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GWG HOLDINGS, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report. This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Unless the context otherwise indicates, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the "Company," "we," "us," "our" or "ours" or similar words are toGWG Holdings Inc. and its direct and indirect wholly-owned and consolidated subsidiaries, references to "GWG Holdings " refer toGWG Holdings Inc. , references to "GWG Life" refer toGWG Life, LLC (a wholly-owned subsidiary ofGWG Holdings ), references to "DLP IV" refer toGWG DLP Funding IV, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP V Holdings " refer toGWG DLP Funding V Holdings, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP V" refer toGWG DLP Funding V, LLC (a wholly-owned subsidiary ofDLP V Holdings ), references to "DLP VI Holdings " refer toGWG DLP Funding Holdings VI, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP VI" refer toGWG DLP Funding VI, LLC (a wholly-owned subsidiary ofDLP VI Holdings ), references to "Ben LP" refer toThe Beneficient Company Group, L.P. (a consolidated subsidiary ofGWG Holdings ), references to "Beneficient" refer toBen LP and all of its consolidated subsidiaries, references to "BCH" refer toBeneficient Company Holdings, L.P. (of whichBen LP is the general partner), references to "Beneficient Management" refer toBeneficient Management, L.L.C. (the general partner ofBen LP ), references to "BCC" refer toBeneficient Capital Company, L.L.C. (a subsidiary ofBen LP ), references to "BACC" refer toBeneficient Administrative and Clearing Company, L.L.C. (a subsidiary ofBen LP ), references to "Pen" refer toPen Indemnity Insurance Company, LTD (a subsidiary ofBen LP ), references to "Ben Markets" refer toBen Markets L.L.C. (a subsidiary ofBen LP ), references to "FOXO" refer toFOXO Technologies Inc. (formerly,FOXO BioScience LLC , an equity investee ofGWG Holdings ), references to "FOXO Labs " refer toFOXO Labs Inc. (formerly,Life Epigenetics Inc. , a wholly-owned subsidiary of FOXO), references to "FOXO Life" refer toFOXO Life LLC (formerly, youSuranceGeneral Agency, LLC , a wholly-owned subsidiary of FOXO); references to the "ExAlt Plan™ ", refer to a trust structure comprising customized trust vehicles (the "ExAlt Trusts", and each, an "ExAlt Trust "). Overview We are an innovative financial services firm based inDallas, Texas , that is a leader in providing unique liquidity solutions and services for the owners of illiquid investments. In 2018 and 2019,GWG Holdings and GWG Life consummated a series of transactions (as more fully described in Item 1. Business) withThe Beneficient Company Group, L.P. ("Ben LP," including all of the subsidiaries it may have from time to time - "Beneficient"). OnDecember 31, 2019 ,GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management. As a result of this change-of-control event,GWG Holdings reported the results of Beneficient on a consolidated basis beginning on the transaction date ofDecember 31, 2019 . As further described in Note 23 to the consolidated financial statements, onAugust 13, 2021 ,GWG Holdings andBen LP , and BCH (as defined below) entered into a non-binding term sheet (the "Term Sheet") which, if completed, is expected to result in, among other things, the deconsolidation of Beneficient fromGWG Holdings . Beneficient is a financial services company, based inDallas, Texas , that markets an array of liquidity and trust administration products to alternative asset investors primarily comprised of mid-to-high-net-worth individuals having a net worth between Page 42 -------------------------------------------------------------------------------- Table of Contents$5 million and$30 million ("MHNW") and small-to-midsize institutional investors and family offices with less than$1 billion in investable assets ("STMIs"). Ben LP plans to offer its products and services through its five operating subsidiaries, which include (i)Ben Liquidity, L.L.C. and its subsidiaries (collectively, "Ben Liquidity"), (ii)Ben Custody, L.L.C. and its subsidiaries (collectively, "Ben Custody Admin"), (iii)Ben Insurance, L.L.C. and its subsidiaries (collectively, "Ben Insurance"), (iv)Ben Markets, L.L.C. , and its subsidiaries (collectively, "Ben Markets") and (v)The Beneficient Company Group (USA ), L.L.C ("Beneficient USA "). Ben Liquidity plans to operate a trust company that is a Kansas Technology Enabled Fiduciary Financial Institutions ("TEFFI") authorized to serve as an alternative asset custodian, trustee and lender with statutory powers granted for each of these activities and permitting Ben Liquidity to provide fiduciary financing for certain of its customer liquidity transactions. Ben Custody Admin plans to operate aTexas trust company that is being organized to provide its customers with certain administrative, custodial and trustee products and specialized services focused on alternative asset investors. Ben Insurance has been chartered as aBermuda based insurance company that plans to offer certain customized insurance products and services covering risks relating to owning, managing and transferring alternative assets. Ben Markets is in the regulatory process for acquiring a captive registered broker-dealer that would conduct certain of its activities attendant to offering a suite of products and services from the Beneficient family of companies. Certain ofBen LP's operating subsidiary products and services involve or are offered to certain of the ExAlt Trusts, which operate for the benefit of the Non-Controlling Interest Holders, and are consolidated subsidiaries ofBen LP for financial reporting purposes (such trusts are and may individually be referred to as Custody Trusts, Collective Trusts, LiquidTrusts, and Funding Trusts).Beneficient USA employs a substantial majority of the executives and staff for Beneficient's operating subsidiaries to whichBeneficient USA provides administrative and technical services. We believe that Beneficient's operations will generally produce higher risk-adjusted returns than those we can achieve from life insurance policies acquired in the secondary market; however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing, recapitalization, partnership, reinsurance guarantees, life insurance operations or other transactions involving of our life insurance portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. These operations are in addition to allocating capital to provide liquidity to holders of a broader range of alternative assets, which we currently provide throughGWG Holdings' and GWG Life's investments in Beneficient.GWG Holdings completed the transactions with Beneficient, in part, to provide the Company with a significant increase in assets and common stockholders' equity. In addition, the transactions with Beneficient may provide us with the opportunity for a diversified source of future earnings within the alternative asset industry. We believe the Beneficient transactions and the other strategies we are pursuing will transformGWG Holdings from a niche provider of liquidity to owners of life insurance to a diversified provider of financial products and services with exposure to a broad range of alternative assets. Critical Accounting Policies Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with the accounting principles generally accepted inthe United States of America ("GAAP") requires us to make significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates, and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. Actual results could differ materially from these estimates. We evaluate our judgments, estimates, and assumptions on a regular basis and make changes accordingly. Material estimates that are particularly susceptible to change, in the near term, relate to: determining the assumptions used in estimating the fair value of our investments in life insurance policies; determining the grant date fair value for equity-based compensation awards; determining the allowance for loan losses as an input to the allocation of income (loss) to Beneficient's equity holders; and evaluation of potential impairment of goodwill and other intangibles. We believe these estimates are likely to have the greatest potential impact on our consolidated financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with these estimates. Page 43 -------------------------------------------------------------------------------- Table of Contents Valuation of Life Insurance Policies We account for the purchase of life insurance policies in accordance with ASC 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. We have elected to account for all of our life insurance policies using the fair value method. We initially record our purchase of life insurance policies at the transaction price, which is the amount paid for the policy, inclusive of all external fees and costs associated with the acquisition. At each subsequent reporting period, we remeasure the investment at fair value in its entirety and recognize the change in fair value as unrealized gain (loss) in the current period, net of premiums paid. Changes in the fair value of our life insurance portfolio are based on periodic evaluations and are recorded in our consolidated statements of operations as changes in fair value of life insurance policies. The fair value of our life insurance policies is determined as the net present value of the life insurance portfolio's future expected cash flows (policy benefits received and required premium payments) that incorporates life expectancy estimates obtained when the policy was purchased and current discount rate assumptions. We refer to our valuation methodology as the Longest Life Expectancy methodology. This methodology utilizes a portfolio mortality multiplier ("PMM") that allows us to "fit" projections to actual results, which provides a basis to forecast future performance more accurately. The table below compares the actual-to-expected ("A2E") mortality cash flow experience of our life insurance portfolio using this methodology. We have achieved expected mortality cash flow experience accuracy of 96% under the Longest Life Expectancy methodology throughDecember 31, 2020 . [[Image Removed: gwgh-20201231_g1.jpg]] Should performance sufficiently deviate in the future from these projections, the A2E analysis will be re-examined to determine if the resultant PMM still results in the most accurate fitting of the projections to actual results. Adjustments to the PMM would then be made based on that analysis if warranted. A discount rate is used to calculate the net present value of the expected cash flows. The discount rate used to calculate fair value of our portfolio incorporates the guidance provided by ASC 820, Fair Value Measurements and Disclosures. We utilized an 8.25% discount rate to estimate the fair value of our portfolio of life insurance policies at bothDecember 31, 2020 and 2019. As we have ceased acquiring insurance policies, we no longer have direct access market-based factors that previously served as a key input to our discount rate. However, we engaged a third-party firm to provide recent market data on comparable assets to support our discount rate as ofDecember 31, 2020 . We also continue to use fixed income market interest rates, credit exposure to the issuing insurance companies and our estimate of the operational risk yield premium a purchaser would apply to the future cash flows derived from our portfolio of life insurance policies as inputs to our discount rate. The determination of the discount rate used in the valuation of the Company's life insurance policies requires management judgment and incorporates information that is reasonably available to management as of the date of the valuation. The discount rate we utilize assumes an orderly and arms-length transaction (i.e., a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction), which is consistent with related GAAP guidance. The carrying Page 44 -------------------------------------------------------------------------------- Table of Contents value of policies held at the end of each quarterly reporting period is adjusted to current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date. We engagedClearLife Limited , owner of the ClariNet LS actuarial portfolio pricing software we use, to prepare a net present value calculation of our life insurance portfolio as ofDecember 31, 2020 .ClearLife Limited processed policy data, future premium data, life expectancy estimate data, and other actuarial information to calculate a net present value for our portfolio using the specified discount rate of 8.25%.ClearLife Limited independently calculated the net present value of our portfolio of 1,058 policies to be$791.9 million and furnished us with a letter documenting its calculation. A copy of such letter is filed as Exhibit 99.1 to this report. Life expectancy estimates and market discount rates for a portfolio of life insurance policies are inherently uncertain and the effect of changes in estimates may be significant. For example, if the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy, and the discount rates were increased or decreased by 1% and 2%, with all other variables held constant, the fair value of our investment in life insurance policies would increase or decrease as summarized below (in thousands): Change in Life Expectancy Estimates Minus Minus Plus Plus 8 Months 4 Months 4 Months 8 Months December 31, 2020$ 97,837 $ 45,536 $ (61,713) $ (114,099) December 31, 2019$ 113,812 $ 57,753 $ (55,905) $ (111,340) Change in Discount Rate Minus 2% Minus 1% Plus 1% Plus 2% December 31, 2020$ 82,983 $ 39,560 $ (36,151) $ (69,284) December 31, 2019$ 91,890 $ 43,713 $ (39,790) $ (76,118) See Note 5 - Investment in Life Insurance Policies and Note 7 - Fair Value Measurements in the notes to the accompanying audited consolidated financial statements for additional information related to our valuation of life insurance policies. Equity-Based Compensation The Company measures and recognizes compensation expense for all equity-based payments at fair value on the grant date over the requisite service period.GWG Holdings uses the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights. For restricted stock grants (including restricted stock units), if any, fair value is determined as of the closing price ofGWG Holdings' common stock on the date of grant. As it is not publicly traded, Beneficient uses various methods to determine the grant date fair value of its equity-based compensation awards. The fair value of theBeneficient Management Partners, L.P. ("BMP") Equity Units is determined on the grant date using a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows are then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. The fair value ofBen LP's restricted equity units ("REUs") was determined for substantially all of the awards granted in 2020, by using the valuation techniques consistent with those utilized to determine the acquisition date equity values arising fromGWG Holdings obtaining a controlling financial interest in Beneficient. These valuation techniques relied upon the OPM Backsolve approach under the market method as more fully described in Note 4 to the consolidated financial statements. For the REUs granted in the latter portion of 2020, which is a de minimis amount of the total 2020 REUs, we utilized valuation techniques consisting of the income approach and market approach. For awards granted in 2019, the fair value of the REUs was estimated using recent equity transactions involving third parties, which provided the Company with observable fair value information sufficient for estimating the grant date fair value. Beneficient's Income Allocation Net income (loss) attributable to noncontrolling interest holders is subject to Beneficient's income allocation in accordance with the governing limited partnership agreement of BCH as more fully described in Note 11. Page 45 -------------------------------------------------------------------------------- Table of Contents The consolidated financial statements of Beneficient reflect the assets, liabilities, revenues, expenses, investment income and cash flows of Beneficient, including, afterDecember 31, 2019 , all of the trusts in the ExAlt PlanTM on a gross basis, and a portion of the economic interests certain of the ExAlt Trusts, held by the residual beneficiaries, are attributed to noncontrolling interests in the accompanying consolidated financial statements. Interest income earned by Beneficient from the ExAlt Trusts is eliminated in its consolidation. However, because the eliminated amounts are earned from, and funded by, its noncontrolling interests, Beneficient's attributable share of the net income from the ExAlt Trusts is increased by the amounts eliminated. Accordingly, the elimination in consolidation of interest income and, for periods afterDecember 31, 2019 , certain fee revenue has no effect on net income (loss) attributable to Beneficient or holders of Common Units. For purposes of income allocation to Beneficient's equity holders, interest income is generally comprised of contractual interest, which is computed at a variable rate compounding monthly, interest recognized on certain of the ExAlt Loans through the effective yield method, and an amortized discount that is recognized ratably over the life of the ExAlt Loan. As a result of the change-of-control event discussed in Note 9 to the accompanying audited consolidated financial statements onDecember 31, 2019 and the resulting valuation performed under ASC 805, the existing loan portfolio between Ben and the ExAlt Trusts was evaluated as ofDecember 31, 2019 , for credit deterioration based on the intentions of all parties that the income allocations provisions of Ben operate under US GAAP as if the ExAlt Trusts were not consolidated for financial reporting purposes. Further, as required under ASC 805, each ExAlt Loans between Beneficient and the ExAlt Trusts was evaluated and classified as either purchased credit impaired ("PCI") or non purchased credit impaired ("non-PCI"). For PCI loans, expected cash flows as of the date of valuation in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequently, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan loss. For non-PCI loans, the difference between the fair value and unpaid principal balance of the loan as of the date of valuation is amortized or accreted to interest income over the contractual life of the loans using the effective interest method. In the event of prepayment, the remaining unamortized amount is recognized in interest income, which is eliminated upon the consolidation of the ExAlt Trusts for financial reporting purposes. Allowance for Loan Losses The allowance for loan losses, which is eliminated in consolidation, is an input to Beneficient's allocation of income to equity holders ofBen LP . The allowance for loan losses is a valuation allowance for probable incurred credit losses in the portfolio. Management's determination of the allowance is based upon an evaluation of the loan portfolio, impaired loans, economic conditions, volume, growth and composition of the collateral to the loan portfolio, and other risks inherent in the portfolio. Currently, management individually reviews all ExAlt Loans due to the low volume and non-homogenous nature of the current portfolio. Management relies heavily on statistical analysis, current NAV and distribution performance of the underlying alternative asset interests and industry trends related to alternative asset investments to estimate losses. Management evaluates the adequacy of the allowance by reviewing relevant internal and external factors that affect credit quality. The cash flows from the underlying alternative assets interests are the sole source of repayment for the ExAlt Loans and related interest. Beneficient recognizes any charge-off in the period in which it is confirmed. Therefore, impaired ExAlt Loans are written down to their estimated net present value. Interest income, for purposes of determining income allocations to Beneficient's equity holders, is adjusted for any allowance for loan losses, which was approximately$5.4 million for the year endedDecember 31, 2020 .Goodwill and Identifiable Intangible AssetsGoodwill and other identifiable intangible assets are initially recorded at their estimated fair values at the date of acquisition.Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. In the event that facts and circumstances indicate that the goodwill or other identifiable intangible assets may be impaired, an interim impairment test would be required. Intangible assets with finite lives are amortized over their useful lives. We perform required annual impairment tests of our goodwill and other intangible assets as ofOctober 1 for our reporting units. The goodwill impairment test requires us to make judgments and assumptions. The test consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples of our peers. We then compare those estimated fair values with the carrying values of the assets and liabilities of each reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, we will recognize an impairment charge for the amount by which the carrying amount Page 46 -------------------------------------------------------------------------------- Table of Contents exceeds the reporting unit's fair value; however, any loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. For 2020, the annual goodwill impairment analysis did not result in any impairment charges. Our impairment evaluation included a qualitative assessment, which considered whether there were indicators of potential impairment following the recent completion of the business combination accounting. In addition, our evaluation included a quantitative analysis, which included multiple assumptions, including estimated discounted cash flows and other estimates that may change over time. For example, a key assumption in determining the fair value of our reporting units is forecasting free cash flow generated by our business over the next five years and includes assumptions regarding expected growth of new service offerings and products. While our assumption reflects management's best estimates of future performance, the estimates assume Beneficient capturing a significant market share of liquidity transactions during the next five years leading to a substantial rate of growth of new service offerings and products, revenues and assets over the next five years endingDecember 31, 2025 . These estimations are uncertain to occur, and to the extent the Company falls short of achieving our expected growth in revenues and assets over the next four years, material impairments of our goodwill may occur in the near term. For example, a 15% decline in our annual projected volume of liquidity transactions reflected in the Company's forecasts would require impairments to begin to be recorded assuming all other assumptions on which the forecasts are built remain constant. Because the Company's forecasts are predicated on estimating future volume for new service offerings and products, the Company's actual future volume of liquidity transactions reflected in the Company's forecasts may fall short of management's forecasts by 15% or greater and may result in a partial or full write down of our goodwill balance, which totaled$2.4 billion atDecember 31, 2020 . In light of Beneficient's significant recurring losses from operations, negative cash flows from operations, and delays in executing its business plans, there could be potential triggering events identified and resulting impairment of goodwill recorded during the annual impairment test during the fourth quarter of 2021. While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit's goodwill balance. In addition, as reflected in Note 23 to the accompanying audited consolidated financial statements, the Company is evaluating potential strategic transactions that, if consummated, may result in the deconsolidation of Beneficient asGWG Holdings will no longer own a controlling financial interest in Beneficient. As we evaluate various strategic changes for the investment in Beneficient, we may make further changes to the Company's forecasted cash flows and such changes could result in losses upon deconsolidation of our subsidiary or may result in increased risk of future goodwill impairment charges. If future discounted cash flows become less than those projected by us, future impairment charges may become necessary that could have a materially adverse impact on our results of operations and financial condition in the period in which the write-off occurs. Recent Developments We define "recent developments" as material transactions or matters that occurred in the most recent fiscal quarter or in the period between the end of the fiscal quarter and the filing of the quarterly or annual financial statements with theSEC . The following recent developments are described in more detail in the notes to the accompanying audited consolidated financial statements. A reference to the corresponding note is included below: •The amendment of Beneficient's Credit Agreements (Note 23). •OnDecember 31, 2020 ,GWG Holdings ,GWG Life andBank of Utah entered into a supplemental indenture (the "Liquidity Bond Supplemental Indenture") providing for the issuance of up to$1.0 billion in aggregate principal amount of two new series of L Bonds known as "Liquidity Bonds" (Note 10). •During the fourth quarter of 2020, Beneficient executed 9 liquidity transactions pursuant to which customers sold interests in private equity funds with an aggregate net asset value of$15.1 million to certain of the ExAlt Trusts in exchange for agreed upon consideration. In connection with these transactions, GWG Life issued$0.5 million of principal in Liquidity Bonds onDecember 31, 2020 . •Subsequent toDecember 31, 2020 and through the date of this filing, Beneficient executed 10 liquidity transactions pursuant to which customers sold interests in private equity funds with an aggregate net asset value of$5.6 million to certain of the ExAlt Trusts in exchange for agreed upon consideration. In connection with certain of these transactions, GWG Life issued an aggregate of$0.3 million of principal in Liquidity Bonds onJanuary 8, 2021 andJanuary 15, 2021 . Page 47 -------------------------------------------------------------------------------- Table of Contents •In addition, onMarch 25, 2021 , Beneficient filed provisional patent applications pending on certain of its systems and processes underlying its liquidity products and trust services. These patent applications cover the following aspects of Beneficient's business: •Ben ExAlt PlanTM Patent Application. ?ExAlt Plan. System and process for providing liquidity to customers for their alternative assets. •Underwriting Systems Patent Applications. ?AltScore. Alternative asset quality scoring system. ?ValueAlt. Method to value interests in alternative asset funds. ?AltRating. Method to assign credit ratings to structured debt that is backed by alternative assets. •Risk Assessment and Risk Reduction Patent Applications. ?AltC. Tool to measure portfolio concentration relative to an established limit or target. ?OptimumAlt. Portfolio optimization and allocation tool specifically designed for alternative asset funds. ?AlphaAlt. Proprietary forecast of expected returns and cash flows for alternative asset fund types. ?AltQuote. Real-time indicator of liquidity solutions for holders of alternative assets. •InApril 2021 , theKansas Legislature adopted, and the governor ofKansas signed into law, a bill that would allow for the chartering and creation ofKansas trust companies, known as Technology Enabled Fiduciary Financial Institutions ("TEFFIs"), that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services in all capacities pursuant to statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative asset trusts. The legislation became effective onJuly 1, 2021 and designates an operating subsidiary ofBen LP ,Beneficient Fiduciary Financial, L.L.C. ("BFF") as the pilot trust company under the TEFFI legislation. A conditional trust charter was issued by theKansas Bank Commissioner to a subsidiary ofBen LP onJuly 1, 2021 . Under the pilot program, BFF will not be authorized to exercise its fiduciary powers as a TEFFI until the earlier of the date theKansas Bank Commissioner promulgates applicable rules and regulations orDecember 31, 2021 . The bill also permits theKansas Bank Commissioner to request a six-month extension of the pilot program period, which could delay Beneficient's permission to exercise its fiduciary powers under the charter untilJuly 1, 2022 . As a result, the directors ofGWG Holdings who serve on the new TEFFI trust company Board of Directors resigned their membership, effectiveJune 14, 2021 , onGWG Holdings' Board of Directors to devote their time to serving as directors of the Beneficient TEFFI trust company, which the Company believes is the highest and best use of their available time and skills and will support the development of the Beneficient TEFFI trust company and the successful execution of Beneficient's business plan (Note 23). •OnJune 28, 2021 , DLP IV entered into a Third Amended and Restated Loan and Security Agreement withLNV Corporation (the "Third Amended Facility") that resulted in a$52.5 million advance fromLNV Corporation , or$51.2 million including certain fees and expenses incurred in connection with the entry into the Third Amended Facility (Note 23). •OnAugust 11, 2021 ,GWG DLP Funding VI, LLC , aDelaware limited liability company ("DLP VI"), entered into a Credit Agreement (the "NF Credit Agreement") with each lender from time to time party thereto andNational Founders LP , aDelaware limited partnership, as the administrative agent (the credit facility evidenced by such NF Credit Agreement, the "NF Credit Facility") that resulted in a one-time$107.6 million advance with a scheduled maturity date ofAugust 11, 2031 (Note 23). Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due under the Third Amended Facility. •OnAugust 13, 2021 ,GWG Holdings ,Ben LP , and BCH entered into a Term Sheet that contemplates a series of transactions which, if completed, will result in, among other things, (i)GWG Holdings receiving certain proposed enhancements to its investments in Beneficient; (ii)GWG Holdings no longer having the right to appoint directors of the board of directors of Beneficient Management; and (iii) Beneficient no longer being a consolidated subsidiary ofGWG Holdings (Note 23). Page 48 -------------------------------------------------------------------------------- Table of Contents •OnSeptember 7, 2021 , DLP IV entered into a Fourth Amended and Restated Loan and Security Agreement withLNV Corporation , as lender, andCLMG Corp. , as the administrative agent on behalf of the lenders under the agreement (the "Fourth Amended Facility") that resulted in a$30.3 million advance fromLNV Corporation , with such advance including amounts to cover certain fees and expenses incurred in connection with the entry into the Fourth Amended Facility (Note 23). •An update on the current state of the Company and potential impact of the COVID-19 pandemic (Note 23). Asset Diversification As ofDecember 31, 2020 , we held a combined portfolio of assets consisting of 78% of fair value secondary life insurance policies and 22% of indirect interests in alternative assets held by certain of the ExAlt Trusts. The table presented below reflects classifications based onGWG Holdings' and Beneficient's current exposure types as ofDecember 31, 2020 (dollar amounts in thousands). Additional information regarding the Collateral portfolio is available on its website at www.trustben.com. The information on Beneficient's website is not part of, or incorporated by reference in, this report. Exposure Type Value Percent of Total Near-Duration Life Insurance Policies (1)$ 329,277 32.5 % Intermediate-Duration Life Insurance Policies (1) 299,812 29.6 % Long-Duration Life Insurance Policies (1) 162,823 16.1 % Growth Stage Private (2) 72,887 7.2 % Late Stage Venture Backed (2) 54,144 5.3 % Corporate Buyouts (2) 34,235 3.4 % Early Stage Venture Backed (2) 31,483 3.1 % Other (2) 29,145 2.8 % Total$ 1,013,806 100.0 %
______________________________________________________
(1)Represents fair value of life insurance policies.
(2)Represents the net asset value ("NAV") of the interests in alternative assets
that provide cash flows, which comprise the Collateral of the ExAlt Loans,
excluding the collateral exchanged in the Collateral Swap, which is eliminated
in consolidation. These ExAlt Loans eliminate upon consolidation in the
presentation of our consolidated financial statements NAV calculation reflects
the most current report of NAV and other data received from firm/fund sponsors.
If no such report has been received, Beneficient estimates NAV based upon the
last NAV calculation reported by the investment manager and adjusts it for
capital calls and distributions made in the intervening time frame.
The underlying exposure data represents GWG Holdings' exposure to life insurance
policies included in its portfolio and its exposure to the underlying Collateral
of Beneficient's loan portfolio to the ExAlt Trusts. Exposure type reflects
classifications based on each company's portfolio as determined by management.
Figures are based on third-party information and other relevant information as
determined by management. "Other" includes private debt strategies, natural
resources strategies, and hedge funds. "Near-Term", "Intermediate-Term", and
"Long-Term" life insurance policies represent policies with life expectancies
between 0 - 47 months, 48 - 95 months, and 96 - 240 months, respectively.
The following sections contain information on each of the secondary life
insurance assets and the interests in alternative assets held by certain of the
ExAlt Trusts separately.
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Table of Contents
Secondary Life Insurance Assets
Our portfolio of life insurance policies, owned by GWG Holdings' subsidiaries as
of December 31, 2020 , is summarized below:
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in
thousands)
$ 1,900,715 Average face value per policy (in thousands) $ 1,797 Average face value per insured life (in thousands) $ 1,943 Weighted average age of insured (years) 83.1 Weighted average life expectancy (LE) estimate (years) 6.9 Total number of policies 1,058 Number of unique lives 978 Demographics 74% Male; 26% Female Number of smokers 40 Largest policy as % of total portfolio face value 0.7 % Average policy as % of total portfolio 0.1 % Average annual premium as % of face value 3.8 % Our portfolio of life insurance policies, owned byGWG Holdings' subsidiaries as ofDecember 31, 2020 , organized by the insured's current age and the associated number of policies and policy benefits, is summarized below:
Distribution of Policies and Policy Benefits by Current Age of Insured
Percentage of Total
Policy Benefits Weighted Average
Min Age Max Age Number of Policies (in thousands) Number of Policies Policy Benefits LE (Years)
63 69 42 $ 49,535 4.0 % 2.6 % 10.21
70 74 191 222,761 18.1 % 11.7 % 10.6
75 79 206 349,467 19.5 % 18.4 % 9.44
80 84 213 375,926 20.0 % 19.7 % 7.54
85 89 229 556,339 21.6 % 29.3 % 4.84
90 94 153 296,310 14.5 % 15.6 % 2.99
95 100 24 50,377 2.3 % 2.7 % 2.09
Total 1,058 $ 1,900,715 100.0 % 100.0 % 6.92
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-------------------------------------------------------------------------------- Table of Contents Our portfolio of life insurance policies, owned byGWG Holdings' subsidiaries as ofDecember 31, 2020 , organized by the insured's estimated life expectancy estimates and associated policy benefits, is summarized below: Distribution of Policies by Current Life Expectancies of Insured Percentage of Total Policy Benefits Min LE (Months) Max LE (Months) Number of Policies (in thousands) Number of Policies Policy Benefits 0 47 300$ 518,044 28.4 % 27.3 % 48 71 225 421,774 21.3 % 22.2 % 72 95 192 318,497 18.1 % 16.8 % 96 119 150 283,899 14.2 % 14.9 % 120 143 109 167,195 10.3 % 8.8 % 144 179 71 145,581 6.7 % 7.7 % 180 240 11 45,725 1.0 % 2.3 % Total 1,058$ 1,900,715 100.0 % 100.0 % We rely on the payment of policy benefit claims by life insurance companies as a significant source of cash inflow. The life insurance assets we own represent obligations of third-party life insurance companies to pay the benefit amount under the policy upon the mortality of the insured. As a result, we manage this credit risk exposure by generally purchasing policies issued by insurance companies with investment-grade credit ratings fromStandard & Poor's , and diversifying our life insurance portfolio among a number of insurance companies. The yield to maturity on bonds issued by life insurance carriers reflects, among other things, the credit risk (risk of default) of such insurance carrier. We follow the yields on certain publicly traded life insurance company bonds because this information is part of the data we consider when valuing our portfolio of life insurance policies for our financial statements. The average yield to maturity of publicly traded life insurance company bonds data we consider as inputs to our life insurance portfolio valuation process was 1.15% as ofDecember 31, 2020 . We believe this average yield to maturity reflects, in part, the financial market's judgment that credit risk is low with regard to these carriers' financial obligations. The obligations of life insurance carriers to pay life insurance policy benefits ranks senior to all of their other financial obligations, including the senior bonds they issue. As ofDecember 31, 2020 , 96.3% of the face value benefits of our life insurance policies were issued by insurers having an investment-grade credit rating (BBB or better) byStandard & Poor's . As ofDecember 31, 2020 , our ten largest life insurance company credit exposures and theStandard & Poor's credit rating of their respective financial strength and claims-paying ability is set forth below: Distribution of Policy Benefits by Top 10 Insurance Companies Policy Benefits Percentage of Policy Ins. Co. Rank (in thousands) Benefit Amount Insurance Company S&P Rating 1$ 279,792 14.7 % John Hancock Life Insurance Company AA- 2 212,879 11.2 % Lincoln National Life Insurance Company AA- 3 200,936 10.6 % Equitable Life Insurance Company A+ 4 164,391 8.6 % Transamerica Life Insurance Company A+ 5 157,755 8.3 % Brighthouse Life Insurance Company AA- 6 87,339 4.6 % American General Life Insurance Company A+ 7 84,998 4.5 % Pacific Life Insurance Company AA- 8 67,376 3.5 % ReliaStar Life Insurance Company A+ 9 59,808 3.1 % Security Life of Denver Insurance Company A+ 10 57,153 3.0 % Protective Life Insurance Company AA-$ 1,372,427 72.1 % Page 51
-------------------------------------------------------------------------------- Table of ContentsExAlt Trusts' Investment in Alternative Assets Beneficient's primary operations, which commenced onSeptember 1, 2017 , consist of offering its liquidity and trust administration services to its customers, primarily through certain ofBen LP's operating subsidiaries, Ben Liquidity (as defined below) and Ben Custody Admin (as defined below), respectively. Ben Liquidity offers simple, rapid and cost-effective liquidity products to its customers through the use of customized trust vehicles, the ExAlt Trusts, that facilitate the exchange of a customer's alternative assets for consideration using a unique financing structure. A subsidiary of Ben Liquidity makes ExAlt Loans to certain of the ExAlt Trusts. Ben Liquidity generates interest and fee income earned in connection with such ExAlt Loans to certain of the ExAlt Trusts, which are collateralized by the cash flows from the exchanged alternative assets (the "Collateral"). Ben Custody Admin provides trust administration services to the trustees of certain of the ExAlt Trusts that own the exchanged alternative asset following a liquidity transaction for fees payable quarterly. The Collateral supports the repayment of the loans plus any related interest and fees. Since the ExAlt Trusts are consolidated,Ben LP's operating subsidiary ExAlt Loans and interest and fee income are eliminated in the presentation of our consolidated financial statements. The ExAlt Trusts' investments in alternative assets are the source of the Collateral supporting the ExAlt Loans. These assets consist primarily of limited partnership interests in various alternative investments, including private equity funds. These alternative investments are valued using NAV as a practical expedient. Changes in the NAV of these investments are recorded in investment income, net in our consolidated statements of operations. The ExAlt Trusts' investments in alternative assets provide the economic value creating the Collateral to the ExAlt Loans made in connection with each liquidity transaction. The ExAlt Trusts held interests in alternative assets with a net asset value of$221.9 million and$342.0 million atDecember 31, 2020 andDecember 31, 2019 , respectively. As ofDecember 31, 2020 , the ExAlt Trusts' portfolio had exposure to 117 professionally managed alternative investment funds, comprised of 327 underlying investments, 91 percent of which are investments in private companies. The portfolio of alternative assets, excluding the collateral exchanged in the Collateral Swap, which is eliminated in consolidation, covers the following industry sectors and geographic regions as of the dates shown below (dollar amounts in thousands): (As Restated) December 31, 2020 December 31, 2019 Percent of Percent of Industry Sector Value Total Value Total Diversified Financials$ 28,462 12.8 %$ 27,418 8.0 % Telecommunication Services 27,401 12.3 % 27,059 7.9 % Food and Staples Retailing 24,450 11.0 % 20,507 6.0 % Software and Services 23,310 10.5 % 22,573 6.6 % Utilities 21,740 9.8 % 15,733 4.6 % Semiconductors and Semiconductor Equipment 21,271 9.6 % 14,658 4.3 % Not Applicable (e.g., Escrow, Earnouts) 18,138 8.2 % 26,569 7.7 % Health Care Equipment and Services 14,682 6.6 % 92,418 27.0 % Pharmaceuticals, Biotechnology and Life Sciences(1) 3,415 1.5 % 52,202 15.3 % Other(1) 39,025 17.7 % 42,875 12.6 % Total$ 221,894 100.0 %$ 342,012 100.0 % Page 52
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Table of Contents
(As Restated)
December 31, 2020 December 31, 2019
Percent of Percent of
Geography Value Total Value Total
North America $ 95,569 43.1 % $ 211,722 61.9 %
Western Europe 50,219 22.6 % 46,719 13.7 %
Asia 36,436 16.4 % 29,144 8.5 %
Latin & South America 25,255 11.4 % 22,377 6.5 %
Other(2) 14,415 6.5 % 32,050 9.4 %
Total $ 221,894 100.0 % $ 342,012 100.0 %
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(1)Industries in this category each comprise less than 5 percent as ofDecember 31, 2020 . Pharmaceuticals, Biotechnology and Life Sciences is shown separately as it comprised greater than 5 percent as ofDecember 31, 2019 . (2)Locations in this category each comprise less than 5 percent. Assets in the portfolio consist primarily of interests in alternative investment vehicles (also referred to as "funds") that are managed by a group ofU.S. and non-U.S. based alternative asset management firms that invest in a variety of financial markets and utilize a variety of investment strategies. The vintages of the funds in the portfolio as ofDecember 31, 2020 ranged from 1993 to 2018. As the ExAlt Trusts grow its portfolio, it will monitor the diversity of the portfolio through the use of concentration guidelines. These guidelines were established, and will be periodically updated, through a data driven approach based on asset type, fund manager, vintage of fund, industry segment and geography to manage portfolio risk. Beneficient will refer to these guidelines when making decisions about new financing opportunities; however, these guidelines will not restrict Beneficient from entering into financing opportunities that would result in Beneficient having exposure outside of its concentration guidelines. In addition, changes to the ExAlt Trusts' portfolio may lag changes to the concentration guidelines. As such, the ExAlt Trusts' portfolio may, at any given time, have exposures that are outside of its concentration guidelines to reflect, among other things, attractive financing opportunities, limited availability of assets, or other business reasons. Given the ExAlt Trusts' limited operating history, the portfolio as ofDecember 31, 2020 had exposure to certain alternative investment vehicles and investments in private companies that were outside of those guidelines. Classifications by industry sector, exposure type and geography reflect classification of investments held in funds or companies held directly in the portfolio. Investments reflect the assets listed by the general partner of a fund as held by the fund and have a positive or negative net asset value. Typical assets include portfolio companies, limited partnership interests in other funds, and net other assets, which are a fund's cash and other current assets minus liabilities. The underlying interests in alternative assets are primarily limited partnership interests, and the limited partnership agreements governing those interests generally include restrictions on disclosure of fund-level information, including fund names and company names in the funds. Industry sector is based on Global Industry Classification Standard (GICS®) Level 2 classification (also known as "Industry Group ") of companies held in the portfolio by funds or directly, subject to certain adjustments by us. "Other" classification is not a GICS® classification. "Other" classification reflects companies in the GICS® classification categories of Automobiles & Components, Banks, Capital Goods, Commercial & Professional Services, Consumer Durables & Apparel, Consumer Services, Energy, Food, Beverage & Tobacco, Household & Personal Products, Insurance, Materials,Media & Entertainment , Real Estate, Retailing, Tech Hardware & Equipment, and Transportation. N/A includes investments assets that we have determined do not have an applicable GICS® Level 2 classification, such as Net Other Assets and investments that are not operating companies. Investment exposure type reflects classifications based on each fund's current investment strategy stage as determined by us. "Other" includes private debt strategies, natural resources strategies and hedge funds. Geography reflects classifications determined by us based on each underlying investment. "Other" geography classification includesIsrael ,Australia ,Northern Europe , andEastern Europe . Page 53 -------------------------------------------------------------------------------- Table of Contents Principal Revenue and Expense Items During the years endedDecember 31, 2020 and 2019, we earned revenues from the following primary sources: •Revenue Realized from Maturities of Life Insurance Policies. We recognize the difference between the face value of the policy benefits and carrying value when an insured event has occurred and determine that collection of the policy benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally collect the face value of the life insurance policy from the insurance company within 45 days of our notification of the insured's mortality, but this collection time varies depending on the insurance company and individual policy. •Change in Fair Value of Life Insurance Policies. We value our life insurance portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which reflects the expected receipt of policy benefits in future periods, net of premium costs, as shown in our consolidated financial statements. •Investment Income. Includes the change in net asset value of the alternative assets held by certain of the ExAlt Trusts as well as the change in fair value of repurchase options issued by certain of the ExAlt Trusts. •Interest Income. During the year endedDecember 31, 2019 , and thus prior to the consolidation of Beneficient. interest income primarily included interest income on the Promissory Note and Commercial Loan Agreement. Interest earned on the Promissory Note and the Commercial Loan Agreement was eliminated in consolidation with Beneficient beginningJanuary 1, 2020 . As such, interest income during the year endedDecember 31, 2020 only includes interest earned from policy benefits receivable and cash held in banks. •Other Income. Includes changes in the fair value of Beneficient's investment in put options, L Bond redemption fees, and other miscellaneous income. Additionally, includes income totaling$36.3 million recognized during the second quarter of 2020 by Beneficient as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient. During the years endedDecember 31, 2020 and 2019, our main components of expense are summarized below: •Interest Expense. Includes interest incurred under the second amended and restated senior credit facility withLNV Corporation (as amended from time to time, "LNV Credit Facility"), as well as interest onGWG Holdings' L Bonds, Seller Trust L Bonds and other outstanding indebtedness, including Beneficient's debt due to related parties. When we issue debt, we amortize the financing costs (commissions and other fees) associated with such indebtedness over the outstanding term of the financing and classify it as interest expense. •Employee Compensation and Benefits. Employee compensation and benefits includes salaries, bonuses and other incentives and costs of employee benefits. Also included are significant non-cash compensation expenses totaling$110.7 million related to Beneficient's equity incentive plans for the year endedDecember 31, 2020 . •Selling, General and Administrative Expenses. We recognize and record expenses incurred in our business operations, including operations related to the purchasing and servicing of life insurance policies, the origination and servicing of ExAlt Loans and costs associated with trust administration. These expenses include legal and professional fees, sales, marketing, occupancy and other expenditures. Additional components of our net earnings include: •Earnings (Loss) fromEquity Method Investment . Prior to the Investment and Exchange Agreements onDecember 31, 2019 , we accounted forGWG Holdings' investment in the common units ofBen LP ("Common Units") using the equity method. Under this method, we recorded our share of the net earnings or losses attributable to holders of Common Units, on a one quarter lag, as a separate line on our consolidated statements of operations. We also account forGWG Holdings' investment in FOXO as an equity method investment, which is also included in earnings (loss) from equity method investment in our consolidated statements of operations. We had losses of$7.3 million and$4.1 million from equity method investments during the years endedDecember 31, 2020 and 2019, respectively. •Gain on Consolidation ofEquity Method Investment . In conjunction with the consolidation of Beneficient onDecember 31, 2019 , we remeasured our preexisting equity method investment to fair value, resulting in a gain due to Page 54 -------------------------------------------------------------------------------- Table of Contents the increase in the estimated fair value compared to our existing book value. The gain on consolidation of Beneficient onDecember 31, 2019 was$243.0 million . Refer to Note 4 to the consolidated financial statements for further information. Results of Operations - 2020 Compared to 2019 The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our consolidated financial statements and related notes (dollar values in thousands). Net Income (Loss) Attributable to Common Shareholders Net loss attributable to common shareholders was$168.5 million for 2020 compared to net income attributable to common shareholders of$70.5 million for 2019. The results of operations for 2020 reflect the consolidation of Beneficient compared to an equity method investment in 2019. The year endedDecember 31, 2020 includes significant non-cash equity based compensation expense of$110.7 million related to Beneficient's equity incentive plans. The net income for 2019 was primarily driven by the net gain of$243.0 million realized upon consolidation of Beneficient. More details regarding revenue and expenses in 2020 compared to 2019 are included in the discussion below. Revenue fromSecondary Life Insurance Year EndedDecember 31, 2020 2019
Revenue realized from maturities of life insurance policies
Revenue recognized from change in fair value of life insurance
policies
34,114 49,015 Premiums and other annual fees (71,439) (65,577) Gain on life insurance policies, net $
49,598
Attribution of gain on life insurance policies, net:
Change in estimated probabilistic cash flows, net of premium and
other annual fees paid
$ (7,976) $ 1,609 Net revenue recognized at maturity 57,574 69,122 Unrealized gain on acquisitions - 6,921 Change in life expectancy evaluation - (2,332) Gain on life insurance policies, net$ 49,598 $ 75,320 Number of policies acquired - 83 Face value of purchases $ -$ 97,316 Purchases (initial cost basis) $ -$ 32,356 Unrealized gain on acquisition (% of face value) - % 7.1 % Number of policies matured 92 78 Face value of matured policies $
125,109
Net revenue recognized at maturity event (% of face value matured) 46.0 %
55.2 % Revenue from changes in estimated probabilistic cash flows, net of premiums paid, was a charge of$8.0 million in 2020 compared to a credit of$1.6 million in 2019. The decrease of$25.7 million in gain on life insurance policies for the year endedDecember 31, 2020 , over the comparable prior year period, was driven by a combination of no gain on policy acquisitions, maturities of life insurance policies with a higher cumulative cost basis, and higher premiums paid. The Company did not purchase any life insurance policies during 2020. The face value of policies purchased in 2019 was$97.3 million . The resulting unrealized gain on acquisition was$6.9 million in 2019. The absence of an unrealized gain on acquisition in the current period is the result of a strategic decision to significantly reduce capital allocated to purchasing additional life insurance policies through the secondary market and to increase capital allocated toward providing liquidity to a broader range of alternative assets, primarily through additional investments in Beneficient. OnDecember 31, 2019 , GWG Page 55 -------------------------------------------------------------------------------- Table of Contents Holdings obtained the right to appoint a majority of the board of directors of the general partner ofBen LP . As a result of this change-of-control event, we reported the results ofBen LP and its subsidiaries on a consolidated basis beginning on the transaction date ofDecember 31, 2019 . We believe that Beneficient's operations will generally produce higher risk-adjusted returns than those we can achieve from life insurance policies acquired in the secondary market; however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing, recapitalization, partnership, reinsurance guarantees, life insurance operations or other transactions involving of our life insurance portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. The face value of matured policies was$125.1 million for each period presented. The net revenue recognized at maturity was$57.6 million and$69.1 million , respectively, reflecting a decrease in revenue attributable to maturity events of$11.5 million primarily from maturities of policies with a higher cumulative cost basis in 2020 compared to 2019. There were no net revenue charges from change in life expectancy evaluation in 2020 compared to a charge of$2.3 million in 2019. The resulting net revenue increase of$2.3 million primarily resulted from refinement of life expectancy data that occurred during 2019 that were nonrecurring in 2020. Investment Income, Interest Income and Other Income (in thousands) Year Ended December 31, 2020 2019 Increase/(Decrease) Investment income$ 44,106 $ - $ 44,106 Interest income 1,594 15,646 (14,052) Other income 29,073 1,310 27,763 Total$ 74,773 $ 16,956 $ 57,817 Investment income was added as result of the consolidation of Beneficient onDecember 31, 2019 . Investment income was$44.1 million during the year endedDecember 31, 2020 , and is comprised of$17.6 million decrease in net asset value of the alternative assets held by certain of the ExAlt Trusts and$61.7 million increase in fair value of repurchase options issued by certain of the ExAlt Trusts. Interest income decreased$14.1 million during the year endedDecember 31, 2020 , compared to the same period in 2019, primarily due to the consolidation of Beneficient, which eliminated interest earned on the Promissory Note and Commercial Loan Agreement beginningJanuary 1, 2020 . Interest income on the Promissory Note entered into onMay 31, 2019 , was$2.2 million during 2019. Interest income earned on the commercial loan between GWG Life and Beneficient was$11.3 million during the year endedDecember 31, 2019 . Interest income recognized during the year endedDecember 31, 2020 and 2019, also includes interest earned from policy benefits receivable and cash held in banks, which in the aggregate was$1.3 million and$2.1 million , respectively. The decrease was driven by lower average cash balances and slightly lower interest rates in 2020 compared to 2019. Other income increased during the year endedDecember 31, 2020 compared to the same period in 2019. Other income for the year ended 2020 includes$36.3 million of income recognized during the second quarter of 2020 by Beneficient as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient. A substantial majority of the former director's equity-based compensation units were fully vested, and the related expense was recorded in prior periods. This income was offset by a$7.8 million decrease to the fair value of Beneficient's put options during 2020. Other income during the year endedDecember 31, 2019 , includes L Bond early redemption fees and other miscellaneous income from legacy initiatives ofGWG Holdings . Page 56 -------------------------------------------------------------------------------- Table of Contents Interest and Operating Expenses (in thousands) Year Ended December 31, Increase/ 2020 2019 (Decrease)
Interest expense (including amortization of deferred
financing costs)
$ 154,616 $ 114,844 $ 39,772 Employee compensation and benefits 146,363 28,309 118,054 Legal and professional fees 30,075 12,824 17,251 Other expenses 18,227 15,896 2,331 Total expenses$ 349,281 $ 171,873 $ 177,408 Interest expense, including amortization of deferred financing costs, increased$39.8 million during the year endedDecember 31, 2020 compared to the same period in 2019. The increase in interest expense was primarily due to the increase in the average outstanding L Bonds in 2020 compared to 2019, contributing$26.5 million of increased interest expense, including amortization of deferred financing costs. Also, the consolidation of Beneficient beginningDecember 31, 2019 , increased interest expense by$11.3 million for the year endedDecember 31, 2020 compared to the same period in 2019, related to Beneficient's debt due to related parties. Additionally,$3.8 million of increased interest expense, including amortization of deferred financing costs, during the year endedDecember 31, 2020 , compared to the same period in 2019, was due to increased interest paid on the LNV Credit Facility associated with a higher average principal balance outstanding. Finally, these increases were partially offset by a$1.8 million decrease in interest expense on Seller Trusts L Bonds related to the portion of Seller Trust L Bonds eliminated as ofSeptember 30, 2020 as a result of the Collateral Swap discussed in Note 1 to the consolidated financial statements. The increase in employee compensation and benefits in 2020 compared to 2019 was primarily related to the consolidation of Beneficient onDecember 31, 2019 . Specifically, the Company recognized$110.7 million of equity-based compensation expense during the year endedDecember 31, 2020 , related to Beneficient's equity incentive plans. Beneficient's Board of Directors adopted the equity incentive plans in 2018 and 2019 and approved the granting of equity incentive awards during the second quarter of 2019 to certain directors and in the first quarter of 2020 to certain employees. Awards are generally subject to service-based vesting over a multi-year period from the recipient's date of hire, though some awards fully vested upon the grant date. As ofDecember 31, 2020 , over 78% of the awards granted under Beneficient's equity incentive plans had vested. Expense associated with these awards is based on the fair value of the equity on the date of grant. AsBen LP's equity is not publicly traded, the fair value of the equity awards is estimated on the grant date using the most recent valuation received from a reputable third-party valuation firm, which provides the Company with observable fair value information sufficient for estimating the grant date fair value. In addition to Beneficient's equity-based compensation expense, we recognized additional retention, severance and other costs in the first quarter of 2020 related to the relocation ofGWG Holdings' principal offices fromMinneapolis toDallas in late 2019. The increase in legal and professional fees in 2020 compared to 2019 is primarily the result of the consolidation of Beneficient onDecember 31, 2019 , which added$19.0 million of legal and professional fees during the year endedDecember 31, 2020 . The increase attributable to the consolidation of Beneficient was partially offset by lower consulting fees during 2020, compared to 2019. The increase in other expenses during the year endedDecember 31, 2020 compared to the same period of 2019, is primarily the result of the consolidation of Beneficient onDecember 31, 2019 , which added$7.6 million of other expenses during 2020. These increases were partially offset by lower business insurance, contract labor and other operating expenses ofGWG Holdings and subsidiaries during the comparable periods. FOXO Initiatives During 2019, we incurred$5.5 million of expenses related to the development of intellectual property surrounding advanced epigenetic testing technology. These expenses were included in the loss from our equity method investment in FOXO during 2020. Page 57 -------------------------------------------------------------------------------- Table of Contents OnNovember 13, 2020 ,FOXO BioScience LLC converted to a corporation and is now known asFOXO Technologies Inc. GWG's previous membership interest in the LLC converted to preferred equity in FOXO. We believe that as a separate entity (rather than as a small subsidiary of a large financial services holding company), the FOXO businesses can reach their maximum potential in terms of marketing and branding, attraction of talent, appropriate peer group comparisons and, ultimately, return to its owners. We expect FOXO's costs to increase in the future, which will affect our consolidated earnings through our earnings (loss) from equity method investment. UnderGWG Holdings' subscription agreement with FOXO, we are obligated to invest approximately$20.0 million in FOXO over a two year period ending inOctober 2021 , of which$16.2 million has been funded throughDecember 31, 2020 . Income Taxes We realized$16.4 million in income tax benefit and$71.9 million in income tax expense for the years endedDecember 31, 2020 and 2019, respectively, which resulted in effective tax rates of 7.9% and 34.8%, compared to the statutory federal income tax rate of 21.0% for both periods. The following table provides a reconciliation of our income tax expense (benefit) at the statutory federal income tax rate to our actual income tax expense (in thousands): Year Ended December 31, 2020 2019 (As Restated) Statutory federal income tax (benefit)$ (43,339) 21.0 %$ 33,449 21.0 % State income taxes (benefit), net of federal benefit (2,995) 1.5 % 12,962 8.1 % Change in valuation allowance 20,688 (10.0) % 25,547 5.8 % Noncontrolling interest 7,718 (3.7) % - - % Other permanent differences, net 1,538 (0.9) % (93) (0.1) % Total income tax expense (benefit)$ (16,390) 7.9 %$ 71,865 34.8 % The most significant temporary differences between GAAP net income (loss) and taxable net income (loss) are the treatment of interest costs, policy premiums and servicing costs with respect to the acquisition and maintenance of the life insurance policies and revenue recognition with respect to the fair value of the life insurance portfolio. As of bothDecember 31, 2020 and 2019, valuation allowances were recorded against the total amount of non-permanent deferred tax assets. Indefinite-lived deferred tax assets of$2.8 million in 2020 were comprised of an interest expense limitation under Internal Revenue Code Section 163(j) and the tax-effected net operating loss ("NOL") created beginning in 2019. AtDecember 31, 2020 , we had federal NOL carryforwards of$58.0 million resulting in related deferred tax assets of$12.2 million , and state NOL carryforwards of$24.3 million resulting in related deferred tax assets of$1.9 million . AtDecember 31, 2019 , we had federal NOL carryforwards of$29.7 million resulting in related deferred tax assets of$6.2 million , and state NOL carryforwards of$29.6 million resulting in related deferred tax assets of$2.3 million . The NOL carryforwards subject to expiration (i.e., those generated prior to 2018) will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. As a result of the Exchange Transaction, a change in ownership for tax purposes only has occurred as ofDecember 28, 2018 . As such, the annual utilization of our net operating losses generated prior to the ownership change is limited. However, net unrealized built-in gains on our life insurance policies result in an increase in the Section 382 limit over the five-year recognition period, which resulted in$0.5 million of current tax liability in 2020 and a nominal amount in 2019. After the change-of-control transaction withBen LP onDecember 31, 2019 ,GWG Holdings moved its headquarters fromMinnesota toTexas . This move resulted in a change in the state deferred tax rate from 9.8% to 0%. In the third quarter 2020,GWG Holdings was allocated a gain from its investment inBen LP . The tax effects of these items were recorded as discrete items. The Company currently records a valuation allowance against its deferred tax assets that cannot be realized by the future reversal of existing temporary differences. Due to the uncertain timing of the reversal of certain of these temporary differences associated with the constraint described below, they cannot be considered as a source of future taxable income for Page 58 -------------------------------------------------------------------------------- Table of Contents purposes of determining a valuation allowance; therefore, the vast majority of the deferred tax liability cannot be utilized in determining the realizability of the deferred tax assets. Due to a prior deemed ownership change, net operating loss carryforwards are subject to Section 382 of the Internal Revenue Code. The Company reassessed its valuation allowance during the third quarter of 2020 and determined it will no longer utilize the reversal of a temporary difference related toGWG Holdings' preferred equity ownership inBen LP , until such time as the preferred equity is no longer constrained, as a source of income to realize existing deferred tax assets related to the net operating loss and Internal Revenue Code Section 163(j) limitations. As a result, we recorded a large net deferred tax liability as ofDecember 31, 2020 . The effects of the reassessment of the valuation allowance on the deferred tax liability as ofDecember 31, 2019 are reflected in Note 21 to the consolidated financial statements. The net deferred tax liability as ofDecember 31, 2020 is specifically related to GWG Life's investment in the Preferred Series A Subclass 1 Unit Accounts described in Note 1 to the consolidated financial statements. The disposition of this investment is constrained by the Pledge and Security Agreement in favor of the holders of the L Bonds ofGWG Holdings . As such, the timing of recognition of the necessary taxable income related to this investment and the future reversal of this temporary difference cannot be predicted. We continue to monitor and evaluate the rationale for recording a full valuation allowance for the net amount of the deferred tax assets in excess of the deferred tax liabilities that are not constrained. We intend to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. OnMarch 27, 2020 ,Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which included significant changes toU.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification to Section 163(j), which increased the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. Revenue and Earnings before Tax by Reportable Segment - 2020 Compared to 2019 We have two reportable segments: 1) Beneficient and 2)Secondary Life Insurance . Corporate & Other includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company andGWG Holdings' equity method investment in FOXO. Comparison of revenue by reportable segment for the periods indicated (in thousands): Year Ended December 31, Increase/ Revenue: 2020 2019 (Decrease) Secondary Life Insurance$ 51,359 $ 78,002 $ (26,643) Beneficient 72,950 13,738 59,212 Corporate & Other 62 536 (474) Total$ 124,371 $ 92,276 $ 32,095 The primary drivers of the changes from 2019 to 2020 were as follows: •Secondary Life Insurance revenue decreased by$26.6 million for the year endedDecember 31, 2020 , over the comparable period in 2019 primarily as a result of a$25.7 million decrease in gain on life insurance policies driven by a combination of no gain on policy acquisitions, maturities of life insurance policies with a higher cumulative cost basis, and higher premiums paid. Also contributing to the decrease in theSecondary Life Insurance segment revenues was a decrease of$0.9 million in interest and other miscellaneous income during 2020 compared to 2019. •Beneficient segment revenue for the year endedDecember 31, 2020 , represents the consolidated operations of Beneficient, compared to an equity method investment in Beneficient during the same period in 2019. As such, the year ended 2020 includes$61.7 million of investment income recognized related to repurchase options issued by certain of the ExAlt Trusts and a$17.6 million downward adjustment to NAV of alternative assets held by certain of the ExAlt Trusts, which are consolidated subsidiaries ofBen LP , whereas the year ended 2019 primarily includes Page 59 -------------------------------------------------------------------------------- Table of Contents$11.3 million of interest income on the Commercial Loan betweenGWG Life and Ben LP and$2.2 million of interest income on the Promissory Note between GWG Life and the ExAlt Trusts, both of which were eliminated in consolidation beginningDecember 31, 2019 . Additionally, there was$36.3 million of income recognized during the second quarter by Beneficient as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient. A substantial majority of the former director's equity-based compensation units were fully vested, and the related expense was recorded in prior periods. Finally, this was offset by a$7.8 million decrease to the fair value of Beneficient's put options during 2020. •Corporate & Other revenue was de minimis during the year endedDecember 31, 2020 . The year ended 2019 includes minimal revenue related to a legacy merchant cash advance subsidiary ofGWG Holdings .GWG Holdings no longer participates in the merchant cash advance industry. Comparison of earnings (loss) before tax by reportable segment for the periods indicated (in thousands): Year Ended December 31, Increase/ Segment Earnings (Loss) Before Tax(1) 2020 2019 (Decrease) (As Restated) Secondary Life Insurance$ (59,684) $ (27,694) $ (31,990) Beneficient(1) (139,575) 222,443 (362,018) Corporate & Other(2) (32,970) (35,470) 2,500 Total$ (232,229) $ 159,279 $ (391,508)
__________________________________
(1)Includes earnings from equity method investments and gain on consolidation of equity method investments for the year endedDecember 31, 2019 , as presented in our consolidated statements of operations, related toGWG Holdings' equity method investment in Beneficient prior toDecember 31, 2019 . (2)Includes loss from equity method investments for the year endedDecember 31, 2020 , as presented in our consolidated statements of operations, related toGWG Holdings' investment in FOXO. The primary drivers of the changes in earnings (loss) before tax for the year endedDecember 31, 2020 , compared to the same period of 2019 were as follows: •Secondary Life Insurance loss before tax increased by$32.0 million as a result of the following: •$25.7 million decrease in the gain on life insurance policies, net as described above in the revenue discussion; and •$14.2 million increase in interest expense as a result of higher average debt outstanding; partially offset by •A decrease in operating expenses of$8.9 million , primarily resulting from lower employee compensation and benefits, lower business insurance costs, and lower legal fees. •Beneficient segment experienced a net loss of$139.6 million in 2020 compared to earnings of$222.4 million in 2019, primarily due to the consolidation of Beneficient onDecember 31, 2019 . During 2019, we accounted for Beneficient using the equity method on a one-quarter lag, and the amount reported represents our proportionate share of the losses of Beneficient for the period presented. The one-quarter lag was discontinued with the consolidation of Beneficient onDecember 31, 2019 . The consolidation of Beneficient resulted in a net gain of$243.0 million related to the remeasurement to fair value ofGWG Holdings' preexisting equity method investment in Beneficient. The loss of Beneficient for the year endedDecember 31, 2020 , was primarily driven by$107.8 million of non-cash charges for equity incentive compensation. During the year endedDecember 31, 2020 , Beneficient's losses were partially offset by$36.3 million of income recognized as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient as described in the revenue comparison discussion above. •Corporate and Other operating loss was lower duringDecember 31, 2020 , compared to 2019, primarily due to lower legal and consulting fees as we incurred higher fees in 2019 as a result of the Beneficient transactions. Page 60 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As ofDecember 31, 2020 and 2019, we had approximately$124.2 million and$115.8 million , respectively, in combined available cash, cash equivalents, and restricted cash. We generated net losses from operations for the years endedDecember 31, 2020 and 2019 totaling$208.5 million and$151.5 million . As ofOctober 15, 2021 , we had approximately$54.3 million in combined available cash, cash equivalents, and restricted cash. Besides funding operating expenditures, we are obligated to pay other items such as interest payments and debt maturities, and preferred stock dividends and redemptions. We have historically financed our businesses primarily through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility, and the NF Credit Facility. We have also financed our business through proceeds from life insurance policy benefit receipts, cash distributions from the ExAlt Trusts' alternative asset portfolio, dividends and interest on investments, and Beneficient's debt due to related parties. We have traditionally used proceeds from these sources for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal, interest and dividends. We have also used proceeds to allocate capital to Beneficient; however, ifBen LP becomes an independent company per the Term Sheet discussed in the "Recent Developments" section above, the Company expects thatBen LP would reduce its reliance onGWG Holdings to fund its operations and would raise future capital from other sources. Ben LP's capital raising efforts and participation in liquidity transactions may include the issuance of equity or debt ofBen LP or one of its subsidiaries, and the newly issued securities may be dilutive toGWG Holdings' and GWG Life's investments inBen LP and BCH and may include preferential terms relative toGWG Holdings' and GWG Life's investments inBen LP and BCH, as applicable. We currently fund our business primarily with debt that generally has a shorter duration than the duration of our long-term assets. The resulting asset/liability mismatch can result in a liquidity shortfall if we are unable to renew maturing short term debt or secure suitable additional financing. In such a situation, we could be forced to sell assets at less than optimal (distressed) prices. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. We heavily rely onGWG Holdings' L Bond offering to fund our business operations, including, among other things, interest and principal payments on the existing L Bonds and capital allocations to Beneficient. We temporarily suspended the offering ofGWG Holdings' L Bonds, commencingApril 16, 2021 , as a result of our delay in filing certain periodic reports with theSEC , including this 2020 Form 10-K, and were required to seek alternative sources of capital. As a result of the suspension ofGWG Holdings' L Bond offering, onJune 28, 2021 (as described in more detail above), we pledged additional life insurance policies as collateral and received an additional advance of$51.2 million under the Third Amended Facility. Subsequently, onAugust 11 2021 , we entered into the NF Credit Agreement (as described in more detail above and in Note 23 to the accompanying audited consolidated financial statements) and received a one-time advance of$107.6 million . Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due, including interest and penalties, under the Third Amended Facility and the additional pledged life insurance policies used as collateral for the Third Amended Facility were released and pledged under the NF Credit Facility. Further, onSeptember 7, 2021 , DLP IV entered into the Fourth Amended Facility, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of$30.3 million fromLNV Corporation , with no additional pledged collateral. Primarily due to the current suspension ofGWG Holdings' L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if our ability to sell L Bonds dissipates, or if we are forced to suspend the L Bond offering. However, the Company may not be able to obtain additional borrowings under existing debt facilities or new borrowings with other third-party lenders. To the extent thatGWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative covenants that restrictGWG Holdings' ability to take specific actions, such as incurring additional debt or making additional investments in growing the operations of the Company. IfGWG Holdings is unable to fund its operations and other obligations, or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding, ii) exercise our right to decline requests for early L Bond redemptions or redemptions of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. Page 61 -------------------------------------------------------------------------------- Table of Contents We anticipate recommencing the offering ofGWG Holdings' L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell our L Bonds in the event that we are unable to meet the applicable NASDAQ listing requirements in a timely manner, which could result in the L Bonds no longer being "covered securities" for federal securities law purposes which would subject the offer and sale of L Bonds to potentially extensive state "blue sky" securities law requirements. If for any reason we are forced to suspendGWG Holdings' L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand forGWG Holdings' L bonds dissipates, our business would be adversely impacted and our ability to service and repay our debt obligations, much of which is short term, would be compromised, thereby negatively affecting our business prospects and viability. We had$97.4 million borrowing base capacity, excluding any potential capacity for premiums and servicing costs, under the LNV Credit Facility as ofDecember 31, 2020 . Additional future borrowing base capacity for premiums and servicing costs, created as the premiums and servicing costs of pledged life insurance policies become due and by additional policy pledges to the facility, if any, exists under the LNV Credit Facility at the sole discretion of the lender. The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these debt covenants as ofDecember 31, 2020 , andDecember 31, 2019 , and continue to be so as of the filing date of this report. Subsequent toDecember 31, 2020 , we received additional advances through amendments to the LNV Credit Facility and entered in to the NF Credit Facility (as described in more detail above and in Note 23 to the accompanying audited consolidated financial statements). Beneficient is obligated to make debt payments totaling$74.5 million on certain outstanding borrowings throughMay 30, 2022 under the terms of the Amendment No. 1 to the Second Amended and Restated Credit Agreements as discussed further in Note 23 to the accompanying audited consolidated financial statements. Primarily due to both the forthcoming debt payments under the Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation of Beneficient fromGWG Holdings , as discussed previously and in Note 23 to the accompanying audited consolidated financial statements, which is expected to result in reduced reliance by Beneficient onGWG Holdings to fund its operations, Beneficient will require additional liquidity to continue its operations over the next twelve months. We expect Beneficient to satisfy these obligations and fund its operations through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments into Beneficient byGWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to close during the fourth quarter of 2021 and/or the first quarter of 2022. Beneficient may not be able to refinance or obtain additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or involve negative covenants that restrict Beneficient's ability to take specific actions, such as incurring additional debt or making additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient sold such assets may not reflect the carrying value of those assets as reflected in our consolidated financial statements, especially in the event of a bulk or distressed sale. As noted in the "Results of Operations" section above, onNovember 11, 2019 ,GWG Holdings contributed the common stock and membership interests of its then wholly-ownedFOXO Labs and FOXO Life subsidiaries to FOXO in exchange for a membership interest in the entity. OnNovember 13, 2020 ,FOXO BioScience LLC converted to a corporation and is now known asFOXO Technologies Inc. With the corporate conversion,GWG Holdings' previous membership interest in the LLC converted to preferred equity.GWG Holdings has contributed$16.2 million in cash to FOXO throughDecember 31, 2020 , and is committed to contribute an additional$3.8 million to the entity throughOctober 2021 , all of which was contributed by such date.
The potential NASDAQ delisting and our current inability to sell L Bonds as
discussed above, in combination with significant recurring losses from
operations, negative cash flows from operations, delays in executing our
business plans, and any potential negative outcome from the ongoing
investigation discussed elsewhere in this Form 10-K, raise substantial doubt
about our ability to continue as a going concern for the next 12 months
following the filing of this Form 10-K.
Page 62 -------------------------------------------------------------------------------- Table of Contents Financings Summary We had the following outstanding debt balances as ofDecember 31, 2020 and 2019, with the following weighted average interest rate as calculated for the years endedDecember 31, 2020 and 2019 (dollars in thousands): December 31, 2020 December 31, 2019 Principal Amount Weighted Average Principal Amount Weighted Average Issuer/Borrower Outstanding Interest Rate Outstanding Interest RateGWG DLP Funding IV, LLC - LNV senior credit facility$ 202,611 9.12 %$ 184,586 9.57 % GWG Holdings, Inc. - L Bonds 1,277,881 7.21 % 948,128 7.15 % GWG Holdings, Inc. - Seller Trust L Bonds 272,104 7.50 % 366,892 7.50 % Beneficient - Debt due to related parties 77,176 6.50 % 152,199 4.59 % Total$ 1,829,772 7.43 %$ 1,651,805 7.26 %
The table below reconciles the face amount of our outstanding debt to the
carrying value shown on our balance sheets (dollars in thousands):
December 31, 2020 December 31, 2019
Senior credit facility with LNV Corporation
Face amount outstanding $ 202,611 $ 184,586
Unamortized deferred financing costs (8,881) (10,196)
Carrying amount $
193,730 $ 174,390
L Bonds and Seller Trust L Bonds: Face amount outstanding$ 1,549,985 $ 1,315,020 Subscriptions in process 17,978 15,839 Unamortized selling costs (48,957) (37,329) Carrying amount $
1,519,006
Debt due to related parties: Face amount outstanding $ 77,176 $ 152,199 Unamortized premium (discount) (916) 887 Carrying amount $ 76,260 $ 153,086 InJanuary 2015 ,GWG Holdings began publicly offering up to$1.0 billion of L Bonds as a follow-on to our earlier$250.0 million public debt offering. InJanuary 2018 ,GWG Holdings began publicly offering up to$1.0 billion L Bonds as a follow-on toGWG Holdings' earlier L Bond offering. OnJune 3, 2020 , a registration statement relating to an additional public offering was declared effective permitting us to sell up to$2.0 billion in principal amount of L Bonds on a continuous basis throughJune 2023 . These bonds contain the same terms and features as our previous offerings. We have raised$231.2 million under this offering since it was declared effective. ThroughDecember 31, 2020 , the total amount of L Bonds sold under all offerings, including renewals, was$2.1 billion . As ofDecember 31, 2020 and 2019, we had approximately$1.3 billion and$0.9 billion , respectively, in principal amount of L Bonds outstanding (exclusive of Seller Trust L Bonds). OnAugust 10, 2018 ,GWG Holdings , GWG Life and theBank of Utah , as trustee, entered into the L Bond Supplemental Indenture to the Amended and Restated Indenture.GWG Holdings entered into the L Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds.GWG Holdings issued Seller Trust L Bonds in the amount of$366.9 million to the Seller Trusts in connection with the Exchange Transaction. As a result of the Collateral Swap discussed in Note 1 to the consolidated financial statements,$94.8 million of the Seller Trust L Bonds are eliminated upon consolidation. The maturity date of theSeller Trust Page 63 -------------------------------------------------------------------------------- Table of Contents L Bonds isAugust 9, 2023 . The Seller Trust L Bonds bear interest at 7.5% per annum. Interest is payable monthly in cash (see Note 10 to the accompanying audited consolidated financial statements). The Amended and Restated Indenture was subsequently amended onDecember 31, 2019 , primarily to modify the calculation of the Debt Coverage Ratio in the Indenture to provideGWG Holdings with the ability to incur indebtedness (directly or through a subsidiary ofGWG Holdings ) that is payable in capital stock ofGWG Holdings or mandatorily convertible into or exchangeable for capital stock ofGWG Holdings that would be excluded from the calculation of the Debt Coverage Ratio. OnDecember 31, 2020 , we entered into the Liquidity Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Liquidity Bonds in a principal amount of up to$1.0 billion . The weighted-average interest rate ofGWG Holdings' outstanding L Bonds (excluding the Seller Trust L Bonds) as ofDecember 31, 2020 and 2019, was 7.21% and 7.15%, respectively, and the weighted-average maturity at those dates was 3.19 and 3.21 years, respectively.GWG Holdings' L Bonds (other than the Seller Trust L Bonds and the Liquidity Bonds) have renewal features. Since we first issuedGWG Holdings' L Bonds, we have experienced$768.7 million in maturities, of which$406.3 million has renewed throughDecember 31, 2020 , for an additional term. This renewal activity has provided us with an aggregate renewal rate of approximately 52.9% for investments in these securities. Future contractual maturities of L Bonds (including the Seller Trust L Bonds and Liquidity Bonds) atDecember 31, 2020 are as follows (in thousands): Years Ending December 31, 2021(1)$ 463,686 2022 293,038 2023 191,446 2024 121,105 2025 167,433 Thereafter 313,277$ 1,549,985
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(1)As ofDecember 31, 2020 , we had approximately$366.9 million in principal amount of Seller Trust L Bonds outstanding, of which$94.8 million are held by the ExAlt Trusts and are eliminated in consolidation. Accordingly, the net of these amounts,$272.1 million , is presented in the table above. As the second anniversary of the Final Closing Date has passed, the holders of the Seller Trust L Bonds now have the right to causeGWG Holdings to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder within 45 days. As such, while the maturity date of the Seller Trust L Bonds is inAugust 2023 , their contractual maturity is reflected in 2021, as that is the period in which they could become payable. The repurchase may be paid, atGWG Holdings' option, in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan Agreement, and (ii) Common Units, or a combination of cash and such property. The L Bonds (including the Seller Trust L Bonds and Liquidity Bonds) are secured by all of our assets and are subordinate to the LNV Credit Facility and the NF Credit Facility. OnSeptember 27, 2017 , we entered into a$300 million amended and restated senior credit facility withLNV Corporation in which DLP IV is the borrower. As ofDecember 31, 2020 , we had approximately$202.6 million outstanding under the senior credit facility. OnNovember 1, 2019 , we entered into the LNV Credit Facility, which replaced the prior agreement governing the facility. A description of the agreement governing the LNV Credit Facility is set forth below under the caption "Amendment of Credit Facility withLNV Corporation ." We intend to use the proceeds from this facility to maintain our portfolio of life insurance policies, for liquidity and for general corporate purposes. Beneficient had borrowings with an aggregate carrying value of$76.3 million and$153.1 million as ofDecember 31, 2020 , andDecember 31, 2019 , respectively. This aggregate outstanding balance includes a first lien credit agreement and a second lien credit agreement with respective balances, including accrued interest, of$2.3 million and$72.3 million atDecember 31, 2020 , and$77.5 million and$72.2 million as ofDecember 31, 2019 , respectively. These amounts exclude an unamortized discount of$0.9 million as ofDecember 31, 2020 , and an unamortized premium of$0.9 million as ofDecember 31, 2019 . Both credit agreements were amended and restated onAugust 13, 2020 , which extended the maturity for both toApril 10 , Page 64 -------------------------------------------------------------------------------- Table of Contents 2021, as discussed in detail in Note 10 to the consolidated financial statements. In accordance with the terms of the Second Amendments, both loans accrue interest at a rate of 1-month LIBOR plus 8.0%, with a maximum rate of 9.5%. Prior to the Second Amendments, both loans accrued interest at a rate of 1-month LIBOR plus 3.95%, compounded daily. OnMarch 10, 2021 , and again onJune 28, 2021 , Beneficient executed amendments to both credit agreements that, among other items, extended the maturity for both agreements toMay 30, 2022 , as discussed in more detail in Note 23 to the consolidated financial statements. These loans are not currently guaranteed byGWG Holdings or GWG Life. Beneficient has additional borrowings maturing in 2023 and 2024 with an aggregate principal balance outstanding, including accrued interest, of$2.6 million and$2.5 million as ofDecember 31, 2020 andDecember 31, 2019 , respectively. Future contractual maturities of Beneficient's debt due to related parties as ofDecember 31, 2020 are as follows (in thousands): Years Ending December 31, 2021$ 74,548 2022 - 2023 750 2024 1,856 2025 - Thereafter -$ 77,154 We expect to meet our ongoing operational capital needs for, among other things,GWG Holdings' and GWG Life's investments in Beneficient, alternative asset investments, policy premiums and servicing costs, exploring opportunities to establish a life insurance company, working capital and financing expenditures including paying principal, interest and dividends through a combination of the receipt of policy benefits from our portfolio of life insurance policies, net proceeds fromGWG Holdings' L Bond offering, dividends and interest from investments, distributions from the alternative assets held by certain of the ExAlt Trusts, future preferred and common equity offerings, and funding available from the LNV Credit Facility. We estimate that our liquidity and capital resources are sufficient for our current and projected financial needs for at least the next twelve months given current assumptions. However, if we are unable to continueGWG Holdings' L Bond offering for any reason, and we are unable to obtain capital from other sources, our business will be materially and adversely affected. In addition, our business will be materially and adversely affected if we do not receive the policy benefits we forecast and if holders ofGWG Holdings' L Bonds fail to renew with the frequency we have historically experienced. In such a case, we could be forced to sell our investments in life insurance policies to service or satisfy our debt-related and other obligations. A sale under such circumstances may result in significant impairment of the recognized value of our portfolio. Capital expenditures have historically not been material and we do not anticipate making material capital expenditures in 2021. Alternative Assets and Secured Indebtedness The following information is specifically related toGWG Holdings, Inc. and its subsidiaries (not including the assets and liabilities held by Beneficient or any eliminations in consolidation). The following table seeks to illustrate the impact that a hypothetical sale of our portfolio of life insurance assets (at various discount rates, including the discount rate used to value our portfolio atDecember 31, 2020 ), and the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH (a substantial majority of the net assets of which are currently represented by intangible assets and goodwill), and the Commercial Loan Agreement (in each case, at their respective carrying amounts and assuming no discount for lack of marketability or transaction costs, which could be substantial) would have on our ability to satisfy our debt obligations as ofDecember 31, 2020 . The investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement are discussed in detail in Note 1 and other applicable notes to the accompanying audited consolidated financial statements. The amounts in the table below do not include the consolidation of the assets and liabilities of Beneficient and related eliminations as ofDecember 31, 2020 . In all cases, the sale of the life insurance assets owned by DLP IV will be used first to satisfy all amounts owing under the LNV Credit Facility. The net sale proceeds remaining after satisfying all obligations Page 65 -------------------------------------------------------------------------------- Table of Contents under the LNV Credit Facility would be applied to the L Bonds and Seller Trust L Bonds on a pari passu basis. All dollar amounts in the table below are in thousands. Life Insurance Portfolio Discount Rate 8.25%(1) 10.00% 12.00% 14.00%
16.12%
Value of life insurance portfolio$ 791,911 $ 730,648 $ 670,923 $ 620,023 $ 573,799 Common Units 438,194 438,194 438,194 438,194 438,194 Preferred Series A Subclass 1 Unit Account of BCH 319,030 319,030 319,030 319,030
319,030
Preferred Series C Unit Account of BCH 195,578 195,578 195,578 195,578 195,578 Commercial Loan Agreement 180,080 180,080 180,080 180,080 180,080 Cash, cash equivalents and policy benefits receivable 120,616 120,616 120,616 120,616 120,616 Other assets 20,082 20,082 20,082 20,082 20,082 Total assets 2,065,491 2,004,228 1,944,503 1,893,603 1,847,379 Less: Senior credit facility(2) 202,611 202,611 202,611 202,611
202,611
Net after senior credit facility 1,862,880 1,801,617 1,741,892 1,690,992 1,644,768 Less: L Bonds(3) 1,644,773 1,644,773 1,644,773 1,644,773 1,644,773 Net remaining$ 218,107 $ 156,844 $ 97,119 $ 46,219 $ (5) Impairment to L Bonds No impairment No impairment No impairment No Impairment
Impairment
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(1)The discount rate used to calculate the fair value of our life insurance portfolio as ofDecember 31, 2020 . (2)This amount excludes unamortized deferred financing costs. (3)Amount represents aggregate outstanding principal balance of L Bonds and Seller Trust L Bonds prior to eliminations as ofDecember 31, 2020 . The above table illustrates that our ability to fully satisfy amounts owing under the L Bonds and Seller Trust L Bonds would likely be impaired upon the sale or the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH and Commercial Loan Agreement at their respective carrying amounts, plus all our life insurance assets at a price equivalent to a discount rate of approximately 16.12% or higher atDecember 31, 2020 . AtDecember 31, 2019 , the likely impairment occurred at a discount rate of approximately 26.78% or higher. Based on a preliminary analysis, atSeptember 30, 2021 , management expects the likely impairment, as calculated in accordance with the table above, to occur at a discount rate of approximately 8.50% or higher. The above hypothetical analysis is included for informational purposes only, and the results of such analysis have no bearing on the current ability ofGWG Holdings to market and sell L Bonds or to satisfy amounts owing under the L Bonds and Seller Trust L Bonds. The table does not include any allowance for transactional fees and expenses (which expenses and fees could be substantial) nor any discount for lack of marketability associated with a portfolio sale or the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH and Commercial Loan Agreement, respectively, and is provided to demonstrate how various discount rates used to value our portfolio of life insurance assets could affect our ability to satisfy amounts owing under our debt obligations in light of our senior secured lender's right to priority payments under our senior credit facility withLNV Corporation . The table also assumesGWG Holdings will realize the full amounts of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement. However, the ultimate value ofGWG Holdings' and GWG Life's investments in Beneficient depends on multiple factors, including the expected growth of new service offerings and products. Since predicting the rate of growth attributable to newly launched products is inherently uncertain, there is no assurance thatGWG Holdings will recover the full book basis of its investments in Beneficient. Additionally, there is currently no market for the aforementioned assets, and a market may not develop. Our Commercial Loan receivable and a portion ofGWG Holdings' and GWG Life's investment in the Common Units may be used as consideration for retiring the Seller Trust L Bonds upon a redemption event or at the maturity of the Seller Trust L Bonds (see Note 10 to the accompanying audited consolidated financial statements). This table also does not include the yield maintenance fee we are required to pay in certain circumstances under the LNV Credit Facility, which could be substantial. The above table should be read in conjunction with the information contained in other sections of this report, including Critical Accounting Policies - Valuation of Life Insurance Policies and the notes to the accompanying audited consolidated financial statements. Page 66 -------------------------------------------------------------------------------- Table of Contents Amendment of Credit Facility withLNV Corporation EffectiveNovember 1, 2019 , DLP IV entered into the LNV Credit Facility. The LNV Credit Facility makes available a total of up to$300.0 million in credit to DLP IV with a maturity date ofSeptember 27, 2029 . Subject to available borrowing base capacity, additional advances are available under the LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay premiums and servicing costs of pledged life insurance policies as such amounts become due. Interest will accrue on amounts borrowed under the LNV Credit Facility at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (a) the greater of 1.50% or 12-month LIBOR, plus (b) 7.50% per annum. The effective rate atDecember 31, 2020 was 9.00%. Interest payments are made on a quarterly basis. Under the LNV Credit Facility, DLP IV has granted the administrative agent, for the benefit of the lenders under the facility, a security interest in all of DLP IV's assets. As with prior collateral arrangements relating to the senior secured debt ofGWG Holdings and its subsidiaries (on a consolidated basis), GWG Life's excess equity value of DLP IV after satisfying all amounts owing under the LNV Credit Facility is available as collateral for the obligations ofGWG Holdings under the L Bonds and Seller Trust L Bonds (although the life insurance assets owned by DLP IV do not themselves serve as direct collateral for those obligations). We are subject to various financial and non-financial covenants under the LNV Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP IV nor GWG Life become an investment company. As ofDecember 31, 2020 , we were in compliance with all financial and non-financial covenants. In addition, the LNV Credit Facility has certain reporting obligations that require DLP IV to deliver audited annual financial statements no later than ninety days after the end of each fiscal year. Due to the failure to issueGWG Life, LLC audited financial statements for 2020 toLNV Corporation within 90 days after the end of the year, we were in violation of our financial reporting obligations under the LNV Credit Facility.CLMG Corp. , as administrative agent forLNV Corporation , has issued a limited deferral extending the delivery of these reports toMay 17, 2021 . We regained compliance onMay 17, 2021 , when the audited annual financial statements of GWG Life were delivered toLNV Corporation . OnJune 28, 2021 , DLP IV entered into the Third Amended Facility withLNV Corporation , as lender, andCLMG Corp. , as the administrative agent on behalf of the lenders under the agreement, that replaced the aforementioned LNV Credit Facility. The Third Amended Facility resulted in an additional advance of$52.5 million fromLNV Corporation . In conjunction with entering into the Third Amended Facility, DLP V transferred life insurance policies having an aggregate face value of approximately$440.6 million to DLP IV which were pledged as additional collateral to the Third Amended Facility, and DLP IV received proceeds of approximately$51.2 million (net of certain fees and expenses incurred in connection with the negotiation and entry into the Third Amended Facility). The Third Amended Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility. The Third Amended Facility was paid off onAugust 11, 2021 , with a portion of the proceeds from the NF Credit Facility described below. OnSeptember 7, 2021 , DLP IV entered into the Fourth Amended Facility withLNV Corporation , as lender, andCLMG Corp. , as the administrative agent on behalf of the lenders under the agreement, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of$30.3 million fromLNV Corporation . The Fourth Amended Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility. Credit Facility withNational Founders LP OnAugust 11, 2021 , DLP VI, entered into the NF Credit Agreement with each lender from time to time party thereto andNational Founders LP , as the administrative agent. OnAugust 11, 2021 , a one-time advance of approximately$107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity date ofAugust 11, 2031 . Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due, including interest and penalties, under the Third Amended Facility. Amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate, determined on a daily basis, generally equal to 5.5% up to a 65% of the loan to value percent as calculated in accordance with the NF Credit Agreement, and 7.0% on anything above that loan to value percent. Page 67 -------------------------------------------------------------------------------- Table of Contents A portion of the proceeds from the funding under the NF Credit Facility was used to purchase life insurance policies that were owned by DLP IV, which used the funds to repay the most recent advance of$52.5 million plus interest and penalties under the LNV Credit Facility described above. AtAugust 11, 2021 , the aggregate face value of life insurance policies owned by DLP VI, was approximately$433.1 million . As of such date, the aggregate face value of life insurance policies owned by DLP IV was approximately$1.42 billion . We are subject to various financial and non-financial covenants under the NF Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP VI nor GWG Life become an investment company. Additionally, we are required to maintain a Debt Coverage Ratio not to exceed 90%. As ofAugust 31, 2021 , we were in compliance with all financial and non-financial covenants in the NF Credit Facility. Cash Flows Interest and Dividend Payments We finance our businesses through a combination of: life insurance policy benefit receipts; principal, dividends and interest receipts from investments; distributions from the alternative assets held by the ExAlt Trusts; debt and equity offerings; and the LNV Credit Facility and the NF Credit Facility. We have historically relied on debt (L Bonds and the LNV Credit Facility) and equity (preferred stock) financing for the majority of our cash expenditures (for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal and interest on existing debt, and forGWG Holdings and GWG Life making investments in Beneficient) as the amount of cash flows from the realization of life insurance policy benefits and cash flows from our other investments has been insufficient to meet all of our needs. This has resulted in the Company incurring substantial indebtedness and, to a lesser extent, obligations to make dividend payments on our classes of preferred stock. Beneficient primarily finances its business through repayments on ExAlt Loans. Such repayments are funded from a portion of the cash distributions the ExAlt Trusts receive from their alternative assets and additional investments in Beneficient byGWG Holdings and/or other parties. See Note 10 to the accompanying audited consolidated financial statements for details on the amendments of Beneficient's credit agreements. Beneficient uses proceeds from these sources to fund liquidity transactions and potential unfunded capital commitments, working capital, debt service payments, and costs associated with potential future products. Beneficient also anticipates the need to establish sufficient regulatory capital if and when itsTexas trust company charter is issued or the Kansas TEFFI trust company becomes operational. Additionally,Bermuda insurance statutes and regulations, and the policies of the BMA, require that Pen, among other things, maintain a minimum level of capital and surplus, satisfy solvency standards, and restrict dividends and distributions.Beneficient Capital Markets will also be subject to regulations of theSEC andFINRA that require, among other things,Beneficient Capital Markets to maintain a minimum level of capital. Our total interest expense of$154.6 million and$114.8 million for the years endedDecember 31, 2020 and 2019, respectively, represent the largest cash expense in each period. Preferred stock cash dividends were$14.6 million and$16.9 million for the years endedDecember 31, 2020 and 2019, respectively. While reducing our cost of funds and increasing our common equity base are primary goals of the Company, until we do so we will continue to expend significant amounts of cash for interest and dividend payments and will thus continue to rely heavily on our ability to raise cash fromGWG Holdings' L Bond offering, LNV Credit Facility and other means as they are developed and available. Life Insurance Policy Premium Payments The payment of premiums and servicing costs to maintain life insurance policies represents one of our most significant requirements for cash disbursement. When a policy is purchased, we are able to calculate the minimum premium payments required to maintain the policy in-force. Over time as the insured ages, premium payments will increase. Nevertheless, the probability we will be required to pay the premiums decreases as mortality becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling. Beyond premiums, we incur policy servicing costs, including annual trustee, policy administration and tracking costs. Additionally, we incur significant financing costs, including principal, interest and dividends. Both policy servicing costs and financing costs are excluded from our internal rate of return calculations. We finance our businesses through a combination of life insurance policy benefit receipts, dividends and interest on other investments, equity offerings, debt offerings, and advances under the LNV Credit Facility and NF Credit Facility. Page 68 -------------------------------------------------------------------------------- Table of Contents The amount of payments for anticipated premiums, including the requirement under the LNV Credit Facility and NF Credit Facility to maintain a two month cost-of-insurance threshold within each policy cash value account, and servicing costs that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below (in thousands): Years Ending December 31, Premiums Servicing Total 2021$ 72,445 $ 1,655 $ 74,100 2022 89,436 1,655 91,091 2023 100,953 1,655 102,608 2024 110,044 1,655 111,699 2025 122,438 1,655 124,093$ 495,316 $ 8,275 $ 503,591 Our anticipated premium expenses are subject to the risk of increased cost-of-insurance charges (i.e., "COI" or premium charges) for the life insurance policies we own. We did not receive any notices of COI rate changes in 2019. We have received COI increases on six policies during the year endedDecember 31, 2020 . We have no known pending cost-of-insurance increases on any policies in our portfolio, but we are aware that cost-of-insurance increases have become more prevalent in the industry. Thus, we may see additional insurers implementing cost-of-insurance increases in the future. Life Insurance Policy Benefit Receipts For the quarter-end dates set forth below, the following table illustrates the total amount of face value of policy benefits owned, and the trailing 12 months of life insurance policy benefits realized and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the ratio of policy benefits realized to premiums paid over the trailing 12-month period from our portfolio of life insurance policies. Portfolio Face 12-Month Trailing 12-Month Trailing 12-Month Trailing Amount Benefits Realized Premiums Paid Benefits/Premiums Coverage Quarter End Date (in thousands) (in thousands) (in thousands) Ratio March 31, 2016$ 1,027,821 $ 21,845 $ 28,771 75.9 % June 30, 2016 1,154,798 30,924 31,891 97.0 % September 30, 2016 1,272,078 35,867 37,055 96.8 % December 31, 2016 1,361,675 48,452 40,239 120.4 % March 31, 2017 1,447,558 48,189 42,753 112.7 % June 30, 2017 1,525,363 49,295 45,414 108.5 % September 30, 2017 1,622,627 53,742 46,559 115.4 % December 31, 2017 1,676,148 64,719 52,263 123.8 % March 31, 2018 1,758,066 60,248 53,169 113.3 % June 30, 2018 1,849,079 76,936 53,886 142.8 % September 30, 2018 1,961,598 75,161 55,365 135.8 % December 31, 2018 2,047,992 71,090 52,675 135.0 % March 31, 2019 2,098,428 87,045 56,227 154.8 % June 30, 2019 2,088,445 82,421 59,454 138.6 % September 30, 2019 2,064,156 101,918 61,805 164.9 % December 31, 2019 2,020,973 125,148 63,851 196.0 % March 31, 2020 2,000,680 120,191 65,224 184.3 % June 30, 2020 1,960,826 137,082 66,846 205.1 % September 30, 2020 1,921,067 149,415 67,931 220.0 % December 31, 2020 1,900,715 125,109 69,734 179.4 % Page 69
-------------------------------------------------------------------------------- Table of Contents We believe that the portfolio cash flow results set forth above are consistent with our general investment thesis that the life insurance policy benefits we receive will continue to increase over time in relation to the premiums we are required to pay on the remaining polices in the portfolio. Nevertheless, we expect that our portfolio cash flow on a period-to-period basis will remain inconsistent as we have reduced capital allocated to acquiring a larger, more diversified portfolio of life insurance policies. Inflation Changes in inflation do not necessarily correlate with changes in interest rates. We presently do not foresee any material impact of inflation on our results of operations in the periods presented in our consolidated financial statements. Off-Balance Sheet Arrangements Unfunded Capital Commitments The ExAlt Trusts had$35.6 million and$34.9 million of potential gross capital commitments as ofDecember 31, 2020 andDecember 31, 2019 , respectively, representing potential limited partner capital funding commitments on the interests in alternative asset funds. The trust holding the interest in the limited partnership for the alternative asset fund is required to fund these limited partner capital commitments per the terms of the limited partnership agreement. Capital funding commitment reserves are maintained by the associated trusts within the ExAlt PlanTM created at the origination of each trust for up to$0.1 million . To the extent that the associatedExAlt Trust cannot pay the capital funding commitment, Beneficient is obligated to lend sufficient funds to meet the commitment. Any amounts advanced by Beneficient to the ExAlt Trusts for these limited partner capital funding commitments above the associated capital funding commitment reserves held by the associated ExAlt Trusts are added to the ExAlt Loan balance between Beneficient and the ExAlt Trusts and are expected to be recouped through the cash distributions from the interests in alternative asset fund that collateralizes such ExAlt Loan. Capital commitments generally originate from limited partner agreements having fixed or expiring expiration dates. The total limited partner capital funding commitment amounts may not necessarily represent future cash requirements. Beneficient considers the creditworthiness of the investment on a case-by-case basis. At bothDecember 31, 2020 andDecember 31, 2019 , Beneficient had no reserves for losses on unused commitments to fund potential limited partner capital funding commitments. Unfunded Commitments Beneficient had$1.1 million of unfunded commitments on liquidity solution transactions as ofDecember 31, 2020 , related to liquidity transactions in process as of that date. There were no reserves for unfunded commitments as ofDecember 31, 2020 , and all amounts in process were fully funded in the first quarter of 2021. Equity Method Investee CommitmentsGWG Holdings has contributed$16.2 million in cash to FOXO to date throughDecember 31, 2020 , and is committed to contribute an additional$3.8 million to the entity throughOctober 2021 , all of which was contributed by such date. Credit Risk and Interest Rate Risk We review the credit risk associated with our portfolio of life insurance policies when estimating its fair value. In evaluating the policies' credit risk, we consider insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We attempt to manage our credit risk related to life insurance policies typically by purchasing policies issued only from companies with an investment-grade credit rating by eitherStandard & Poor's , Moody's, orA.M. Best Company . As ofDecember 31, 2020 , 96.3% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment-grade credit rating (BBB or better) byStandard & Poor's . The LNV Credit Facility, NF Credit Facility, and Beneficient's debt due to related parties are floating-rate financings. In addition, our ability to offer interest and dividend rates that attract capital (including in our continuous offering of L Bonds) is generally impacted by prevailing interest rates. Furthermore, whileGWG Holdings' L Bond offering provides us with fixed-rate debt financing, our Debt Coverage Ratio is calculated in relation to the interest rate on all of our debt financing, exclusive of our Seller Trust L Bonds. Therefore, increases in interest rates impact our business by increasing our borrowing costs and reducing availability under our debt financing arrangements. Earnings from our life insurance portfolio are based upon the spread, if any, generated between the return on the portfolio and the total cost of our financing (excluding cost of Page 70 -------------------------------------------------------------------------------- Table of Contents financing for the Seller Trust L Bonds). As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance policies. The ExAlt Trusts hold investments in alternative assets, which are exposed to risks related to markets, credit, currency, and interest rates. Currently, all of these alternative assets consist of private equity limited partnership interests, which are primarily denominated in theU.S. dollar, Euro, and Canadian dollar. The underlying portfolio companies primarily operate inthe United States andWestern Europe , with the largest percentage, based on NAV, operating in diversified financials, telecommunications services, food and staples retailing, and software and services industries. As ofDecember 31, 2020 , and 2019, all of the ExAlt Loans, which are eliminated upon consolidation, are collateralized by the cash flows originating from the ExAlt Trusts' investments in alternative assets. These ExAlt Loans are a key determinant in income (loss) allocable to Beneficient's equity holders, and thusGWG Holdings . Beneficient has underwriting procedures and utilizes market rates. Additionally, Beneficient has purchased put options to protect the net asset value of the interests in alternative assets held by certain of the ExAlt Trusts from impacts associated with a broad market downturn. Finally, the ExAlt Trusts applicable trust agreements allow for excess cash flows from a collective pool of alternative assets to be utilized to repay the ExAlt Loans they have with Beneficient when cash flows from the customer's originally alternative assets are not sufficient to repay the outstanding principal, interest, and fees. Guarantee and Collateral Provisions ofL Bonds GWG Holdings' L Bonds are offered and sold under a registration statement declared effective by theSEC , andGWG Holdings has issued Seller Trust L Bonds under the L Bond Supplemental Indenture, as described in Note 10 to the consolidated financial statements. The L Bonds and Seller Trust L Bonds are secured by substantially all the assets ofGWG Holdings and a pledge of all ofGWG Holdings' common stock held byBCC and AltiVerse Capital Markets, L.L.C. , a limited liability company owned by an entity related to theBen Initial Investors , includingBrad K. Heppner (GWG Holdings' former Chairman, who served in such capacity fromApril 26, 2019 toJune 14, 2021 , and Beneficient's current Chief Executive Officer and Chairman), and an entity related toThomas O. Hicks (one of Beneficient's current directors and a former director ofGWG Holdings ) ("AltiVerse"). Together, BCC and AltiVerse represent approximately 12% of our outstanding common stock, and are guaranteed by GWG Life and a corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds and Seller Trust L Bonds. GWG Life's equity inGWG Life Trust , DLP IV, andDLP V Holdings serves as collateral forGWG Holdings' L Bond and Seller Trust L Bond obligations. As ofDecember 31, 2020 , substantially all of our life insurance policies were held by DLP IV, DLP V, orGWG Life Trust . The policies held by DLP IV are not direct collateral for the L Bonds as such policies are pledged under the LNV Credit Facility. OnDecember 31, 2020 ,GWG Holdings ,GWG Life andBank of Utah , as trustee, entered into the Liquidity Bond Supplemental Indenture that provides for the issuance of two series of Liquidity Bonds, as described in Note 10 to the consolidated financial statements. The Liquidity Bonds are issued by GWG Life and guaranteed byGWG Holdings . The Liquidity Bonds are secured by the same collateral as the other L Bonds. Furthermore, regarding the obligations ofGWG Holdings and its subsidiaries as ofDecember 31, 2020 : (1) The Seller Trust L Bonds are secured obligations ofGWG Holdings , ranking junior to all senior debt ofGWG Holdings and pari passu in right of payment and in respect of collateral with all L Bonds ofGWG Holdings (see Note 10 to the accompanying audited consolidated financial statements). Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in connection with the Beneficent transaction are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Common Units are held byGWG Holdings and the Commercial Loan is held by GWG Life. (2) The Liquidity Bonds are secured obligations of GWG Life, ranking junior to all senior debt ofGWG Holdings or GWG Life and pari passu in right of payment and in respect of collateral with all L Bonds ofGWG Holdings . Payments under the Liquidity Bonds are guaranteed byGWG Holdings . (3) The terms of the LNV Credit Facility require that we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given time. Any excess after satisfying all amounts owing under the LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds and Liquidity Bonds). Page 71 -------------------------------------------------------------------------------- Table of Contents The following represents summarized financial information as ofDecember 31, 2020 andDecember 31, 2019 , with respect to the financial position, and for the year endedDecember 31, 2020 , with respect to results of operations. The tables present summarized financial information ofGWG Holdings and GWG Life on a combined basis after elimination of (i) intercompany transactions and balances among such entities, includingGWG Holdings' interest in GWG Life, and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor (including DLP IV, DLP V,GWG Life Trust and Beneficient). The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X. Summarized Balance Sheet Information (in thousands, not intended to balance): (As Restated) December 31, 2020 December 31, 2019 Assets(1) Cash, cash equivalents and restricted cash $ 65,556 $ 60,365 Financing receivables from affiliates - 67,153 Other assets 6,366 8,659 Total assets $ 71,922 $ 136,177 Liabilities L Bonds$ 1,246,902 $ 926,638 Seller Trust L Bonds 366,892 366,892 Interest and dividends payable 12,086 12,491 Accounts payable and accrued expenses 7,347 3,093 Deferred tax liabilities 51,469 71,855 Total liabilities$ 1,684,696 $ 1,380,969 Equity Redeemable preferred stock and Series 2 redeemable preferred stock $ 156,833
$ 201,891
______________________________________
(1) Assets exclude: i)GWG Holdings' investment in GWG Life of$1.2 billion as of bothDecember 31, 2020 andDecember 31, 2019 ; ii)GWG Holdings' aggregate investments in non-obligor subsidiaries of$643.1 million and$439.4 million as ofDecember 31, 2020 andDecember 31, 2019 , respectively; and iii) GWG Life's aggregate investments in and loans to non-obligor subsidiaries of$1.2 billion as of bothDecember 31, 2020 andDecember 31, 2019 .
Summarized Statement of Operations Information (in thousands):
Year Ended
December 31, 2020
Total revenues $ 100,518
Interest expense 125,012
Other expenses 38,155
Total expenses 163,167
Loss before income taxes and preferred dividends
(62,649)
Income tax expense (benefit) (19,849)
Preferred dividends 14,630
Net loss $ (57,430)
Page 72
-------------------------------------------------------------------------------- Table of Contents Debt Coverage RatioGWG Holdings' L Bond borrowing covenants require us to maintain a Debt Coverage Ratio not to exceed 90%. The Debt Coverage Ratio is calculated by dividing the sum of our total interest-bearing indebtedness (other than Excluded Indebtedness defined and described in note 5 to the table below) by the sum of our cash, cash equivalents, restricted cash, life insurance policy benefits receivable, the net present value of the life insurance portfolio, and, without duplication, the value of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP.GWG Holdings' and GWG Life's investments in Beneficient and GWG Life's ownership interests in the holding companies that own DLP IV and DLP VI, which own substantially all of the life insurance portfolio, secure our obligations under the L Bonds, and are illiquid assets. AlthoughGWG Holdings and GWG Life own debt and equity securities of Beneficient, a substantial majority of the net assets of Beneficient are currently represented by goodwill, an intangible asset. The calculation of Beneficient's goodwill required the utilization of significant estimates and management judgment, as discussed elsewhere in this 2020 Form 10-K. As a result, the carrying value of those assets as reflected in our consolidated financial statements may not necessarily reflect the current market price for those assets, especially in the event of a bulk or distressed sale. Proceeds from L Bond sales will be primarily used for the repayment of L Bond maturities, interest payments and other operating expenses ofGWG Holdings , and as otherwise specified in the prospectus for the L Bonds.GWG Holdings may also continue to use a portion of the proceeds from L Bond sales to make investments in Beneficient. Because advances may be used by Beneficient for working capital purposes, such investments may not increase the tangible assets securing the L Bonds. If the trustee for the L Bonds were forced to sell all or a portion of the collateral securing them, there can be no assurance that the trustee would be able to sell them for the prices at which we have recorded them in our consolidated financial statements, and the trustee might be forced to sell them at significantly lower prices. The discount rate we use for the net present value of our life insurance portfolio for this calculation may not be the same discount rate we use for our GAAP valuation and is not necessarily reflective of the amount we could realize upon a sale of the portfolio (dollars in thousands): (As Restated) December 31, 2020 December 31, 2019 Life insurance portfolio policy benefits$ 1,900,715 $ 2,020,973 Discount rate of future cash flows(1) 7.46 % 7.55 % Net present value of life insurance portfolio policy $ 822,859 $ 826,196 benefits All cash and cash equivalents (including restricted cash) 106,282 81,780 Life insurance policy benefits receivable, net 14,334 23,031 Financing receivables from affiliates(2) 180,080 258,402 Investments in Common Units(2)(3)(4) 438,194 313,443 Investment in Preferred Series A Subclass 1 Unit Account(4) 319,030 319,030 Investment in Preferred Series C Unit Account(4) 195,578 - Option Agreement and other assets (3) 20,082 54,365 Total Coverage (5)$ 2,096,439 $ 1,876,247 Total Indebtedness (5)$ 1,519,107 $ 1,146,646 Debt Coverage Ratio 72.46 % 61.10 %
__________________________________
(1)Weighted-average interest rate paid on indebtedness, excluding that of Seller Trust L-Bonds, as required under the indenture governing the L Bonds. (2)The Promissory Note, previously included in financing receivables from affiliates, was converted to Preferred Series C onSeptember 30, 2020 . (3)The Option Agreement was exercised and converted to Common Units effectiveAugust 11, 2020 . (4)Generally represents the value of the investment in Beneficient as ofDecember 31, 2019 for investments that existed at the time of the change-in-control transaction, or the value at the time of purchase for investments that were made subsequent toDecember 31, 2019 . As noted above, these are illiquid investments that are carried at book basis and not market value. (5)Total Coverage excludes the assets of Beneficient. Total Indebtedness is equal to the total liabilities balance ofGWG Holdings (excluding the liabilities of Beneficient) as ofDecember 31, 2020 , other than Excluded Indebtedness. "Excluded Indebtedness" means Page 73
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Table of Contents indebtedness that is payable atGWG Holdings' option in capital stock ofGWG Holdings or securities mandatorily convertible into or exchangeable for capital stock ofGWG Holdings , or any indebtedness that is reasonably expected to be converted or exchanged, directly or indirectly, into capital stock ofGWG Holdings . This change in the definition of the Debt Coverage Ratio was defined in Amendment No. 2 to the Amended and Restated Indenture entered into as ofDecember 31, 2019 (see Note 10 to the accompanying audited consolidated financial statements). As ofDecember 31, 2020 and 2019, we were in compliance with the Debt Coverage Ratio. Based on a preliminary analysis, the Company expects the Debt Coverage Ratio to be approximately 82% as ofSeptember 30, 2021 .
TABULA RASA HEALTHCARE, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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