| (Mark One) | |||
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE | ||
| ACT OF 1934 | |||
| For the fiscal year ended December 31, | |||
| or | |||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE | ||
| ACT OF 1934 | |||
COMMISSION FILE NUMBER 000-10685
Midwest Holding Inc.
(Exact name of registrant as specified in its charter)
| Nebraska | 20-0362426 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 2900 S. 70th, Suite 400, Lincoln, NE | 68506 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(402) 489-8266
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of thischapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitivedefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K.☒☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer☐ | Accelerated |
| Non-accelerated filer☐ | Smaller reporting company☒ |
| (Do not check if a | |
| smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-votingshares of the registrant's common equitystock held by non-affiliates as of the registrant on the last business day of the registrants most recently completed second fiscal quarter is not determinable, as there is no public market for such shares.was $13.5 million.
As of March 1, 2016,2017, there were18,006,30122,558,956 shares of voting common stock, par value $0.001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be filed for its 20162017 Annual Meeting of Shareholders, scheduled to be held, are incorporated by reference into Part III of this Form 10-K.
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MIDWEST HOLDING INC.
FORM 10-K10-K
TABLE OF CONTENTS
PART I
2
PART III
3
PART I.
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s expectations, estimates, projections and assumptions. In some cases, you can identify forward-looking statements by terminology including “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “intend,” or “continue,” the negative of these terms, or other comparable terminology used in connection with any discussion of future operating results or financial performance. These statements are only predictions, and reflect our management’s present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
General Information
Midwest Holding Inc., a Nebraska corporation, (OTCQB: MDWT) (“Midwest”, the “Company”,“Registrant”, “we”, “our”, or “us”) was formed on October 31,in Nebraska in 2003 for the primary purpose of becomingto become alife insurance financial services holding company.We have conductedThe Company’s life insurance businesssince 2009 throughour primary life insurancesole operating subsidiary, American Life & Security Corp. (“American Life”). In addition to American Life, was formed in 2009 as ofMarch 16, 2016, we owned:
We also own a dormantNebraska-domiciled life insurance company, Capital Reserve Life Insurance Co., a Missouri domiciled life insurance company, and have less than majority ownership of two small startup entities that may seek to form insurance companies in the event they raise significant additional capital.company.
The principal executive offices for Midwest and its subsidiariesAmerican Life are at 2900 South 70th70th Street, Suite 400, Lincoln, Nebraska 68506, phone number is (402) 489-8266.
Development ofOur Business
Since our inception, we haveWe raised approximately $18.0 million of capital to build Midwest through sales of shares of voting common stockvarious exempt intra-state offerings between 2003 and non-voting convertible preferred stock in several private placements2009. Since that time, Midwest has acquired eight other small holding company/life insurance companies and an intrastate offeringin Nebraska. Each of these offerings was intended primarily to provide capital forour operations.
We were a development stage company untilconsolidated them with Midwest and American Life commenced its insurance operations in 2009. We have incurred significant net losses since inception totaling approximately$23.7 million throughsuch that commencing December 31, 2015. These losses have resulted primarily from costs incurredin raising capital and establishingand operating2016, Midwest operated its life insurance business exclusively through American Life. We expect to continue toincur operating losses until we achieve a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.
In 2009, American Lifebegan conducting life insurance businessin Nebraska. Capital and surplus contributed to American Life was approximately $10.6 million as As ofDecember 31, 2015, 2016, statutory capital and surplus of American Life at that date was approximately $2.5$3.8 million.For the years ended December 31, 20152016 and 2014,2015, American Life generated approximately $2.4$5.9 million and $2.9$6.4 million in premium revenue on a statutory accounting reporting basis, respectively.
On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life.AcquisitionsWe intend to selland Divestitures Capital Reserve in2016 and have a contract with an unaffiliated party to sell this entity to it as discussed further below.Since 2014
In early 2011, we completed the private sale of 74,159 shares of our Series A Preferred Stock tocertain investors in Latin America. Proceeds after expenses, were approximately$415,750. These proceeds were used to further capitalize our insurance operations, for working capital and for general corporate purposes.The preferred shares are non-voting and may be converted by the holders into our voting common shares. The shares were sold at $6.00 per share and may be converted at the option of the holder for 1.3 shares of voting common stock for each share of Series A Preferred Stock.
In February 2011, we completed an intrastate offeringin Nebraska of 1,554,320 voting common shareswith gross proceeds after expensesof approximately $7.7 million. These proceeds were used to fund the acquisition of Old Reliance Insurance Company (“Old Reliance”) as described below, and to further capitalize our insurance operations, for working capital and for general corporate purposes.
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In 2011, we acquired all of the issued and outstanding capital stock of Old Reliance, an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with thesurviving company changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of our voting commonstock.
In August 2011,we acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), astartup companyformed to develop, manufacture, and market the Hot Dot Alert Patcha body heat sensor. The operating results of Hot Dot were consolidated withours, due toour control ofHot Dot’s board ofdirectors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of itscommon stock fromus for $750,000. As aresult, we ceased to have a controlling financial interest in Hot Dot andwe deconsolidateditin our financial statements on thatdate. In October 2014, Hot Dot repurchasedour 1,500,000 remainingHot Dot shares for $775,000.
We commenced third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee incomefor us. Services provided vary based on the respective needs of the client and can include some or all aspects of back-office accounting and policy administration.We have been able to performour TPA services usingour existing in-house resources.
In October of 2013,we completed a private placement offering under Regulation D of the Securities Act of 1933of Units, with each Unit consisting of50 shares of voting common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31,2016, for gross proceeds of$353,700. A total of 58,950 shares of voting common stock and 1,179 warrantswere sold in the offering.
On July 21, 2014, we consummated an exchange agreement with Great Plains Financial Corporation, a South Dakota corporation (“Great Plains”) and Security Capital in order to acquireCorporation, an Arkansas corporation (“Security Capital”), acquiring the outstanding shares of each company held by their shareholders (other than those shares already held by us)us). The Great Plains shareholders received approximately 1.298 shares of our voting common stock for each share of Great Plains common stock held by the Great Plains shareholders and the Security Capital shareholders received approximately 0.162 shares of our voting common stock for each share of Security Capital common stock held by them. On August 5, 2014, Shortly thereafter, Great Plains and Security Capital were merged into us. We issued a total of 4,767,4004,120,000 voting common shares pursuant to these transactions. On December 1, 2016, the former principal subsidiary of Great Plains, Great Plains Life Assurance Company (“Great Plains Life”), a life insurance company, was merged into American life.
In September, 2014, we completed a private offering of a newly-created class of preferred shares, Series B preferred stock, at $6.00 per share. The Series B shares are non-cumulative, non-voting and convertible into our voting common shares after May 1, 2017 at a rate of 2.0 voting common shares for each share of Series B preferred stock. A total of 102,669 shares of Series B preferred stock were sold for total gross proceeds of $616,012.
On October 27, 2015, we acquired the shares of First Wyoming Capital Corporation not already owned by us, a Wyoming corporation (“First Wyoming”) pursuantby issuing approximately 4,767,000 shares to an Agreement and Plan of Merger dated July 31, 2015 by exchanging 1.37 shares of our voting common stock for each sharethe former shareholders of First Wyoming common stock, or approximately4,767,000 shares.Wyoming. Subsequent to the closing, First Wyoming merged into us. On September 1, 2016, the former principal subsidiary of First Wyoming, First Wyoming Life Insurance Company (“First Wyoming Life”), was merged into American Life.
In December, 2015, an agreementOn March 15, 2016, we acquired the outstanding shares of Northstar Financial Corp., a Minnesota corporation (“Northstar”). We issued approximately4,553,000 shares in the transaction. Northstar’s primary asset at the time we acquired it was reached to sellcash of approximately $2.4 million.
On August 29, 2016, we sold Capital Reserve to an unaffiliated party for $50,000 plus statutory capital and surplus. We expect the sale to occur in early to mid 2016.
On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015. Northstar became a wholly-owned subsidiary of ours. We have exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’sprimary asset at the time of its acquisition by us was cash of approximately $2.2 million.
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Life Insurance
General
American Life, as it exists today, is primarily the product of the August 2011a merger in 2010 of Old Reliance and American Life, and the contribution of Great Plains Lifeto American Life in 2014. Organized in 1960, Old Reliance primarily focused on the sale of final expense or burial products which typically are small face amount policies with limited underwriting.2014 (which was merged into American Life historically did not offer similar productson December 1, 2016), and instead focusedthe merger with First Wyoming Life into American Life on the sale September 1, 2016of its American Accumulator product (a multi-benefit life insurance policy) and its Future Cornhusker Plan (a single premium term life product for children), as described below. The final expense and burial products have been offered by Old Reliance through a small network of independent agents in the southwest United States. Sales over the pastseveralproducts. years have been nominal as American Life lacked the capitalis authorized to underwrite and surplus to support broad sales of the products.
American Life underwrites and marketsmarket life insurance products within the State of Nebraska, but is licensedand in14 states. American Life is required to comply with the insurance laws of its state of domicile,Arizona. Great Plains Life underwrites and markets life insurance products within South Dakota and is domiciledsolely in that state. First Wyoming Life underwrites and markets life insurance products within Wyoming and is domiciledsolely in that state. Over time, we may apply with other state insurance departments in order to obtain certificates of authority to market life insurance products in those states.We are in the process of redomesticating these two life insurance subsidiaries in Nebraska.
Types ofInsurance Policies
American Life initially offered two insurance products, the “American Accumulator”, which is a multi-benefit life insurance policy that combines cash value ordinary life insurance with a tax deferred annuity and the “Future Cornhusker Plan”, which is a single premium convertible term life product offered for children aged three months to 15 years. The Future Cornhusker Plan is available in annual premium amounts of $125 or $250 and carries an initial face amount of $5,000 or $10,000. The American Accumulator is sold in annual premium units of $2,000. The average annual premium is approximately $2,000 with an average face amount of $66,000. Premiums may be higher based upon the age and health of the insured. Great Plains Life sells a product similar to the “American Accumulator” called the “Great Plains Life Accumulator.” First Wyoming Life sells a product similar to the “American Accumulator” called the “First Wyoming Accumulator.”
Three new products were developed inhave been introduced over the last quarter of 2014 to be sold by all of Midwest’s insurance subsidiaries except Capital Reserve:past twoyears: (i) the “Accelerator”, which is a non-participatingparticipating whole life insurance policy with guaranteed level death benefits and premiums; (ii) the “American Protector”, which is a 7-year7-year pay non-participatingparticipating whole life insurance policy with an embedded flexible annuity and modified death and premiums; and (iii) the “Accumulator X”, which is a 10-year10-year pay non-participating whole life insurance policy with an embedded flexible annuity and modified death benefit and premiums. The Accelerator premiums vary according to issue age, gender, and smoking classification with a minimum face amount of $25,000. The American Protector premiums are payable for seven years, during which time the face amount remains level. After the seven years the policy face amount gradually decreases to the ultimate amount which is equal to 50% of the issued policy face amount. Annual premiums per unit are $1,000 with a minimum of ½ a unit and maximum often units. After the first year, 30% of the annual premiums are allocated to the flexible annuity. The Accumulator X premiums are payable for ten years, during which time the policy face amount remains level. After ten years, the policy face amount gradually decreases to the ultimate amount which is equal to 50% of the issued policy face amount. Annual premiums per unit are $1,000 with a minimum of ½ a unit and maximum often units.
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Table After the first year, 40% of Contentsthe annual premiums are allocated to the flexible premium annuity.
Product Pricing
The currentOur products offered forsale have been approved by the appropriate insurance regulatory authorities and incorporate the following features:
| ● | Provide a competitively priced product to the insurance consumer; |
| ● | Provide sufficient gross marginsto us based upon achieving projected levels of volume to allow the insurance subsidiary to achieve operating profits comparable to the life insurance industry as a whole; and |
| ● | Provide sufficient first year and renewal commission structures necessary to attract and retain career-oriented insurance agents. |
All of our products have beenwere developed by using the services of an independent qualified consulting actuary, Miller and Newberg, Inc., of Kansas City, Missouri. In addition to product development, Miller and Newberg serveserves asvaluation actuary to American Life, Great Plains Life, and First WyomingLife.Life.
Underwriting Standards
Underwriting guidelines have a direct impact on the operating results of American Life, Great Plains Life, and First Wyoming Life. If the underwriting standards that are established are not adequate, desired operating results will not be realized. Generally, when underwriting standards are less restrictive, more mortality claims and lower persistency willresult. Underwriting standards have a direct impact on the pricing structure of a product. The less restrictive the underwriting standards, the higher the product needs to be priced in order to allow for higher incidence of mortality. This higher incidence of mortality is also reflected in greater policy reserves being established.
American Life Great Plains Life, and First Wyoming Life have established similar underwriting guidelines consistent with their products’ pricing structure. The companies utilizeutilizes informationfrom applications and, in some cases, telephone interviews with applicants, inspection reports, doctors’ statements and/or medical examinations to determine whether a policy should be issued in accordance withan application, with a different rating, with a rider, with reduced coverage or rejected. In addition to an applicant’s medical history, the companiescompany also considerconsiders other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Requests for coverage are reviewed on their merits and a policy is not issued unless the particular risk has been examined and approved by our underwriters. The companies’ consulting actuaryMiller and Newberg, Inc., and reinsurers assist the insurance subsidiariesAmerican Life in establishing theirits underwriting standards.The underwriting for American Life Great Plains Life, and First WyomingLife is performed bytheir its third party administrator, Midwest. The Company’s Chief Underwriter has more than 20 years’ experience in such business.
Marketing
The insurance products of our insurance subsidiariesAmerican Life are marketed using a personal, face-to-face marketing concept. The insurance agents use the shareholder base and the current policyholders of ours and their referrals as potential clients for life insurance products. For most of 2016, we do not anticipate that our insurance subsidiaries willwere unable to generate a significant amount of new life insurance sales due to the lack of significantexcess capital and surplus of our life insurance subsidiaries and due to the time and expense of us redomesticating First Wyoming Life and Great Plains Life in Nebraska.surplus. We expect to focusfocused on new policy sales after our life insurance subsidiaries are redomesticated in Nebraska and when we are able to raise additional capital. Upon our recent acquisition of Northstar, we contributed approximately $1.0 million of capital to American Life, which will allow it to market life insurance throughout 2016 without jeopardizing the financial viability ofwere consolidated with American Life. During the final two months of 2016, new annualized premiums totaling more than $75,000 were submitted.
NewCandidate agents that lack insurance sales agentsexperience must complete a multiple interview process. These individuals are recruitedsecured through a recruiting agency, referrals from shareholders, newspaper advertisements, and solicitation through the use of on-line job sites. Each potential candidate must go through a three interview process. If hired to sell insurance, the candidate must complete a 40-hour training course conducted by a third party as well as pass the applicable state examination. Once licensed, each agent must complete a week long product and sales training class. Following course completion, each agent has a training week where his or her manager will work side by side with the agent by conducting sales meetings.
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Operating Results
There are certain factors unique to the life insurance business in which we operate which have an adverse effect on our operating results. One factor is that the cost of putting a new policy in force is usually greater than the first year’s policy premium and, accordingly, in the early years of an unseasoneda new life insurance company, these initial costs and the required provisions for reserves have an adverse effect on operating results. American Life, First Wyoming Life and Great Plains Life, as is common among an unseasonedrelatively young life insurance companies, aremay be expected to continue to operate atsustain losses for a numberseveral years until such time as the block of years becausebusiness matures and the profit stream offsets the cost of the substantial costs of writing new life insurance.business. The aggregate cost of writing new life insurance includes such significant, nonrecurring items such as first year commissions, medical and investigation expenses, and other expenses incidental to the issuance of new policies, together with the initial reserves required to be established. For our ordinary life products, the costs to cover expenses and the policyholder liability that must be set up at policy issuance exceed the first year premium by approximately24% 35%. Additionally, there is no excess of costs to cover expenses and the policyholder liability for the Future Cornhusker product. However, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), incremental direct costs that result directly from and are essential to a life insurance company acquisition transaction and would not have been incurred by us had the transaction not occurred, are capitalized and amortized over the life of the premiums produced.
Our operating results are reported in accordancewith GAAP for stock life companies; although our life insurance subsidiariesAmerican Life will also prepare financial statements in accordance with accounting practices prescribed or permitted by their respective statesits state of domicile (statutory basis of accounting) for the purpose of reporting to insurance regulatory authorities. The statutory basis of accounting has many significant differences to GAAP. For example, the incremental direct costs for acquiring new business, which are capitalized under GAAP, as discussed in the preceding paragraph, are expensed immediately under the statutory basis of accounting. In addition, under GAAP, assumptions used in calculating reserves are less conservative than those used under the statutory basis, thereby further reducing adverse effects on operating results.
Administration
We commenced our TPAthird party administration ("TPA") services in 2012 by first offering the services to our life insurance subsidiaries and other entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for us. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Management does not expect such service to be a significant source of future revenue.
Investments
The type and amount of investments which can be made by a life insurance company are specifically controlled by applicable state statutes and rules and regulations of the respective state departments of insurance.Our insurance companies have American Life has adopted investment policies in compliance with the insurance laws of the State of Arizona, Missouri, Wyoming, and South Dakota, respectively.Nebraska.
As a newan unseasoned company grows,ages, investment income will increase as a percent of total income due to investment of policy reserves; therefore, it is critical that an insurer invests its assets conservatively to ensure that investment income can become a significant component of total revenue. Accordingly, our insurance companies haveAmerican Life has developed a conservative investment policy in an effort to minimize investment risk. An independent professionalOur investments are managed by our Chief Executive Officer (“CEO”), who has over 30 years of portfolio management experience. He consults with a number of investment advisor who specializesbankers and traders in the insurance industry assists us withmanagement of our investment decisions.
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Table of Contentsportfolio. Trades are cleared through a common broker after competitive bids are solicited.
Reinsurance
Our insurance subsidiaries reinsureAmerican Life reinsures with other companies (reinsurers) portions of the life insurance risks they underwrite and occasionally will reinsure portions of life insurance risks underwritten by other (ceding) companies.it underwrites. The primary purpose of reinsurance is to allow a company to reduce the amount of its risk on any particular policy by transferring a portion of the risk to the reinsurers. However, our insurance companies remainAmerican Life remains contingently liable for the risk in the event any reinsurer is not able to meet its obligations under the applicable reinsurance agreements. Further, when life insurance risks are ceded to another insurer, the ceding company must pay a reinsurance premium to the reinsurance company as consideration for the risk being transferred. The payment of this reinsurance premium to the reinsurer represents a reduction of the premium revenue received by our insurance subsidiaries.American Life. This reduction in premium income has a direct impact on the profitability of the ceding company. The types of reinsurance treaties utilized are yearly renewable term based. As such, we pay the assuming carrier an annual premium based upon “term life” rates which are typically lower than those we charge.
The average face amount of all of our life insurance policies in force is approximately $35,000,$34,000, with the American Accumulator averaging $63,000,$63,000, Future Cornhusker Plan averaging $9,000,the Accelerator averaging $83,000,$81,000, the AmericanProtector averaging $10,000, the Accumulator X averaging $79,000, and thedeath benefit policies acquired through Old Reliance averaging $9,000. With respect to the new policies written, American Accumulator and Future Cornhusker policies, the CompanyLife retains $40,000 to $55,000 of risk on any one life. With respect to the policies acquired through Old Reliance, the Company retains $25,000$40,000 of risk on any one life. As of December 31, 2015,2016, approximately22% 22% of theour gross outstanding life insurance policies in force are reinsured with third parties.Overall, it cedesceded premium represents approximately $39.11$11.34 of premium per year for each $1,000 of gross life insurance in force. All accidental death benefits are reinsured.
Reserves
Eachof our insurancesubsidiariesAmerican Life establishes as liabilities actuarially computed reserves to meet the obligations on the policies they write,it writes, in accordance with the insurance laws and the regulations of the applicable state insurance regulators,Nebraska, for statutory accounting andGAAP. Reserves,, whether calculated under statutory accounting practices prescribed by various state insurance regulators or GAAP, do not represent an exact calculation of exposure, but instead represent our best estimates based on the relevant basis of accounting, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions. The various actuarial factors are determined from mortality tables and interest rates in effect when the policies are issued and are applied against policy in force amounts. The National Association of Insurance Commissioners (“(“NAIC”) has proposed reserve rules to be used for Statutory Accounting purposes that are based solely on company experience. However, these proposed rules must be adopted by a majority of states before implementation. We have not yet performed analysis to determine the effects of these rules. All of our reserves are established in conjunction with and certified annually by an independent actuary.
Competition
The life insurance industry is fiercely competitive. Many of the life insurance companies authorized to do business in states that we conduct business in are well-established companies with good reputations, offeringoffer a broader line of insurance products, havinghave larger selling organizations, and possessingsignificantly greater financial resources than usMidwest and our subsidiaries. Our insurance subsidiaries areAmerican Life. American Life is not rated by industry analysts and likely will not be rated for the foreseeable future. This has a negative impact on the companies’ ability of American Life to compete with rated insurance companies.
There is also considerable competition among insurance companies in obtaining qualified sales agents, which might require our insurance subsidiariesAmerican Life to pay higher commissions to attract such agents. We feel that we are uniquely positioned to serve our client base – primarily rural areas of the Midwest where competition from large companies is less intense due to geographic and economic constraints.
PossibleAcquisitions of Other Companies
We may acquire one or more life insurance or insurance-related companies in the future. Our acquisition strategy, should this avenue continue to be pursued, will be to identify one or more established insurance companies which have developed viable marketing networks for their products and which are or could be managed from our Lincoln, Nebraska administrative office. In selecting target insurance companies whichthat constitute suitable acquisition candidates, we will consider factorsincluding,, but not limited to, the target company’s financial statements and operating history (including surplus adequacy and underwriting standards); the price and features of insurance products sold and the markets serviced; the competency and loyalty of its agents; certain income tax considerations; and the purchase price.
We also may seek to acquire insurance-related companies such as: (i) third-party administrators; (ii) existing marketing agencies; (iii) life insurance reinsurance brokerage companies; and (iv) life and health insurance data processing servicers.
The primary reasons we may acquire an existing life insurance company or insurance-related company are: (i) administrative, accounting and data processing systems that would allow us to expand; (ii) to provide additional revenue streams to us through additional marketing expansion or ancillary services; and (iii) to provide additional profits through more effective cost management of an existing company as many companies within the insurance industry have excessive administrative cost levels relative to premium income.
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Certain Relationships and Affiliations
The Company and certain of our directors and officers have current or past relationships and affiliations with businesses that operate, once operated, or plan to operate in the life insurance industry and that have conducted public and private stock offerings in connection with their operations. Additional information on these relationships and affiliations, organized by company, is as follows:
Pacific Northwest:Pacific Northwest was incorporated in Idaho in October 2010 with the purpose of organizing a life insurance subsidiary in that state.We own approximately 22.4%24.7%, or 850,000 shares, of Pacific Northwest common stock. Mark A. Oliver, the Chief Executive Officer and the Chairman of the Board of Directors of Midwest, is Treasurer and a member of the Board of Directors of Pacific Northwest and owns100,000 shares of non-voting capital stock of Pacific Northwest. Todd C. Boeve, an officer of Midwest, is Secretary and a member of the Board of Directors of Pacific Northwest and owns25,000 shares of capital stock of Pacific Northwest. Pacific Northwest is a development stagedormant companywith an insignificant amount ofassets that has not conducted operations apart from raising capital.It needs. There is no plan at this time to raise significantmore capital before it may seek to formor pursue forming a life insurance subsidiary.
New Mexico CapitalCapital:: New Mexico Capital was incorporated in New Mexico in November 2010 with the purpose of organizing a life insurance subsidiary in that state.Midwest owns 500000500,000 shares or approximately 11.7%11.5% of New Mexico Capital. Mark A. Oliver, the Chief Executive Officer and Chairman of the Board of Directors of Midwest, is Chief Executive Officer and Chairman of the Board of New Mexico Capital and owns 200,000186,667 shares of its common stock. Todd Boeve, an executive officer of Midwest, is Secretary and a memberstock or 4.3% of the Board of Directors of New Mexico Capital and owns 75,000 shares of itsoutstanding common stock.shares. Other of Midwest’s present and former officers and directors also own capital391,667 shares of common stock of New Mexico Capital.Capital, or 9.0% of the outstanding shares. New Mexico Capital is a development stage company that has not conducted operations apart from raising capital.It needs to raise significant capital before it may seek to form a life insurance subsidiary.
Regulation
Eachof our insurancesubsidiariesAmerican Life is subject to the regulation and supervision of the insurance regulatory authorities ofits state of domicile, and/or Nebraska, and other state insurance regulators whereit is licensed to do business. Such regulation is primarily for the benefit of policyholders rather than shareholders. These regulators possess broad administrative powers, including the power to grant and revoke licenses to transact business, to approve the form of insurance contracts, to regulate capital requirements, to regulate the character of permitted investments, and to require deposits for the protection of investments. These insurance laws require the filing of a detailed annual report with the department of insurance in each state, as do other states’ laws.The business and financial accounts of our insurance subsidiaries will beAmerican Life are subject to examination by insurance regulatory agencies in their respective statesthe Nebraska Department of domicile,Insurance, as well as insurance departments of any other states in which we may do business.
As the holder of a controlling interest inour insurancesubsidiaries, American Life, we are also subject to regulation as an insurance holding company system under the insurance laws of statesthe state of each subsidiary’s domicile.Nebraska. The provisions of these laws generally provide for restrictions on a change in control of the insurance holding company, requirerequires the filing of certain reports with the relevant department of insurance, and limitlimits the amount of dividends which may be received by the holding company.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law. The Dodd-Frank Act reshapes financial regulations in the United States by creating new regulators, regulating new markets and firms, and providing new enforcement powers to regulators. Virtually all major areas of the Dodd-Frank Act will be subject to regulatory interpretation and implementation rules requiring rulemaking that may take several years to complete. Although the ultimate outcome of the regulatory rulemaking proceedings cannot be predicted with certainty, we do not believe that the provisions of the Dodd-Frank Act or the regulations promulgated thereunder will have a material impact on our consolidated financial results or financial condition.
Employees and Agents
As of December 31, 2015,2016, we had approximately 3019 full-time employees as well as approximately 10090 insurance agents who operate as independent contractors.
MARKET FOR MIDWEST’S COMMON STOCK
Market Information
There is no established public trading market for ourOur voting common stock. Our securities are not listedstock became eligible for trading or quoted on any national securities exchange nor are bid or asked quotations reportedthe OTCQB in any over-the-counter quotation system.mid-2016 where it trades under the ticker symbol: MDWT. At December 31, 2016, there were approximately 11,900 shareholders of record of our common stock.
Dividends
We have not paid cash dividends on our voting common stock and do not anticipate paying cash dividends in the foreseeable future. Instead, we intend to retain any future earnings for reinvestment in our business. Any future determination to pay cash dividendson our voting common stock will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
The stated annual dividend on the Class B preferred shares is 7% which commenced in 2015. The Board of Directors has approved the payment of dividends of $43,120 and $56,057 during the yearyears ended December 31, 2015.2016 and 2015, respectively.
We face many significant risks in the operating of our business and may face significant unforeseen risks as well. An investment in our voting common stock should be considered speculative. Our significant material risks are set forth below.
Ownership of shares of Midwest voting common stock involves substantial risk, and the entire value of those shares may be lost.
Shares of our voting common stock constitute a high-risk investment in a developing business that has incurred substantial losses to-date and expects to continue to incur substantial losses for several years. No assurance or guaranty can be given that any of the potential benefits envisioned by our business plan will prove to be available to our shareholders, nor can any assurance or guaranty be given as to the actual amount of financial return, if any, which may result from ownership of our voting common shares.The entire value of your shares of Midwest voting common stock may be lost.
We expect significant operating losses for a number of years.
We commenced life insurance operations in 2009, and we expect to incur significant losses for a number of years. Our insurance subsidiaries,American Life, as is common among youngunseasoned life insurance companies, likely will incur significant losses for a number of years because the costs of administration and the substantial nonrecurring costs of writing new life insurance. The costs of writing new business, which are deferred and amortized in accordance with our deferred acquisition policy, include first year commissions payable to insurance agents, medical and investigation expenses, and other expenses incidental to the issuance of new policies, together with the initial reserves required to be established for each policy. At December 31, 2015 we had anWe have a significant accumulated deficit of$23.7 million. These losses were attributable primarily to our organization and capital raising efforts and to our expansiveexpensive entry into the life insurance business.
Our lack of capital preventsCapital constraints prevented us from writing any significant amounts of new life insurance business in 2016 and 2015, which will adversely affectaffects our future prospects for profitability.profitability.
At present, we do not have sufficient capital and surplus for our life insurance subsidiariesAmerican Life in order for it to seek to sell a meaningfulsignificant amount of new life insurance products. We are seeking to address this lack of capital through (i) our recent acquisition of Northstar, in which we contributed approximately $1.0 million of capital to American Life, our primary insurance subsidiary, (ii) we intended to seek to raise additional equity capital during 2016, and (iii) we intended to redomesticate First Wyoming Life in Nebraska and merge it into American Life, which will significantly increase the capital and surplus of American Life. Because of this lack of capital and our efforts to redomesticate First Wyoming Life and Great Pains Life in the state of Nebraska (whichrequires a significant amount of management time and attention), we cannot allocate significant resources to marketing and we will also be required to rename our policies so that they may be deemed to be issued through a Nebraska insurance company. Accordingly, ourOur new life insurance product sales were significantly limited in 2015 and will be in 2016 as well.2016. As a result, our agency force hasbeen significantly depleted. In the event we We intend to commence any significant marketing efforts we will needin 2017 and have begun to retainrecruit new agents, which is an expensive and time consuming process. We cannot assure that in the event we are able to alleviate our capitalconstraints,, that we will be successful in retaining agents who are successful in selling significant new insurance policies for our life insurance subsidiariesAmerican Life in a cost effectiveefficient manner for us. A continued lack of new insurance policy sales will have a negative long-term impact on our profitability.revenues, results of operations and financial viability.
Midwest is a holding company and has no ability to generate revenues other than payments from American Life, which are presently not adequate to fund the operations of Midwest.
Midwest is a holding company whose only operating subsidiary is American Life. Midwest depends on reimbursement of costs from American Life but has no other source of revenue from American Life, particularly at this time, since American Life has limitedcapital as well. These payments are not adequate to cover the costs of Midwest’s operations. Lack of available funds of Midwest could restrict its operations significantly and without additional capital, Midwest could be forced to curtail its operations significantly. This would likely have an adverse effect on Midwest and itsliquidity and financialresults.
We intend to raise additional equity capital which will likely dilute the ownership interests of our existing shareholders.
In order to fund the capital and surplus required for our insurance subsidiariesAmerican Life and to seek to grow assets and revenue to support our business plan, we plan to seek to raise additional capital, which we envision will sought to be raised through the issuance of additional shares of our voting common stockand/or preferred stock which would be convertible into voting common stock. If additional shares are issued, the ownership interests of existing shareholders will be diluted. We cannot assure we will obtain additional equity capital, or if any capital is raised, it will be on terms beneficial to our shareholders or to us.
We have alimited operating historyand own a limited amount of assets.
We have alimited operating history and have incurred substantivesubstantial lossesevery year since we were organized.organized. We face all of the risks inherent in establishing a newan unseasoned business, including limited capital, uncertain product markets, lack of significant revenues, as well asfierce competition from better capitalized and more seasoned companies. We have no control over general economic conditions, competitors’ products or their pricing, customer demand and costs of marketing or advertising to build and expand our life insurance business. There can be no assurance that our life insurance operations will be successful or result in any significant revenues to the extent that we achieve profits and, the likelihood of any success must be considered in light of our limited history of operations and significant operating losses incurred to date.date and lack of capital to pursue expansion and significant policy sales. These risks and the lack of a seasoned operating history make it difficult to predict our future revenues or results of operations. As a result, our financial results may fluctuate and fall below expectations. This could cause the value of our voting common stock to decline.
We may not be able to execute ouran acquisition strategy with any degree of success, which could cause our business and future growth prospects to suffer.suffer.
A primary component of our business plan isWe intend to continue to pursue strategic acquisitions of insurance related companies that meet our acquisition criteria.companies. However, suitable acquisition candidates may not be available on terms and conditions that are economic to us.us, particularly with our limited capital resources. In pursuing acquisitions, we will compete with other companies, most of which have greater financial and other resources than us. Further, if we succeed in consummating acquisitions, our business, financial condition and results of operations may be negatively affected because:
| ● | Some of the acquired businesses may not achieve anticipated revenues, earnings or cash flows; |
| ● | We may assume liabilities that were notdisclosed or exceed estimates; |
| ● | We may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner; |
| ● | Acquisitions could disrupt our on-going business, distract our management and divert our financial and human resources; |
| ● | We may experience difficulties operating in markets in which we have no or only limited direct experience; and |
| ● | There is the potential for loss of customers and key employees of any acquired company. |
Our insurance marketing efforts may fail to achievetheir proposed business plan.
Our life insurance subsidiaries market theirAmerican Life markets its insurance products through the services of licensed insurance agents. New agents are recruited through a staffing agency, referrals from shareholders, newspaper advertisements, and solicitation through use of onlineon-line job sites; however we havesites. Most of these agents do not recruitedbecome successful life insurance agents. Our agency force may not be successful in generating any new agents since early 2015 due to our lack of capital in oursignificant insurance subsidiaries. Each potentialpolicy sales agent candidate must complete a lengthy interview process. If hired to sell insurance, the candidate must complete a 40 hour training course conducted by a third party as well as pass a state insurance licensing examination. Once licensed, each candidate must complete a week long product and sales training class. Following course completion, each candidate has a training week where his or her manager will work side by side by conducting sales meetings with him or her.on cost efficient terms for us.
OurAlso, insurance products arehave been marketed by us using a face-to-face, referral based marketing concept. Historically our insurance agents have used our shareholder base and their referrals as potential clients for our life insurance products. We cannot predict how marketing efforts will succeed when our agents conduct general public solicitation to the public regarding insurance products.
It should be expected that many of our agentswill have little or no prior insurance selling experience and, accordingly, this lack of experience may have a negative impact on the amount of premium volume we write. The extent of this negative impact on the premium volume written will depend primarily on our ability to timely and adequately train agents to sell insurance products and the effectiveness of the face-to-face marketing concept used by us.
Our insurance subsidiariesAmerican Life may fail as a result of being inadequately capitalized.
Our insurance subsidiariesAmerican Life must have adequate capital and surplus capital, calculated in accordance with statutory accounting principles prescribed by state insurance regulatory authorities to meet regulatory requirements in the states in which they are domiciled.Nebraska. American Life was granted a certificate of authority by the Nebraska Department of Insurance based on initial capital and surplus (based upon statutory accounting principles) of approximately $3.5 million which was increased to approximately $5.5 million (based upon statutory accounting principles) on September 1, 2009. Subsequent to year-end,we made a $1.0 million capital contribution to American Life,Life; as a result, American Life had approximately $2.5$3.8 million (based upon statutory accounting principles) at December 31, 2015 and $2.4 million (based upon statutory accounting principles) in capital and surplus at December 31,2014. Great Plains Life had capital and surplus2016. The Nebraska Department of $1.7 million (based upon statutory accounting principles) and $2.0 million (based upon statutory accounting principles) as of December 31, 2015 and 2014, respectively. First Wyoming Life had capital and surplus of $2.7 million (based upon statutory accounting principles) and $3.3 million (based upon statutory accounting principles) as of December 31, 2015 and 2014, respectively.The department of insurance of an insurance company’s state of domicileInsurance may require additional amounts of capital and surplus to support itsthe business of American Life going forward. The amount of capital and surplus ultimately required will be based on certain “risk-based capital” standards established by statute and regulation and administered by theArizona, South Dakota, and Wyoming Departments Nebraska Department of Insurance and other regulators.Insurance. The “risk-based capital” system establishes a framework for evaluating the adequacy of the minimum amount of capital and surplus, calculated in accordance with statutory accounting principles, necessary for an insurance company to support its overall business operations. It identifies insurers that may be inadequately capitalized by reviewing certain inherent risks of each insurer’s assets and liabilities and its mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation, or liquidation. If any of AmericanLife, Great Plains Life or First Wyoming Life, fails to maintain required capital levels in accordance with the “risk-based capital” system, such company’sits ability to conduct business would be compromised and theour ability of us to seek to expand our insurance business would be significantly reduced absent a prompt infusion of capital to the insurance subsidiary.
Table of Contentsinto American Life.
The insurance industry is subject to numerous laws and regulations, and compliance costs and/or changes in the regulatory environment could adversely affect our business.
Our insurance operations are subject to government regulation in each of the states in which we and our subsidiaries conduct business. Such regulatory authority is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than shareholders. During the past several years, increased scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding companysystems. The National Association of Insurance Commissioners (the NAIC)NAIC and state insurance regulators reexamine existing laws and regulations on an ongoing basis, and focus on insurance company investments and solvency issues, risk-based capital guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. Future NAIC initiatives, and other regulatory changes, could have a material adverse impact on our insurance business. There can be no assurance that our insurance subsidiariesAmerican Life will be able to satisfy the regulatory requirements of the DepartmentsNebraska Department of Insurance of their respective state of domicile or a similar department in any other state in which theyit may wish to transact business.
Individual state guaranty associations assess insurance companies to pay benefits to policyholders of insolvent or failed insurance companies. The impact of such assessments may be partly offset by credits against future state premium taxes. We cannot predict the amount of any future assessments, nor have we attempted to estimate the amount of assessments to be made from known insolvencies.
On July 21, 2010, President Obama signed into law financial regulatory reform legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act reshapes financial regulations in the United States by creating new regulators, regulating new markets and firms, and providing new enforcement powers to regulators. Virtually all major areas of the Dodd-Frank Act will be subject to regulatory interpretation and implementation rules requiring rulemaking that may take several years to complete.
Impairment or negative performance of other financial institutions could adversely affect us
We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. The operations of U.S. and global financial services institutions are interconnected and a decline in the financial condition of one or more financial services institutions may expose us to credit losses or defaults, limit our access to liquidity or otherwise disrupt our business operations.
We operate in a highly competitive industry, and our business will suffer if we are unable to compete effectively.
The operating results of life insurance companies are subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies such as A.M. Best and other factors. The life insurance business is highlyfiercely competitive. Our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain agents to market insurance products, our ability to develop competitive and profitable products and our ability to obtain acceptable ratings. In connection with the development and sale of products, our life insurance subsidiaries encounter significantAmerican Life encounters competition from other insurance companies, most of whom have financial and human resources substantially greater than ours,American Life’s, as well as competition from other investment alternatives available to customers.potential policyholders. We do not anticipate that American Life, Capital Reserve or Great Plains Life will be rated by industry analysts for several years. This will likely have a negative impact on theirits ability to compete with rated insurance companies.
Our insurance subsidiaries competeAmerican Life competes with up to 2,000800 other life insurance companies in the United States, and American Life also competes with some of these companies internationally, which are facing increased competitive pressures due to industry consolidation, where larger, more efficient organizations are emerging from consolidation. Additionally, legislation became effective in 2000 permitting commercial banks, insurance companies and investment banks to combine. This law permits, for instance, a commercial bank to acquire or form an insurance company.
States. Most life insurance companies have greater financial resources, longer business histories, and more diversified lines of insurance coverage than our insurance subsidiaries have.American Life. These larger companies also generally have large sales forces. We also face competition from companies operating in foreign countries and marketing in person as well as from direct mail and email sales campaigns.
Our ability to compete is dependent upon, among other things, our ability:
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We are highly dependent upon our Chief Executive Officer, and the loss this officer could materially and adversely affect our business.
Our ability to operate successfully is dependent primarily upon the efforts of Mark A. Oliver, itsour Chief Executive Officer and the Chief Executive Officer of American Life. The loss of the services of Mr. Oliver could have a material adverse effect on our ability to executeour business plan. The Company has executed an employment agreement with Mr. Oliver with a term ending of 2019.
Development of life insurance products involves the use of certain assumptions, and the inaccuracy of these assumptions could adversely affect profitability.
In our life insurance business, we must make certain assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of life insurance products. These assumptions are based on industry experience and are reviewed and revised regularly to reflect actual experience on a current basis. However, variation of actual experience from that assumed in developing such terms may affect a product’s profitability or sales volume and in turn adversely impact our revenues.
If we underestimate our liability for future policy benefits, our results of operations could suffer.
Liabilities established for future life insurance policy benefits are based upon a number of factors, including certain assumptions, such as mortality, morbidity, lapse raterates and crediting rate.rates. If we underestimate future policy benefits, we would incur additional expenses at the time we become aware of the inadequacy. As a result, our ability to achieve profits would suffer.
Our insurance subsidiaries may not be able to obtain favorable insurance ratings.
Insurance ratings are an important factor in establishing the competitive position of insurance companies. Ratings reflect the rating agencies’ opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders. Our insurance subsidiaries will not receive a rating until they have maintained operations for a minimum of three to five years. There can be no assurance that our insurance subsidiaries will be rated by a rating agency or that any rating, if and when received, will be favorable to our insurance subsidiary. The lack of a rating could impact the ability to make sales in the broad insurance marketplace. For example, potential insureds may choose not to purchase a policy from an unrated company, or our insurance subsidiaries may be required to charge lower rates and offer discounts to attract business, which in turn would adversely affect our results of operations.
Fluctuations in interest rates could adversely affect our business and profitability.
Interest rate fluctuations could impair an insurance company’s ability to pay policyholder benefits with operating and investment cash flows, cash on hand and other cash sources. Our annuity product exposes us to the risk that changes in interest rates will reduce any spread, or the difference between the amounts that the insurance companyAmerican Life is required to pay under the contracts and the amounts the insurance subsidiaryAmerican Life is able to earn on its investments intended to support its obligations under the contracts. Spread is a key component of revenues.
To the extent that interest rates credited are less than those generally available in the marketplace, policyholder lapses, policy loans and surrenders, and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to purchase products with perceived higher returns. This process may result in cash outflows requiring that an insurance subsidiaryAmerican Life sell investments at a time when the prices of those investments are adversely affected by the increase in market interest rates, which may result in realized investment losses.
Increases in market interest rates may also negatively affect profitability. In periods of increasing interest rates, we may not be able to replace invested assets with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep interest sensitive products competitive. Our life insurance subsidiariesAmerican Life therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts.
Our investments are subject to risks of default and reductions in market values.
We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities, bankruptcy filings and other events could reduce our investment income and realized investment gains or result in the recognition of investment losses.losses and restrict our access to cash and investments. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the bonds included in our portfolio, financial market performance, general economic conditions, and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio and may adversely affect Midwest’sour results of operations.
Our goodwill may become impaired, which may adversely impact our results of operations and financial condition.
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. In testing for impairment, the fair value of net assets is estimated based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a noncash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2015, we had goodwill of $1,129,824, or 17% of our total stockholders' equity.
Reinsurers with which we do business may not honor their obligations, leaving us liable for the reinsured coverage, and our reinsurers could increase their premium rates.
Our life insurance subsidiaries cedeAmerican Life cedes a substantial amount of theirits insurance to other insurance companies. However, the relevant life insurance subsidiaryit remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it.the reinsurer. The cost of reinsurance is, in some cases, reflected in its premium rates. Under certain reinsurance agreements, the reinsurer may increase the rate it charges our relevant life insurance subsidiaryAmerican Life for the reinsurance. However, if the cost of reinsurance were to increase with respect to policies for which our relevant life insurance subsidiaryAmerican Life has guaranteed the rates, the relevant life insurance subsidiarycosts to American Life would increase could be adversely affected, which would in turn adversely affect us.our profitability.
Changes in the tax laws could adversely affect our business.
Congress has from time to time considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. This and similar legislation, including a simplified “flat tax” income tax structure with an exemption from taxation for investment income, could adversely affect the sale of life insurance compared with other financial products if such legislation were to be enacted. There can be no assurance as to whether such legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on any annuity and life insurance products that we and our operating subsidiariessubsidiary develop.
Under the Internal Revenue Code, income taxes payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain insurance products a competitive advantage over other non-insurance products. To the extent that the Internal Revenue Code may be revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including those owned by us, would be adversely affected with respect to their ability to sell products. Also, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies might increase. In addition, life insurance products are often used to fund estate tax obligations. We cannot predict what future tax initiatives may be proposed with respect to the estate tax or other taxes which may adversely affect us.
We do not intend to declare cash dividends on shares of our common stock for the foreseeable future.
We have never paid a cash dividend on our voting common stock and we do not anticipate paying dividends for the foreseeable future. We intend to retain available funds to be used in the expansion offor operations. Future dividend policy will depend on earnings, capital requirements, financial condition and other relevant factors. Moreover, we are a holding company without independent operations and generate nolimited cash flow from itsour operations.
Because we do not intend to pay cash dividends for the foreseeable future, shareholders will benefit from an investment in Midwest voting common stock only if the stock appreciates in value.
Because we do not expect to pay any cash dividendson our voting common stock for the foreseeable future, the success of any investment in itsour voting common stock will depend upon any future appreciation in itsour value. We cannot assure that our voting common stock will appreciate in value or even achieve or maintain a value equal to the price at which shares were purchased.purchased, particularly since we expect to incur losses.
Policy lapses in excess of those actuarially anticipated would have a negative impact on our financial performance.
Our profitability couldwould likely be reduced if our lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies. Policy sales costs are deferred and recognized over the life of a policy. Excess policy lapses, however, cause the immediate expensing or amortizing of deferred policy sales costs.
The insurance industry is highly regulated and our activities are restricted as a result. We expend substantial amounts of time and incur substantialsignificant expenses in connection with complying with applicable regulations, and we are subject to the risk that more burdensome regulations could be imposed on it.
Compliance with insurance regulation by us is costly and time consuming. Insurance companies in the U.S. are subject to extensive regulation in the states where they do business. This regulation primarily protects policyholders rather than stockholders. The regulations require:
| ● | prior approval of acquisitions of insurance companies; |
| ● | certain solvency standards;licensing of insurers and their agents; |
| ● | investment limitations; |
| ● | deposits of securities for the benefit of policyholders; |
| ● | approval of policy forms and premium rates; |
| ● | periodic examinations; and |
| ● | reserves for unearned premiums, losses and other matters. |
EachTable of our life insurance subsidiariesContents
American Life is subject to this regulation in each state in the U.S. in which it is licensed to do business. This regulation involves additionalsignificant costs and restricts operations. We cannot predict the form of any future regulatory initiatives.
In addition, as the owner of a life insurance subsidiary, we areMidwest is regulated by various state insurance regulatedregulatory agencies under the Holding Company Systems Act.uniform insurance holding company act. Certain "extraordinary" intercorporate transfers of assets and dividend payments from our life insurance subsidiariesAmerican Life require prior approval by the applicable state insurance regulator. We also file detailed annual reports with the ArizonaNebraska Department of Insurance and all of the states in whichwe are licensed. The business and accounts ofourAmerican Life life insurance subsidiaries are subject to examination by the ArizonaNebraska Department of Insurance, as well as inquiries and follow up, including investigations, of the various insurance regulatory authorities of the states in which our insurance subsidiaries areAmerican Life is licensed.
There are a substantial number of shares of Midwest common stock eligible for future sale in the public market. The sale of a large number of these shares could cause the market price of our common stock to fall.
There were18,006,301 22,558,956 shares of our voting common stock outstanding as ofMarch 1, 2016.28, 2017. As of that date, nearly all outstanding shares may be sold withoutrestriction. Sale of a substantial number of these shares would likely have a significant negative effect on the market price of our voting common stock, particularly if the sales are made over a short period of time.If our shareholders sell a large number of shares of our voting common stock, the market price of shares of our voting common stock could decline significantly.
Breaches of security or interference with our technology infrastructure could harm our business
Our business is reliant upon technology systems and networks to process, transmit and store information and to conduct many of our business activities and transactions. Maintaining the integrity of our systems and networks is critical to the success of our business operations and to the protection of our proprietary information and our clients' personal information. Any such breaches or interference that may in the future occur could have a material adverse impact on our business, financial condition or results of operations. Moreover, any unauthorized access to or the disclosure or loss of our proprietary information or our clients' personal information may result in legal claims, damage to reputation, the incurrence of costs to eliminate or mitigate further exposure, or other damage to our business. Despite measures taken to address and mitigate these risks, we cannot assure that our systems and networks will not be subject to breaches or interference.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
As a “smaller reporting company,” we are not required to provide disclosure pursuant to this item.None.
We currently lease approximately 13,007 square feet office space at 2900 South 70th Street, Suite 400, Lincoln, Nebraska 68506. This lease was executed October 17, 2013 and expires on January 31, 2024. We executed an amendment to the above lease for the additional 2,876 square feet of office space in Suite 450 on October 23, 2015, which expireswill expire on May 31, 2017. Great Plains entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota,2017, which expires on November 30, 2016. First Wyoming Life entered into a lease August 28, 2013 for office space located in Cheyenne, Wyoming for approximately 1,421 square feet which expires on August 31, 2016.we do not plan to renew.
We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
There is no established public trading market for ourOur voting common stock. Our securities arestock began trading on the OTCQB as of mid-2016 where it trades under the ticker symbol: MDWT. Shares do not listed for trading or quoted on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation systemactively trade. Bid and ask information by quarter is shown below:
As of December 31, 2015,March 28, 2017, we had issued and outstanding 18,006,30122,558,956 shares of our voting common stock, 74,159 shares of Class A preferred non-voting stock, and 102,669 shares of Class B preferred non-voting stock. No other equity securities of the Company are outstanding.
Holders of Record
As ofMarch 15, 2016,28, 2017, there were approximately11,493 11,900 holders of record of our voting common stock.
Dividends
We have not paid cash dividends on our voting common stock and do not anticipate paying cash dividends in the foreseeable future. Instead, we intend to retain any future earnings for reinvestment in our business.
The stated annual dividend rate on the Class B preferred shares is7%, which commenced in 2015. Dividends of $43,120 and $56,057 were paid during 2015.2016 and 2015, respectively.
Securities Authorized for Issuance Under Equity Compensation Plans
We have not established any equity compensation plans or granted any equity awards under such plans. As a result, there are no securities authorized for issuance under such plans.
Recent Sales of Unregistered Securities
Please see Item 7 -- "Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and Item 1 -- “Business, Development of the Business” for information regarding securities sold by Midwest and its subsidiaries during the past three years.
ITEM 6. SELECTED FINANCIAL DATA.
As a “smaller reporting company,” we are not required to provide disclosure pursuant to this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report.
Cautionary Note Regarding Forward-Looking Statements
Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements"“forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "hopes," "estimates," "projects," "intends," "anticipates,"“believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and "likely,"“likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item“Item 1A. Risk Factors,"” along with any supplements in Part II below.
All such forward-looking statements speak only as of the date of this Form 10-K. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company'sCompany’s expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Overview
Midwest Holding Inc., a Nebraska corporation, (“we”, “us”, “our”, “Midwest”, the“Company” or the“Registrant”) wasWe were formed on October 31, 2003 for the primary purpose of becoming a financial services holding company. We presently conduct our business through ourprimary sole life insurance subsidiary, American Life & Security Corp. (“(“American Life”). On August 5, 2014, Great Plains Financial (“Great Plains”) was acquired by us.Its wholly owned subsidiary, Great Plains Life Assurance Company (“Great Plains Life”) became a subsidiary of Midwest and then became a wholly owned subsidiary ofIn 2009, American Life throughwas issued a capital contribution from us. First Wyoming Capital Corporation (“First Wyoming”) was acquired by us on October 27, 2015. First Wyoming Life Insurance Company (“First Wyoming Life”) became a subsidiarycertificate of Midwest with an ownership interest of 99.9%. We arecurrently seekingauthority toredomesticate First Wyoming Life conduct life insurance business in Nebraska. For the years ended December 31, 2016 and Great Plains Life2015, we generated approximately $3.5 million and $3.4 million in Nebraska contingent on regulatory approval.premium revenue, respectively.
We were a development stage company until American Life commenced insurance operations in 2009. We have incurred significant net losses since inception in 2003 totaling approximately$23.7 million through December 31, 2015. These losses havethat resulted primarily from costs incurred while raising capital and establishingand operating American Life.Life and other entities. We expect to continue toincur operating losses until we achieveAmerican Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.
From our inception, we have raised approximately $18.0 million through sales of shares of voting common stock and convertible non-voting preferred stock in several private placements exempt from registration under Section 4(2) of the Securities Act of 1933 andpursuant to an intrastate offering in the State of Nebraska.
In 2009, American Life was issued a certificate of authority to conduct life insurance businessin Nebraska. Capital and surplus contributed to American Life was approximately $10.6 million as ofDecember 31, 2015, capital and surplus of American Life at that date was approximately $2.5 million. At December 31, 2015 and 2014, American Life generated approximately $2.4 million and $2.9 million in premium revenue, respectively.
On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life. Capital and surplus of Capital Reserve as of December 31, 2015 and 2014 was $1.5 million and $1.3 million, respectively.Capital Reserve is presently a dormant company and it incurred a $77,720 and $123,940 net loss for the years ended December 31, 2015 and 2014, respectively. We have entered into an agreement to sell Capital Reserve for its net book value to an unaffiliated third party and we expect the sale to close in early to mid 2016.
In January 2011, we completed the private sale of 74,159 shares of our Series A Preferred Stock tocertain investors in Latin America. The net proceeds of this sale, after expenses, were approximately $415,750. These proceeds were used to further capitalize our insurance operations, for working capital and for general corporate purposes.
In February, 2011, we completed an offering of 1,554,320 shares of voting common stock to existing shareholders who were residents of the State of Nebraska for gross proceeds of approximately $7.7 million. Net proceeds were used to fund the acquisition of Old Reliance Insurance Company as described below, to further capitalize our insurance operations, for working capital and general corporate purposes.
In 2011,we acquired all of the issued and outstanding capital stock of OldReliance, an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with thesurviving company changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of our voting commonstock.
During the third quarter of 2011, we obtained control of an entityin which we previously had a noncontrolling interest in, Security Capital Corp. (“Security Capital”), an Arkansascorporation. Security Capital was a development stage company that had not conducted operations apart from raising capital. Security Capital was acquired byus on August 5, 2014, through a share exchange described below.
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In August 2011, we acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), a startup company formed to develop, manufacture, and market the Hot Dot Alert Patch, a body heat sensor. The operating results of Hot Dot were consolidated with those of ours, due to our control of Hot Dot’s board of directors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of its common stock from us for $750,000. As a result, we ceased to have a controlling financial interest in Hot Dot and we deconsolidated it in our financial statements on that date. In October 2014, Hot Dot repurchased our 1,500,000 remaining Hot Dot shares for $775,000.
Wecommenced third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee income for us. Services provided vary based on the respective needs of the client and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources.
In October 2013, wecompleted a private placement offering under Regulation D of the Securities Act of 1933of Units, with each Unit consisting of 50 shares of voting common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016 for gross proceeds of$353,700. A total of 58,950 shares of voting common stock and 1,179 warrants were sold in the offering.Net proceeds were used for general corporate purposes.
On July 21, 2014, we consummated an exchange agreement with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their shareholders (other than those shares already held by us.) The Great Plains shareholders received approximately 1.298 shares of our voting common stock for each share of Great Plains common stock held and the Security Capital shareholders received approximately 0.162 shares of our voting common stock for each share of Security Capital common stock held. On August 5, 2014, Great Plains and Security Capital were merged into us. We issued a total of 4,767,400 voting common shares pursuant to these transactions.
In September, 2014, we completed a private offering of a newly-created class of preferred shares, Series B preferred stock, at $6.00 per share. The Series B shares are non-cumulative, non-voting and convertible into our voting common shares after May 1, 2017 at a rate of two voting common shares for each share of Series B preferred stock. A total of 102,669 shares of Series B preferred stock were sold for total gross proceeds of $616,012 and the net proceeds were used for general corporate purposes.
On October 27, 2015, we acquired First Wyoming Capital Corporation, a Wyoming corporation (“First Wyoming”) pursuant to an Agreement and Plan of Merger dated July 31, 2015 by exchanging 1.37 shares of our voting common stock for each share of First Wyoming common stock, or approximately4,767,000 shares. Subsequent to the closing, First Wyoming was merged into us.
On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015 and Northstar became a wholly-owned subsidiary of ours. We exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’sprimary asset as of its purchase date was cash of approximately $2.2 million.
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of theseour consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanationa summary of our significant accounting policies and the estimates considered most significant by management.estimates. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in Note 1 — Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.Statements in this Report.
Valuation of Investments
Our principal investments are in fixed maturity and equity securities.maturities. Fixed maturity and equity securities,maturities, which are classified as available for sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). We utilize external independent third-party pricing services to determine the fair values on investment securities available for sale. We have routines, processes, and controls in place to review prices received from service providers for reasonableness and unusual fluctuations.fluctuations in prices. In the event that a price is not available from a third-party pricing service, we pursue external pricing from brokers. Generally, we pursue and utilize only one broker quote per security. In doing so, we solicit only brokers which have previously demonstrated knowledge and experience of the subject security.
Additionally, we have minor investments in development stage entities. These equity securities approximate carrying value and are invested in privately-held, development stage holding companies. These securities have no active trading. The fair value for these securities is determined through the use of unobservable assumptions about market participants. These companies are regularly bringing new investors into their entities at or above the prices paid by us. Accordingly, we have asserted that a willing market participant would purchase the security for the same price as we paid until such time as the development stage company commences operations.
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We have a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. We consider severity of impairment, duration of impairment, forecasted recovery period, industry outlook, financial condition of the issuer, issuer credit ratings and whether we intend to sell a security or it is more likely than not that we would be required to sell a security prior to the recovery of the amortized cost.
The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the income statement as an other-than-temporaryanother-than-temporary impairment. As it relates to debt securities, if we do not expect to recover the amortized basis,do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporaryother-than- temporary impairment is bifurcated. We recognize the credit loss portion through earnings in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.
Deferred Acquisition Costs
Incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to thea life insurance contract acquisition transaction and would not have been incurred by us had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the life insurance premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.
Value of Business Acquired
Value of business acquired (VOBA) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon management’s current view of future events. VOBA is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. Management’s view primarily reflects our experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect the amortization of VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted. If it is determined that it is appropriate to change the assumptions related to future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain assumptions, such as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple assumptions. The VOBA balance is immediately impacted by any assumption changes, with the change reflected through the statements of comprehensive income as an unlocking adjustment in the amount of VOBA amortized. These adjustments can be positive or negative with adjustments reducing amortization limited to amounts previously deferred plus interest accrued through the date of the adjustment.
In addition, we may consider refinements in estimates due to improved capabilities resulting from administrative or actuarial system upgrades. We consider such enhancements to determine whether and to what extent they are associated with prior periods or simply improvements in the projection of future expected gross profits due to improved functionality. To the extent they represent such improvements, these items are applied to the appropriate financial statement line items in a manner similar to unlocking adjustments.
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VOBA is also reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. If it is determined from emerging experience that the premium margins or gross profits are less than unamortized deferred acquisition costs, then the asset will be adjusted downward with the adjustment recorded as an expense in the current period.
Goodwill and Intangibles
Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.
WeThe Company elected to forgo the qualitative impairment analysis and performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2015,2016, the fair value of each of ourthe Company’s reporting units exceededunit was less than the carrying value of the net assets assigned to that unit;unit therefore we were notthe Company was required to perform further testing for impairment. Management'sManagement’s determination of the fair value of eachthe reporting unit incorporates peer company price to earnings multiples andincorporated assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.Determining theBased upon our fair value of goodwill is considered a critical accounting estimate because of its sensitivity to market based economics. In addition, any allocationanalysis, the Company determined that the full amount of the fair valuegoodwill should be written off as of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements variability in market conditions and key assumptions or subjective measurements used to estimate and allocate fair value are reasonably possible and could have a material impact on our consolidated financial statements.December 31, 2016.
We assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
We compared the carrying value of our identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 2015,2016, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.
Reinsurance
In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. We generally strive to diversify our credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish our primary liability under the policies written. Therefore, we regularly evaluate the financial condition of our reinsurers including their activities with respect to claim settlement practices and commutations, and establish allowances for uncollectible reinsurance recoverable as appropriate.
Future Policy Benefits
We establish liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by using a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables. Such liabilities are reviewed quarterly by an independent consulting actuary.
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Income Taxes
Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. We have no uncertain tax positions that we believe are more-likely-than not that the benefit will not to be realized.
Recognition of Revenues
Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.
Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statementsconsolidated statement of Cash Flows.cash flows.
Amounts received under our multi-benefit policy form are allocated to the life insurance portion of the multi-benefit life insurance arrangement and the annuity portion based upon the signed policy.
New Accounting Standards
A detailed discussion of new accounting standards is provided in Note 1 — Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated FinancialStatements.
Consolidated Results of Operations
Net Loss: Theincrease in net lossin 2016 compared to 2015 was due to theimpairment of the goodwill of $1,129,824, the loss of $420,720 on the revised valuation of Midwest's equity method investment in FirstWyoming mentioned below, the net loss of $185,000 as a result of the inclusion of First Wyoming Life. the decline in premium revenue, increase in interest credited, and other operating expenses. These were offset by the bargain purchase gain on the revised valuation of the Midwest and First Wyoming merger of $1,326,526. Midwest engaged a third party to prepare a valuation of Midwest and First Wyoming. The total bargain purchase gain recorded based upon the final valuation was $2,231,104. Of that amount, $904,578 was recognized in the fourth quarter of 2015on a provisional basis, with the remainder recorded in 2016. There were also lower death benefits, decrease in reserves, and decrease in amortization of deferred acquisition costsin2016.
Insurance revenues are primarily generated from premium revenues and investment income. Insurancerevenues are summarized in the table below.Unless the context requires otherwise, all references compare 20152016 to 2014.2015.
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Premiums | $ | 3,517,458 | $ | 3,424,377 | ||||
| Investmentincome, net of expenses | 878,991 | 663,968 | ||||||
| Loss on equity method investment | (420,720 | ) | (357,437 | ) | ||||
| Net realized gains(losses) on investments | 31,504 | (117,364 | ) | |||||
| Miscellaneous income | 107,015 | 171,571 | ||||||
| $ | 4,114,248 | $ | 3,785,115 | |||||
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| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Premiums | $ | 3,424,377 | $ | 4,007,810 | ||||
| Investment income (loss), net of expenses | 306,531 | (9,883 | ) | |||||
| Net realized (losses) gains on investments | (117,364 | ) | 346,304 | |||||
| Miscellaneous income | 171,571 | 295,246 | ||||||
| $ | 3,785,115 | $ | 4,639,477 | |||||
Premium revenue: Premium revenuedeclined increased primarily due to the accounting treatment for renewal premiums on our Accumulatorof approximately $500,000 and surrenders of $287,000.These decreases were offset by new premiums written of $158,000 and First Wyoming Life premiums of $50,000 due to the mergerinclusion of $322,000of premiums attributable to the acquisition of First Wyoming.Wyomingin late 2015; such premiumsof $49,000 were only recognized for two months in 2015. This increase was offset by our decision to significantly reduce new life insurance policy sales in 2015 and selling efforts in 2016 in order to preserve the regulatory capital and surplus of American Life. We expect to have limited production of new insurance business in 2017 in order to continue to preservesurplus, although new sales resulted in $75,000 of new annual premium written in the fourth quarter of 2016. The essential flat revenue number was also due to GAAP accounting for premiums from our Accumulator life insurance product (our primary product). We recognize 100% of the first year payments received for our Accumulator life insurance products as premiums earned when due. In subsequent years, 50% of the payments received on the Accumulator life insurance products are applied toward the traditional life insurance premium. Thepremium and the other 50% of the payments received are applied towards the annuity premium which is recognized as deposits to policyholder account balances and included in future insurance policy benefits rather than revenues. Premiums on our other insurance products are recognized as earned when due. Production of new life premiumdecreased significantly because actuarial development and regulatory approval of American Life’s new life insurance products took a significant amount of time, as well asdecreased agents due to our low levels of capital and surplus. We have limited production of new business to preserve surplus of American Life, First Wyoming Life and Great Plains Life.
Miscellaneous income: Miscellaneous income decreased primarily due to lower TPA fee income due to our divestment of our interest in Northern Plains and Hot Dot in 2014. The decrease was also due to the acquisition of First Wyoming and the recognition ofFirst Wyoming TPA fees only through October 27, 2015.
Net realized(losses) gains on investments: Thisincrease was primarily dueto the change in bond prices during 2015. In 2014, we recognized $90,812 and $251,102 gains on the divestments of Northern Plains and Hot Dot, respectively.revenues.
Investment income, net of expenses:The components of net investmentincome (loss) for 2015 2016 and 20142015 are as follows:
| Year Ended December 31, | Year Ended December | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Fixed maturities | $ | 681,999 | $ | 401,138 | $ | 889,860 | $ | 681,999 | ||||||||
| Equity securities | 186 | 83 | 1,434 | 186 | ||||||||||||
| Cash and short-term investments | 7 | 3,965 | ||||||||||||||
| Equity in the net loss of unconsolidated subsidiaries | (357,437 | ) | (438,175 | ) | ||||||||||||
| Other | 44,863 | 99,477 | 58,849 | 44,870 | ||||||||||||
| 369,618 | 66,488 | 950,143 | 727,055 | |||||||||||||
| Less investment expenses | (63,087 | ) | (76,371 | ) | (71,152 | ) | (63,087 | ) | ||||||||
| $ | 306,531 | $ | (9,883 | ) | ||||||||||||
| Investment income, net of expenses | $ | 878,991 | $ | 663,968 | ||||||||||||
The increase in investmentincome was primarily due to theincreased size of our bond portfolio using a part of the $2.4 million of cash received from our acquisition of Northstar in early 2016, the consolidation of First Wyoming Life and its investment income followingof $122,000for theacquisition full year of 2016 compared to $22,000 of First Wyoming, the losses from equity method investments decreased due towhich only included twochangingmonths in prior year treatment for the investment in Pacific Northwest Corporation from cost to equity method of accounting which brought our investment to zero at December 31, 2014, and the divestment of our2015. Policy loan interest, in Hot Dot,Inc.These increases were offset by the market value adjustment to our equity method investment in First Wyoming of$198,760 due to the merger of First Wyoming. Interest income from real estate investment, policy loan interest,investments, and miscellaneous investment income is included in the “Other” line item above.
Loss on equity method investment: The decreaseinincrease “Other”ininvestment loss for equity method investments was primarily due to the decreasefinal valuation by a third party of Midwest’s investment in interestFirst Wyoming. The original investment in First Wyoming was $810,500. The preliminary valuation prepared for us by the third party was determined to be $642,150 which resulted in a loss of $168,350 for the year ended December 31, 2015. The final valuation by the third party valued First Wyoming at $221,430 resulting in the $420,720 loss for the year ended December 31, 2016, offset by the gain as discussed above.
Net realized gains(losses) on investments:The increase was due primarily to improved market conditions on sale of bonds.
Miscellaneous income:Miscellaneous income from real estate investments.decreased due to our TPA fee income decline as we acquired two companies in 2015 and 2016for whom we were performing TPAservices. We have three customers for whom we performed these services.We do not expect such service to be a significant source of future revenue. Fees earned during the years ended December 31, 2016 and 2015 were $63,500 and $154,670, respectively.
Expenses are summarized in the table below.
| Year Ended December 31, | Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||
| Death and other benefits | $ | 908,658 | $ | 1,313,095 | $ | 803,091 | $ | 908,658 | ||||
| Interest credited | 533,646 | 403,556 | 776,541 | 533,646 | ||||||||
| Increase in benefit reserves | 777,111 | 1,072,740 | 751,743 | 777,111 | ||||||||
| Amortization of deferred acquisition costs | 469,674 | 625,680 | 367,235 | 469,674 | ||||||||
| Salaries and benefits | 1,940,345 | 2,359,140 | 2,345,311 | 1,940,345 | ||||||||
| Goodwill impairment | 1,129,824 | - | ||||||||||
| Other operating expenses | 2,578,288 | 2,771,172 | 3,114,951 | 2,578,288 | ||||||||
| $ | 7,207,722 | $ | 8,545,383 | $ | 9,288,696 | $ | 7,207,722 | |||||
Death and other benefitsbenefits:: Death benefits decreased due primarily due to a lawsuit settlementdecrease in 2014 of $205,000our pending claims and incurred but not reported claims for American Lifewhich did not recur and the decrease in overall claims.Life. Death benefits are expected to continue to be paid out primarilyat current levels on the Old Relianceour older block of business.business as a result of the age of the block. We maintain policy reserves to offset the effect of all claims. These decreases were offset by $30,000 of claims relating to the inclusion of First Wyoming Lifefor the full year of 2016 compared to $4,000 for only two months of 2015.
Interest credited:Interest creditedincreasedwas as a result of the increase in the annuity deposits and the inclusion of First Wyoming Life which addeddeposit-type$950,000 liability owedof annuity deposits and$49,000 of interest creditedfor the full year of 2016 compared to the policyholders as described above.$7,000 for only two months of 2015.
Increase in benefit reserves: The decrease in benefit reserves reflects the decrease in new business written and the increase in surrenders. These decreases were offset by the inclusion of First Wyoming Life which added$72,000 for the full year of 2016 compared to$15,500 for only two months in 2015 and the maturity of our in-force block of business, and increase in surrenders as well as the effect of the structure of the initial life insurance policy sold by American Life, Great Plains Life and First Wyoming Life.business.
Amortization of deferred acquisition costs: ThisThe decline is a result of fewer policieswas due primarily to the decline in new business written in 2014the first nine months of 2016 to conserve capital and 2015 as discussed above.surplus. New business was written in the fourth quarter of 2016 of $75,000 of annual premiums.
Salaries and benefitsbenefits:: The decrease primarily relatesincrease was due to marketing-relatedthe inclusion of First Wyoming salaries transitionedand benefits of$390,000for the full year of 2016 compared to commission $75,500 for only two months of 2015 andsimilar costs after the merger of Northstar of $225,000in January 2015March 2016. These were offset by personnel reductions. We expect further salary and benefit reductions of approximately $166,000in 2017 compared to 2016 and $184,000 in 2018 compared to 2017.
Goodwill impairment: During our goodwill analysis, we determined that we needed to impair the efficiencies gained from the acquisitionwhole balance of Great Plainsas well as$1,129,824. staff reductions.
Other operating expenses: Other operating expenses decreasedincreased due to non-recurring higher professional fees associated with the acquisition of Great Plains Financial and Security Capital in 2014, as well as fees related to routine regulatory examinations occurring in 2014 conducted by agencies from the states of Arizona, Missouri, and Wyoming as required by state statues. The decreases were offset professional fees associated with the acquisition of FirstWyoming andinclusion the fees incurred for proposed acquisition of Northstar.
Bargainpurchase gain for business acquisition: The gain in 2015 was a result of the acquisition of First Wyoming inLife expenses of $354,000October 2015.for the full year of 2016 compared to $37,000 for only two months of 2015, expenses related to Northstar and First Wyoming mergers and the redomestication and merger of ourformer
Net Loss:The decrease life subsidiaries of $289,159 and an increase in net loss was primarilytravel and legal expenses due tothe gain on the acquisition capital raising efforts of First Wyoming, higher investment income, a decrease in reserves, lower salary expense,net gains on investments, and a reduction in other operating expenses,$82,000; offset by a decline in premiumrevenue.
Loss attributable to noncontrolling interests:We owned approximately 60% of the capital stock of Security Capital, and approximately 25.7% of Great PlainsFinancial through August 5, 2014 at which time we acquired the remaining outstanding common shares of each company not held by us. Great PlainsFinancial and Security Capital were included in the 2014 consolidated financials and we subtracted from our earnings the portion of the gain/loss that we did not own, or 40% for Security Capital and 74.3%reimbursement for Great PlainsFinancial. As a result Life 2015 regulatory examination fees of the acquisition for the year ended December 31, 2015, we did not have a gain/loss attributable to noncontrolling interests compared to the same period in 2014.$67,000.
Investments
Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities, with smaller holdings in equity securities, real estate, held for investment, mortgage loans on real estate held for investment, policy loans, and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| Carrying | Percent | Carrying | Percent | Carrying | Percent | Carrying | Percent | |||||||||||||||||
| Value | of Total | Value | of Total | Value | of Total | Value | of Total | |||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| U.S. government obligations | $ | 3,193,499 | 12.5 | % | $ | 3,116,067 | 13.9 | % | $ | 3,224,219 | 11.0 | % | $ | 3,193,499 | 12.5 | % | ||||||||
| States and political subdivisions - general | ||||||||||||||||||||||||
| obligation | 995,051 | 3.9 | 974,654 | 4.3 | 381,395 | 1.3 | 995,051 | 3.9 | ||||||||||||||||
| States and political subdivisions - special revenue | 273,336 | 1.1 | 1,164,965 | 5.2 | 277,735 | 0.9 | 273,336 | 1.1 | ||||||||||||||||
| Corporate | 18,809,391 | 73.5 | 12,461,562 | 55.3 | 23,855,590 | 81.3 | 18,809,391 | 73.5 | ||||||||||||||||
| Total fixed maturity securities | 23,271,277 | 91.0 | 17,717,248 | 78.7 | 27,738,939 | 94.5 | 23,271,277 | 91.0 | ||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||
| Preferred corporate stock | - | - | 75,000 | 0.3 | ||||||||||||||||||||
| Total equity securities | - | - | 75,000 | 0.3 | ||||||||||||||||||||
| Cash and cash equivalents | 1,192,336 | 4.8 | 2,310,047 | 10.3 | 661,545 | 2.3 | 1,192,336 | 4.8 | ||||||||||||||||
| Equity method investments | - | - | 978,744 | 4.4 | ||||||||||||||||||||
| Equity securities, at cost | 140,250 | 0.5 | 124,250 | 0.6 | - | - | 140,250 | 0.5 | ||||||||||||||||
| Other investments: | ||||||||||||||||||||||||
| Mortgage loans on real estate, held for investment | - | - | 349,386 | 1.6 | ||||||||||||||||||||
| Real estate, held for investment | 529,769 | 2.1 | 541,809 | 2.4 | 517,729 | 1.8 | 529,769 | 2.1 | ||||||||||||||||
| Policy loans | 420,775 | 1.6 | 374,186 | 1.7 | 412,583 | 1.4 | 420,775 | 1.6 | ||||||||||||||||
| Total | $ | 25,554,407 | 100.0 | % | $ | 22,470,670 | 100.0 | % | $ | 29,330,796 | 100.0 | % | $ | 25,554,407 | 100.0 | % | ||||||||
Increases in fixed maturity securities primarily resulted from the purchase of additional purchases made by American Life and Great Plains Life during 2015.bonds from normal operating activities.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 20152016 and 2014.2015.
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| Carrying | Carrying | Carrying | Carrying | |||||||||||||||||||||
| Value | Percent | Value | Percent | Value | Percent | Value | Percent | |||||||||||||||||
| AAA and U.S. Government | $ | 3,406,770 | 14.6 | % | $ | 3,330,233 | 18.9 | % | $ | 4,301,163 | 15.5 | % | $ | 3,406,770 | 14.7 | % | ||||||||
| AA | 1,711,366 | 7.4 | 1,606,451 | 9.1 | 1,612,897 | 5.8 | 1,711,366 | 7.4 | ||||||||||||||||
| A | 6,341,991 | 27.2 | 7,290,941 | 41.0 | 8,319,121 | 30.1 | 6,341,991 | 27.1 | ||||||||||||||||
| BBB | 11,534,042 | 49.6 | 5,383,788 | 30.4 | 12,827,754 | 46.2 | 11,534,042 | 49.6 | ||||||||||||||||
| Total investment grade | 22,994,169 | 98.8 | 17,611,413 | 99.4 | 27,060,935 | 97.6 | 22,994,169 | 98.8 | ||||||||||||||||
| BB and other | 277,108 | 1.2 | 105,835 | 0.6 | 678,004 | 2.4 | 277,108 | 1.2 | ||||||||||||||||
| Total | $ | 23,271,277 | 100.0 | % | $ | 17,717,248 | 100.0 | % | $ | 27,738,939 | 100.0 | % | $ | 23,271,277 | 100.0 | % | ||||||||
Reflecting the high quality of securities maintained by us, 98.8%97.6% and 99.4%98.8% of all fixed maturity securities were investment grade as of December 31, 20152016 and 2014,2015, respectively. Due to the low interest rate environment, we have invested in bonds with “A” or “BBB” ratings
at the time the investment was made.Table of Contents
Market Risks of Financial Instruments
We hold a diversified portfolio of investments that primarily includes cash, bonds, stocks, mortgage loans on real estate, held for investment, real estate, held for investment, and notes receivable. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.
Interest Rate Risk
Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixesfixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. The Company attemptsWe attempt to mitigate itsour exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.
Credit Risk
The company isWe are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainuncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. The Company manages itsWe manage our credit risksrisk through establisheddiversification of investments amongst many corporations and numerous industries. Additionally our investment credit policies and guidelines which addresspolicy limits the qualitysize of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management.holding in any particular issuer.
Liquidity and Capital Resources
At December 31, 2016, we had cash and cash equivalents totaling$661,545. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for atleast twelvemonths when combined with the level of maturing securities and the liquidity associated with our investmentportfolio. The Company is also looking to raise additional capital in 2017. The Company has based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than they currently expect. Our surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes a repayment cannot be made without the prior approval of the Nebraska regulators and they have not approved any repayment to date.
Since inception, our operations have been financed primarily through the sale of voting common stock and preferred stock. Our operations have generated significant operating losses since we were incorporated in 2003. We expect significant losses for several years.
Aside from raising capital, which has funded the vast majority of our operations, premium income, deposits to policyholder account balances, and investment income are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to paymeet future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds for 2016.2017.
Net cash usedby operating activities was$1,200,764927,125 for 2015,2016, which was comprised primarily of the net loss of$2,518,0293,847,922 partially offset by an increase in policy liabilityliabilities of$1,185,036. $939,095. Net cash used in investingactivities was$2,000,954from was907,664.. The primary source of cash was from sales of available for sale securities,capital contribution toCapital Reserve, acquisition of First Wyoming Capital, and the sale of an inactive subsidiary, and the remaining mortgage loans.acquisition of Northstar. Offsetting this source of cash was our purchases of investments in available-for-sale securities the net change in policy loans and the purchase of property and equipment. Net cash provided by financingactivities was$2,084,007.was $1,303,998. The primary source of cash wasnet receipts on deposit-type contracts, offset by dividends paid to Class B Preferred Stock shareholders.
At December 31, 2015, we had cash and cash equivalents totaling $1,192,336. We believe that our existing cash and cash equivalents, with the cash injection due to the Northstar asset acquisition in March 2016, will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2015. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than they currently expect. The growthTable of our insurance subsidiaries is uncertain and will require additional capitalin seeking to grow them.Contents
Impact of Inflation
Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Contractual Obligations
As a “smaller reporting company” we are not required to provide the table of contractual obligations required pursuant to this Item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company,”company” we are not required to provide disclosure pursuant to this Item.item.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements are included as a part of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Conclusions RegardingManagement’s Annual Report on Internal Control over Financial Reporting
The information contained in this section addresses management's evaluation of our disclosure controls and procedures and our assessment of our internal control over financial reporting for the year ended December 31, 2016.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiaries, is made known to our officers who certify our financial reports and toManagement (with the other membersparticipation of our senior management and the Board of Directors.
As required by Exchange Act Rule 13a-15(b)principal executive officer/principal financial officer), our management, including our Chief Executive Officer and the Financial Reporting Manager, conductedcarried out an evaluation as of the end of the period covered by this report, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act Rules 13a-15(e)of 1934, as amended (the Exchange Act). Based upon anon this evaluation, atour principal executive officer/principal financial officer concluded that, because of the material weakness described below, as of the end of the period covered in this report, our disclosure controls and procedures along with the Chief Executive Officerrelated internal controls over financial reporting were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the Financial Reporting Managertime periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and is accumulated and communicated to our management, including our principal executive officer/principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Inherent Limitations on Effectiveness of Controls
Our management, including the principal executive officer/principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives will be met. Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will be met and our principal executive officer/principal financial officer has concluded that our disclosure controls and procedures are not effective at the reasonable assurance level. The design of a control system must reflect that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in timely alerting themall control systems, no evaluation of controls can provide absolute assurance that misstatements due to material information relatingerror or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by individual acts of persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls in future periods are subject to us and our consolidated subsidiaries required to be disclosedrisks. Over time, controls may become inadequate because of changes in our periodic reports underconditions or deterioration in the Exchange Act.degree of compliance with policies or procedures.
(b) Management’s Assessment on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effectiveadequate internal control over financial reporting as(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act Rules 13a-15(f)Act). Management hasOur internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures by us are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.
Under the supervision and with the participation of our management, including our principal executive officer/principal financial officer, we conducted an assessmentevaluation of the effectiveness of our internal control over financial reporting at December 31, 2015as of the period covered by this report based on the criteria establishedfor effective internal control described inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.(“COSO”). Based on ourthe results of management’s assessment under the criteria of this framework, Managementand evaluation, principal executive officer/principal financial officer concluded that our internal control over financial reporting was not effective at December 31, 2015.due to the material weaknesses described below.
This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicable to smaller reporting companies.
(c) Changes in Internal Control over Financial Reporting
There were noOur efforts to improve our internal controls are ongoing and focused on expanding our organizational capabilities to improve our control environment and on implementing process changes to strengthen our internal control and monitoring activities. In addition, although we are implementing remedial measures to address all of the identified material weaknesses as discussed below, our assessment of the impact of these measures have not been completed as of the filing date of this report.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A number of significant audit adjustments were made to our consolidated financial statements as of December 31, 2016 and for the year then ended, resulting in material changes to net loss and stockholders’ equity. The audit adjustments related primarily to complex nonrecurring transactions with our investees and how assets are evaluated for collectability and impairment. The material weakness resulted from the Company not utilizing sufficient technical accounting capabilities in recording and analyzing these transactions.
Remediation
Management is developing certain remediation steps to address the material weaknesses discussed above and to improve our internal control over financial reporting as definedreporting. If not remediated, these control deficiencies could result in Exchange Act Rule 13a-15(f) duringmaterial misstatements to our future financial statements. Our management and our Board of Directors take the year ended December 31, 2015control and integrity of our financial statements seriously and believe that have materially affected, orthe remediation steps described below are reasonably likelyessential to materially affect, ourmaintaining an effective internal control overenvironment. The following remediation steps will be implemented by us as soon as practicable with respect to the material weaknesses described herein and particularly with respect to future complex non-routine transactions:
| 1) | Continual evaluation and enhancement of internal technical accounting capabilities supported by the use of third-party advisors where our Management and internal control personnel believe the complexity of a particular transaction exceeds our internal capabilities; | ||
| 2) | Enhanced management awareness and oversight to identify early on complex technical accounting issues and early identification of situations and transactions which might require the use of third-part advisors and consultants. |
We believe that these remediation actions will result in significant improvements in our controls. We intend to perform such procedures and commit such resources as necessary to continue to allow us to overcome or mitigate the above material weaknesses such that we can make materially and accurate quarterly and annual SEC financial reporting.filings.
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders.
We have adopted a Code of Ethics for Officers, Directors and Employees. The Code of Ethics is available on our website at http://www.midwestholding.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the 20162017 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the 20162017 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the 20162017 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the 20162017 Annual Meeting of Stockholders.
29
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
| (a) | 1. Consolidated Financial Statements: | |
| The list of financial statements filed as part of this Annual Report on Form 10-K is provided on page F-1. | ||
| 2. | Financial Statement Schedules: | |
| The list of financial statement schedules filed as part of this Annual Report on Form 10-K is provided on page FS-1. | ||
| (b) | Exhibits: | |
| EXHIBIT NUMBER | ||
DESCRIPTION | ||
| 2.1 | ||
Plan and Agreement of | ||
Plan and Agreement of Exchange | ||
| 3.1 | Amended and Restated Articles of Incorporation, dated March 29, | |
| 3.2 | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 6, 2010. (Incorporated by reference to Exhibit 3.2 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | |
| 3.3 | Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.3 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | |
| 3.4 | Articles of Amendment to the amended and Restated Articles of Incorporation of MidwestHolding Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filedMay 15, 2014.) | |
| 3.5 | American Life & Security Corp. State of Nebraska Department of Insurance Amended Certificate of Authority, issued August 3, 2011. (Incorporated by reference to Exhibit 3.4 to the Company’s Amendment No. 2 to Form 10 Registration Statement, filed March 20, 2012.) | |
Consulting and Advisory Agreement, dated September 1, 2009, by and between Midwest Holding Inc. and Bison Capital Corp. (f/k/a Corporate Development Inc.). (Incorporated by reference to Exhibit 10.3 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
30
Administrative Services Agreement, dated August 17, 2009, by and between American Life & Security Corp. and Investors Heritage Life Insurance Company. (Incorporated by reference to Exhibit | ||
Employment Agreement, dated July 1, 2011, by and between Midwest Holding Inc. and Mark Oliver. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 10.4 | Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.6 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | |
| Exhibit Number | Description | |
Amendment Number One to Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.7 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
Amendment Number Two to Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
Bulk Reinsurance Agreement, dated September 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.9 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
Amendment to all Reinsurance Agreements, dated August 4, 2011, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.10 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Investors Heritage Life Insurance Company. (Incorporated by reference to Exhibit 10.11 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
Reinsurance Agreement, dated January 1, 2010, by and between American Life | ||
Master Reinsurance Agreement, dated December 20, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.13 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | ||
Amendment Number One to Master Reinsurance Agreement, dated December 20, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.14 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | ||
Reinsurance Agreement Number One, dated December 31, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.15 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | ||
Amendment Number One to Reinsurance Agreement Number One, dated December 31, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.16 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | ||
Master Reinsurance Agreement, dated April 1, 2000, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.17 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) |
31
Reinsurance Agreement Number One, dated April 1, 2000, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.18 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) |
| Exhibit Number | ||||
Description | ||||
| 14.1 | Code of Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K, filed April 2, 2012.) | |||
| 21.1* | List of Subsidiaries. | |||
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31.2* | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32* | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| 101.INS ** | XBRL Instance Document. | |||
| 101.SCH ** | XBRL Taxonomy Extension Schema Document. | |||
| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document. | |||
| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document. | |||
| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document. | |||
| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document. | |||
| * | Filed herewith. | |
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 201628,2017
| MIDWEST HOLDING INC. | |||||
| By: | /s/ | Mark A. Oliver | |||
| Name: | Mark A. Oliver | ||||
| Title: | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
| Signature | Title | Date | ||||||
| /s/ Mark A. Oliver | Chief Executive Officer, Treasurer, | March | ||||||
| Mark A. Oliver | Chairman of the Board | |||||||
| (Principal Executive Officer, | ||||||||
| Principal Financial Officer) | ||||||||
| /s/ Dana Stapleton | Director | March | ||||||
| Dana Stapleton | ||||||||
| /s/ Jack Theeler | Director | March | ||||||
| Jack Theeler | ||||||||
| /s/ Scott Morrison | Director | March | ||||||
| Scott Morrison | ||||||||
| Director | March | |||||||
| /s/ John T. Hompe | Director | March | ||||||
| John T. Hompe | ||||||||
| /s/ Steve Connor | Director | March | ||||||
| Steve Connor | ||||||||
33
MIDWEST HOLDING INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Midwest Holding Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Holding, Inc. and Subsidiariessubsidiaries (the Company) as of December 31, 20152016 and 2014,2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedules of Midwest Holding Inc. listed in Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financialreporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controlcontrols over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principlespolicies used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Midwest Holding Inc. and Subsidiariessubsidiaries as of December 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for the years then ended in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America. Also, in our opinion, the related financial statement schedules, whenwhich considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ RSM US LLP
Omaha, Nebraska
March30March 29, 2016, 2017
Midwest Holding Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 20152016 and 20142015
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Assets | ||||||||||||||||
| Investments, available for sale, at fair value | ||||||||||||||||
| Fixedmaturities (amortized cost: $24,279,231 and $18,062,280, respectively) | $ | 23,271,277 | $ | 17,717,248 | ||||||||||||
| Equity securities (cost: $0 and $75,000, respectively) | - | 75,000 | ||||||||||||||
| Equity method investments | - | 978,744 | ||||||||||||||
| Fixed maturities (amortized cost: $29,024,083 and$24,279,231, respectively) | $ | 27,738,939 | $ | 23,271,277 | ||||||||||||
| Equity securities, at cost | 140,250 | 124,250 | - | 140,250 | ||||||||||||
| Mortgage loans on real estate, held for investment | - | 349,386 | ||||||||||||||
| Real estate, held for investment | 529,769 | 541,809 | 517,729 | 529,769 | ||||||||||||
| Policy Loans | 420,775 | 374,186 | 412,583 | 420,775 | ||||||||||||
| Total investments | 24,362,071 | 20,160,623 | 28,669,251 | 24,362,071 | ||||||||||||
| Cash and cash equivalents | 1,192,336 | 2,310,047 | 661,545 | 1,192,336 | ||||||||||||
| Amounts recoverable from reinsurers | 12,212,656 | 12,636,910 | 11,704,055 | 12,212,656 | ||||||||||||
| Interest and dividends due and accrued | 264,791 | 179,197 | ||||||||||||||
| Interest due and accrued | 312,054 | 264,791 | ||||||||||||||
| Due premiums | 640,073 | 584,526 | 670,989 | 640,073 | ||||||||||||
| Deferred acquisition costs, net | 2,765,063 | 2,646,970 | 2,568,799 | 2,765,063 | ||||||||||||
| Value of business acquired, net | 2,039,110 | 1,763,952 | 1,726,192 | 2,039,110 | ||||||||||||
| Intangible assets | 700,000 | 700,000 | 700,000 | 700,000 | ||||||||||||
| Goodwill | 1,129,824 | 1,129,824 | - | 1,129,824 | ||||||||||||
| Property and equipment, net | 217,565 | 329,835 | 158,471 | 217,565 | ||||||||||||
| Assets associated with business held for sale (see Note 3) | 16,870,241 | 17,691,344 | - | 16,870,241 | ||||||||||||
| Other assets | 532,674 | 293,890 | 95,773 | 532,674 | ||||||||||||
| Total assets | $ | 62,926,404 | $ | 60,427,118 | $ | 47,267,129 | $ | 62,926,404 | ||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Benefit reserves | $ | 24,155,140 | $ | 22,728,938 | $ | 24,606,543 | $ | 24,155,140 | ||||||||
| Policy claims | 839,859 | 925,039 | 565,148 | 839,859 | ||||||||||||
| Deposit-type contracts | 13,897,421 | 10,722,227 | 16,012,567 | 13,897,421 | ||||||||||||
| Advance premiums | 57,699 | 82,504 | 52,074 | 57,699 | ||||||||||||
| Total policy liabilities | 38,950,119 | 34,458,708 | 41,236,332 | 38,950,119 | ||||||||||||
| Accounts payable and accrued expenses | 1,013,313 | 938,018 | 1,211,875 | 1,013,313 | ||||||||||||
| Liabilities associated with business held for sale (see Note 3) | 15,508,998 | 16,443,657 | - | 15,508,998 | ||||||||||||
| Surplus notes | 550,000 | 550,000 | 550,000 | 550,000 | ||||||||||||
| Total liabilities | 56,022,430 | 52,390,383 | 42,998,207 | 56,022,430 | ||||||||||||
| Commitments and Contingencies (See Note 8) | ||||||||||||||||
| Stockholders' Equity: | ||||||||||||||||
| Preferred stock, Series A, $0.001 par value. Liquidationpreference $6.00 per share. | ||||||||||||||||
| Authorized 2,000,000 shares; issued and outstanding 74,159 shares | ||||||||||||||||
| as of December 31, 2015 and 2014. | 74 | 74 | ||||||||||||||
| as of December 31, 2016 and 2015. | 74 | 74 | ||||||||||||||
| Preferred stock, Series B, $0.001 par value. Liquidationpreference $6.00 per share. | ||||||||||||||||
| Authorized 1,000,000 shares; issued and outstanding 102,669 shares as of | ||||||||||||||||
| December 31, 2015and 2014. | 103 | 103 | ||||||||||||||
| December 31, 2016 and 2015. | 103 | 103 | ||||||||||||||
| Common stock, $0.001 par value. Authorized 120,000,000 shares; issued and | ||||||||||||||||
| outstanding 18,006,301 and 13,167,654 shares, respectively. | 18,006 | 13,168 | ||||||||||||||
| outstanding22,558,956 and18,006,301 shares as of December 31, 2016 | 22,559 | 18,006 | ||||||||||||||
| and 2015, respectively. | ||||||||||||||||
| Additional paid-in capital | 31,584,529 | 29,583,631 | 33,036,924 | 31,584,529 | ||||||||||||
| Accumulated deficit | (23,685,525 | ) | (21,167,496 | ) | (27,533,447 | ) | (23,685,525 | ) | ||||||||
| Accumulated other comprehensive loss | (1,013,213 | ) | (392,745 | ) | (1,257,291 | ) | (1,013,213 | ) | ||||||||
| Total stockholders' equity | 6,903,974 | 8,036,735 | 4,268,922 | 6,903,974 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 62,926,404 | $ | 60,427,118 | $ | 47,267,129 | $ | 62,926,404 | ||||||||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016 and 2015
| 2016 | 2015 | |||||||
| Income: | ||||||||
| Premiums | $ | 3,517,458 | $ | 3,424,377 | ||||
| Investment income, net of expenses | 878,991 | 663,968 | ||||||
| Loss on equity method investment | (420,720 | ) | (357,437 | ) | ||||
| Net realized gains (losses) on investments | 31,504 | (117,364 | ) | |||||
| Miscellaneous income | 107,015 | 171,571 | ||||||
| 4,114,248 | 3,785,115 | |||||||
| Expenses: | ||||||||
| Death and other benefits | 803,091 | 908,658 | ||||||
| Interest credited | 776,541 | 533,646 | ||||||
| Increase in benefit reserves | 751,743 | 777,111 | ||||||
| Amortization of deferred acquisition costs | 367,235 | 469,674 | ||||||
| Salaries and benefits | 2,345,311 | 1,940,345 | ||||||
| Goodwill impairment | 1,129,824 | - | ||||||
| Other operating expenses | 3,114,951 | 2,578,288 | ||||||
| 9,288,448 | 7,207,722 | |||||||
| Operating loss | (5,174,448 | ) | (3,422,607 | ) | ||||
| Bargain purchase gain for business acquisition | 1,326,526 | 904,578 | ||||||
| Loss before income taxes | (3,847,922 | ) | (2,518,029 | ) | ||||
| Income tax expense | - | - | ||||||
| Net loss | (3,847,922 | ) | (2,518,029 | ) | ||||
| Comprehensiveloss | ||||||||
| Unrealizedlosses on investments | ||||||||
| arising during period | (212,574 | ) | (737,832 | ) | ||||
| Less: reclassification adjustment for net | ||||||||
| realized (gains) losses on investments | (31,504 | ) | 117,364 | |||||
| Other comprehensiveloss | (244,078 | ) | (620,468 | ) | ||||
| Comprehensiveloss | $ | (4,092,000 | ) | $ | (3,138,497 | ) | ||
| Netloss per common share, basic and diluted | $ | (0.18 | ) | $ | (0.18 | ) | ||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Stockholders’ Equity
Years Ended December 31, 20152016 and 20142015
| 2015 | 2014 | |||||||
| Income: | ||||||||
| Premiums | $ | 3,424,377 | $ | 4,007,810 | ||||
| Investment income (loss), net of expenses | 306,531 | (9,883 | ) | |||||
| Net realized (losses) gains on investments | (117,364 | ) | 346,304 | |||||
| Miscellaneous income | 171,571 | 295,246 | ||||||
| 3,785,115 | 4,639,477 | |||||||
| Expenses: | ||||||||
| Death and other benefits | 908,658 | 1,313,095 | ||||||
| Interest credited | 533,646 | 403,556 | ||||||
| Increase in benefit reserves | 777,111 | 1,072,740 | ||||||
| Amortization of deferred acquisition costs | 469,674 | 625,680 | ||||||
| Salaries and benefits | 1,940,345 | 2,359,140 | ||||||
| Other operating expenses | 2,578,288 | 2,771,172 | ||||||
| 7,207,722 | 8,545,383 | |||||||
| Operating Loss | (3,422,607 | ) | (3,905,906 | ) | ||||
| Bargain purchase gain for business acquisition | 904,578 | - | ||||||
| Loss before incometaxes | (2,518,029 | ) | (3,905,906 | ) | ||||
| Income tax expense | - | - | ||||||
| Net loss | (2,518,029 | ) | (3,905,906 | ) | ||||
| Less: Loss attributable to noncontrolling interest | - | (460,920 | ) | |||||
| Net loss attributable to Midwest Holding Inc. | $ | (2,518,029 | ) | $ | (3,444,986 | ) | ||
| Comprehensive income (loss): | ||||||||
| Unrealized (losses) gains on investments | ||||||||
| arising during period | (737,832 | ) | 388,277 | |||||
| Less: reclassification adjustment for net | ||||||||
| realized (losses) gains on investments | 117,364 | (4,391 | ) | |||||
| Other comprehensive (loss) income | (620,468 | ) | 383,886 | |||||
| Less: Comprehensive (loss) income attributable to noncontrolling interest | - | 36,540 | ||||||
| Total comprehensive (loss) income attributable to Midwest Holding Inc. | (620,468 | ) | 347,346 | |||||
| Comprehensive loss attributable to Midwest Holding Inc. | $ | (3,138,497 | ) | $ | (3,097,640 | ) | ||
| Net loss attributable to Midwest HoldingInc. | ||||||||
| per common share, basic and diluted | $ | (0.18 | ) | $ | (0.32 | ) | ||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and SubsidiariesConsolidated Statements of Stockholders’ EquityYears Ended December 31, 2015 and 2014
| Accumulated | Total Midwest | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Stock | Other | Holding Inc.'s | Total | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Paid-In | Subscription | Accumulated | Comprehensive | Stockholders' | Noncontrolling | Stockholders' | Preferred | Common | Paid-In | Accumulated | Comprehensive | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Capital | Receivable | Deficit | Loss | Equity | Interests | Equity | Stock | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2013 | $ | 74 | $ | 9,121 | $ | 25,131,714 | $ | (1,917 | ) | $ | (17,722,510 | ) | $ | (740,091 | ) | $ | 6,676,391 | $ | 4,322,687 | $ | 10,999,078 | ||||||||||||||||||||||||||||||||||||
| Non-cash compensation expense | - | - | - | 1,917 | - | - | 1,917 | - | 1,917 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances of preferred stock | 103 | - | 615,909 | - | - | - | 616,012 | - | 616,012 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | - | (47 | ) | (58,205 | ) | - | - | - | (58,252 | ) | - | (58,252 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Changes in equity of non-controlling interest | - | 4,094 | 3,894,213 | - | - | - | 3,898,307 | (3,898,307 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (3,444,986 | ) | - | (3,444,986 | ) | (460,920 | ) | (3,905,906 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 347,346 | 347,346 | 36,540 | 383,886 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | $ | 177 | $ | 13,168 | $ | 29,583,631 | $ | - | $ | (21,167,496 | ) | $ | (392,745 | ) | $ | 8,036,735 | $ | - | $ | 8,036,735 | $ | 177 | $ | 13,168 | $ | 29,583,631 | $ | (21,167,496 | ) | $ | (392,745 | ) | $ | 8,036,735 | |||||||||||||||||||||||
| Issuances of common stock | 71 | 250,110 | - | - | - | 250,181 | - | 250,181 | - | 71 | 250,110 | - | - | 250,181 | |||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | - | - | (56,057 | ) | - | - | - | (56,057 | ) | - | (56,057 | ) | - | - | (56,057 | ) | - | - | (56,057 | ) | |||||||||||||||||||||||||||||||||||||
| Merger of First Wyoming Capital Corporation | - | 4,767 | 1,806,845 | - | - | - | 1,811,612 | - | 1,811,612 | - | 4,767 | 1,806,845 | - | - | 1,811,612 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (2,518,029 | ) | - | (2,518,029 | ) | - | (2,518,029 | ) | - | - | - | (2,518,029 | ) | - | (2,518,029 | ) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | (620,468 | ) | (620,468 | ) | - | (620,468 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensiveloss | - | - | - | - | (620,468 | ) | (620,468 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | $ | 177 | $ | 18,006 | $ | 31,584,529 | $ | - | $ | (23,685,525 | ) | $ | (1,013,213 | ) | $ | 6,903,974 | $ | - | $ | 6,903,974 | $ | 177 | $ | 18,006 | $ | 31,584,529 | $ | (23,685,525 | ) | $ | (1,013,213 | ) | $ | 6,903,974 | |||||||||||||||||||||||
| Preferred stock dividend | - | - | (43,120 | ) | - | - | (43,120 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Northstar Financial Corporation | - | 4,553 | 2,401,321 | - | - | 2,405,874 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Merger of First Wyoming Capital Corporation | - | - | (905,806 | ) | - | - | (905,806 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | 3,847,922 | - | (3,847,922 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (244,078 | ) | (244,078 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | $ | 177 | $ | 22,559 | $ | 33,036,924 | $ | (27,533,447 | ) | $ | (1,257,291 | ) | $ | 4,268,922 | |||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 20152016 and 20142015
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||
| Net loss | $ | (2,518,029 | ) | $ | (3,905,906) | $ | (3,847,922 | ) | $ | (2,518,029 | ) | |||||
| Adjustments to arrive at cash provided by operating activities: | ||||||||||||||||
| Net premium and discount on investments | 173,915 | 162,790 | 213,055 | 173,915 | ||||||||||||
| Depreciation and amortization | 400,870 | 403,902 | 381,582 | 400,870 | ||||||||||||
| Deferred acquisition costs capitalized | (552,466 | ) | (549,831 | ) | (178,419 | ) | (552,466 | ) | ||||||||
| Amortization of deferred acquisition costs | 469,674 | 625,680 | 367,235 | 469,674 | ||||||||||||
| Net realizedlosses (gains) on investments | 117,364 | (346,516 | ) | (31,504 | ) | 117,364 | ||||||||||
| Goodwill impairment | 1,129,824 | - | ||||||||||||||
| Bargain purchase gain for business acquired | (904,578 | ) | - | (1,326,526 | ) | (904,578 | ) | |||||||||
| Equity in the net loss of unconsolidated subsidiaries | 357,437 | 438,174 | ||||||||||||||
| Non-cash compensation expense | - | 1,917 | ||||||||||||||
| Loss on equity method investment | 420,720 | 357,437 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Amounts recoverable from reinsurers | 424,254 | 729,367 | 508,601 | 424,254 | ||||||||||||
| Interest and dividends due and accrued | (44,596 | ) | (2,180 | ) | (47,263 | ) | (44,596 | ) | ||||||||
| Due premiums | (21,568 | ) | 1,578 | (30,916 | ) | (21,568 | ) | |||||||||
| Policy liabilities | 1,185,036 | 586,355 | 939,095 | 1,185,036 | ||||||||||||
| Other assets and liabilities | (219,213 | ) | (474,739 | ) | 575,313 | (219,213 | ) | |||||||||
| Other assets and liabilities held for sale | (68,864 | ) | (4,828 | ) | - | (68,864 | ) | |||||||||
| Net cash(used for) operating activities | (1,200,764 | ) | (2,334,237 | ) | ||||||||||||
| Net cashused for operating activities | (927,125 | ) | (1,200,764 | ) | ||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| Purchases | (16,090,449 | ) | (14,079,958 | ) | (19,213,405 | ) | (16,090,449 | ) | ||||||||
| Proceeds from sale or maturity | 13,594,158 | 9,584,680 | 14,387,936 | 13,594,158 | ||||||||||||
| Securities held for sale: | ||||||||||||||||
| Securities associated with business held for sale | ||||||||||||||||
| Purchases | (964,450 | ) | (164,362 | ) | - | (964,450 | ) | |||||||||
| Proceeds from sale or maturity | 869,528 | 76,311 | 52,703 | 869,528 | ||||||||||||
| Net change in equity securities carried at cost: | ||||||||||||||||
| Purchases | - | (61,383 | ) | |||||||||||||
| Proceeds from sale or maturity | 9,000 | 1,955,500 | ||||||||||||||
| Proceeds from sale | 30,250 | 9,000 | ||||||||||||||
| Proceeds from payments on mortgage loans on real estate, held for investment | 349,386 | 316,183 | - | 349,386 | ||||||||||||
| Sale of Capital Reserve Life Insurance Company | 1,432,446 | - | ||||||||||||||
| Net change in policy loans | (46,589 | ) | (4,673 | ) | 8,192 | (46,589 | ) | |||||||||
| Acquisition of Northstar Financial Corporation | 2,427,394 | - | ||||||||||||||
| Acquisition of First Wyoming Capital Corporation | 315,546 | - | - | 315,546 | ||||||||||||
| Net change in notes receivable | - | 27,383 | ||||||||||||||
| Net change in short-term investments | - | 1,180,314 | ||||||||||||||
| Net purchases of property and equipment | (37,084 | ) | (132,124 | ) | (33,180 | ) | (37,084 | ) | ||||||||
| Net cash (used for) investing activities | (2,000,954 | ) | (1,302,129 | ) | ||||||||||||
| Net cashused for investing activities | (907,664 | ) | (2,000,954 | ) | ||||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||||
| Repurchases of common stock | - | (58,252 | ) | |||||||||||||
| Issuance of common stock | 286,722 | - | - | 286,722 | ||||||||||||
| Issuance of preferred stock | - | 616,012 | ||||||||||||||
| Preferred stock dividend | (56,057 | ) | - | (43,120 | ) | (56,057 | ) | |||||||||
| Receipts on deposit-type contracts | 2,387,104 | 2,409,659 | 2,433,781 | 2,387,104 | ||||||||||||
| Withdrawals on deposit-type contracts | (533,762 | ) | (398,984 | ) | (1,086,663 | ) | (533,762 | ) | ||||||||
| Net cash provided by financing activities | 2,084,007 | 2,568,435 | 1,303,998 | 2,084,007 | ||||||||||||
| Net (decrease) in cash and cash equivalents | (1,117,711 | ) | (1,067,931 | ) | ||||||||||||
| Netdecrease in cash and cash equivalents | (530,791 | ) | (1,117,711 | ) | ||||||||||||
| Cash and cash equivalents: | ||||||||||||||||
| Beginning | 2,310,047 | 3,377,978 | 1,192,336 | 2,310,047 | ||||||||||||
| Ending | $ | 1,192,336 | $ | 2,310,047 | $ | 661,545 | $ | 1,192,336 | ||||||||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and Subsidiaries
Supplemental Cash Flow Information
Years Ended December 31, 20152016 and 20142015
| 2015 | 2014 | |||||
| Supplemental Disclosure of Non-Cash Information | ||||||
| Exchange of common stock for non-controlling interest | $ | - | $ | 3,861,767 | ||
| Common stock issued on the First Wyoming acquisition | 1,811,612 | - | ||||
| $ | 1,811,612 | $ | 3,861,767 | |||
| 2016 | 2015 | ||||||
| Supplemental Disclosure of Non-Cash Information | |||||||
| Common stock issued on the First Wyoming acquisition and | |||||||
| measurement period adjustment | $ | (905,806 | ) | $ | 1,811,612 | ||
| Common stock issued on Northstar Acquisition | 2,405,874 | - | |||||
| $ | 1,500,068 | $ | 1,811,612 | ||||
See Notes to Consolidated Financial Statements.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of operations:Midwest Holding Inc. (“Midwest” or “the Company”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of organizingoperating a financial services company. The Company is in the life insurance subsidiary. From 2003 to May 2009, Midwest was focused on raising capital, firstbusiness and operates through private placements and finally through an intra-state offering of 2,000,000 common shares at $5.00 per share. These offerings sold out, including a 10% over sale on the final offering. Midwest became operational during the year ended December 31, 2009. Upon capitalizingits wholly owned subsidiary, American Life & Security Corp. (“American Life”) and acquiring Capital Reserve Life Insurance. The Company (“Capital Reserve”), as described below, Midwest deemed it prudent to raise additional capital to fund primarily the expansionhas made several acquisitions of the life insurance operation. Beginning in 2009, American Life, a wholly owned subsidiarycompanies and related entities since 2008, all of Midwest, was authorized to do business in the State of Nebraska. American Life was also granted a certificate of authority to write insurance in the State of Nebraska on September 1, 2009. American Life is engaged in the business of underwriting, selling, and servicing life insurance and annuity policies.
First Wyoming Capital Corporation (“First Wyoming”) was incorporated in Wyoming on July 8, 2009, for the primary purpose of organizing a life insurance subsidiary. The Company was in the development stage through 2011. The year 2012 was the first year during which it was considered an operating company.From 2009 to 2012, Midwest acquired shares of capital stock of First Wyoming resulting in a 22.2% ownership stake. The remaining shares of First Wyoming were acquired by Midwest on October 27, 2015. Following the acquisition, First Wyoming’s remaining assets and liabilities werehave been merged into Midwest.
In 2010, American Life completed the purchase of a 100% ownership interest in Capital Reserve, a dormant insurance company domiciled in Missouri. Capital Reserve is licensed in the states of Kansas and Missouri. Currently, 100% of the policies issued by Capital Reserve are reinsured to an unaffiliated reinsurer. In December, 2015, a stock purchase agreement was executed for the sale of Capital Reserve which is contingent on regulatory approval. The assets, liabilities, and results of operations have been shown in these financial statements as business held for sale, see Note 3.
In August, 2010, Midwest began an exempt offering of shares to existing holders in the state of Nebraska at $5.00 per share. Midwest raised approximately $7,400,000 before capital raising expenses through this offering that extended into 2011. Additionally, Midwest offered a newly-created class of preferred shares to residents of Latin America. The preferred shares are non-voting and convert to common shares in 2015 at the rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). The shares were sold at $6.00 per share and a total of 74,159 were sold in 2010.
In 2011, First Wyoming Life Insurance Company (“FWLIC”), was incorporated and domiciled in Wyoming and became a subsidiary of First Wyoming with an ownership interest of 99.9%. FWLIC began issuing business on August 17, 2012. Midwest is seeking toredomesticate FWLIC inNebraska in 2016.
In 2011, Midwest acquired all of the issued and outstanding capital stock of Old Reliance Insurance Company (“Old Reliance”), an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with the survivor changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares ofMidwest voting common stock.
During the third quarter of 2011, Midwest obtained controlof Security Capital Corporation (“Security Capital”), an Arkansas corporation. Security Capital was a development stage company that had not conducted operations apart from raising capital. Security Capital was acquired by Midwest on August 5, 2014, through a share exchange described below.
In August 2011, Midwest acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), a company organized in August 2011 to develop, manufacture, and market the Hot Dot Alert Patch. From its inception, the operating results of Hot Dot were consolidated with those of Midwest, due to Midwest’s control of the Board of Directors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of its stock from Midwest for a purchase price of $750,000. As a result of the stock repurchase by Hot Dot, Midwest ceased to have a controlling financial interest in Hot Dot and subsequently deconsolidated Hot Dot on the effective date of the stock repurchase. In October 2014, Hot Dot repurchased Midwest’s 1,500,000 remaining shares of stock for $775,000.
Midwest commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee income for Midwest. Services provided vary based on the respective needs of the client and can include some or all aspects of back-office accounting and policy administration. Midwest has been able to perform its TPA services using its existing in-house resources.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
On November 25, 2013, Midwest entered into a Plan and Agreement of Exchange (the “Exchange Agreement”) with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their shareholders (other than those shares already held by Midwest.) Under the Exchange Agreement with Great Plains, the Great Plains shareholders received approximately 1.298 shares of Midwest voting common stock for each share of Great Plains common stock held by the Great Plains shareholders. The Security Capital shareholders received approximately 0.162 shares of Midwest voting common stock for each share of Security Capital common stock held. The Exchange Agreement was consummated on July 21, 2014. On August 5, 2014, Great Plains and Security Capital were merged into Midwest. Great Plains’ wholly owned subsidiary, Great Plains Life, along with any remaining assets of Great Plains and Security Capital were transferred to Midwest. Great Plains Life was contributed to American Life via a surplus contribution and became a wholly owned subsidiary of American Life. Midwest is seeking toredomesticate Great PlainstoNebraska in 2016.
During the first quarter of 2014, the Company purchased additional shares of Pacific Northwest Capital Corporation (PNC) which increased Midwest’s ownership to 22.4% which required us to change our method of carrying the investment fromthe cost to equitymethod.
Northstar Financial Corp. (“Northstar”) was a Minnesota corporation organized on April 15, 2010, for the purpose of forming and/or acquiring a Minnesota-domiciled life insurance company or life insurance –related companies in Minnesota. On December 18, 2015, Midwest and Northstar entered into a plan and agreement for Midwest to acquire the remaining outstanding stock of Northstar by distributing Midwest’s voting common stockto shareholders of Northstar at a ratio of 1.27 to 1.The closing date of the acquisition was March 15, 2016.American Life.
Basis of presentation:The accompanying consolidated financial statements include the accounts of Midwest and/or our wholly owned subsidiariessubsidiary American Life, American Life’s wholly owned subsidiaries Capital Reserve and Great Plains Life Assurance Company, and the 99.9% owned subsidiary of First Wyoming Life. Hereafter, entities are collectively referred to as the “Company,” “we,” “our” or “us.”
Management evaluates the Company as one reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of life insurance products through its subsidiaries.American Life. The product offerings, the underwriting processes, and the marketing processes are similar. The Company’s product offerings consist of a multi-benefitmulti- benefit life insurance policy that combines cash value life insurance with a tax deferred annuity and a single premium term life product. These product offerings are underwritten, marketed, and managed as a group of similar products on an overall portfolio basis.
These consolidated financial statements have been prepared in conformity with Generally Accepted Accounting Principles (GAAP) in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform to the current period’s presentation with no impact on results of operations or total stockholders’ equity.
Investments:All fixed maturities and a portion of the equity securities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in comprehensive loss.
Declines in the fair value of available for sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, financial condition of the issuer, issuer credit ratings, and the intent and ability of the Company to hold the investment until the recovery of the cost.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. No other-than-temporary impairments were recognized during the years ended December 31, 20152016 or 2014.2015.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Included within the Company’s equity securities carried at cost and equity method investments are certain privately placed common stocks for severalsome development stage holding companies organized for the purpose of forming life insurance subsidiaries. Our privately placed common stocks are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. These securities do not have a readily determinable fair value. The Company does not control these entities economically, and therefore does not consolidate these entities. The Company reports the earnings from privately placed common stocks accounted for under the equity method in net investment income.
Investment income consists of interest, dividends, gains and losses from equity method investments, and real estate income, which are recognized on an accrual basis and amortization of premiums and discounts.
Mortgage loans on real estate, held for investment: Mortgage loans on real estate, held for investment are carried at unpaid principal balances. Interest income on mortgage loans on real estate, held for investment is recognized in net investment income at the contract interest rate when earned. A mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances on mortgage loans are established based upon losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate. These evaluations are revised as conditions change and new information becomes available. No valuation allowance was established for mortgage loans on real estate, held for investment as of December 31, 2015 and 2014, primarily 2016due the sale of three ofto the mortgage loans during the fourth quarter of 2014 with the two remaining loans being sold during Januaryin 2014 and 2015.
Policy loans: Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. No valuation allowance is established for these policy loans as the amount of the loan is fully secured by the death benefit of the policy and cash surrender value.
Notes receivable:Short-term investmentsNotes receivable are stated at their outstanding principal amount. Outstanding notes accrue interest based on the terms of the respective note agreements.
Short-term investments::Short-term investments are stated at cost and consist of certificates of deposit. At December 31, 20152016 and 20142015 the Company did not have any short-term investments.
Real estate, held for investment:Real estate, held for investment is comprised of ten condominiums in Hawaii acquired in the purchase of Old Reliance.Hawaii. Real estate is carried at depreciated cost. Depreciation on residential real estate is computed on a straight-line basis over 50 years.
Cash:The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At December 31, 20152016 and 2014,2015, the Company had no cash equivalents.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Deferred acquisition costs:Deferred acquisition costs consist of incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. The Company evaluates the types of acquisition costs it capitalizes. The Company capitalizes agent compensation and benefits and other expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.
Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined during its December 31, 20152016 analysis that all deferred acquisition costs were recoverable.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
The following table provides information about deferred acquisition costs (“DAC”) for the years ended December 31, 20152016 and 2014,2015, respectively.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Balance at beginning of period | $ | 2,646,970 | $ | 2,722,819 | $ | 2,765,063 | $ | 2,646,970 | ||||||||
| Capitalization of commissions, sales and issue expenses | 552,466 | 549,831 | 178,419 | 552,466 | ||||||||||||
| Change in DAC due to unrealized investment losses | 35,301 | - | (7,448 | ) | 35,301 | |||||||||||
| Gross amortization | (469,674 | ) | (625,680 | ) | (367,235 | ) | (469,674 | ) | ||||||||
| Balance at end of period | $ | 2,765,063 | $ | 2,646,970 | $ | 2,568,799 | $ | 2,765,063 | ||||||||
ValueValue of business acquired:Value of business acquired(“VOBA”) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. American Life purchased Capital Reserve during 2010, resulting in an initial capitalized asset for value of business acquired of $116,326. 2016. Additionally, the Company paid an upfront ceding commission of $375,000 to Security National Life (“SNL”) in respect of the purchase of Capital Reserve. An initial asset was established for the value of this business acquired totaling $348,010, representing primarily the ceding commission.The agreement has an automatic renewal provision unless the Company notifies SNL of its intention not to renew, no less than 180 days prior to the expiration of the then current agreement. Each automatic renewal period is for one year. This reinsurance remains in place.The remaining capitalized and SNL asset balances at December 31, 2015, of $46,531 and the remaining SNL asset balance of $139,204, respectively, will beincluded in the accounting for the sale of Capital Reserve in mid 2016. Midwest acquired Great Plains Financial and established an asset for value of business acquired of $1,288,207. Midwest acquired First Wyoming Capital during 2015 and established an asset for value of business acquired of$506,600. These assets are being amortized on a straight-line basis, which approximates the earnings pattern of the related policies, over ten years. The Company recognized amortization expense of$183,698 and$175,254 for the years ended December 31, 2015 and 2014, respectively relative to these transactions.
Additionally, American Life purchased Old Reliance in August 2011, resulting in an initial capitalized asset for value of business acquired of $824,485. This asset is being amortized over the life of the related policies (refer to “revenue recognition and related expenses” discussed later regarding amortization methods). Amortization recognized during the years ended December 31, 2015 and 2014 totaled $47,745 and $41,951, respectively.
Recoverability of value of business acquired is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined during its December 31, 20152016 and 20142015 analysis that all value of business acquired were recoverable.
Goodwill and Other Intangible Assets:Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
In September 2011, the FASB issued ASU 2011-08 which amends the rules for testing goodwill for impairment. Under the new rules, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
The Company elected to forgo the qualitative impairment analysis and performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2015 and 2014,2016, the fair value of the Company’s reporting unitunitwas less than exceeded the carrying value of the net assets assigned to that unit andtherefore the Companywas not required to perform further testing for impairment. Management's determination of the fair value ofthe reporting unit incorporates multiple inputs including, peer company price to earnings multiples andincorporated assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levelsBased upon our fair value analysis, the Company determined that the full amount of economic capital, future business growth,the goodwill should be written off as of December 31, 2016.
Midwest Holding Inc. and earnings projections.Subsidiaries
Notes to Consolidated Financial Statements – Continued
The Company assesses the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
The Company compared the carrying value of its identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 20152016 and 2014,2015, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.
Property and equipment:Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $157,388$103,623 and $174,658$157,387 for the years ended December 31, 20152016 and 2014,2015, respectively. The accumulated depreciation totaled $864,526$961,864 and $713,167$864,526 as of December 31, 20152016 and 2014,2015, respectively.
Maintenance and repairs are expensed as incurred. Replacements and improvements which extend the useful life of the asset are capitalized. The net book value of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. The Company determined that no such events occurred that would indicate the carrying amounts may not be recoverable.
Reinsurance:In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of December 31, 20152016 or 2014.2015.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Benefit reserves:The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.
Policy claims:Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Deposit-type contracts:Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders, premium deposit funds and supplemental contracts without life contingencies.
Income taxes:The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2012. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that they believeit believes are more-likely-than not that the benefit will not to be realized.
When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at December 31, 20152016 and 2014.2015.
Revenue recognition and related expenses:Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.
Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services and cost of insurance, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statementsconsolidated statements of Cash Flows.cash flows.
Amounts received under our multi-benefit policy form are allocated to the life insurance portion of the multi-benefit life insurance arrangement and the annuity portion based upon the signed policy.
Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the life of the premiums produced. Traditional life insurance products are treated as long duration contracts, which generally remain in force for the lifetime of the insured.
Comprehensive loss:Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive loss includes unrealized gains and losses from marketable securities classified as available for sale, net of applicable taxes.
Common and preferred stock and earnings (loss) per share:The par value per common share is $0.001 with 120,000,000100,000,000 shares authorized and 20,000,000 preferred shares authorized. At December 31, 20152016 and 2014,2015, the Company had 18,006,30122,558,956 and 13,167,65418,006,301 common shares issued and outstanding, respectively.
At December 31, 20152016 and 2014,2015, the Company had 1,179 warrants outstanding. The warrants arewere exercisable through December 31, 2016 for 10 shares of voting common stock at an exercise price of $6.50 per share.
Midwest Holding Inc. No warrants were exercised during 2016 and Subsidiaries
2015and are now expired.Notes to Consolidated Financial Statements – Continued
The Class A preferred shares are non-cumulative, non-voting and convertible by the holder to voting common shares after May, 2015, at a rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). There is no stated dividend rate on the Class A shares, but the holders of Class A shares will receive a dividend on each outstanding share of Class A preferred stock in an amount equal to the amount of the dividend payable on each share of common stock. The par value per preferred share is $0.001 with 2,000,000 shares authorized. At both December 31, 20152016 and 2014,2015, the Company had 74,159 Class A preferred shares issued and outstanding.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
The Class B preferred shares are non-cumulative, non-voting and convertible by the holderor the Company to voting common shares after May 1, 2017 at a rate of 2.0 common shares for each preferredshare. The Company may only affect a conversion through a deemed liquidation or initial public offering. The par value per preferred share is $0.001 with 1,000,000 shares authorized. The statedannual dividend rate on the Class B preferred shares is 7%, commencing after December 31, 2014.. Dividends totaling $43,120 and $56,057 were paid during the yearyears ended December 31, 2015.2016 and 2015, respectively. At December 31, 20152016 and 2014,2015, the Company had 102,669 Class B preferred shares issued and outstanding.
The Company evaluated its Class B preferred stock for potential embedded derivatives. In doing so, the companyCompany first concluded that the nature of the host contract was more equity than debt like. The embedded conversion features were determined not to be derivatives as net settlement does not exist given the lack of trading activity in the company’sCompany’s stock. Additionally, the conversion features are clearly and closely related to an equity host contract. Consideration was also given to whether a beneficial conversion feature should be recognized in additional paid in capital for the intrinsic value of the conversion feature at the issuance date. The Class B preferred stock is not mandatorily redeemable but may be redeemed at the time of a deemed liquidation. Holders could elect redemption upon the occurrence of certain deemed liquidation events, including mergers in which the company is a constituent party and sales of substantially all the assets of the corporation,Company, that are within the Company’s control, if the Company does not dissolve the corporation.it. As such, the preferred stock is recognized in permanent equity. The redemption feature was determined to not be a derivative as settlement would be gross.
Earnings (loss) per share attributable to the Company’s common stockholders were computed based on the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the years ended December 31, 2016 and 2015 were21,625,878and 2014 were 14,081,926 and 10,654,483 shares, respectively.
Risk and uncertainties:Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our consolidated financial statements. The more significant of those risks and uncertainties, as well as the Company’s method for mitigating the risks, are presented below and throughout the notes to the consolidated financial statements.
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Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
New accounting standards:In May 2014,June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2014-09,Accounting Standards Update (“ASU”) 2016-13,RevenueFinancial Instruments – Credit Losses (Topic 326). Under the new guidance, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from Contracts with Customers (Topic 606) regarding accountingan incurred loss to an expected credit loss. An allowance for revenue recognition that identifies the accounting treatment forexpected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an entity's contracts with customers. Although insurance contracts are excluded from this ASU, other customer contracts ofadjustment to the Company wouldallowance can be covered. This guidance ismade. The new standard becomes effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is2019. We are currently evaluating this guidance, but it does not believe that there will be a materialthe impact toof our pending adoption of the new standard on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323). Under the new guidance, when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, this ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The new standard becomes effective December 15, 2016. Early adoption of this update is permitted and we will adopt this update should an investment change from the cost method to the equity method due to a change in ownership or degree of influence.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840,Leases. Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent or material to the Company at this time.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
In January 2016, the FASB issued ASU 2016-1, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.
Effective January 1, 2016, the Company adopted ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires (i) that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, (ii) that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, (iii) that an entity present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company reflected these changes in Note 2below.
Note 2. Recent Acquisitions
On March 15, 2016, Midwest acquired Northstar Financial Corporation (“Northstar”), an inactive Minnesota corporation, pursuant to an Agreement and Plan of Merger dated December 18, 2015. Pursuant to this merger, Midwest exchanged 1.27 shares of its voting common stock for each share of Northstar common stock, or approximately 4,553,000 shares. The merger of Northstar was recorded as an asset acquisition. The assets (primarily cash) and liabilities of Northstar were recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date.
On October 27, 2015, Midwest acquired 100% of all of the remaining outstanding shares of First Wyoming, a Wyoming corporation, that it did not previously own of First Wyoming Capital Corporation (“First Wyoming”), a Wyoming corporation, pursuant to an Agreement and Plan of Merger dated July 31, 2015 by and among the Company, First Wyoming and Midwest Acquisition, Inc., a Wyoming corporation and wholly-owned subsidiary of the Company (“Merger Subsidiary”) (the “Merger Agreement”). Under the Merger Agreement, the Merger Subsidiary merged with and into First Wyoming (the “Merger”); the separate corporate existence of the Merger Subsidiary ceased andunder which First Wyoming became the surviving corporation of the Merger and a wholly ownedwholly-owned subsidiary of Midwest. Pursuant to the Merger Agreement, Midwest agreedissued approximately 4,767,400 shares to exchange 1.37 shares of its voting common stock for each sharethe former shareholders of First Wyoming common stock, or approximately 4,767,400 shares.other than Midwest. The fair value of the Midwest shares exchanged to acquire 100% of the remaining outstanding shares of First Wyoming that it did not previously own was estimated by applying the income approach andpreliminarily determined to be $1,811,612.$905,806, which is different from our preliminary estimate of $1,811,612 as disclosed in Note 2 of our 2015 10-K. This fair value measurement iswas based on significant inputs that are not observable in the market. Key assumptions include projected cash flowtotal income growth of between 3% and 5%16%, expected long term growth of 3%, a discount rate of 16.5%16.0%, and a terminal value based on earnings and a capitalization rate of 13.5%, and adjustments due to lack of control that market participants would consider when estimating the fair value of Midwest's shares.13.0%. Subsequent to the Closing,closing, First Wyoming merged into Midwest. Midwest is seeking to mergeand on September 1, 2016 First Wyoming Life, the life insurance subsidiary of First Wyoming, merged into American Life.
Midwest made a strategic decisionHolding Inc. and Subsidiaries
Notes to acquire First Wyoming and then consolidate First Wyoming Life into American Life to gain economies of scale to decrease overall expenses.Consolidated Financial Statements – Continued
The First Wyoming acquisition was accounted for under the acquisition method of accounting, which requires the consideration transferred and all assets and liabilities assumed to be recorded at fair value. Prior to the acquisition, Midwest held 22.1% of the outstanding shares of First Wyoming, which it had recorded in its financial statements under the equity method of accounting at a book value of $810,500 with a related accumulated other comprehensive loss of $30,410. The fair value of our previously held equity interest in First Wyoming waspreliminarily determined to be $221,430, resulting in a loss of $619,480 on the previously held equity interest. The preliminary fair value of our previously held equity interest in First Wyoming as disclosed in Note 2 of the 2015 10-K was determined to be $642,150 resulting in apreliminary loss of $198,760, at the acquisition date, which iswas included in the net investment income (loss) line item in the Consolidated Statement2015 10-K consolidated statement of Comprehensive Income.comprehensive income for the year ended December 31, 2015 and the remaining $420,720 was recognized in the period ended September 30, 201610-Q in loss on equity method investment on the consolidated statement of comprehensive income. Thepreliminary fair value of the previously held equity interest in First Wyoming was estimated by applying the income approach using significant inputs that are not observable in the market. Key assumptions include projected cash flowtotal income growth of between 3% and 27%13%, expected long term growth of 3%, a discount rate of 18.0%, a terminal value based on earnings and a capitalization rate of 13.5%13.0%, and adjustments due to lack of control that market participants would consider when estimating the fair value of the previously held equity interest in First Wyoming.
The following table summarizes thepreliminary fair value of the consideration transferred and thepreliminary fair value of First Wyoming assets acquired and liabilities assumed:
| Fair value of common stock of Midwest issued as consideration | $ | 905,806 | |
| Fair value of Midwest's previously held equity interest in First Wyoming | 221,430 | ||
| $ | 1,127,236 |
Recognizedpreliminary amounts of identifiable assets acquired and liabilities assumed:
| Investment securities | $ | 3,961,937 | ||
| Cash | 315,546 | |||
| VOBA | 506,600 | |||
| Other assets | 92,045 | |||
| Benefit reserves | (611,110 | ) | ||
| Policy claims | (41,754 | ) | ||
| Deposit-type contracts | (799,990 | ) | ||
| Other liabilities | (64,934 | ) | ||
| Total identifiable net assets | 3,358,340 | |||
| Bargain purchase gain | (2,231,104 | ) | ||
| $ | 1,127,236 |
The fair value of the Midwest common stock issued as consideration, the fair value of our previously held equity interest in First Wyoming, and the assets acquired and liabilities assumed from our acquisition of First Wyoming was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas that are not yet finalized areAll amounts related to the fair value of Midwest common stock issued, the fair value of our previously held equity interest in First Wyoming,business combination are finalized and the fair value of VOBA. Measurement period adjustments will be applied to the period that the adjustment is identified in our consolidated financial statements.
are no longer provisional. The transaction resulted in apreliminary bargain purchase gain of$904,578, which is $2,231,104 and, of that amount, $904,578 was included in the Bargain Purchase Gain For Business Acquisitionbargain purchase gain for business acquisition line item in the Consolidated Statementconsolidated statement of Comprehensive Income.comprehensive income for the year ended December 31, 2015. The remaining $1,326,526 was included in the consolidated statement of comprehensive income for the period ended September 30, 2016. The bargain purchase gain was driven by the fact that as a standalone company, First Wyoming Life would have been required to significantly increase its administrative operations in Cheyenne, Wyoming, in the near future, the cost of which would be prohibitive to a small life insurance company.company such as First Wyoming Life.
VOBAbusiness acquired (“VOBA”) is being amortized on a straight-line basis over ten years which approximates the earnings pattern of the related policies.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Acquisition costs relating to the business combination with First Wyoming totaling $123,219 were expensed as incurred and are included in the Otherother operating expenses line item in the Consolidated Statementconsolidated statement of Comprehensive Income.comprehensive income for the year ended December 31, 2015.
Total income and net loss of $71,165 and $73,939, respectively, were included in the accompanying consolidated statements2015 10-K Consolidated Statements of comprehensive incomeComprehensive Income from the October 27, 2015 acquisition date through December 31, 2015. Operations of the acquired entity and its subsidiary (First Wyoming Life) were immediately integrated with the Company'sCompany’s operations.
The following table presents unaudited pro forma consolidated total income and net loss as if the acquisition had occurred as of January 1, 2014 (the earliest date presented)2015 (earliest period shown).
| Year ended December 31, (unaudited) | 2015 | 2014 | 2015 | ||||||||||
| Premiums | $ | 3,723,084 | $ | 4,382,288 | Premiums | $ | 3,723,084 | ||||||
| Investment income | 414,970 | 699,238 | Investment income | 414,972 | |||||||||
| Miscellaneous income | 48,864 | 214,254 | Miscellaneous income | 48,864 | |||||||||
| Total income | $ | 4,186,918 | $ | 5,295,780 | Total income | $ | 4,186,920 | ||||||
| Net loss | $ | (4,338,051 | ) | $ | (4,215,594 | ) | Net loss | $ | (4,338,598 | ) | |||
The unaudited pro forma total income and net loss above was adjusted to excludeeliminate the bargain purchase gainequity method investment loss of$904,578 $158,677 recorded for the year ended December 31, 2015, eliminate the equity method investment income of $158,677 and $247,635 from First Wyoming2015. The pro forma amounts above also included an adjustment for the years ended December 31, 2015 and 2014, respectively, eliminate theelimination of TPA fees paid by First Wyoming to Midwest of $122,903 and $80,992 for the years ended December 31, 2015 and 2014, respectively; and eliminate the loss of $198,760 for the previously held equity investment in First Wyoming recorded for the year ended December 31,2015. The unaudited proforma net loss presented above also includes adjustments for the amortization of VOBA for the yearsyear ending December 31, 2015 and 2014 of$50,660. $50,660.
Note 3.Assets and Liabilities Held for Sale
In December 2015, American Life entered into a purchase agreement with anunaffiliateda third party to sell its interest in its dormant subsidiary, Capital Reserve Life Insurance Company (“Capital Reserve”)for $50,000 plus. Under the terms of the purchase agreement, American Life received cash which approximated the statutory capital and surplus of Capital Reserve. The sale of Capital Reserve was effective as of December 31, 2015. We expectAugust 29, 2016. Prior to the sale to occur in early to mid2016.
As of December 31, 2015,Capital Reserve, Midwest has classifiedhad $16.9 million and$15.5 million of assets related to Capital Reserveand liabilities, respectively, classified as a business held-for-sale within total assets and $15.5 million of liabilities related to Capital Reserve as a business held-for-sale within total liabilitiesheld for sale on the Consolidated Balance Sheet. The held for sale assets are primarily comprised of amounts recoverable from reinsurers,Capital Reserve resulted in a net gain of approximately $26,000 which includes the $50,000 cash above book value and the held forunrealized gains on the fair market value of bonds at August 29, 2016 becoming realized at the date of sale liabilities are primarily comprised of Benefit Reserves and Deposit-type contracts.The net changes$17,000 offset by the write-off of the VOBA of $40,714. This gain is included in the held for sale assets have been shown in the Other Assets and Liabilities Held for Sale lineNet realized gain (loss) on investments on the Consolidated Statementsconsolidated statement of Cash Flows.comprehensive income.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Note 4. Noncontrolling Interests
The effects on our equity of changes in our ownership interest in equity securities were as follows:
| Year Ended | |||
| December 31, | |||
| 2014 | |||
| Net (loss) attributable to Midwest Holding Inc. | $ | (3,444,986 | ) |
| Transfers (to) from noncontrolling interest: | |||
| Increase in Midwest Holding Inc.'s additional | |||
| paid-in capital for Great Plains Financial and First Wyoming | |||
| Capital stock purchases, net of change in ownership | 3,861,768 | ||
| Change from net loss attributable to Midwest Holding | |||
| Inc. and transfers from noncontrolling interests | $ | 416,782 | |
Note 5. Investments
The amortized cost and estimated fair value of investments classified as available-for-sale as of December 31, 20152016 and 20142015 are as follows:
| Cost or | Gross | Gross | ||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||
| Cost | Gains | Losses | Fair Value | |||||||||
| December 31, 2016: | ||||||||||||
| Fixed maturities: | ||||||||||||
| U.S. government obligations | $ | 3,390,545 | $ | - | $ | 166,326 | $ | 3,224,219 | ||||
| States and political subdivisions -- general obligations | 383,730 | 732 | 3,067 | 381,395 | ||||||||
| States and political subdivisions -- special revenue | 275,262 | 5,633 | 3,160 | 277,735 | ||||||||
| Corporate | 24,974,546 | 16,232 | 1,135,188 | 23,855,590 | ||||||||
| Total fixed maturities | $ | 29,024,083 | $ | 22,597 | $ | 1,307,741 | $ | 27,738,939 | ||||
| December 31, 2015: | ||||||||||||
| Fixed maturities: | ||||||||||||
| U.S. government obligations | $ | 3,256,704 | $ | 6,610 | $ | 69,815 | $ | 3,193,499 | ||||
| States and political subdivisions -- general obligations | 1,001,993 | - | 6,942 | 995,051 | ||||||||
| States and political subdivisions -- special revenue | 275,333 | - | 1,997 | 273,336 | ||||||||
| Corporate | 19,745,201 | 1,468 | 937,278 | 18,809,391 | ||||||||
| Total fixed maturities | $ | 24,279,231 | $ | 8,078 | $ | 1,016,032 | $ | 23,271,277 | ||||
The Company hadfive securities that individually exceed 10% of the total of the state and political subdivisions categories as of December 31, 2016. The amortized cost, fair value, credit rating, and description of each such security is as follows:
| Cost or | Gross | Gross | ||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||
| Cost | Gains | Losses | Fair Value | |||||||||
| December 31, 2015: | ||||||||||||
| Fixed maturities: | ||||||||||||
| U.S. government obligations | $ | 3,256,704 | $ | 6,610 | $ | 69,815 | $ | 3,193,499 | ||||
| States and political subdivisions -- general obligations | 1,001,993 | - | 6,942 | 995,051 | ||||||||
| States and political subdivisions -- special revenue | 275,333 | - | 1,997 | 273,336 | ||||||||
| Corporate | 19,745,201 | 1,468 | 937,278 | 18,809,391 | ||||||||
| Total fixed maturities | 24,279,231 | 8,078 | 1,016,032 | 23,271,277 | ||||||||
| December 31, 2014: | ||||||||||||
| Fixed maturities: | ||||||||||||
| U.S. government obligations | $ | 3,031,743 | $ | 106,673 | $ | 22,350 | $ | 3,116,066 | ||||
| States and political subdivisions -- general obligations | 998,778 | 4,971 | 29,095 | 974,654 | ||||||||
| States and political subdivisions -- special revenue | 1,197,350 | 2,649 | 35,034 | 1,164,965 | ||||||||
| Corporate | 12,834,409 | 1,904 | 374,750 | 12,461,563 | ||||||||
| Total fixed maturities | 18,062,280 | 116,197 | 461,229 | 17,717,248 | ||||||||
| Equity securities: | ||||||||||||
| Preferred corporate stock | 75,000 | - | - | 75,000 | ||||||||
| Total equity securities | 75,000 | - | - | 75,000 | ||||||||
| Total | $ | 18,137,280 | $ | 116,197 | $ | 461,229 | $ | 17,792,248 | ||||
| Amortized | Estimated | |||||||
| Cost | Fair Value | Credit Rating | ||||||
| December 31, 2016: | ||||||||
| Fixed maturities: | ||||||||
| States and political subdivisions -- general obligations | ||||||||
| Bellingham Wash | $ | 110,988 | $ | 109,633 | AA+ | |||
| Longview Washington Refunding | 163,172 | 161,460 | NR | |||||
| Memphis Tenn | 109,570 | 110,302 | AA | |||||
| States and political subdivisions -- special revenue | ||||||||
| Philadelphia PA Auth For Indl Dev City Svc Agreement | 149,411 | 146,973 | AA | |||||
| Riviera Beach FLA Pub Impt Rev | 100,392 | 106,025 | AA | |||||
| Total | $ | 633,533 | $ | 634,393 | ||||
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
The Company had four securities that individually exceed 10% of the total of the state and political subdivisions categories as of December 31, 2015. The amortized cost, fair value, credit rating, and description of the security is as follows:
| Amortized | Estimated | ||||||
| Cost | Fair Value | Credit Rating | |||||
| December 31, 2015: | |||||||
| Fixed maturities: | |||||||
| States and political subdivisions -- general obligations | |||||||
| Maricopa County Arizona School District No. 31 | $ | 336,419 | $ | 334,481 | AA | ||
| Longview Washington Refunding Taxable | 166,303 | 165,297 | N/R | ||||
| New York State Taxable Series | 163,331 | 162,179 | AA+ | ||||
| Philadelphia PA Authority for Industrial | 149,352 | 148,662 | AA | ||||
| Total | $ | 815,405 | $ | 810,619 | |||
The following table summarizes, for all securities in an unrealized loss position at December 31, 20152016 and 2014,2015, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||||||||
| Gross | Number | Gross | Number | Gross | Number | Gross | Number | ||||||||||||||||||||||||
| Estimated | Unrealized | of | Estimated | Unrealized | of | Estimated | Unrealized | of | Estimated | Unrealized | of | ||||||||||||||||||||
| Fair Value | Loss | Securities | Fair Value | Loss | Securities | Fair Value | Loss | Securities | Fair Value | Loss | Securities | ||||||||||||||||||||
| Fixed Maturities: | |||||||||||||||||||||||||||||||
| Less than 12 months: | |||||||||||||||||||||||||||||||
| U.S. government obligations | $ | 2,484,188 | $ | 62,343 | 14 | $ | 107,273 | $ | 3,963 | 1 | $ | 3,224,219 | $ | 166,326 | 17 | $ | 2,484,188 | $ | 62,343 | 14 | |||||||||||
| States and political subdivisions -- | |||||||||||||||||||||||||||||||
| general obligations | 660,596 | 5,004 | 5 | - | - | - | 271,093 | 3,066 | 2 | 660,569 | 5,004 | 5 | |||||||||||||||||||
| States and political subdivisions -- | |||||||||||||||||||||||||||||||
| special revenue | 248,146 | 1,618 | 2 | - | - | - | 171,711 | 3,160 | 2 | 248,146 | 1,618 | 2 | |||||||||||||||||||
| Corporate | 15,320,916 | 796,204 | 97 | 8,092,678 | 258,647 | 41 | 19,737,965 | 935,546 | 112 | 15,320,916 | 796,204 | 97 | |||||||||||||||||||
| Greater than 12 months: | |||||||||||||||||||||||||||||||
| U.S. government obligations | 305,055 | 7,472 | 3 | 1,096,399 | 18,387 | 8 | - | - | - | 305,055 | 7,472 | 3 | |||||||||||||||||||
| States and political subdivisions -- | |||||||||||||||||||||||||||||||
| general obligations | 334,481 | 1,938 | 1 | 654,822 | 29,095 | 3 | - | - | - | 334,481 | 1,938 | 1 | |||||||||||||||||||
| States and political subdivisions -- | |||||||||||||||||||||||||||||||
| special revenue | 25,190 | 379 | 1 | 1,052,184 | 35,034 | 9 | - | - | - | 25,190 | 379 | 1 | |||||||||||||||||||
| Corporate | 3,166,108 | 141,074 | 22 | 3,626,258 | 116,103 | 22 | 2,558,275 | 199,643 | 12 | 3,166,108 | 141,074 | 22 | |||||||||||||||||||
| Total fixed maturities | $ | 22,544,653 | $ | 1,016,032 | 145 | $ | 14,629,614 | $ | 461,229 | 84 | $ | 25,963,263 | $ | 1,307,741 | 145 | $ | 22,544,653 | $ | 1,016,032 | 145 | |||||||||||
Based on our review of the securities in an unrealized loss position at December 31, 20152016 and 2014,2015, no other-than-temporary impairments were deemed necessary.The Company had one bond related to non-investment grade, Diamond Offshore Drilling, Inc., which has an unrealized loss of $90,807. The remaining unrealized loss of $1,216,934 was related to investment grade bonds. Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2015,2016, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
The amortized cost and estimated fair value of fixed maturities at December 31, 2015,2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized | Estimated | Amortized | Estimated | ||||||||
| Cost | Fair Value | Cost | Fair Value | ||||||||
| Due in one year or less | $ | 209,648 | $ | 209,084 | $ | - | $ | - | |||
| Due after one year through five years | 1,530,385 | 1,521,658 | 1,319,856 | 1,299,868 | |||||||
| Due after five years through ten years | 14,433,713 | 13,851,865 | 13,739,800 | 13,196,864 | |||||||
| Due after ten years | 8,105,485 | 7,688,670 | 13,964,427 | 13,242,207 | |||||||
| $ | 24,279,231 | $ | 23,271,277 | $ | 29,024,083 | $ | 27,738,939 | ||||
The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At December 31, 20152016 and 2014,2015, these required deposits had a total amortized cost of $6,186,865$2,747,571 and $3,185,698$6,186,865 and fair values of $2,635,225 and $6,000,376, respectively.
Midwest Holding Inc. and $3,262,233, respectively.Subsidiaries
Notes to Consolidated Financial Statements – Continued
The components of net investmentincome (loss) for the years ended December 31, 20152016 and 20142015 are as follows:
| Year Ended December 31, | Year Ended December | |||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||
| Fixed maturities | $ | 681,999 | $ | 401,138 | $ | 889,860 | $ | 681,999 | ||||||
| Equity securities | 186 | 83 | 1,434 | 186 | ||||||||||
| Cash and short-term investments | 7 | 3,965 | ||||||||||||
| Equity in the net loss of unconsolidated subsidiaries | (357,437 | ) | (438,175 | ) | ||||||||||
| Other | 44,863 | 99,477 | 58,849 | 44,870 | ||||||||||
| 369,618 | 66,488 | 950,143 | 727,055 | |||||||||||
| Less investment expenses | (63,087 | ) | (76,371 | ) | (71,152 | ) | (63,087 | ) | ||||||
| $ | 306,531 | $ | (9,883 | ) | ||||||||||
| Investment income, net of expenses | $ | 878,991 | $ | 663,968 | ||||||||||
Proceeds for the years ended December 31, 20152016 and 20142015 from sales of investments classified as available for sale were$14,179,936 and $13,394,158, and $8,288,570, respectively. Gross gains of$148,661 $178,104 and $50,974$148,661 and gross losses of$266,025 $54,610 and $46,795$266,025 were realized on those sales during the years ended December 31, 20152016 and 2014,2015, respectively.
In 2014, Midwest sold its investment in the equity securities, at cost, back to Hot Dot and Northern Plains for a gain of $90,812 and $251,104, respectively.
As of December 31, 2015,2014, all mortgage loans were under contract to be sold. The sales were completed on January 15, 2015. The following table summarizes the activity in the mortgage loans on real estate, held for investment account for the years ended December 31, 20152016 and 2014.2015.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||
| Balance at beginning of period | $ | 349,386 | $ | 665,569 | $ | - | $ | 349,386 | ||||||
| Proceeds from payments on mortgage loans on real estate, held for investment | - | (3,931 | ) | |||||||||||
| Proceeds from settlement on mortgage loans on real estate, held for investment | (349,386 | ) | (312,252 | ) | - | (349,386 | ) | |||||||
| Balance at end of period | $ | - | $ | 349,386 | $ | - | $ | - | ||||||
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Note 6.5. Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
| ● | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| ● | Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Fixed maturities:Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended December 31, 2015,2016, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.
Equity securities, available for sale: Equity securities consist of preferred stock of publicly traded companies. The fair values of our preferred equity securities are based on prices obtained from independent pricing services and these securities are classified within Level 2 in the fair value hierarchy.
Equity method investments: The equity method investment is comprised of the Company’s investment in First Wyoming. This security has no active trading and the fair value for this security is not readily determinable. Therefore, this investment has been omitted from the following fair value disclosure tables.
Cash and cash equivalents and short-term investments:Cash:The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.
Policy loans:Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value. Policy loans are categorized as Level 3 in the fair value hierarchy.
Notes Receivable:Fair values for short-term notes receivable approximate carrying value. The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the origination of the loan and its expected repayment. These receivables are categorized as Level 3 in the fair value hierarchy.
Mortgage loans on real estate, held for investment:The fair values of mortgage loans on real estate, held for investment are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. As part of the Old Reliance purchase agreement, the seller guaranteed the performance of the mortgage loans and accordingly we believe book value is equal to fair value. Mortgage loans are categorized as Level 3 in the fair value hierarchy.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Deposit-type contracts:The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. Liabilities under deposit-type insurance contracts that are wholly ceded by Capital Reserve to a non-affiliated reinsurer are carried at cash surrender value which approximates fair value. The fair values for insurance contracts other than deposit-type contracts are not required to be disclosed. These liabilities are categorized as Level 3 in the fair value hierarchy.
Surplus notes:The fair value for surplus notes is calculated using a discounted cash flow approach. Cash flows are projected utilizing scheduled repayments and discounted to the valuation date using market rates currently available for debt with similar remaining maturities. These notes are structured such that all interest is paid at maturity. In the following fair value measurement tables, the Company has included accrued interest expense of approximately $229,405$261,971 and $196,927$229,405 in carrying value of the surplus notes as of December 31, 20152016 and 2014,2015, respectively. These liabilities are categorized as Level 3 in the fair value hierarchy.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 20152016 and 2014.2015.
| Significant | Significant | ||||||||||||||||||||||
| Quoted | Other | Significant | Quoted | Other | Significant | ||||||||||||||||||
| In Active | Observable | Unobservable | Estimated | In Active | Observable | Unobservable | Estimated | ||||||||||||||||
| Markets | Inputs | Inputs | Fair | Markets | Inputs | Inputs | Fair | ||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Value | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||||||||
| December 31, 2016 | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government obligations | $ | - | $ | 3,224,219 | $ | - | $ | 3,224,219 | |||||||||||||||
| States and political subdivisions — general obligations | - | 381,395 | - | 381,395 | |||||||||||||||||||
| States and political subdivisions — special revenue | - | 277,735 | - | 277,735 | |||||||||||||||||||
| Corporate | - | 23,855,590 | - | 23,855,590 | |||||||||||||||||||
| Total fixed maturities | $ | - | $ | 27,738,939 | $ | - | $ | 27,738,939 | |||||||||||||||
| December 31, 2015 | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government obligations | $ | - | $ | 3,193,499 | $ | - | $ | 3,193,499 | $ | - | $ | 3,193,499 | $ | - | $ | 3,193,499 | |||||||
| States and political subdivisions — general obligations | - | 995,051 | - | 995,051 | - | 995,051 | - | 995,051 | |||||||||||||||
| States and political subdivisions — special revenue | - | 273,336 | - | 273,336 | - | 273,336 | - | 273,336 | |||||||||||||||
| Corporate | - | 18,809,391 | - | 18,809,391 | - | 18,809,391 | - | 18,809,391 | |||||||||||||||
| Total fixed maturities | $ | - | $ | 23,271,277 | $ | - | $ | 23,271,277 | $ | - | $ | 23,271,277 | $ | - | $ | 23,271,277 | |||||||
| December 31, 2014 | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government obligations | $ | - | $ | 3,116,066 | $ | - | $ | 3,116,066 | |||||||||||||||
| States and political subdivisions — general obligations | - | 974,654 | - | 974,654 | |||||||||||||||||||
| States and political subdivisions — special revenue | - | 1,164,965 | - | 1,164,965 | |||||||||||||||||||
| Corporate | - | 12,461,563 | - | 12,461,563 | |||||||||||||||||||
| Total fixed maturities | - | 17,717,248 | - | 17,717,248 | |||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Preferred corporate stock | - | 75,000 | - | 75,000 | |||||||||||||||||||
| Total equity securities | - | 75,000 | - | 75,000 | |||||||||||||||||||
| Total | $ | - | $ | 17,792,248 | $ | - | $ | 17,792,248 | |||||||||||||||
There were no transfers of financial instruments between Level 1 and Level 2 during the years ended December 31, 20152016 or 2014.2015.
Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis. Equity securities carried at cost are privately placed common stocks for several recently formed holding companies organized for the purpose of forming life insurance subsidiaries. These common stocks are recorded using the cost basis of accounting. These securities have no active trading and the fair value for these securities is not readily determinable. The Company does not control these entities economically, and therefore does not consolidate these entities.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of December 31, 2016 and 2015, and 2014, respectively:
| December 31, 2015 | |||||||||||||||
| Fair Value Measurements at Date Using | |||||||||||||||
| Quoted Prices in | |||||||||||||||
| Active Markets | |||||||||||||||
| for Identical | Significant Other | Significant | |||||||||||||
| Assets and | Observable | Unobservable | |||||||||||||
| Carrying | Liabilities | Inputs | Inputs | Fair | |||||||||||
| Amount | (Level 1) | (Level 2) | (Level 3) | Value | |||||||||||
| Assets: | |||||||||||||||
| Policy loans | $ | 420,775 | $ | - | $ | - | $ | 420,775 | $ | 420,775 | |||||
| Cash and cash equivalents | 1,192,336 | 1,192,336 | - | - | 1,192,336 | ||||||||||
| Liabilities: | |||||||||||||||
| Policyholder deposits | |||||||||||||||
| (Deposit-type contracts) | 13,897,421 | - | - | 13,897,421 | 13,897,421 | ||||||||||
| Surplus notes and accrued interest payable | 779,405 | - | - | 768,022 | 768,022 | ||||||||||
| December 31, 2014 | December 31, 2016 | ||||||||||||||||||||||||||||
| Fair Value Measurements at Date Using | Fair Value Measurements at Date Using | ||||||||||||||||||||||||||||
| Quoted Prices in | Quoted Prices in | ||||||||||||||||||||||||||||
| Active Markets | Active Markets | ||||||||||||||||||||||||||||
| for Identical | Significant Other | Significant | for Identical | Significant Other | Significant | ||||||||||||||||||||||||
| Assets and | Observable | Unobservable | Assets and | Observable | Unobservable | ||||||||||||||||||||||||
| Carrying | Liabilities | Inputs | Inputs | Fair | Carrying | Liabilities | Inputs | Inputs | Fair | ||||||||||||||||||||
| Amount | (Level 1) | (Level 2) | (Level 3) | Value | Amount | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Mortgage loans on real estate held for | |||||||||||||||||||||||||||||
| investment | $ | 349,386 | $ | - | $ | - | $ | 349,386 | $ | 349,386 | |||||||||||||||||||
| Policy loans | 374,186 | - | - | 374,186 | 374,186 | $ | 412,583 | $ | - | $ | - | $ | 412,583 | $ | 412,583 | ||||||||||||||
| Cash and cash equivalents | 2,310,047 | 2,310,047 | - | - | 2,310,047 | 661,545 | 661,545 | - | - | 661,545 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Policyholder deposits | |||||||||||||||||||||||||||||
| (Investment-type contracts) | 10,722,227 | - | - | 10,722,227 | 10,722,227 | ||||||||||||||||||||||||
| (Deposit-type contracts) | 16,012,567 | - | - | 16,012,567 | 16,012,567 | ||||||||||||||||||||||||
| Surplus notes and accrued interest payable | 746,927 | - | - | 739,042 | 739,042 | 811,971 | - | - | 808,602 | 808,602 | |||||||||||||||||||
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
| December 31, 2015 | |||||||||||||||
| Fair Value Measurements at Date Using | |||||||||||||||
| Quoted Prices in | |||||||||||||||
| Active Markets | |||||||||||||||
| for Identical | Significant Other | Significant | |||||||||||||
| Assets and | Observable | Unobservable | |||||||||||||
| Carrying | Liabilities | Inputs | Inputs | Fair | |||||||||||
| Amount | (Level 1) | (Level 2) | (Level 3) | Value | |||||||||||
| Assets: | |||||||||||||||
| Policy loans | $ | 420,775 | $ | - | $ | - | $ | 420,775 | $ | 420,775 | |||||
| Cash and cash equivalents | 1,192,336 | 1,192,336 | - | - | 1,192,336 | ||||||||||
| Liabilities: | |||||||||||||||
| Policyholder deposits | |||||||||||||||
| (Investment-type contracts) | 13,897,421 | - | - | 13,897,421 | 13,897,421 | ||||||||||
| Surplus notes and accrued interest payable | 779,405 | - | - | 768,022 | 768,022 | ||||||||||
Note 7.6. Income Tax Matters
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 20152016 and 20142015 are as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Losscarryforwards | $ | 8,962,587 | $ | 7,598,830 | $ | 9,705,974 | $ | 8,962,587 | ||||||||
| Capitalized costs | 667,264 | 802,000 | 667,264 | 667,264 | ||||||||||||
| Unrealized losses on investments | 356,495 | 121,110 | 436,949 | 356,495 | ||||||||||||
| Benefit reserves | 1,071,997 | 1,239,298 | 984,640 | 1,071,997 | ||||||||||||
| Total deferred tax assets | 11,058,343 | 9,761,238 | 11,794,827 | 11,058,343 | ||||||||||||
| Less valuation allowance | (9,287,024 | ) | (8,112,743 | ) | (10,170,638 | ) | (9,287,024 | ) | ||||||||
| Total deferred tax assets, net of valuation allowance | 1,771,319 | 1,648,495 | 1,624,189 | 1,771,319 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Policy acquisition costs | 593,654 | 908,021 | 571,148 | 593,654 | ||||||||||||
| Due premiums | 234,468 | 220,823 | 228,136 | 234,468 | ||||||||||||
| Value of business acquired | 693,297 | 249,351 | 586,905 | 693,297 | ||||||||||||
| Intangible assets | 238,000 | 238,000 | 238,000 | 238,000 | ||||||||||||
| Property and equipment | 11,900 | 32,300 | - | 11,900 | ||||||||||||
| Total deferred tax liabilities | 1,771,319 | 1,648,495 | 1,624,189 | 1,771,319 | ||||||||||||
| Net deferred tax assets | $ | - | $ | - | $ | - | $ | - | ||||||||
At December 31, 20152016 and 2014,2015, the Company recorded a valuation allowance of$9,287,02410,170,638 and$8,112,743, $9,287,024, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwardscarry forwards are expected to be available to reduce taxable income.
Loss carryforwardscarry forwards for tax purposes as of December 31, 2015,2016, have expiration dates that range from 2024 through 2035.2036.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
There was no income tax expense for the years ended December 31, 20152016 and 2014.2015. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34% to pretax income, as a result of the following:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Computed expected income tax benefit | $ | (1,163,686 | ) | $ | (1,171,295 | ) | $ | (1,308,293 | ) | $ | (856,129 | ) | ||||
| Increase (reduction) in income taxes resulting from: | ||||||||||||||||
| Bargain purchase gain | (451,019 | ) | (307,557 | ) | ||||||||||||
| Meals, entertainment and political contributions | 46,315 | 24,141 | 18,956 | 46,315 | ||||||||||||
| Dividends received deduction | (44 | ) | (20 | ) | ||||||||||||
| Noncontrolling interests | - | 10,597 | ||||||||||||||
| True-up benefit reserves and 2014 NOL; and First Wyoming Capital Merger | 178,519 | 25,732 | ||||||||||||||
| Goodwill impairment | 384,140 | - | ||||||||||||||
| Other (Benefit reserves and NOL true-up/merger of First Wyoming 2015) | (53,722 | ) | 178,519 | |||||||||||||
| 224,790 | 60,450 | (101,645 | ) | (82,767 | ) | |||||||||||
| Tax benefit before valuation allowance | (938,896 | ) | (1,110,845 | ) | (1,409,938 | ) | (938,896 | ) | ||||||||
| Change in valuation allowance | 938,896 | 1,110,845 | 1,409,938 | 938,896 | ||||||||||||
| Net income tax expenses | $ | - | $ | - | $ | - | $ | - | ||||||||
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Note 8.7. Reinsurance
A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of December 31, 20152016 and 20142015 and for the years ended December 31, 20152016 and 20142015 is as follows:
| Year Ended December 31, | Year Ended December 31, | ||||||||||
| 2015 | 2014 | 2016 | 2015 | ||||||||
| Balance sheets: | |||||||||||
| Benefit and claim reserves assumed | $ | 2,763,779 | $ | 2,678,376 | $ | 2,470,063 | $ | 2,763,779 | |||
| Benefit and claim reserves ceded | 12,212,656 | 12,636,910 | 11,704,055 | 12,212,656 | |||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||
| 2015 | 2014 | 2016 | 2015 | ||||||||
| Statements of comprehensive income: | |||||||||||
| Premiums assumed | $ | 36,777 | $ | 35,466 | $ | 24,064 | $ | 36,777 | |||
| Premiums ceded | 498,787 | 340,464 | 287,780 | 498,787 | |||||||
| Benefits assumed | 57,317 | 82,897 | 43,602 | 57,317 | |||||||
| Benefits ceded | 904,867 | 983,168 | 696,159 | 904,867 | |||||||
| Commissions assumed | 21 | 44 | 35 | 21 | |||||||
| Commissions ceded | 3,399 | 6,216 | 1,649 | 3,399 | |||||||
The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer along with the A.M. Best credit rating as of December 31, 2015:2016:
| Recoverable on | Total Amount | Recoverable on | Total Amount | |||||||||||||||||||||||||||||||
| Recoverable | Recoverable | Benefit | Ceded | Recoverable | Recoverable | Recoverable | Benefit | Ceded | Recoverable | |||||||||||||||||||||||||
| AM Best | on Paid | on Unpaid | Reserves/Deposit- | Due | from | AM Best | on Paid | on Unpaid | Reserves/Deposit- | Due | from | |||||||||||||||||||||||
| Reinsurer | Rating | Losses | Losses | type Contracts | Premiums | Reinsurer | Rating | Losses | Losses | type Contracts | Premiums | Reinsurer | ||||||||||||||||||||||
| Optimum Re Insurance Company | A- | $ | - | $ | 154,928 | $ | 184,474 | $ | - | $ | 339,402 | A- | $ | - | $ | 77,032 | $ | 180,681 | $ | - | $ | 257,713 | ||||||||||||
| Sagicor Life Insurance Company | A- | - | 412,884 | 11,689,455 | 229,085 | 11,873,254 | A- | - | 284,617 | 11,403,908 | 242,183 | 11,446,342 | ||||||||||||||||||||||
| $ | - | $ | 567,812 | $ | 11,873,929 | $ | 229,085 | $ | 12,212,656 | $ | - | $ | 361,649 | $ | 11,584,589 | $ | 242,183 | $ | 11,704,055 | |||||||||||||||
DuringTable of Contents
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Effective 1999, Old RelianceAmerican Life entered into a 75% coinsurance agreement with Sagicor Life (Sagicor)(“Sagicor”) whereby 75% of thecertain business written by Old Reliance is ceded to Sagicor. During 2000, Old Reliance coinsured the remaining 25% was coinsured with Sagicor. At December 31, 20152016 and 2014,2015, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by Old RelianceAmerican Life to Sagicor were $11,446,342 and $11,873,254, and $12,143,472, respectively. Old RelianceAmerican Life remains contingently liable on this ceded reinsurance should Sagicor be unable to meet their obligations.obligations
The use of reinsurance does not relieve the CompanyAmerican Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation. No reinsurer of business ceded by the CompanyAmerican Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.
The CompanyAmerican Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If the Company believes that any reinsurer would not be able to satisfy its obligations with the Company, a separate contingency reserve may be established. At December 31, 20152016 and 2014,2015, no contingency reserve was established.
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Note 9.8. Deposit-Type Contracts
The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for the years ended December 31, 20152016 and 2014:2015:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Beginning balance | $ | 10,722,227 | $ | 8,422,105 | $ | 13,897,421 | $ | 10,722,227 | ||||||||
| First Wyoming Life beginning balance | 799,990 | - | - | 799,990 | ||||||||||||
| Change in deposit-type contracts assumed from SNL | (1,200 | ) | (114,109 | ) | - | (1,200 | ) | |||||||||
| Deposits received | 2,387,104 | 2,409,659 | 2,433,781 | 2,387,104 | ||||||||||||
| Investment earnings | 533,646 | 403,556 | 776,541 | 533,646 | ||||||||||||
| Withdrawals | (533,762 | ) | (398,984 | ) | (1,086,661 | ) | (533,762 | ) | ||||||||
| Contract Charges | (10,584 | ) | - | (8,515 | ) | (10,584 | ) | |||||||||
| Ending balance | $ | 13,897,421 | $ | 10,722,227 | $ | 16,012,567 | $ | 13,897,421 | ||||||||
Under the terms of American Life’s coinsurance agreement with SNL, American Life assumes certain deposit-type contract obligations, as shown in the table above. Additionally, Capital Reserve cedes 100% of its direct business to SNL. Accordingly, this amount is presented within the corresponding single line above. The remaining deposits, withdrawals and interest credited represent those for American Life’s direct business.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Note 10.9. Commitments and Contingencies
Legal Proceedings:We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.
Regulatory MattersMatters:: State regulatory bodies, the SEC, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning the Company’s compliance with laws in relation to, but not limited to, insurance and securities. The issues involved in information requests and regulatory matters vary widely. The Company cooperates in these inquiries. Agencies from the statesstate of Arizona, Missouri, and WyomingNebraska are currently conducting a routine regulatory examination for the period 20092013 through 20122016 as required by state statutes.
Office Lease:The Company leases office space in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires on January 31, 2024.TheCompany also subleases office space executed an amendment to the above lease for a satellite office in Kearney, Nebraska, which was executed on June 11, 2012 which we closed and cancelled in January 2015. Great Plains Financial entered into a lease on May 1, 2011 forthe additional 2,876 square feet of office space in Pierre, South Dakota,Suite 450 on October 23, 2015, which expiredwill expire on April 30, 2014.May 31, 2017, which we do not plan to renew. Great Plains also entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota, which expiresexpired on November 30, 2016. First Wyoming leased space in Cheyenne, Wyoming, which expired on August 31, 2016. Rent expense for the years ended December 31, 20152016 and 20142015 was$232,130341,424 and $227,182,$232,130, respectively. Future minimum payments are as follows:
| 2016 | $ | 198,030 | |||
| 2017 | 149,481 | $ | 149,481 | ||
| 2018 | 136,557 | 136,557 | |||
| 2019 | 141,412 | 141,412 | |||
| 2020 | 146,477 | 146,477 | |||
| 2021 | 151,543 | ||||
| Later years | 483,333 | 331,790 | |||
| Total | $ | 1,255,290 | $ | 1,057,260 | |
Midwest Holding Inc. and SubsidiariesNotes to Consolidated Financial Statements – Continued
Note 11.10. Statutory Net Income and Surplus
American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the ArizonaNebraska Department of Insurance. Likewise, Capital Reserve, Great Plains Life, and First Wyoming Life are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Missouri, South Dakota, and Wyoming Departments of Insurance, respectively. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. SubsequentFirst Wyoming Life and Great Plains Life merged with American Life as of September 1, 2016 and December 31, 2016, respectively. Capital Reserve was sold effective August 29, 2016. The December 31, 2015 numbers in the table below have been restated to year-end,include the Arizona regulators required usFirst Wyoming Life and Great Plains Life balances into American Life to make a $1.0 million capital contribution to American Life.be consistent with the December 31, 2016 statutory statement filing. The following table summarizes the statutory net loss and statutory capital and surplus of American Life Capital Reserve, Great Plains Life, and First Wyoming Life as of December 31, 20152016 and 20142015 and for the years ended December 31, 20152016 and 2014.2015. The amounts below as of and for the year ended December 31, 20142015 are based on the respective company’s audited statutory financial statements. The auditsaudit of the companies’ statutoryAmerican Life's financial statements as of and for the year ended December 31, 2015 are2016is expected to be completed by May 31, 2016.
| Statutory Net Loss for the Years Ended December 31, | ||||||
| 2015 | 2014 | |||||
| American Life | $ | 1,275,874 | $ | 1,465,181 | ||
| Capital Reserve | $ | 77,720 | $ | 123,940 | ||
| Great Plains Life | $ | 436,268 | $ | 112,890 | ||
| First Wyoming Life | $ | 493,511 | $ | 311,803 | ||
| Statutory Capital and Surplus as of December 31, | ||||||
| 2015 | 2014 | |||||
| American Life | $ | 2,526,392 | $ | 2,429,604 | ||
| Capital Reserve | $ | 1,464,044 | $ | 1,332,772 | ||
| Great Plains Life | $ | 1,663,368 | $ | 2,025,982 | ||
| First Wyoming Life | $ | 2,715,494 | $ | 3,272,791 | ||
Note 12. Surplus Notes
The following provides a summary of theAmerican Life’s surplus notes along with issue dates, maturity dates, face amounts, and interest rates as of December 31, 2015:2017
| Creditor | Issue Date | Maturity Date | Face Amount | Interest Rate | ||||
| David G. Elmore | September 1, 2006 | September 1, 2016 | $250,000 | 7% | ||||
| David G. Elmore | August 4, 2011 | August 1, 2016 | 300,000 | 5% |
| Statutory Net Loss for the Years Ended December 31, | ||||||
| 2016 | 2015 | |||||
| American Life | $ | 1,979,009 | $ | 2,085,450 | ||
| Capital Reserve | N/A | $ | 77,720 | |||
| Statutory Capital and Surplus as of December 31, | ||||||
| 2016 | 2015 | |||||
| American Life | $ | 3,817,756 | $ | 5,288,649 | ||
| Capital Reserve | N/A | $ | 1,464,044 | |||
Any payments and/or repayments must be approved by the Arizona Department of Insurance. As of December 31, 2015, the Company has accrued $229,405 of interest expense under accounts payable and accrued expenses on the consolidated balance sheet.
Note 13. Investment in Pacific Northwest Capital Corporation
During the first quarter of 2014, we purchased additional shares of Pacific Northwest Capital Corporation (Pacific Northwest). The purchase increased our total investment in Pacific Northwest to 850,000 shares. Our aggregate ownership percentage increased to approximately 22.4%.
As a result of the increased ownership of Pacific Northwest, the Company changed its method of carrying the investment from cost to equity as required by GAAP. Under the equity method, the Company records its proportionate share of the earnings of Pacific Northwest. There was no effect of the change in accounting method for the year ended December 31, 2015. The effect of the change in accounting method for the year ended December 31, 2014, was to increase loss before provision for income taxes and net loss by $72,306. The change for the period ended December 31, 2014 decreased our investment in Pacific Northwest to zero.
Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued
Note 11. Surplus Notes
The following provides a summary of the American Life’s surplus notes along with issue dates, maturity dates, face amounts, and interest rates as of December 31, 2016:
| Creditor | Issue Date | Maturity Date | Face Amount | Interest Rate | |||||
| David G. Elmore | September 1, 2006 | September 1, 2016 | $ | 250,000 | 7% | ||||
| David G. Elmore | August 4, 2011 | August 1, 2016 | 300,000 | 5% | |||||
Any payments and/or repayments must be approved by the Nebraska Department of Insurance. As of December 31, 2016, the Company has accrued $261,971 of interest expense under accounts payable and accrued expenses on the consolidated balance sheet. No payments were made in the years ended December 31, 2016 and 2015. The surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes, a repayment cannot be made without the prior approval of the Nebraska insurance regulators.
Note 14.12. Related Party Transactions
The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to the Company’s subsidiariessubsidiary and to non-consolidated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the years ended December 31, 20152016 and 20142015 amounted to $63,500 and $154,670, and $295,093, respectively.
Note 15.13. Subsequent Events
All of the effects of subsequent events that provide additional evidence about conditions that existed at December 31, 2015,2016, including the estimates inherent in the process of preparing consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated financial statements but arose after, but before the consolidated financial statements were available to be issued. In some cases, non-recognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.
On January 29, 2015, the Department of Insurance of the state of Arizona required that Midwest make a capital contribution to American Life. The transaction was recorded for statutory purposes as ofDecember 31, 2015. Midwest received an advance from Northstar for $1.0 million on February 19, 2016 and Midwest contributed the $1.0 million to American Life on February 22, 2016.
On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015. Northstar became a wholly-owned subsidiary of ours. We have exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’sprimary asset at the time of its acquisition by us was cash of approximately $2.2 million.The Company will account for the acquisition of Northstar as an Asset Acquisition.misleading
MIDWEST HOLDING INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Midwest Holding Inc. and Subsidiaries
Summary of Investments — Other Than Investments in Related Parties
December 31, 20152016
| Amount | Amount | |||||||||||||||||
| Recognized in | Recognized in | |||||||||||||||||
| Amortized | Consolidated | Amortized | Consolidated | |||||||||||||||
| Cost | Fair Value | Balance Sheets | Cost | Fair Value | Balance Sheets | |||||||||||||
| Type of Investment | ||||||||||||||||||
| Fixed maturity securities, available for sale: | ||||||||||||||||||
| U.S. government obligations | $ | 3,256,704 | $ | 3,193,499 | $ | 3,193,499 | $ | 3,390,545 | $ | 3,224,219 | $ | 3,224,219 | ||||||
| States and political subdivisions -- general obligations | 1,001,993 | 995,051 | 995,051 | 383,730 | 381,395 | 381,395 | ||||||||||||
| States and political subdivisions -- special revenue | 275,333 | 273,336 | 273,336 | 275,262 | 277,735 | 277,735 | ||||||||||||
| Corporate | 19,745,201 | 18,809,391 | 18,809,391 | 24,974,546 | 23,855,590 | 23,855,590 | ||||||||||||
| Total fixed maturity securities | $ | 24,279,231 | $ | 23,271,277 | $ | 23,271,277 | $ | 29,024,083 | $ | 27,738,939 | $ | 27,738,939 | ||||||
| Equity securities, at cost | 140,250 | 140,250 | ||||||||||||||||
| Real estate, held for investment | 529,769 | 529,769 | 517,729 | 517,729 | ||||||||||||||
| Policy loans | 420,775 | 420,775 | 412,583 | 412,583 | ||||||||||||||
| Total Investments | $ | 25,370,025 | $ | 24,362,071 | $ | 29,954,395 | $ | 28,669,251 | ||||||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-2
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Registrant
Balance Sheets
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Assets: | ||||||||||||||||
| Investment in subsidiaries (1) | $ | 7,640,794 | $ | 5,988,239 | $ | 4,424,693 | $ | 7,640,794 | ||||||||
| Equity method investments | - | 978,744 | ||||||||||||||
| Equity securities, at cost | 140,250 | 124,250 | - | 140,250 | ||||||||||||
| Total investments | 7,781,044 | 7,091,233 | 4,424,693 | 7,781,044 | ||||||||||||
| Cash and cash equivalents | 212,422 | 1,132,057 | 112,563 | 212,422 | ||||||||||||
| Property and equipment, net | 85,339 | 85,654 | 78,790 | 85,339 | ||||||||||||
| Other assets | 381,149 | 243,066 | 153,502 | 381,149 | ||||||||||||
| Total assets | $ | 8,459,954 | $ | 8,552,010 | $ | 4,769,548 | $ | 8,459,954 | ||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | 1,555,980 | 515,275 | 500,626 | 1,555,980 | ||||||||||||
| Total liabilities | 1,555,980 | 515,275 | 500,626 | 1,555,980 | ||||||||||||
| Stockholders' Equity: | ||||||||||||||||
| Preferred stock, Series A | 74 | 74 | 74 | 74 | ||||||||||||
| Preferred stock, Series B | 103 | 103 | 103 | 103 | ||||||||||||
| Common stock | 18,006 | 13,168 | 22,559 | 18,006 | ||||||||||||
| Additional paid-in capital | 31,584,529 | 29,583,631 | 33,036,924 | 31,584,529 | ||||||||||||
| Accumulated deficit | (23,685,525 | ) | (21,167,496 | ) | (27,533,447 | ) | (23,685,525 | ) | ||||||||
| Accumulated other comprehensive loss | (1,013,213 | ) | (392,745 | ) | (1,257,291 | ) | (1,013,213 | ) | ||||||||
| Total Midwest Holding Inc.'s stockholders' equity | 6,903,974 | 8,036,735 | 4,268,922 | 6,903,974 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 8,459,954 | $ | 8,552,010 | $ | 4,769,548 | $ | 8,459,954 | ||||||||
| (1) | Eliminated in consolidation. |
See accompanying Report of Independent Registered Public Accounting Firm
FS-3
Schedule II (Continued)
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Registrant
Statements of Comprehensive Income
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Income: | ||||||||||||||||
| Investment (loss) income, net of expenses | $ | (363,263 | ) | $ | (443,847 | ) | ||||||||||
| Net realized gain on investments | - | 341,914 | ||||||||||||||
| Investment loss, net of expenses | $ | (5,635 | ) | $ | (5,826 | ) | ||||||||||
| Net realized loss on investments | (117,500 | ) | - | |||||||||||||
| Loss on equity method investment | (420,720 | ) | (357,437 | ) | ||||||||||||
| Miscellaneous income | 536,997 | 630,690 | 515,667 | 536,997 | ||||||||||||
| 173,734 | 528,757 | (28,188 | ) | 173,734 | ||||||||||||
| Expenses: | ||||||||||||||||
| General | 1,562,147 | 1,940,913 | 2,054,032 | 1,562,147 | ||||||||||||
| Loss before income tax expense | (1,388,413 | ) | (1,412,156 | ) | (2,082,220 | ) | (1,388,413 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Loss before equity in loss of consolidated subsidiaries | (1,388,413 | ) | (1,412,156 | ) | (2,082,220 | ) | (1,388,413 | ) | ||||||||
| Equity in loss of consolidated subsidiaries | (2,034,194 | ) | (2,032,830 | ) | (3,092,228 | ) | (2,034,194 | ) | ||||||||
| Bargain purchase gain for business acquisition | 904,578 | - | 1,326,526 | 904,578 | ||||||||||||
| Net loss attributable to Midwest Holding Inc. | $ | (2,518,029 | ) | $ | (3,444,986 | ) | ||||||||||
| Netloss | $ | (3,847,922 | ) | $ | (2,518,029 | ) | ||||||||||
| Comprehensive loss: | ||||||||||||||||
| Unrealized gains (losses) on investments arising during period | (620,468 | ) | 347,346 | |||||||||||||
| Less: reclassification adjustment for net realized gains on investments | - | - | ||||||||||||||
| Other comprehensive(loss) income | (620,468 | ) | 347,346 | |||||||||||||
| Comprehensive loss attributable to Midwest Holding Inc. | $ | (3,138,497 | ) | $ | (3,097,640 | ) | ||||||||||
| Unrealizedlosses on investments arising during period | (212,574 | ) | (737,832 | ) | ||||||||||||
| Less: reclassification adjustment for net realized(gains) losses on investments | (31,504 | ) | 117,364 | |||||||||||||
| Other comprehensiveloss | (244,078 | ) | (620,468 | ) | ||||||||||||
| Comprehensiveloss | $ | (4,092,000 | ) | $ | (3,138,497 | ) | ||||||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-4
Schedule II (Continued)
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Registrant
Statements of Cash Flows
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||
| Net loss | $ | (2,518,029 | ) | $ | (3,444,986 | ) | $ | (3,847,922 | ) | $ | (2,518,029 | ) | ||||
| Adjustments to reconcile net loss to net cash and cash equivalents used in | ||||||||||||||||
| operating activities: | ||||||||||||||||
| Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | ||||||||||||||||
| Equity in net loss of consolidated subsidiaries | 747,476 | (1,199,861 | ) | 2,972,023 | 747,476 | |||||||||||
| Depreciation | 43,825 | 43,825 | 31,931 | 43,825 | ||||||||||||
| Net realized gain on investments | - | (341,914 | ) | 117,500 | - | |||||||||||
| Bargain purchase gain for business acquired | (904,578 | ) | - | (1,326,526 | ) | (904,578 | ) | |||||||||
| Equity in net loss of unconsolidated subsidiaries | 357,437 | 438,175 | ||||||||||||||
| Non-cash compensation expense | - | 1,917 | ||||||||||||||
| Equity in the net loss of unconsolidated subsidiaries | 420,720 | 357,437 | ||||||||||||||
| Other assets and liabilities | 986,290 | (675,343 | ) | (861,791 | ) | 986,290 | ||||||||||
| Net cash (usedin) operating activities | (1,287,579 | ) | (5,178,187 | ) | ||||||||||||
| Net cashused in operating activities | (2,494,065 | ) | (1,287,579 | ) | ||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||
| Equity securities carried at cost: | ||||||||||||||||
| Purchases | - | (61,383 | ) | |||||||||||||
| Proceeds from equity securities carried at cost | 9,000 | 1,955,500 | 30,250 | 9,000 | ||||||||||||
| Acquisition of First Wyoming Capital Corporation | 165,759 | - | - | 165,759 | ||||||||||||
| Net change in notes receivable | - | 27,383 | ||||||||||||||
| Merger of Great Plains Investment in New Mexico Capital Corporation | - | (20,000 | ) | |||||||||||||
| Issurance of common stock acquisition of Northstar Financial | 2,427,394 | - | ||||||||||||||
| Purchases of property and equipment | (37,480 | ) | (60,895 | ) | (20,318 | ) | (37,480 | ) | ||||||||
| Netcash provided by investing activities | 137,279 | 1,840,605 | 2,437,326 | 137,279 | ||||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||||
| Issurance of common stock | 286,722 | - | - | 286,722 | ||||||||||||
| Repurchases of common stock | - | (58,252 | ) | |||||||||||||
| Proceeds from issuance of preferred stock | - | 616,012 | ||||||||||||||
| Preferred stock dividend | (56,057 | ) | - | (43,120 | ) | (56,057 | ) | |||||||||
| Net transfers from noncontrolling interest | - | 3,861,767 | ||||||||||||||
| Net cash provided by financing activities | 230,665 | 4,419,527 | (43,120 | ) | 230,665 | |||||||||||
| Net (decrease) increase in cash and cash equivalents | (919,635 | ) | 1,081,945 | |||||||||||||
| Netdecrease in cash and cash equivalents | (99,859 | ) | (919,635 | ) | ||||||||||||
| Cash and cash equivalents: | ||||||||||||||||
| Beginning | 1,132,057 | 50,112 | 212,422 | 1,132,057 | ||||||||||||
| Ending | $ | 212,422 | $ | 1,132,057 | $ | 112,563 | $ | 212,422 | ||||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-5
Schedule II (Continued)
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Registrant
Supplemental Cash Flow Information
| Year Ended December 31, | ||||||
| 2015 | 2014 | |||||
| Supplemental Disclosure of Non-Cash Information | ||||||
| Exchange of common stock for non-controlling interest | $ | - | $ | 3,861,767 | ||
| Common stock issued on the First Wyoming acquisition | 1,811,682 | - | ||||
| $ | 1,811,682 | $ | 3,861,767 | |||
| 2016 | 2015 | |||||
| Supplemental Disclosure of Non-Cash Information | ||||||
| Common stock issued on the First Wyoming acquisition and | ||||||
| measurement period adjustment | $ | (905,806 | ) | $ | 1,811,612 | |
| Common stock issued on Northstar Acquisition | 2,405,874 | - | ||||
| $ | 1,500,068 | $ | 1,811,612 | |||
See accompanying Report of Independent Registered Public Accounting Firm
FS-6
Midwest Holding Inc. and Subsidiaries
Supplementary Insurance Information
| As of December 31, 2015 | For the Year Ended December 31, 2015 | As of December 31, 2016 | For the Year Ended December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||
| Future Policy | Death and | Amortization | Future Policy | Death and | Amortization | ||||||||||||||||||||||||||||||||||||||||||||
| Benefits, | Other Benefits | of Deferred | Benefits, | Other Benefits | of Deferred | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred Policy | Claims and | Net | and Increase | Policy | Other | Deferred Policy | Claims and | Net | and Increase | Policy | Other | ||||||||||||||||||||||||||||||||||||||
| Acquisition | Deposit-type | Advance | Premium | Investment | in Benefit | Acquisition | Operating | Acquisition | Deposit-type | Advance | Premium | Investment | in Benefit | Acquisition | Operating | ||||||||||||||||||||||||||||||||||
| Costs | Contracts | Premiums | Revenue | Income (Loss) | Reserves | Costs | Expenses | Costs | Contracts | Premiums | Revenue | Income (Loss) | Reserves | Costs | Expenses | ||||||||||||||||||||||||||||||||||
| Life Insurance | $ | 2,765,063 | $ | 38,892,420 | $ | 113,757 | $ | 3,424,377 | $ | 306,531 | $ | 2,219,415 | $ | 469,674 | $ | 4,518,633 | $ | 2,568,799 | $ | 41,184,258 | $ | 52,074 | $ | 3,517,458 | $ | 878,991 | $ | 2,331,375 | $ | 367,235 | $ | 6,590,086 | |||||||||||||||||
| As of December 31, 2014 | For the Year Ended December 31, 2014 | As of December 31, 2015 | For the Year Ended December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||
| Future Policy | Death and | Amortization | Future Policy | Death and | Amortization | ||||||||||||||||||||||||||||||||||||||||||||
| Benefits, | Other Benefits | of Deferred | Benefits, | Other Benefits | of Deferred | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred Policy | Claims and | Net | and Increase | Policy | Other | Deferred Policy | Claims and | Net | and Increase | Policy | Other | ||||||||||||||||||||||||||||||||||||||
| Acquisition | Deposit-type | Advance | Premium | Investment | in Benefit | Acquisition | Operating | Acquisition | Deposit-type | Advance | Premium | Investment | in Benefit | Acquisition | Operating | ||||||||||||||||||||||||||||||||||
| Costs | Contracts | Premiums | Revenue | Income (Loss) | Reserves | Costs | Expenses | Costs | Contracts | Premiums | Revenue | Income (Loss) | Reserves | Costs | Expenses | ||||||||||||||||||||||||||||||||||
| Life Insurance | $ | 2,646,970 | $ | 34,376,204 | $ | 82,504 | $ | 4,007,810 | $ | (9,883 | ) | $ | 2,789,391 | $ | 625,680 | $ | 5,130,312 | $ | 2,765,063 | $ | 38,892,420 | $ | 57,699 | $ | 3,424,377 | $ | 663,968 | $ | 2,219,415 | $ | 469,674 | $ | 4,518,633 | ||||||||||||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-7
Midwest Holding Inc. and Subsidiaries
Reinsurance Information
| Percentage | Percentage | |||||||||||||||||||||||||||||
| Assumed | of Amount | Assumed | of Amount | |||||||||||||||||||||||||||
| Ceded to Other | from Other | Assumed to | Ceded to Other | from Other | Assumed to | |||||||||||||||||||||||||
| Gross Amount | Companies | Companies | Net Amount | Net | ||||||||||||||||||||||||||
| Year ended December 31, 2016 | ||||||||||||||||||||||||||||||
| Life insurance in force | $ | 229,981,000 | $ | 110,670,000 | $ | 3,879,000 | $ | 123,190,000 | 3.15 | % | ||||||||||||||||||||
| Life insurance premiums | $ | 3,253,742 | $ | 287,780 | $ | 24,064 | $ | 3,517,458 | 0.68 | % | ||||||||||||||||||||
| Gross Amount | Companies | Companies | Net Amount | Net | ||||||||||||||||||||||||||
| Year ended December 31, 2015 | ||||||||||||||||||||||||||||||
| Life insurance in force | 252,791,000 | 147,714,000 | 15,349,000 | 120,426,000 | 12.75 | % | $ | 252,791,000 | $ | 147,714,000 | $ | 15,349,000 | $ | 120,426,000 | 12.75 | % | ||||||||||||||
| Life insurance premiums | $ | 2,963,317 | $ | 498,787 | $ | 36,777 | $ | 3,425,327 | 1.07 | % | $ | 2,962,367 | $ | 498,787 | $ | 36,777 | $ | 3,424,377 | 1.07 | % | ||||||||||
| Year ended December 31, 2014 | ||||||||||||||||||||||||||||||
| Life insurance in force | 245,498,000 | 141,321,000 | 13,913,000 | 118,090,000 | 11.78 | % | ||||||||||||||||||||||||
| Life insurance premiums | $ | 4,312,808 | $ | 340,464 | $ | 35,466 | $ | 4,007,810 | 0.88 | % | ||||||||||||||||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-8
Midwest Holding Inc. and Subsidiaries
Valuation and Qualifying Accounts
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| 2015 | 2014 | 2016 | 2015 | ||||||||||||
| Accumulated Depreciation: | |||||||||||||||
| Beginning of the year | 713,167 | 545,646 | 864,526 | 713,167 | |||||||||||
| Depreciation expense | 157,387 | 174,658 | 103,623 | 157,387 | |||||||||||
| Disposals | (6,028 | ) | (7,137 | ) | (6,285 | ) | (6,028 | ) | |||||||
| End of the year | $ | 864,526 | $ | 713,167 | $ | 961,864 | $ | 864,526 | |||||||
See accompanying Report of Independent Registered Public Accounting Firm
FS-9
INDEX OF EXHIBITS
| EXHIBIT | |||
| NUMBER | DESCRIPTION | ||
| 2.1 | |||
| |||
| Plan and Agreement of | |||
| Plan and Agreement of Exchange - Midwest Holding Inc., Northstar Financial Corporation dated December 18, 2015. (Incorporated by reference to Appendix A to the Registration Statement on Form S-4, filed on January 8, | |||
| 2016.) | |||
| 3.1 | Amended and Restated Articles of Incorporation, dated March 29, 2010. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 3.2 | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 6, 2010. (Incorporated by reference to Exhibit 3.2 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 3.3 | Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.3 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 3.4 | Articles of Amendment to the Amended and Restated Articles of Incorporation of Midwest Holding Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed May 15, 2014.) | ||
| 3.5 | American Life & Security Corp. State of Nebraska Department of Insurance Amended Certificate of Authority, issued August 3, 2011. (Incorporated by reference to Exhibit 3.4 to the Company’s Amendment No. 2 to Form 10 Registration Statement, filed March 20, 2012.) | ||
| 10.1 | |||
| 10.2 | Administrative Services Agreement, dated August 17, 2009, by and between American Life & Security Corp. and Investors Heritage Life Insurance Company. (Incorporated by reference to Exhibit 10.5 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| Employment Agreement, dated July 1, 2011, by and between Midwest Holding Inc. and Mark Oliver. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | |||
| 10.4 | |||
|
Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.6 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| Amendment Number One to Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.7 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 10.6 | ||
| Amendment Number Two to Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| Bulk Reinsurance Agreement, dated September 1, 2009, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.9 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 10.8 | ||
| Amendment to all Reinsurance Agreements, dated August 4, 2011, by and between American Life & Security Corp. and Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.10 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | ||
| 10.9 | ||
Automatic Reinsurance Agreement, dated August 1, 2009, by and between American Life & Security Corp. and Investors Heritage Life Insurance Company. (Incorporated by reference to Exhibit 10.11 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) |
| EXHIBIT | |||
| NUMBER | DESCRIPTION | ||
| Reinsurance Agreement, dated January 1, 2010, by and between American Life & Security Corp. and Security National Life Insurance Company. (Incorporated by reference to Exhibit 10.12 to the Company’s Form 10 Registration Statement, filed December 12, 2011.) | |||
| Master Reinsurance Agreement, dated December 20, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.13 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | |||
| Amendment Number One to Master Reinsurance Agreement, dated December 20, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.14 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | ||
| Reinsurance Agreement Number One, dated December 31, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.15 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | |||
| Amendment Number One to Reinsurance Agreement Number One dated December 31, 1999, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.16 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | |||
| Master Reinsurance Agreement, dated April 1, 2000, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.17 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) | |||
| 10.16 | |||
Reinsurance Agreement Number One, dated April 1, 2000, by and between Old Reliance Insurance Company and American Founders Life Insurance Company. (Incorporated by reference to Exhibit 10.18 to the Company’s Amendment No. 1 to Form 10 Registration Statement, filed February 3, 2012.) |
| 14.1 | Code of Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K, filed April 2, 2012.) | |
| 21.1* | List of Subsidiaries. | |
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32* | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS ** | XBRL Instance Document. | |
| 101.SCH ** | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document. | |
* Filed herewith.