GWG Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 23 Nov 2020

[Dan Callahan:]

Thank you. Good afternoon, everybody. My name is Dan Callahan, Director of Communication for GWG Holdings. Welcome to our Third Quarter 2020 Earnings Webcast. On the webcast with me today are Murray Holland, our President and Chief Executive Officer; Brad Heppner, Chairman of the Board of GWG Holdings; and Tim Evans, our Chief Financial Officer. Following our remarks today, we'll be taking submitted questions obtained in through the registration process. We've gotten a few questions 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 e-mail us, call us, and we'll get you an answer.

[Murray Holland:]

Dan, thank you very much. Today, we'd like to review a number of agenda items on GWG and Beneficient’s third quarter 2020. The first is an update on corporate events during the third quarter, then we will cover the COVID-19 update, Beneficient update by Brad Heppner will be about Beneficient operations. Then we will talk about Ben risk management underwriting tools that have been developed and then review the third quarter 2020 financial metrics and results and finish with a Q&A session. First, we have reported strong performance in our life insurance portfolio with just under $40 million of maturities. This compares very favorably with prior quarters. Continued success in raising capital through our $2 billion L bond offering, this quarter we raised right at $115 million in L bond sales, including a $43 million month in September. Beneficient closed $8.1 million in originations in October 2020 just after the quarter closed and has built a pipeline of approximately $300 million of origination sourced from RIAs, family offices, general partners, foundations, and various other sources. The third quarter was our first full quarter with Grant Thornton as our new independent public auditing firm. We're very pleased to have Grant Thornton here and they've done a very good job for the firm. GWG Holdings and Beneficient have taken steps to assist management in oversight of our combined company’s controls. This includes engaging internationally recognized accounting firms to prepare quarterly valuations and an opinion on Beneficient’s loan portfolio. We engaged internationally recognized accounting firm to consult with GWG and Beneficient on internal audit department developments. We've hired another internationally recognized accounting firm to review the cost basis of Beneficient financings and related loan balances.

[Brad Heppner:]

Thank you, Murray. Good afternoon, everyone. GWG and Ben further advanced our strategic partnership in December, 2019, nearly a year ago. And that created a joint workforce of over 150 employees. It also expanded our strategy of providing early liquidity on professionally managed alternative assets to a vast and underserved market of mid- to high-net worth individuals and a small- to mid-sized institutions. During 2020, we have focused our efforts to build the foundation of our companies by introducing unique products, services, and systems. Some of these systems, we intend to file patents to protect. We believe all of these efforts poise our companies for 2021 to scale at a time when there's a great need for our products and services that we have created. We believe the liquidity challenges faced by individuals and families by small institutions and their advisors provide an opportunity for our liquidity line of products. This need for liquidity has grown substantially in the past few years driven basically by U.S.-based investors who now hold over $3 trillion in institutionally managed net asset value of alternative assets. Now that $3 trillion excludes hedge funds that have interval liquidity, BDCs and real estate investments that are exchange traded. It's quite a large market for people needing liquidity. Today, only 50% of these assets are held by large institutions, which have greater than $1 billion balance sheet. And that number of 50% continues to decrease.

[Murray Holland:]

Brad, thank you very much. I'd now like to share with you Ben's risk management and underwriting tools that have been implemented here in the third quarter of 2020. First is TotalAlt. TotalAlt was developed by Ben's risk management team. It's a comprehensive portfolio management system. It was designed and built to maintain a risk optimized collateral portfolio by employing and synchronizing accepted principles of diversified portfolio construction, using alternative asset valuation, methodologies, and hedging strategies to manage the quality and makeup, as well as the risk profile of Ben's collateral portfolio. Underwriting has developed the AltRating system. It’s an original grading system built by Beneficient’s Underwriting and Risk Management teams to analyze and review new and existing loans. It’s tailored specifically to evaluate loans that are collateralized with alternative assets. It evaluates various loan metrics using internally generated simulation models to create a rating score reflecting the probabilistic risk of default for each loan. Next I would like to introduce Tim Evans, our Chief Financial Officer. Tim?

[Tim Evans:]

Thanks, Murray. Happy to be here to go through our Q3 results for 2020. We'll start off with our 2020 financial metrics review, then we'll move over and talk about our balance sheet and liquidity and we’ll end with a discussion of both the Ben collateral portfolio and the life insurance portfolio, Let's go ahead and start with our 2020 financial metrics review for Q3. So again we see we have total assets in excess of $3.6 billion and stockholders' equity in excess of $400 million. So from a balance sheet perspective, still in line with where we were last quarter. And as we switch over here to our income statement metrics, we'll be able to discuss some of those differences that we see from Q3 2020 versus Q3 2019.

[A - 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, could you comment regarding coverage of L Bonds in the event of the liquidation?

[Tim Evans:]

Sure. I can take that one, Dan. If we look at our L Bond indenture, there is a debt coverage ratio that set out there, which effectively says that the value of the total indebtedness cannot exceed 90% of the assets of the company. And so we perform that calculation each quarter and disclosed that calculation quarterly in all of our Qs, its right there towards the end of the Q and this quarter as well. And for this quarter, I think we've reported a 69% debt coverage ratio, which means that the total indebtedness of the company does not exceed 69% of the value of the assets of the company as set out in the debt coverage ratio. So I would encourage everyone to review that debt coverage ratio disclosure in the queue, which breaks down the value of the different assets and the methodology that we use for determining our debt coverage.

[Dan Callahan:]

Thanks Tim. One more question for you. Is the viability of life settlements progressing as expected?

[Tim Evans:]

Yes, I would say that it is. And as you may recall, back in 2018, GWG changed its portfolio evaluation methodology and began using a longest life expectancy methodology as opposed to an Average LE methodology. And what we found as a result of that is that are actual to expected a methodology, which we discussed at length in our K. So if you want to look for actual to expected methodology in our 2019 10-K, you will see an extended discussion there that talks about how the actual performance of the portfolio is performing as expected underneath that methodology. And that's true through Q3 as well. So again, our disclosures there, I think would give folks more information on that methodology and yes, it's still performing as expected.

[Dan Callahan:]

Thanks Tim. Murray, what will be the future of the GWG business model?

[Murray Holland:]

We have been reporting since 2018, that GWG is going to be moving their investment strategy away from life settlements industry, to other alternative assets through its investment in Ben. Over the last five or seven years, the life settlements businesses become highly competitive. A number of very large well-financed entities have entered the space and yields consequently on policies have been declining substantially. And in that yield has not, is not producing a big enough spread for GWG to continue in the business. Consequently, that our investment strategy has moved to investments in other alternative assets, through the subsidiary of beneficent. And there we are experiencing as you heard earlier from Brad Heppner, we've reported in the Q, we're experiencing considerably higher yields, and we expect to continue that strategy in the future.

[Dan Callahan:]

Thanks Murray. Thank you, Tim and everyone who dialed in. Again, if you didn't get your question answered, we're happy to get it to you offline. You can call or email us. I want to thank everybody for taking time to hear about our third quarter and our prospects going forward. We hope you have a great rest of the day. Thank you again.