued success in raising capital through our investment product with approximately 93.5 million during the second quarter of 2020.

We made two significant sales hires for the western part of the United States and for the Florida, Puerto Rico regions of the United States in our security sales organization. We closed out our $1 billion L Bond offering and began raising capital under our $2 billion L Bond offering that was made effective by the SEC during the second quarter. We were again included in the Russell 2000 Index of small-cap U.S. stocks, which we consider a great bellwether for the company and a bellwether for our future with Beneficient.

And then, we've completed a number of key financial transactions that are necessary for the growth of the company. We entered into an agreement with Ben to enable GWG to make more capital contributions with Ben. The GWG special committee and the board of directors approved the release of LiquidTrust borrowers' debt in exchange for equity in Ben. We filed preliminary documents with the SEC reflecting common shareholder authorities to amend certificate of incorporation, and we requested the approval of consent solicitation for preferred shareholders for approval of that same amendment.

And lastly, we entered into a credit agreement that enabled GWG to assume part of Ben's debt, which was a prerequisite for trust charters under the Texas Banking Regulatory Department. So our path forward, as we have explained over the last two years, has been investments in Ben. That is our core investment strategy for GWG. In the second quarter, late June, Ben publicly launched its liquidity platform for high net worth individuals and small to midsized institutions.

These products provide investors access to simple, quick and cost-effective liquidity solutions for their alternative investments. We expect to see the first assets being closed by Ben near the later part of the third quarter. As part of the launch, Ben's CEO and chairman, Brad Heppner, was live on CNBC and Bloomberg Radio, and he was quoted in Stories in the Wall Street Journal, ThinkAdvisor, The Deal, StreetInsider and The Dallas Business Journal. We've had a number of significant changes in operations as a result of COVID, so I think it's worth reviewing these with everybody.

Our life insurance portfolio and the Ben investments remained strong during this period. As most of you know, the life insurance portfolio is non-correlated, so the turmoil in the market has no effect on the value of our portfolios or the realization under our portfolios. The current market conditions have created a significant amount of distress to many high net worth individuals around the country and, in many cases, have lowered their alternative asset values. Like most companies, we have focused on the health and safety of our employees.

And while we continue to raise capital and receive interest in common dividends and receive insurance policy benefits and meet our other obligations, most of the employees are operating from their homes. We've had relatively strong L Bond sales in the face of the pandemic, and security sales have rebounded significantly since the March-April time frame. We anticipate no material impact on our life insurance policies and portfolio from the COVID-19 pandemic. As of June 30, we had consolidated total assets of a little over $3.7 billion, total liabilities of just over 1.9 billion, total equity and noncontrolling interest of $1.8 billion and stockholders' equity of $541 million.

And now, I'd like to hand it over to Tim Evans, our chief financial officer. Tim?

Tim Evans -- Chief Financial Officer

Thank you, Murray. Look forward to walking through our Q2 2020 financial results with you. We're going to take on a few topics this afternoon. First will be the Q2 2020 financial metrics review.

Next, we'll go to a review of the balance sheet and liquidity. Then we'll take a look at both the Ben collateral portfolio and our life insurance portfolio. So, let's start with the metrics review. So we see here that in Q2 of 2020, we had gross revenue of 68.8 million compared to just 24 million in Q2 of 2019.

Take a look at what made up that difference. If we look down at the bottom left of the slide, we can see that that revenue increase breaks down into a few different areas. The biggest one there on the bottom is other income. That 36.3 million was from other income recognized by Ben in the second quarter of 2020 as a result of the deemed forfeiture of some vested equity-based compensation related to a former Ben director.

When that was forfeited back, we recognized under GAAP income for that through Ben of 36.3 million. In addition to that one large item, we also had a few other nice increases here. You can see that we had higher interest and other income of $8.8 million. That's attributable primarily to about $11.3 million of increased interest income through our investment in Ben and trust service revenues of $4.8 million from our investment in Ben.

So, in total, Ben contributed more than $15 million of additional income to our revenue. We did have $5 million of lower net gain on life insurance policies, but that's simply a function of the fact that we're no longer purchasing life insurance policies. And so, we're going to continue to see that natural difference quarter to quarter. On the expenses side, we did have $68.7 million of expenses this quarter compared to $45.9 million a year ago.

On the bottom right, we can see what the breakdown of that increase in expenses relates to. And you can see that the No. 1 contributor is the higher interest in Q2 2020. The higher interest obviously relates to the fact that we have sold more L Bonds.

As Murray mentioned, we continue to have relatively strong L Bond sales, particularly through these COVID times. And so, those increased L Bond sales just naturally leads to higher interest. There was also, as you can see at the bottom, the 7.2 provision for loan loss that was made at Ben, and that's going to be reflected in the expenses for the period. We also have higher employee compensation of about $5 million as we are taking on and consolidating Ben.

We're also reflecting the employee compensation expenses of Ben's entire staff as well, so we would expect to see those higher employee compensations. And we also have higher legal expenses of $2.9 million as compared to last year. A lot of that, obviously, we had, as Murray mentioned, a lot going on in July of this year. That would not affect our Q2 numbers.

As Murray mentioned, we did have a lot of items going on in Q2 that culminated in items in July of this year. So, those increased expenses over the quarter makes sense for the increase of our legal expenses over that same time. We did have lower other expenses of $1 million. And our loss from equity method investment, we had a $1.3 million loss this quarter.

That's related to our former subsidiary, Life Epigenetics, which is now under the name of FOXO, the $1.3 million loss this quarter compared to a $0.6 million gain from the prior year. I will note, though, that that's not the same equity method investment. In Q2 of 2019, that would have been Ben as compared to the loss here what's coming from FOXO. I also want to take a look at the income tax benefit, just one line above, $8.6 million for the quarter as compared to nothing in Q2 of 2019.

The net income tax benefit is just deriving from the natural maturities in our portfolio and the equity investment that we have in Ben. So in total for the quarter, we have a net income of $7.3 million compared to a year ago, a net loss. So, great to see that net income. The net income or loss attributable to common shareholders was an $18.1 million loss as compared to last year, which was a $25 million loss.

So, we see improvement there. And so, our earnings per share also improved at $0.59 loss per share as opposed to the $0.78 loss per share, so an improvement of $0.19 per share on our earnings for Q2 2020. So, now that we've looked at our metrics, let's take a look at our balance sheet and liquidity. We can see here on the left that, as Murray mentioned, $3.7 billion of total assets.

You can see here on the bottom left that our assets continue to grow slightly each quarter. Equity has dropped off just a bit here, and we're at total equity of $1.8 billion when you include all of the non-controlling interests as well. On the liquidity side, we see a very positive trend there of increased liquidity, and that would include our cash, restricted cash, benefits and fees receivable. So, nice to, again, see the impact of our continuing L Bond sales, assisting our liquidity there through June 30, 2020.

Now, we're redirecting -- as we can see at the bottom bullet on the right here, we're redirecting that capital that's being raised away from the life policy purchases, which has been GWG's historical business, to the higher-yielding alternative asset business that we can do through Ben. So, let's take a look at that Ben portfolio here on the next slide. So we see here Ben's collateral assets. So, just as a reminder, this is something new we added last quarter.

So, I want to take a minute to focus on this again since it's still relatively new. But this business is to hold loans that were used to purchase alternative assets by an ExAlt Plan. The ExAlt Plan uses the cash off of those assets to repay the loans. And as we can see here, on the approximately $210 million of loans receivable that Ben has after its loan loss allowance, it's going to earn approximately a 15% effective interest rate on those loans and at least a 2.8% fee through its annual administration fee on those loans as well.

So we're -- we hold our life portfolio at about 8.25% yield. We're expecting that Ben is going to be yielding over 17, 18% on its loans receivable. And so, we're very excited to see those expected yields off of those loans receivable. And as Murray mentioned, Ben is now out in the market with its product, looking to add its originations so that we'll see additional loans receivable here in the future, which can continue to earn those yields.

When we talk about the collateral portfolio itself, it's over 120 funds that are owned by the ExAlt Plan and that -- or act as collateral behind Ben's loans that have over 368 different investments. And we can see on the right here the different diversifications for those investments, and this is going to be similar to what we've seen in the prior quarters and our prior disclosures on that vital asset portfolio. So, we're very excited about the yields on this portfolio, about the new originations that we're looking to see now that Ben has launched its product. I hope you can see those originations come on over the future quarters as well, so we're excited about the future.

That said, what we've done historically is also performing well, as we'll see in the next slide here on our life insurance portfolio. That portfolio, because we're not adding new policies at this time, is continuing to season. So, we have approximately $2 billion in total portfolio, face amount will be $1.96 billion. And of that, $332 million of those policy benefits are in insurance over the age of 90.

And this portfolio is paying consistent benefits as well. So, for Q2 of 2020, we had $39.9 million of total maturities. If we look just back last quarter, that was $25.5 million. So, this is a very strong quarter here in Q2.

The other thing we like to always look at is how our benefits are covering our premiums. So, we can see that consistently, this portfolio's benefit is far exceeding its premiums on a trailing 12-month basis as what we see here at the bottom of the slide. And we can see, it continued to improve each quarter, and really here in Q2 2020, it's over 200% coverage on the benefits versus the premiums. And what that tells us is that this portfolio continues to support itself as far as the premiums.

So, we're very happy with the performance there. So, again, we've talked about the $1.96 billion face amount of the portfolio and just over 1,100 policies. We can see the breakdown of the policy benefits by the age insured here. As we mentioned earlier, over $300 million just in the 90 and over.

But we see in the 85 and over, it's 45% of the benefits or over $880 million of benefits in the 85 and over. So, continue to see seasoning on the portfolio, and we continue to have very favorable and creditworthy counterparties. As you can see here, the breakdown of the counterparties that we have for the majority of our holdings and the quality of that credit. So, Dan, that's the end of my section, and I think we're going to take some questions.

Dan Callahan

Thanks, Tim. We allowed people to submit questions during registration. We received a number of good questions. Our first question is from an advisor who asks about the potential of a Biden presidency affecting, I'm assuming, the entire market, as well as GWG Holdings.

I might note that our CEO, Murray Holland, is author of the book, A Nation in the Red, about the government debt crisis, which gives him an interesting and important perspective on the macroeconomic trends. Murray, how would you look at a potential Biden presidency?

Murray Holland -- President and Chief Executive Officer

I don't view that the presidency is an issue with respect to the market significantly, particularly with respect to private equity, which is where we are. I'm more concerned about the macroeconomic trends. And those trends -- the government debt trend is -- the one thing that bothers me the most is our trajectory for government debt. But the other significant factors affecting it are interest rates and GDP growth, etc.

that are all outside the presidency. So, I don't view that either candidate would make a significant difference to the economics of the private equity industry.

Dan Callahan

Thanks, Murray. Our next question is from another advisor who asks for the status on the trust charters. We mentioned it briefly, do we have any more information we can give people?

Murray Holland -- President and Chief Executive Officer

Sure. During the second quarter of 2020, both Ben and the Texas regulators worked significantly in long hours on the trust charters. We remain optimistic about them. But again, they're still in the hands of the trust of the regulators here in the state of Texas.

Dan Callahan

Thanks, Murray. We have another question from an advisor who asks about the pandemic and how it's affected sales, renewals, and our projections going forward.

Murray Holland -- President and Chief Executive Officer

We addressed this briefly in my comments earlier. And like everybody, during the March-April time frame, we saw a decline in sales. But we've had a significant rebound since that. And we're very positive about the future of L Bond sales.

Dan Callahan

And our final question came in about the liquidity product that Ben has launched and the ability to access high net worth individuals. The question is if it's more challenging to try and reach high net worth individuals with this type of liquidity product and how Ben is going about reaching them.

Tim Evans -- Chief Financial Officer

Well, that's a good question, and the answer is we do not anticipate it's going to be difficult to reach high net worth individuals for their liquidity product. Ben has developed three multichannel strategies to initiate originations and to source deal flow from this diverse mix of clients. Each of Ben's channels -- they have three channels of originations are pioneering and their design and delivery of liquidity solutions. The first channel is what Ben calls the advisory channel.

This has Ben's national, dedicated coverage model that supports high net worth individuals and small to midsized institutional investors and the entities that work with these investors, such as family offices, RIAs and professional service providers. The next channel of originations is the preferred provider channel. This is where Ben operates as a strategic and preferred enterprise liquidity provider for wealth management firms. These include national and regional broker-dealers, private banks, general partner sponsor firms and other AI platform and service providers.

Then the final channel is the direct-to-investor channel that was built to deliver liquidity solutions directly to investors through the Ben's online portal, which is a secure portal. Since the formal launch of the first offering of Ben just a few weeks ago, Ben has seen significant interest in the liquidity bond product, and the pipeline is growing as anticipated.

Dan Callahan

Very exciting stuff. With that that is the end of our Q&A. And again, if you didn't get your question answered, we're happy to get it to you off-line. You can call or email us.

I want to thank everybody for taking time to hear about our second quarter and the exciting prospects we have going forward. We hope you have a great rest of the day. Thank you all very much.

Duration: 22 minutes

Call participants:

Dan Callahan

Murray Holland -- President and Chief Executive Officer

Tim Evans -- Chief Financial Officer

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