UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 000-10685001-39812
Midwest Holding Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-0362426 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
2900 S. 70th, Suite 400, Lincoln, NE | 68506 | |
(Address of principal executive offices) |
|
Registrant’s telephone number, including area code: (402) 489-8266817-5701
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading Symbol(s):Name of Each Exchange on Which Registered
Voting Common Stock, $0.001 par valueMDWTThe NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None.
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405c of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviewed financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the shares of the registrant’s common stock held by non-affiliates as of the last day of the registrant’s most recently completed second fiscal quarter was $86,371,384$111.0 million calculated by reference to the average of the bid and ask price of such voting common stock on June 30, 2020.2021.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒
As of March 12, 2021,24, 2022, there were 3,737,564 shares of voting common stock, par value $0.001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
MIDWEST HOLDING INC.
FORM 10-K
TABLE OF CONTENTS
| | | | |
Item No. |
| Item Caption |
| Page |
| | | | |
| | | | |
| ||||
| ||||
33 | ||||
| ||||
34 | ||||
34 | ||||
34 | ||||
| | | | |
| ||||
| ||||
35 | ||||
36 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |||
| ||||
| ||||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
| |||
| ||||
| ||||
| | | | |
| | | | |
|
|
|
|
|
| ||||
| ||||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| |||
Certain Relationships and Related Transactions, and Director Independence |
| |||
| ||||
| | | | |
| ||||
|
|
|
|
|
| ||||
| ||||
|
2
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Form 10-K constitute forward-looking statements. 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 good faith 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.
Factors that may cause our actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include among others, the following possibilities:
• our business plan, particularly including our reinsurance strategy, may not prove to be successful;
● | our business plan, particularly including our reinsurance strategy, may not prove to be successful; |
● | the success of our recent changes in executive leadership; |
● | our reliance on third-party insurance marketing organizations to market and sell our insurance products through a network of independent agents; |
● | adverse changes in the ratings obtained from independent rating agencies; |
● | failure to maintain adequate reinsurance; |
● | our inability to expand our insurance operations outside the 22 states and District of Columbia in which we are currently licensed; |
● | our insurance products may not achieve significant market acceptance; |
● | we may continue to experience operating losses in the foreseeable future; |
● | the possible loss or retirement of one or more of our key executive personnel; |
● | intense competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; |
● | adverse state and federal legislation or regulation, including limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; |
● | fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest-rate sensitive investments; |
● | failure to obtain new customers, retain existing customers, or reductions in policies in force by existing customers; |
● | higher service, administrative, or general expense due to the need for additional marketing, administrative or management information systems expenditures related to implementation of our business plan; |
● | changes in our liquidity due to changes in asset and liability matching; |
● | possible claims relating to sales practices for insurance products; |
● | accuracy of management’s assumptions and estimates; |
3
● | variability of statutory capital required to be held by insurance or reinsurance entities; and |
● | lawsuits in the ordinary course of business. |
See “Risk Factors” beginning on page 18 for further discussion of the material risks associated with our business.
3
You should not place undue reliance on any forward-looking statement.statements. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.
Unless the context otherwise requires, we use the terms “Midwest Holding,” the “Company,” “we,” “us” and “our” in this Form 10-K to refer to Midwest Holding Inc. together with its consolidated subsidiaries and any reference to “Midwest” relates to Midwest Holding Inc. (parent) only.
Summary of Risks Associated with our Business and Voting Common Stock
Our business is subject to risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this report. A summary of these risks include, but are not limited to, the following:
● | Our reliance on third-party insurance marketing organizations to market and sell our insurance products could face difficulties that could adversely affect our results of operations and financial condition. |
● | Our reinsurance program was designed to enable us to write larger amounts of business while limiting our risk exposure and maximizing the use of our available regulatory capital. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. We remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by that reinsurer. |
● | Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. The inability to obtain an upgrade to our financial strength rating from A.M. Best, or the possibility of a downgrade in our rating, may have a material adverse effect on our competitive position, the marketability of our product offerings. |
● | Our new insurance products and other products we may develop may not achieve market penetration. |
● | Fluctuations in interest rates causing a reduction of investment income or increase in interest expense and the market value of interest-rate sensitive investments could adversely affect our business. |
● | The insurance industry is highly regulated and our activities are restricted as a result. State insurance regulators are charged with protecting policyholders and have broad regulatory, supervisory and administrative powers over our business practices, including, among other things, the power to grant and revoke licenses to transact business, and the power to regulate and approve underwriting practices and rate changes, which may delay the implementation of premium rate changes or prevent us from making changes we believe are necessary to match rate to risk. |
● | The domiciliary regulator of American Life, the Nebraska Department of Insurance, imposes risk-based capital requirements on us to ensure that insurance companies maintain appropriate levels of surplus to support our overall business operations and to protect customers against adverse developments. If the amount of our capital falls below this minimum, we may face restrictions with respect to soliciting new business and/or keeping existing business. Similar regulations will apply in other states in which American Life currently or may operate. |
● | We are highly dependent upon Georgette Nicholas, our Chief Executive Officer, and Mike Minnich, our President, and the loss of either of these officers could materially and adversely affect our business. |
4
● | The annuity and life insurance industry is highly competitive. Many of the insurance companies authorized to do business in states where we conduct business are well-established companies with good reputations that offer broader lines of insurance products, have larger selling organizations, and possess significantly greater financial and human resources than we do. Our business will suffer if we are unable to compete effectively. |
● | The ongoing events resulting from the outbreak of the COVID-19 pandemic, and the uncertainty regarding future similar events, could have an adverse impact on our financial condition and results of operations. |
● | Our business plan, seeking to become a capital efficient, technology-enabled and service-oriented solutions provider to the annuity and life markets, may not be successful. |
● | We have experienced significant operating losses and may not be able to reverse them in the foreseeable future. |
● | The impact on customers and vendors of sustained or significant deterioration in national or worldwide economic conditions could adversely affect our business. |
● | We are exposed to significant financial and capital markets risk, including changes in interest rates, equity prices, market volatility, the performance of the economy in general, the performance of the specific obligors included in our investment portfolio and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. |
● | Our business success depends, in part, on safe and effective information technology systems and on continuing to develop and implement improvements in our technology. |
● | The market price and trading volume of our voting common stock has been volatile, which has resulted in and could continue to result in, rapid and substantial losses for our stockholders. |
● | Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our voting common stock. |
● | There may be future issuances or resales of our voting common stock, including by our management, which may materially and adversely affect the market price of our voting common stock. |
● | We do not expect to pay any cash dividends to stockholders. |
Our Company and Business Model
We are a growing financial services company focused on helping people plan and secure their future by providing technology-enabled and services-oriented solutions to support individuals’ retirement through our annuity products. We currently distribute our annuities through independent distributors who are primarily independent marketing organizations (“IMOs”). Our operations are comprised of four distinct, inter-connected businesses. We seek to reinsure our annuity policies using a reinsurance platform that is attractive to traditional reinsurance entities and other institutional investors seeking above average risk-adjusted returns uncorrelated to the equity markets. To date we have developed relationships with reinsurers ofwho capitalize and manage their own reinsurance capital vehicles utilizing our infrastructure and expertise. Our long-term goal is to build a platform that provides competitive annuity and life insurance products via efficient technology resulting in North America. We utilize our technology platform and insurance company capabilities supported by reinsurance to develop and distribute what we believe to be competitive insurance products through third-party independent marketing organizations (“IMOs”). We seek to provide cost-effective and efficient policy administration services and asset management services as a comprehensive solution for reinsurers.seamless customer experience.
We believe that our differentiated business model, operating capabilities and scalable technology platform provides annuity distributors and reinsurers with more flexible and lower-cost solutions than traditional insurance companies and associated service providers.cost-effective solutions. We seek to create value through our ability to provide the distributors and reinsurers with annuity and life product innovation, speed to market for new products, competitive rates and commissions, and streamlined customer and agent experience. We provide increased ease of use and serve customers and agents more efficiently and at lower costs than typical insurance companies.experiences. Our capital efficient model allows us to support increasing productannuity sales volumes of distributors with capital capacity provided by third-party reinsurers.
5
We provide an end-to-end solution to manage annuity and life insurance policiesproducts that includes a broad set of product development, distribution support, policy administration, and asset asset/liability management services. Our technology platform enables us to efficiently develop, sell and administer a wide range of annuity and life products and we believe that it provides cost-effective product development, sales and administration as we scale our business through increased product sales. We also provideproducts. Our asset management services are also provided to third-party insurers and reinsurers.
We currently emphasize the offering ofoffer annuity products, includingconsisting of multi-year guaranteed annuity (“MYGA”) and fixed indexed annuity (“FIA”) policies, through IMOs that offer annuityin turn distribute our products and life products, infrastructure and other services to independent insurance agents in 2122 states and the District of Columbia. We further provide IMOs with our product development expertise, administrative capabilities and technology platform.
We seek to reinsure substantially all of our insuranceannuity policies with third-party reinsurers and our captive reinsurance subsidiary, Seneca Reinsurance Company, LLC (“Seneca Re”). Our third-party reinsurers include traditional reinsurers and capital markets reinsurers, which are third-party investors seeking Our third-party reinsurers include traditional reinsurers and capital markets reinsurers, who are seeking exposure to lifereinsurance revenue and annuity reinsurance earnings who typically do not have their own reinsurance platforms or operations of their own.insurance related operations.
We were formed in 2003 as a financial services company and began our insurance operations in 2009. In 2018, we underwentFollowing a change in control transaction with entities controlled by our Co-Chief Executive Officers, Michael Minnich and A. Michael Salem. Following this transaction,in 2018, we began implementing our current business model and strategic plan and business model.plan. In December 2020, our voting common stock was listed on The Nasdaq Capital Market under the ticker symbol MDWT.
We operate our core business through three subsidiaries.four subsidiaries under one reportable segment. American Life & Security Corp. (“American Life”) is a Nebraska-domiciled life insurance company, whichthat is also commercially domiciled in Texas and is currently licensed to sell, underwrite, and market life insurance and annuity products in 2122 states and the District of Columbia. During 2020, American Life was granted licenses in six states and the District of Columbia, including Ohio, Louisiana and Kansas and it has licensing applications pending in Oregon and Puerto Rico. American Life obtained a financial strength rating of B++ (“Good”) from A.M. Best Company (“A.M. Best”), a leading rating agency for insurance companies, in December 2018 that was affirmed in December 2020.2020 and February 2022. A.M. Best also upgraded American Life’s long-term issuer credit rating to bbb+ from bbb in December 2020.2020 and affirmed in February 2022. All of our annuities are written by American Life.
Our other insurance subsidiary, Seneca Re, is a Vermont-domiciled sponsored captive reinsurance company that we established on March 12,in early 2020 for the purpose of reinsuringto reinsure various types of risks on behalf of American Life and third-party capital providers (including capital markets reinsurers) through special purpose reinsurance entities.entities known as “protected cells.” Through Seneca Re, we assist capital market investors in establishing and licensing new protected cells. 1505 Capital LLC, (“1505 Capital”), a Delaware limited liability company of which we acquired majority ownership in 2019 and 100% ownership on June 15, 2020,(“1505 Capital”), is an SEC registered investment adviser that provides financial, and investment advisory, and management services.
4
We seek to deliver long-term stockholder value by growing our premiumannuity volumes and generating profitable fee-based revenue with attractive profit margins. We have grown substantially since we implemented our business model and began selling our first annuity policies in 2019.revenue. We generate fees and other revenue based on the gross written premium ofdeposits received on the annuity policies we issue, reinsure, and administer. For
By reinsuring a significant portion of the year endedannuity policies we issue, the level of capital needed for American Life is significantly less than retaining all of the business on its books. We believe this “capital light” approach has the potential to produce enhanced returns for our business compared to a traditional insurance company capital structure. This strategy helps alleviate our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us. We also have the flexibility to selectively retain assets and liabilities associated with our policies for a period of time when we expect that doing so will provide an attractive return on our capital.
As of December 31, 2020, we generated $415.6 million2021, approximately 50% of direct written premium on a statutory accounting practices (“SAP”) basis and as prescribedthe deposits received, in the current year, relating to our annuity products were ceded to reinsurance vehicles capitalized by third party reinsurers or permitted by the Nebraska Department of Insurance (the “NDOI”) a 158% increase over the $161.4 million of direct written premium on a SAP basis that we generatedheld in protected cells within Seneca Re for the year ended December 31, 2019.future reinsurance transactions.
For the years ended December 31, 2021 and 2020, we generated $10.6$30.1 million and $3.4$10.6 million of revenue while incurring net losses of $12.4 millionfrom investment income, realized gains on investments, ceding commissions earned, policy administration, and $5.7 million, respectively.
Our Business Modelasset management fees.
In 2018, we launched our business plan to become a capital efficient, technology-enabled, and service-oriented solutions provider to the annuity and life markets. We provide insurance distributors and reinsurers with an end-to-end solution to develop, issue and administer annuity products.
We utilize our insurance and ancillary services businesses to develop and issue annuities through IMOs. We generally seek to reinsure substantially all of the financial risk associated with our policies to third-party reinsurers, including traditional and capital markets
6
reinsurers, and Seneca Re. We also have the flexibility to selectively retain assets and liabilities associated with our policies for a period of time when we expect that doing so will provide an attractive return on our capital.
Through our ancillary services businesses we administer the policies we issue and offer asset management services to our reinsurance partners for a fee. Through Seneca Re, we also assist capital market investors in establishing and licensing new special purpose reinsurance entities. We believe our broad service offering provides a growing and valuable fee stream, and expect that our policy administration and asset management fee income will increase as we grow our number of administered policies and the associated assets that we manage. In the future, we expect to have opportunities to increase our policy administration and asset management revenue by providing these services on a stand-alone basis to new customers.
We seek to create value for our distribution and reinsurance partners by facilitating product innovation, rapid speed to market for new products, competitively-priced products, streamlined customer and agent experience, and efficient technology-enabled operations. We generate fee income from reinsurers in the form of ceding commissions, policy administration fees, and asset management fees. We typically receive upfront ceding commissions and expense reimbursements at the time the policies are reinsured and policy administration fees over the policy lifetimes. We also earn asset management fees on the assets we hold that support the obligations of many of our reinsurers.
Our reinsurance strategy helps alleviate our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us. In investing on behalf of our insurance and reinsurance company subsidiaries, we seek to maximize yield by constructing portfolios that include a diversified portfolio of bonds, mortgages, private credit and structured securities, including collateralized loan obligations while minimizing the difference in duration between our investment assets and our liabilities and diversifying our investments primarily across a broad range of fixed income instruments.liabilities.
Our Products
Through American Life we presently issue several MYGA and FIA products. American Life presently offers five annuity products, two MYGAs, a FIA, and two bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products. Fixed annuities are a type of insurance contract in which the policyholder makes one or more premium deposits, earning interest at a crediting rate determined in relation to a specific market index, on a tax deferred basis. MYGAs are insurance contracts under which the policyholder makes deposits and earns a crediting rate guaranteed for a specified number of years before it may be changed. American Life’s MYGA products are three and five-year single premium deferred individual annuity contracts, providing consumers with an attractive, low risk, predictable and tax-deferred investment option. American Life’s FIA products are long-term (10-year)(7 and 10-year) annuity products with interest rates that are tied, in part, to published stock market indices chosen by customers. The FIA products are modified single premium annuity contracts designed for individuals seeking to benefit from potential market gains in a full principalwith fully protected format.principal. American Life began selling its first MYGA and FIA products in 2019.
We introduced two new indexes into the selections on FIA products. The S&P 500 ESG index for fixed annuities, comprised of a subset S&P 500 companies built to meet the increasing needs of investors seeking socially responsible investments aligned with a mainstream index which is published by one of the foremost index authorities in the world, S&P Dow Jones Indices (S&P DJI).
The Goldman Sachs Xenith Index is a multi-asset strategy that uses the anticipated macro regime, as identified by a leading economic indicator, to make asset allocations. By using a leading economic indicator, the Goldman Sachs Xenith Index differs from indices that rely on a backward-looking methodology alone. Instead of relying purely on the S&P 500 Index for exposure to U.S. equities, the index employs an intraday overlay that can reduce equity exposure based on intra-day trading "signals". As a result, the strategy incorporates real-time market movements, in addition to other factors, in its rules-based methodology.
We expect to expand American Life’s product line and to introduce other insurance products into the market in the future.future and we recently introduced two index FIAs, the “S&P 500 ESG Index” and the “Goldman Sachs Xenith Index.” Depending on market demand, we expect to consider having American Life write a wide variety of insurance products, including fixed deferred, fixed indexed and other annuities, in addition to life and Medicare supplemental insurance products.annuities. Any new insurance products we create must be filed with and approved by appropriate state insurance regulatory authorities before being sold.offered to the public. American Life’s MYGA and FIA products were developed using the services of an independent consulting actuary, and we expect that any new
5
products will utilize similar services. In the near future we expect to expand our MYGA and FIA products through term durations. Our long-term plan is to broaden our products to life and Medicare supplements asunder attractive market conditions align for us to enter into these products.conditions.
7
The table below outlinessets forth American Life’s MYGA and FIA premiums earned by quarterdeposits received during 2020the years ended December 31, 2021 and 2019 on statutory accounting principles basis:2020:
| | | | | | | | | | | | | | | | |
| Year ended December 31, | Year ended December 31, | ||||||||||||||
| 2020 | | 2019 | 2021 | 2020 | |||||||||||
| | MYGA | | | FIA | | | MYGA | | | FIA | |||||
| Premium(1) | | Premium(1)(2) | | Premium(1) | | Premium(1)(2) | |||||||||
First quarter | $ | 31,565,506 | | $ | 16,249,504 | | $ | 8,292,617 | | $ | — | |||||
Second quarter | | 27,400,367 | | | 72,270,636 | | | 29,946,263 | | | — | |||||
Third quarter | | 27,537,077 | | | 104,514,068 | | | 41,261,292 | | | — | |||||
Fourth quarter | | 28,158,140 | | | 107,866,003 | | | 66,247,565 | | | 15,616,831 | |||||
(In thousands) | Deposits Received(1) | | Deposits Received(1) | |||||||||||||
Annuity Premium | | | | | | |||||||||||
MYGA | $ | 126,588 | | $ | 114,661 | |||||||||||
FIA | | 345,058 | | | 300,900 | |||||||||||
Total issued | $ | 114,661,090 | | $ | 300,900,211 | | $ | 145,747,737 | | $ | 15,616,831 | $ | 471,646 | | $ | 415,561 |
Under |
Our Ancillary Services
Policy Administration
We provide a cloud-based policy administration solution we call m.pas,called “m.pas,” which currently operates as a division of American Life, but later may be established as a separate entity within the Company.Life. We built m.pas to provide a scalable policy administration solution for annuity and life products. Its policy administration platform is a flexible solution designed to aggregate and manage structured and unstructured data, providingand provide operational efficiencies that lead to lower policy administration costs relative to traditional life and annuityinsurance carriers. OurThis technology-enabled solution also provides acceleratedrelatively shortened new product launch capabilities and our platform facilitates integration of asset/liability management into traditional asset portfolio risk systems of our reinsurers.systems. We are under contract with most of our annuity reinsurers to administer all policies ceded under our various reinsurance agreements. We believe this solution creates an opportunity to expand these services into a broader business as a third-party administrator (“TPA”) for other insurers as we expand our capabilities. We have had conversations with several companies about potentially providing TPA services but at this time our main focus is to improve and enhance internal technology.insurers.
Asset Management
1505 Capital is an SEC-registered investment advisor offering comprehensiveprovides asset-liability management services to American Life, third-party reinsurers and third-party insurance clients. 1505 Capital provides its expertise, infrastructure and scaleinfrastructure to develop and implement customized solutions for clients seeking to optimize risk-adjusted portfolio yields, liquidity, maturity profile, risk and capital monitoring, and asset-liability management. 1505 Capital also focuses on originating and managing commercial mortgages, private credit, and structured products. We generally require reinsurers to secure their obligations to American Life in the form of assets deposited on American Life’s balance sheet (known as “funds withheld” or through modified coinsurance) or via assets held in trust.trust to provide security for potential claims. Reinsurers may appoint 1505 Capital to manage these assets pursuant to guidelines adopted by us that are consistent with state investment statutes and reinsurance regulations. At December 31, 2021, 1505 Capital had approximately $405 million total third-party reinsurer assets under management.
6
Our Partners
Distributors
We currently have selling agreements with eight IMOs that contract with numerous independent agents to sell our annuity policies. The IMOs recruit, train and support independent agents thatwho sell annuities, life insurance and other financial products to consumersconsumers. Although we contract with the IMOs, as mentioned above, we holdalso have contracts with the agents.each agent. We require independent agents thatwho distribute our policies to complete our product and compliance training in anti-money laundering, annuity products and annuity suitability, and the annuity products we offer. As of December 31, 2020,2021, we had approximately 1,2001,686 active agents under contract.
We support our distribution partners by enabling them to introduce additional products, meet the needs of independent agents and consumers, implement flexible policy designs and bring new products to market quickly. Our technology capabilities allow for flexible product design with speed to market to meet the needs of independent agents and consumers. We may develop products exclusively with certain IMOs to provide specific products that have a perceived competitive advantage. We believe that if we are able to achieve
8
an upgrade of American Life’s A.M. Best rating to A-, it would increase the demand for our products distributed by our existing IMOs,annuities, and would attract additional distribution and reinsurance partners. We believe such an upgrade would provide us access to new institutional distribution channels,partners, including small to mid-sized banks and broker-dealers. In late 2020, we were notified that A.M. Best was putting American Life on an upgraded watch list.
Reinsurance.
ReinsuranceAs indicated above, reinsurance is an integral part of our business plan. We market, underwrite and issue annuity products through American Life and seek to reinsure substantially all of thosethe policies with third-party reinsurers and Seneca Re. We partner with traditional third-party reinsurers and reinsurers sponsored by capital markets investors, including asset managers and institutional investors. We believe this strategy helps us preserve our capital while supporting sales growth because we have lower capital requirements when the policy liabilities are reinsured than when we retain all of the policy liabilities.
In some cases, we will retain our policies for a period of time in our captive reinsurance company in order to create block reinsurance transactions. We expect that our ability to accumulate and reinsure larger portfolios of policies over time willshould increase the size and number of reinsurers who seek to reinsure our liabilities. Under these reinsurance agreements, there is a monthly or quarterly settlement of premiums, claims, surrenders, collateral and other administration fees.
Seneca Re was formed to operate as a sponsored captive insurance company for the purpose of reinsuring insurance policies through one or more single purpose entities, or “protectedprotected cells,” under Vermont insurance regulations. Seneca Re provides an efficient structure for capital markets investors to reinsure our policies through protected cells that it manages.we manage. As of December 31, 2021, through Seneca Re and American Life we had five reinsurance agreements with third parties and a reinsurance agreement with an affiliate of Crestline Assurance Holdings LLC, discussed below.
Our Technology
Our business model utilizes a modern, end-to-end, cloud-based technology platform that we began implementing in 2018. This platform enables us to develop, sell and administer a broad range of competitive annuity and other life products. We license key components of our technology from third-party software providers, including product development, new business, distribution management and policy administration applications. We believe this strategy allows us to provide market leadinghigh quality technology capabilities with limited capital investment and increased flexibility. In addition, we have added several core technology integrations to optimize the speed and efficiency of our interactions with IMOs, their agents and policyholders, including document management, electronic application capability, secure log-ins, and an agent and policyholder portal. We believe our technology platform provides cost effective product development, sales and administration that enables us to control the growth of our operating and other expenses while expanding our operations and growing our sales volume. We expect to leverage our internal capabilities to continue to optimize our technology platform, including additional proprietary applications.
7
Our Market Opportunity
We participate in a large U.S. market that we expect to grow in part due to a number of demographic trends. As measured by annual premiums written, annuities are the largest product line in the life, annuity, and accident and health sector. Annuities play an important role in retirement planning by providing individuals with stable, tax-efficient sources of income. AnnualIn 2020 annuity considerations, also referred to as premiums, accounted for $296$295 billion of annual premiums, or approximately 32%31% of the $934$963 billion of total annual life, annuity, and accident and health premiums in 2019 according to S&P Global Market Intelligence.Insurance Information Institute. The most common annuities are fixed and variable and can be written on an individual or group basis. Our current products are fixed annuitiesFIA’s written on an individual basis. We estimate that the yearly total addressable U.S. market for fixed annuity products purchased by individuals is approximately $140 billion of annual premium. We estimate our current share of the individual fixed annuity market to be less than 0.5%.
An increasing portion of the U.S. population is of retirement age and is expected to increase the retirement income needs of retirees. The number of people of retirement age has increased significantly since 2010, driven by the aging of the “Baby Boomer” generation. The U.S. population over 65 years old is forecast to grow from 5556 million in 2020 to an estimated 7981 million in the next 20 years, according to the United Nations WorldU.S. Census Bureau, Population Prospects – 2019.Estimates and Projections. This study also forecasted that by 2040, the portion of the U.S. population aged over 65 years old is expected to represent over 21% ofgrow by 44% from 2020 to 2040, while the total U.S. population comparedis expected to under 17% in 2020.grow by only 12%.
9
Annuities in the U.S. are distributed through a number of channels, most of which are independent from the insurance companies that issue annuities. Independent distribution channels serve as the primary and a growing source of annuity distribution. In 2019,2020, approximately 76%77% of U.S. individual annuity sales occurred through independent distributors, including independent agents, broker-dealers, and banks, representing an increase from approximately 70% in 20152016 according to U.S. Individual Annuities, 20192020 Year in Review, Life Insurance Marketing and Research Association (“LIMRA”), 2020.2021. Independent agents are the second largest distribution channel, behind independent broker-dealers, accounting for approximately 20%19% of U.S. individual annuity sales in 2019.2020. IMOs provide independent agents with access to annuity products along with operational support services and functionality to support theirthe distribution activities.services of the agents. The infrastructure and support services provided by IMOs to independent agents are critical to the success of independent agents and their ability to serve their customers and generate additional sales. Independent broker-dealers, full-service national broker-dealers and banks collectively accounted for 76% of U.S. individual annuity sales in 2019 also according to the LIMRA review mentioned above.
We believe that capital markets investors have been actively seeking annuity and life insurance risk in recent years by investing in and acquiring insurance and reinsurance companies.companies in recent years. Fixed annuities provide upfront premiums and stable, long-term payment obligations and are thus attractive sources of liability-funded assets for a variety of traditional and alternative asset managers and investors. ThereHowever, there are significant regulatory and operational hurdles for capital providers looking to enter the annuityinsurance market. These hurdles are exacerbated by the limited legacy administrative capabilities, product development processes and technology systems, of traditional insurers and reinsurers. We provide asset managers and investors the ability to seamlessly access funding from annuity businessannuities through a variety of reinsurance entities that we can form quickly and operate efficiently with lower upfront and ongoing regulatory and operating costs.
We operate in highly competitive markets with a variety of participants, including insurance companies, financial institutions, asset managers, and reinsurance companies. These companies compete in various forms in the annuity market, for investment assets and for services. We seek to build strong relationships along with offering technology-enabled and services-oriented solutions for our partners.
Our Competitive Strengths
Differentiated Value Proposition
We provide insuranceannuity product development and asset management services, enhanced by American Life’s A.M. Best financial strength rating and licenses to sell annuity products in 2122 states and the District of Columbia. We believe that our focus on the needs of our product distributors, reinsurers and capital markets investors and the value-added services we offer them will enable us to develop deep and long-standing industry relationships. We have developed and implemented a technology platform and administrative services that we believe willprovides us with the opportunity to expand our revenue opportunities, maintain lowlower our operating costs on a per policy basis and increase customer value for our distribution partners, and allow us to provide high quality, efficient services to our various industry partners. We believe our business model and multi-service capabilities provide our reinsurance and capital provider participants with attractive capital deployment opportunities with us.opportunities.
We also believe our ongoing strategy to have American Life become licensed to sell insurance in additional states and seek a higher A.M. Best rating will further strengthen our value.
8
Multiple Revenue Sources
Our business model generates upfront ceding commissions and fee-based revenue from recurring policy administration and asset management fees. We receive ceding commissions and expense reimbursement from reinsurers at the time we cede our primary insurance liabilities to them, providing meaningful cash flow. During the yearyears ended December 31, 2021 and 2020, we generated $11.2 and $10.6 million, respectively, in upfront ceding commissions, recorded oncommissions. On our financial statements as deferredbalance sheet is an item “deferred gains on reinsurance” equaling $28.5 million and $18.2 million as of December 31, 2021 and 2020, respectively which will be earned as revenue over the contract periods. Amortization of the deferred gain on reinsurance most of which have not yet beenwas $3.0 million and $1.8 million for the years ended December 31, 2021, and 2020, respectively, and was recognized as revenue under GAAP. We also receive policy administration fees on policiesannuities that we issue and manage, and we receive asset management fees from most of our third-party reinsurers relating to assets they deposit as collateral to cover claims on the policies they reinsure. These fees are typically received over the life of our annuity products, usually over five to ten years, thereby providing a stable revenue stream.
Efficient and Flexible Capital Structure
We have a capital efficientOur business model that utilizes our insurance and reinsurance affiliatesindustry participants to transfer assets and liabilities associated with our issued productsannuities to third-party capital providers and our captive reinsurerSeneca Re via reinsurance agreements. This strategy reduces our regulatory capital and surplus requirements because policies that are reinsured require less capital and surplus reserves than policies retained by us, allowing us to scalegrow our business because we do not havewithout significant capital constraints.
10
Effective Use of Technology
We believe we are well-positioned to capitalize on the accelerating trend of digital transformation across the insurance industry. We believe our modern, fully functional technology platform provides us a significant opportunity to penetrate large addressable markets now being served by traditional insurance providers whosewith our compressed product development cycles and product development costs are greater than ours. We use our technology to efficiently develop, underwrite, distribute and administer competitive annuity products through IMOs as well as create an interactive and seamless customer and selling agent experience.cycles.
Scalable, Low-Cost Operations
We focus on maintaining low operating expenses and investing in technology enhanced processes that improve the efficiency and effectiveness of developing, distributing, issuing and managing our insuranceannuity products. We believe our low operating expenses allowmodel allows us to develop attractively priced products that are desirable for our IMOs to market. We currently operate on a small scale in a large addressable market and have a predominantly fixed cost base and a relatively low employee headcount.market. Going forward, our technology platform and streamlined processes should enable us to be highly scalable and allow us to produce incremental premium volumes without significant additional investment in infrastructure and with low incremental fixed operating including labor, costs.
Low-Risk, ProfitableLower-Risk, Business Model
We believe our business model enables us to operate with reduced risk while increasing our potential profitability because substantially all of the liabilities associated with policies we write are reinsured. Asreinsure a result, we retain minimal financial risk other than the credit risksubstantial portion of our reinsurance providers, for whombusiness. While we holdwould have to pay policy claims in the event of non-payment of them by any of our reinsurers, we often obtain collateral from reinsurers to provide for policy claims or use reinsurers who have creditworthy ratings.Further, we have designed American Life’s MYGA and FIA products to have fixed, predictable costs with low volatility and surrender charges that discourage redemptions prior to maturity and contain features to reward persistency.
We generate revenue through the ceding commissions and other fee income we receive from our reinsurance providers and the ancillary services we provide. Also, we incur minimal direct expenses associated with the ceding commissions we generate, and we incur low incremental expenses on additional policy volumes we produce. As a result, we believe we will be able to convert a significant portion ofachieve profitable incremental fee-based revenue from additional premium volume into operating revenue.volume. Because we have a fully integrated technology platform, we also expect that we will be able to increase our operating margins as we continue to scale our business.
Entrepreneurial, Highly Experienced and Aligned Management Team
Our highly experienced, entrepreneurial senior management team has extensive experience in insurance, technology, and investment management. Georgette Nicholas, our Chief Executive Officer has more than 30 years’ experience in the global financial services industry including insurance reinsurance and capital markets. She has a commitment to developing strong culture and leadership in organizations, supporting diversity and inclusion to grow engagement. Ms. Nicholas previously held the position of CEO and Managing Director for Genworth Mortgage Insurance Australia, a publicly listed Australian Securities Exchange Ltd company in Sydney, Australia. She also held various roles with Genworth Financial, Inc. in investor relations, chief financial officer roles in the mortgage insurance business and controllership. Ms. Nicholas also worked in public accounting, including as a firm director with Deloitte.
Michael Minnich, our Co-Chief Executive Officer,President, has over 25 years of experience in asset management, insurance company management, technology and risk management. Prior to joining Midwest, Mr. Minnich served as Managingmanaging member of Rendezvous
10
Capital LLC, a New York firm advising insurers on capital and investments. Previously, he was a Managing Director at Swiss Re, where he managed a multibillion-dollar investment portfolio. A. Michael Salem, our other Co-Chief Executive Officer, has over 16 years of experience in insurance investing, distribution and technology. Prior to joining Midwest, Mr. Salem co-founded Vanbridge LLC, a specialty insurance intermediary that was acquired in 2018 by EPIC Insurance Brokers and Consultants. Prior to Vanbridge, he was a founding portfolio manager at Arrowgrass Capital Partners, a multibillion-dollar hedge fund.
Our Growth Strategy
Expand Market Presence
We believe that our current product offerings willshould enable us to continueachieve policy sales growth as we increase the number of states in which we become licensed to sell insurance. Many of our IMOs distribute to insurance agents throughout the United States, and we expect they will increase their sales volume as American Life enters new states. Because of our technology platform and capabilities, we also expect to gain market share through flexible product offerings. We also expect to increase the total addressable market by joining with our IMOs to develop innovative products for customers who previously elected not to purchase annuities.
The 2122 states and District of Columbia in which we currently operate represented over $103$113 billion in total annuity premiums during 2019.2021. By comparison, we generated $415.6$417.6 million of total annuity premiums under SAP for the year ended December 31, 2020. The states in which we are not currently active represented over $193 billion in total annuity premiums during 2019, or 65%2021.
11
Develop Additional Distribution and Reinsurance Relationships
We currently distribute annuity products through eight third-party IMOs that offer products, infrastructure and other services to independent insurance agents across the U.S.IMOs. We believe our capital efficient product development, prompt policy processing, operating flexibility and speed to market make us a desirable partner for insurance distributors. We expect to continuewill seek to grow by increasing volumes with our current IMOs and by establishing new IMO relationships.
We expectare seeking to leverage the relationships we have with reinsurers, capital markets investors and reinsurance intermediaries to develop newadditional reinsurance relationships. In 2020,addition, as indicated above we established Seneca Re in early 2020 to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of insurance risks on behalf of Midwestfor American Life and various and third-party capital providers through one or more protected cells. Also, in early 2020, we developed a strategic relationship with Crestline Assurance Holdings LLC and its affiliates (collectively, “Crestline”)discussed below to provide reinsurance capital and access to high-qualityquality assets with attractive risk-adjusted returns. In April 2020, Seneca Re entered into its first flow quota share reinsurance agreement with American Life.
Exploit Established Corporate Platform
We believe that we have the leadership and corporate culture, industry relationships, infrastructure and technology to achieve continued growth and improve operating margins with increased annuity sales. We believe we have an efficient corporate platform to support a significant increase in ourincreased sales volume,volumes, an expansion of our distribution relationships and the development of new annuity and other life insurance products without significant additional investment in infrastructure and with low incremental fixed operating costs. As a result, we believe we should be able to convert a significant portion of incremental fee income from additional sales volumes into operating income.
As we grow, we expect that we will benefit from increased scale and diversification of our business in seeking to optimize the terms of our reinsurance transactions.
Increase Revenue from ComplementaryPolicy Administration and Asset Management Services
In addition to the ceding commissions we receive through our reinsurance strategy, we generate recurring fee income for providing policy administration and asset management services to third-party reinsurers. We are contracted to administer all of our policies ceded under various reinsurance agreements. We also provide asset management services for most of our third-party reinsurers. In 2019, we
11
acquired a majority ownership of 1505 Capital to enhance our asset management capabilities, and we purchased all of the remaining ownership of 1505 Capital effective June 15, 2020. We may develop or acquire additional asset management expertise and capabilities to provide expanded asset origination and sourcing to our reinsurance partners. We believe ourthese complementary services provide a differentiated comprehensive solution to third-party reinsurers that will allowshould assist us to develop newin developing additional reinsurer relationships, including capital markets investors.relationships.
Continue to Invest in Technology Capabilities
Our business strategy is centered upon our commitment to apply technology to improve and expand our business. We have developed a modern technology platform with a combination of proprietary and third-party systems that enables us to efficiently develop, sell and administer a broad range of annuity and life insurance products. We expect to continue to develop our technology platform to expand the technology-enabled capabilities we offer to distributors and reinsurers.
History
We are a financial services holding company that was originally incorporated in Nebraska in October 2003. In September 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. In June 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement (the “Xenith Agreement”) with a then non-affiliated third-party, Xenith Holdings LLC (“Xenith”). Xenith was a wholly controlled subsidiary of Vespoint LLC (“Vespoint”), which was also the manager of Xenith. Vespoint is owned and managed by investment funds controlled by Michael Minnich and A. Michael Salem. Pursuant to the Xenith Agreement, we issued Series C Preferred Stock and convertible senior secured notes to Xenith between June and December 2018. Of the funds received from Xenith, we contributed $20.5 million to American Life through capital contributions. Following the closing of the Xenith Agreement, we embarked on implementing our current business plan. At the closing of the Xenith Agreement, Messrs. Minnich and Salem were appointed as executive officers of American Life and later as the Company’s Executive Chairman and Chief Executive Officer, respectively, in 2019. They were appointed as our Co-Chief Executive Officers on November 16, 2020.
In June 2019, the Xenith Series C Preferred Stock and convertible senior secured notes were converted into 145,709 shares and 1,855,361 shares of our voting common stock, respectively. In August 2020, Xenith distributed all of its shares of our voting common stock to its members, including Vespoint. On November 10, 2020, Vespoint distributed all of its shares of our voting common stock to its members, which included entities owned and controlled by Messrs. Minnich and Salem.members.
In August 2020, we effected a 500 for one reverse stock split of our issued and outstanding shares of voting common stock, and we reincorporated in Delaware.
12
On December 17, 2020, our voting common stock was listed on The Nasdaq Capital Market under the symbol “MDWT.” On December 21, 2020, Midwestwe completed a public offering of 1,000,000 shares of itsour voting common stock offered by the Company at a price to the public of $70.00 per share. On December 17, 2020, Midwest voting common stock was listed on the Nasdaq Capital Market under the ticker symbol “MDWT.” The aggregate net proceeds toof the Companyoffering were approximately $65.1 million, after deducting underwriting discounts and commissions.
On November 10, 2021, Midwest purchased 1,000 shares of Common Stock, $.01 par value per share for a total purchase price of $5.7 million for 100% ownership in an intermediary holding company Midwest Capital Corporation. Also, on November 10, 2021, Seneca Re Protected Cell 2021-03 (“SRC3”) was granted a Certificate of Authority by the Vermont Department of Financial Regulation. The intermediary holding company contributed capital of $5.5 million to purchase 100% of SRC3 Class A and B capital stock. Also, on November 10, 2021, American Life and SRC3 entered into a Funds Withheld and Modified Coinsurance Agreement, whereby, SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA and quota share percentage of 45% of American Life’s FIA products.
As discussed above, Midwest owned 100% in SRC1 by contributing a total of $21.4 million. On December 30, 2021, Midwest closed the sale of approximately 70% of Seneca Incorporate Cell, LLC 2020-01 (“SRC1”) to a subsidiary of ORIX Corporation USA “ORIX USA”) for $15.0 million. Under the terms of the agreement, Midwest holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, will be the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital LLC.
Crestline Relationship
On April 24, 2020, we entered into a Securities Purchase Agreement with Crestline Assurance Holdings LLC (“Crestline”) an institutional alternative investment management firm. Pursuant to the Securities Purchase Agreement,firm under which we issued 444,444 shares of our voting common stock to Crestline for aggregate proceeds of $10.0 million. Also, on April 24, 2020, we issued 231,655 shares of our voting common stock to various other investors in separate transactions for approximately $5.3 million. We contributed $5.0 million of the net proceeds to American Life and used $3.3 million of the proceeds to capitalize Seneca Re and its first protected cell. We also entered into a Stockholders Agreement along with Xenith and Vespoint that grants Crestline certain rights. Also, Douglas K. Bratton, a principal of Crestline, was appointed as a director of both our board of directors and the American Life board of directors of American Life.directors.
In addition, on April 24, 2020, American Life entered into a three-year master letter agreement and related reinsurance, trust and asset management agreement with Seneca Re and a Crestline affiliate regarding athe flow of annuity reinsurance and related asset management, whereby Crestline agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its MYGA and quota share percentage of 40% of American Life’s FIA products. The Crestline affiliate contributed $40.0 million of assets to
12
capitalize SRC2 now known as Crestline Re SP1 (“Crestline SP1”). Through December 31, 2020,2021, American Life had ceded $130.5$227.2 million face amount of annuities to Crestline SP1. American Life received total ceding commissions under SAP of $6,242,612$12.9 million and expense reimbursements under SAP of $11,798,718$24.1 million in connection with these reinsurance transactions for the year ended December 31, 2020.2021. Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline SP1, a segregated portfolio company of Crestline Re SPC, under which the above described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1.
Employees
As of December 31, 2020,2021, we had 4864 full time employees. Our headquarters is in Lincoln, Nebraska and has an office in New York. We consider our relations with our employees to be good.
We are committed to creating an environment of diversity, equity and inclusion as part of our foundational values. Recruiting, developing and retaining talent is a key to succeeding in growing our business.
Regulation
General
Our insurance subsidiaries are subject to extensive regulation and supervision by the states in which they are domiciled, particularly with respect to their financial condition. American Life is domiciled in Nebraska and commercially domiciled in Texas, where it is
13
regulated and supervised by the NDOI and the Texas Department of Insurance, respectively. Seneca Re is domiciled in Vermont where it is regulated and supervised by the Vermont Department of Financial Regulation. Our insurance subsidiaries are also subject to regulation by all states in which they transact business, which oversight in practice often focuses on review of their market conduct. American Life is licensed to conduct insurance business and is therefore subject to regulation and supervision by insurance regulators, in 2122 states and the District of Columbia. Seneca Re, a Vermont limited liability company, was formed by Midwest to operate as a sponsored captive insurance company for the purpose of reinsuring various types of risks of its participants through one or more special purpose reinsurance or “protected cell” entities and to conduct any other business that is permitted for sponsored captive insurance companies under Vermont insurance regulations. The extent and scope of insurance regulation varies between jurisdictions, but most jurisdictions have laws and regulations governing the financial security of insurers, including admittance of assets for purposes of calculating statutory surplus, standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers.
In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and for certain lines of insurance, the approval of rates. State statutes and regulations also prescribe the permitted types and concentrations of investments by insurers. The primary purpose of this insurance industry regulation is to protect policyholders. Life insurance companies are required to file detailed quarterly and annual financial statements with insurance regulatory authorities in each of the jurisdictions in which they are licensed to do business, and their operations are subject to periodic examination by such authorities. Regulators have discretionary authority, in connection with the continued licensing of insurance companies, to limit or prohibit the ability to continue to do business policies if, in their judgment, the regulators determine that an insurer is not maintaining necessary statutory surplus or capital or if the further transaction of business will be detrimental to its policyholders.
The amount of dividends that our insurance subsidiaries may pay in any twelve-month period, without prior approval by their respective domestic insurance regulators, is restricted under the laws of Nebraska, Texas and Vermont.
Under Nebraska law, dividends payable from American Life during any twelve-month period without the prior approval of the state’s Insurance Director are limited to the greater of 10% of American Life’s surplus as shown on the immediately preceding calendar year’s statutory financial statement on file with the NDOI or 100% of net gain from operations for the prior calendar year. Any dividend in excess of such limitation must be approved by the Insurance Director.
In addition, payments of dividends and advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of our insurance subsidiaries’ respective jurisdictions requiring that each insurance subsidiary hold a specified amount of minimum reserves in order to meet future obligations on its outstanding policies. These regulations specify that the minimum reserves shall be calculated to be sufficient to meet future obligations, giving consideration for required future premiums to be received, which are based on certain specified interest rates and methods of valuation, which are subject to change.
13
Insurance holding company regulation
We are an insurance holding company and, together with our insurance subsidiaries and our other subsidiaries and affiliates, are subject to the insurance holding company system laws of Nebraska, Texas and Vermont. These laws vary across jurisdictions, but generally require an insurance holding company and insurers that are members of such insurance holding company’s system to register with the jurisdiction’s insurance regulatory authorities, to file reports disclosing certain information, including their capital structure, ownership, management, financial condition, enterprise risk and own risk and solvency assessment.
These laws also require disclosure of certain qualifying transactions between or among our insurance subsidiaries and us or any of our other subsidiaries or affiliates to which one or more of our insurance subsidiaries is a party. Such transactions could include loans, investments, sales, service agreements and reinsurance agreements among other similar inter-affiliate transactions. These laws also require that intercompany transactions be fair and reasonable and not adversely affect the interests of policyholders. In certain circumstances, the insurance company must give prior notice of the transaction to the insurance department in its state of domicile, and the insurance department must either approve or disapprove the subject intercompany transaction within defined periods. Further, these laws require that an insurer’s contract holders’ surplus following any dividends or distributions to shareholder affiliates is reasonable in relation to the insurer’s outstanding liabilities and its financial needs.
14
The insurance holding company laws in some states, including Nebraska, Texas and Vermont, require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s parent company. Generally, to obtain approval from the insurance commissioner for any acquisition of control of an insurance company or its parent company, the proposed acquirer must file with the applicable commissioner an application containing information regarding: (i) the identity and background of the acquirer and its affiliates; (ii) the nature, source and amount of funds to be used to carry out the acquisition; (iii) the financial statements of the acquirer and its affiliates; (iv) any potential plans for disposition of the securities or business of the insurer; (v) the number and type of securities to be acquired; (vi) any contracts with respect to the securities to be acquired; (vii) any agreements with broker-dealers; and (viii) other relevant matters. Different jurisdictions may have similar or additional requirements for prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in those jurisdictions. Additional requirements may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control.
Credit for reinsurance
State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. Credit for reinsurance means the ceding company is permitted to reflect in its statutory financial statements a credit in an amount equal to the ceding company’s liability that is reinsured. In general, credit for reinsurance is allowed if the reinsurer is licensed or “accredited” in the state in which the primary insuredceding insurer is domiciled; or if neither of the above applies, to the extent that the reinsurance obligations of the reinsurer are collateralized appropriately, typically through the posting of a letter of credit for the benefit of the ceding insurer, or the deposit of assets into a trust fund established for the benefit of the primaryceding insurer.
Statutory examinations
Our insurance subsidiaries are required to file detailed quarterly and annual financial statements, in accordance with SAP with regulatory officials in each of the jurisdictions in which they conduct business. As part of their routine regulatory oversight process, the NDOI, the Texas Department of Insurance and the Vermont Insurance Department conduct periodic detailed examinations, generally once every three to five years of the books, records, accounts and operations of our insurance subsidiaries domiciled in their states. The State of Nebraska began a scheduled examination of American Life for the period of 2017-2019 in January 2021. On September 30, 2021, the NDOI completed their examination for American Life through 2019 and issued the final report.
Financial tests
The NAIC has developed a set of financial relationships or “tests,” known as the Insurance Regulatory Information System or IRIS, which is designed for early identification of companies that may require special attention or action by insurance regulatory authorities. Insurance companies submit data annually to the NAIC, which in turn analyzes the data by utilizing ratios. State insurance regulators review this statistical report, which is available to the public, together with an analytical report, prepared by and available only to state insurance regulators, to identify insurance companies that appear to require immediate regulatory attention. A “usual range” of results for each ratio is used as a benchmark.
14
Risk-based capital requirements
In order to enhance the regulation of insurers’ solvency, the National Association of Insurance Commissioners (“ NAIC”) adopted a model law to implement Risk Based Capital (“RBC”) requirements for life insurers. All states have adopted the NAIC’s model law or a substantively similar law. The NAIC Risk-Based Capital Model Act requires insurance companies to submit an annual RBC Report, which compares an insurer’s total adjusted capital with its authorized control level RBC. A company’s RBC is calculated by using a specified formula that applies factors to various specified assets, premium, claim, expense and reserve items. The factors are higher for those items with greater underlying risk and lower for items with less underlying risk.
“Total Adjusted Capital” is defined as the sum of an insurer’s statutory capital and surplus and asset valuation reserve and the estimated amount of all dividends declared by the insurer’s board of directors prior to the end of the statement year that are not yet paid or due at the end of the year. The RBC Report is used by insurance regulators to set in motion appropriate regulatory actions relating to insurers that show indications of weak or deteriorating conditions. RBC is an additional standard for minimum capital requirements that insurers must meet to avoid being placed in rehabilitation or liquidationreceivership by regulators. The annual RBC Report, and the information contained therein, is not intended by the NAIC as a means to rank insurers.
15
RBC is a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. It provides a means of setting the capital requirement in which the degree of risk taken by the insurer is the primary determinant. The value of an insurer’s Total Adjusted Capital, which is the sum of its year-end statutory capital and surplus, in relation to its RBC, together with its trend in its Total Adjusted Capital, is used as a basis for determining regulatory action that a state insurance regulator may be authorized or required to take with respect to an insurer. The four determinations, potentially applicable under each jurisdiction’s laws, are essentially as follows:
Market Conduct Exams
Our insurance subsidiaries are subject to periodic market conduct exams (“MCE”) in any jurisdiction where they do business. AnA MCE typically entails review of business activities, such as operations and management, complaint handling, marketing and sales, producer licensing, policyholder service, underwriting, and claims handling. Regulators may impose fines and penalties upon finding violations of regulations governing such business activities. To date, neither American lifeLife nor Seneca Re hashave been the subject of such market conduct exam.
Form approvals
Our insurance subsidiaries are subject to state laws and regulations regarding form approvals. In most states, insurance policies are subject to prior regulatory approval in the state in which the policy is sold.
15
Unfair claims practices
Generally, insuranceInsurance companies are prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions; failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled.
Assessments against insurers
Under the insurance guaranty fund laws, which exist in each state and the District of Columbia.,Columbia, licensed insurers can be assessed by insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws provide for annual limits on the assessments and for an offset against state premium taxes. These premium tax offsets must be spread over future periods ranging from five to 20 years. Since these assessments typically are not made for several years after an insurer fails and depend upon the final outcome of liquidation or rehabilitation proceedings, we cannot accurately determine the amount or timing of any future assessments.
Regulation of investments
Our insurance subsidiaries are subject to state laws that restrict the kinds of investments they can make. These laws require diversification of our investment portfolios and limit the amounts of investments in certain asset categories, such as below-investment grade fixed income securities, equity real estate, other equity investments and derivatives. Failure to comply with these requirements and limitations could cause affected investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, could require the divestiture of such nonqualifying investments. American Life’s investment guidelines, including its Derivative Use Plan, hashave been filed with the Nebraska Department of Insurance.
Statutory accounting practices
SAP are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s solvency. Statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
16
GAAP is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriately matching revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
Unfair trade practices
Most stateState insurance laws prohibit insurers from engaging in unfair trade practices. The kinds of practices addressed are (i) misrepresentation and false advertising, (ii) unfair discrimination in premiums and policy benefits, (iii) boycott, coercion and intimidation, (iv) discrimination based on race, color, creed or national origin, sex or marital status, and (v) rebating of premium.
Enterprise risk and other developments
The NAIC, as part of its solvency modernization initiative, has engaged in a concerted effort to strengthen the ability of U.S. state insurance regulators to monitor U.S. insurance holding company groups. The NAIC’s solvency modernization initiative, among other things, aims to expand the authority and focus of state insurance regulators to encompass U.S. insurance holding company systems at the group level. The holding company reform efforts at the NAIC culminated in December 2010 in the adoption of significant amendments to the NAIC’s Insurance Holding Company System Regulatory Act (the “Model Holding Company Act”) and its Insurance Holding Company System Model Regulation (the “Model Holding Company Regulation”). Among other things, the revised Model Holding Company Act and Model Holding Company Regulation explicitly address “enterprise” risk — the risk that an activity, circumstance, event or series of events involving one or more affiliates of an insurer will, if not remedied promptly, be likely to have a
16
material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole - and require annual reporting of potential enterprise risk as well as access to information to allow the state insurance regulator to assess such risk. In addition, the Model Holding Company Act amendments include a requirement to the effect that any person divesting control over an insurer must provide 30 days’ notice to the regulator and the insurer (with an exception for cases where a Form A is being filed). The amendments direct the domestic state insurance regulator to determine those instances in which a divesting person will be required to file for and obtain approval of the transaction. Some form of the 2010 amendments to the Model Holding Company Act has been adopted in all states.
In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. The ORSA Model Act also provides that, no more than once a year, an insurer’s domiciliary regulator may request that an insurer submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and the insurance group of which it is a member. The ORSA Model Act imposes more extensive filing requirements on parents and other affiliates of domestic insurers. Our insurance company subsidiaries are not subject currently to the requirements of the ORSA Model Act adopted in Nebraska, Texas and Vermont, respectively, however, will be when their direct written premiums and unaffiliated assumed premiums, if any, exceed $500 million, which we expect will occur in 2021.million. As of December 31, 2021, had direct written premiums of approximately $472 million.
Privacy regulation
Federal and state law and regulation require financial institutions to protect the security and confidentiality of personal information, including health-related and customer information, and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to protecting the security and confidentiality of that information. State laws regulate the use and disclosure of social security numbers and federal and state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain personal information, including social security numbers. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to consumers and customers. Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information.
17
Cybersecurity regulation
The NAIC adopted the Insurance Data Security Model Law in October 2017. This law establishes standards for data security and for the investigation and notification of certain cybersecurity events. As of the date of this filing, eleven11 states have adopted the model law or a variation of it. We expect that additional regulations could be enacted in other jurisdictions that could impact our cybersecurity program. Depending on these and other potential implementation requirements, we will likely incur additional costs of compliance.
We face many significant risks in the operation of our business and may face significant unforeseen risks as well. Also, in the second half of 2018 we embarked upon a new business plan and, therefore, we face all of the risks of doing business with a model in which we do not have a significant experience. The material risks of this business plan are set forth below, but there may be additional risks that we do not anticipate, which could materially adversely affect our results of operations and financial condition. An investment in our voting common stock should be considered speculative.
Business Risks
We have a limited operating history under our business plan.plan and our business plan may not be successful.
We face all of the risks inherent in establishing an unseasoned business, including limited capital, unanticipated administrative costs, uncertain product markets, possible lack of market acceptance of new insuranceannuity products and corresponding lack of significant revenues, as well as fierceintense competition from better-capitalized and more seasoned companies with respect to any insuranceannuity products we may seek to create and distribute. We
17
have no control over general economic conditions, competitors’ products or their pricing and customer demand and we have limited control over necessary costs of marketing in seeking to build and expand our new business. Such costs may be significantly higher than we anticipate. For example, our general and administrative costs in 2021 were significantly higher than we expected. There can be no assurance that our proposed insurance activitiesbusiness plan will be economically 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 lack of operating history under our recently reconstituted executive leadership, our business plan and our limited capital. The lack of a seasoned operating history makes it difficult to predict our future revenues or results of operations.
Our business plan provides that we will seek to utilize American Life and its technology, product development and administration capabilities to distribute insurance products through third-party marketing organizations. As part of this plan, American Life has obtained a “B++” (“Good”) A.M. Best financial strength rating and an A.M. Best bbb+ long-term issuer credit rating. American Life is seeking to become licensed to sell insurance in additional states. We cannot make any assurance that our business plan will achieve economic success and we anticipate implementation of our business plan will take place over several years. Some of these material risks include market non-acceptance of our new products, non-acceptance of our products by our IMOs and their agents, shortcomings or failures in our technology or encountering other problems that we may not be able to overcome and unforeseen difficulties obtaining financially capable reinsurance providers.
Our use of IMOs could face several difficulties that could adversely affect our results of operations and financial condition.
We will create and sell annuity products through IMOs that provide the sales agents and infrastructure in order to sell our products. This strategy entails several significant risks, including the possibility that our IMOs will not be able to successfully sell our products or will not devote sufficient time and attention to sell our products. It should be noted that we will have no control over any IMOs and, therefore, any sales success regarding our products will be substantially dependent upon the efforts of those organizations and their sales agents. Also, we have concentrated channels of product distribution.distribution because we have eight IMOs as of December 31, 2021. If any one of our IMOs does not perform within our expectations, our results of operation could be materially adversely affected and our financial condition would suffer.
18
Our strategy to reinsure substantially all of the annuity and insurance policies we write may not be successful.
As part of our business plan, American Life intends to cede most of its annuity policies to other companies through reinsurance agreements. However, American Life will remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by that reinsurer. The failure of any one of American Life’s reinsurers would likely have a material adverse economic effect on American Life, and the value of our voting common stock would likely decline significantly as well. Thus, it is critical for us that we adequately assess the financial strength of our reinsurers on an ongoing basis. If we fail to adequately assess reinsurer payment risk relating to our reinsurers including any amounts of collateral we may hold as security for claims payments we may require for them to provide additional collateral to back up their potential obligations, we could be faced with severe economic consequences in the event any reinsurer does not meet its financial obligations to the policyholders of policiesthe annuities that we cede to the reinsurer. Also, we expect that in the early years of our new business plan’s implementation we will have a concentrated group of reinsurers, which will heightenheightens the risks we face should any reinsurer not meet its obligations to insuredsannuitants who purchase insurance productsannuities from us.
We face a risk of non-availability and increased cost of reinsurance.
Market conditions beyond our control determine the availability and cost of the reinsurance we may seek to purchase. We can offer no guaranteesassurance that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as are currently available.available to us. If we are unable to maintain our current level of reinsurance or to purchase new reinsurance in amounts that we consider sufficient and at prices that we consider acceptable, we would either have to accept an increase in our net insurance liability exposures or reduce our insurance writings. A significant reinsurer’s insolvency or inability to make payments under the terms of a reinsurance treaty could subject us to credit risk with respect to our ability to recover amounts due from reinsurers. Because of these risks, we may not be able to collect all amounts due to us from reinsurers, andreinsurers. Further, reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.
Our business plan may not be successful.
Our business plan provides that we will seek to utilize American Life and its technology, product-development and administration capabilities to distribute insurance products through third-party marketing organizations. As part of this plan, American Life has obtained a “B++” (“Good”) A.M. Best financial strength rating and an A.M. Best bbb+ long-term issuer credit rating. American Life is seeking to become licensed to sell insurance in additional states. We cannot assure you that our business plan will achieve economic success and we anticipate implementation of our business plan will take place over several years. Some of these material risks include market non-acceptance of our new products, non-acceptance of our products by our IMOs, shortcomings or failures in our technology or encountering other problems that we may not be able to overcome and unforeseen difficulties obtaining financially capable reinsurance providers.
18
We may be unable to expand insurance operations to other states to any significant degree.
A significant part of our business plan is expanding the ability of American Life to sell insurance in substantially more states. At present, American Life is licensed to sell insurance in 2122 states and the District of Columbia. In 2021 and subsequent years,While we intend to seekare seeking to expand to additional states. Westates, we cannot assure you that these efforts will be successful, and to the extent they are not, our ability to achieve product scale and significant annuity sales will be significantly adversely affected. Our results of operations and future prospects will in turn be adversely affected.
Our business success depends, in part, on effective information technology systems and on continuing to develop and implement improvements in our technology.
We depend in large part on our technology systems for conducting our business, as well as for providing the data and analytics we utilize to manage our business, and thus ourbusiness. Our business success is dependent on maintaining the effectiveness of existing technology systems and on continuing to develop and enhance technology systems that support our business in a cost and resource efficient manner. System development projects may not deliver the benefits we expect, or may be replaced or become obsolete more quickly than expected, which could result in accelerated recognition ofincreased expenses. If we do not effectively and efficiently manage and upgrade our technology systems, or if the costs of doing so are higher than we expect, our ability to provide competitive services to new and existing customers in a cost-effective manner and our ability to implement our business plan could be adversely impacted.
Reinsurance subjects us to theWe are faced with credit riskrisks of our counterparties, and our reinsurers, which may have a material adverse effect on our operating results and financial condition.
WeIn our investments we are exposed to many different industries, issuers and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutions. Many of these transactions expose us to credit risk in the event of default of the counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. We may have further exposure to these issuers in the form ofour holdings in unsecured debt instruments and derivative transactions of these issuers. There can be no guarantee that any such realized losses or impairments to the carrying value of these assets would not materially and adversely affect our results of operations and financial condition.
In addition to exposure to credit risks related to our investment portfolio, we are exposed to credit risks in several other areas of our business operations as discussed above and credit risks in our operations related to reinsurance. The collectability of reinsurance
19
recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Since we are primarily liable to an insured for the full amount of insurance coverage, our inability to collect a material recovery from a reinsurer could have a material adverse effect on our operating results and financial condition.
We operate in a highly competitive industry, and our business will suffer if we are unable to compete effectively.
The operating results of 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 insurance business is intensely competitive. Our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain IMOs to market our insurance products, our ability to develop competitive and profitable products and our ability to obtain acceptable financial strength ratings. In connection with the development and sale of products, American Life encounters competition from other insurance companies, most of whom offer annuity products and have financial and human resources substantially greater than American Life’s, as well as competition from other investment alternatives available to potential policyholders.annuitants.
American Life competes with up to 775several hundred other insurance companies in the United States. Most of these companies have greater financial resources, longer business histories, and more diversified lines of insurance coverage than American Life. These larger companies also generally have large sales forces. We also face competition from direct mail and email sales marketers. We may not be able to compete successfully against these companies.competitors.
19
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 insuranceannuity 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 annuities and life insurance compared with other financial products if such legislation were to be enacted. In addition, we could be unable to attract reinsurance capital. There can be no assurance as to whether any 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 develop.
Under the Internal Revenue Code of 1986, income taxes payable by policyholders on investment earnings is deferred during the accumulation period of certain annuity and life insurance 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 annuity and life insurance products, or to increase the tax-deferred status of competing products, American Life and its industry as a whole would be adversely affected with respect to their ability to sell products. In addition, annuity and related 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 that may materially adversely affect us.
Some of our investments are relatively illiquid.
We hold certain investments that may lack liquidity, such as certain fixed maturity securities (including collateralized loan obligations, bonds and mortgage loans). We do not have the present intent to sell, nor is it more likely than not that we will be required to sell, debt securities in an unrealized loss position. Investment losses, however, may be realized to the extent liquidity needs require the disposition of debt securities in unfavorable interest rate, liquidity or credit spread environments.
We have exposure to mortgage loans on real estate, which could cause declines in the value of our investment portfolio.
Securities and other capital markets products connectedwith respect to mortgage lending may become less liquid.liquid than conventional securities such as stocks and bonds. The value of our investments in mortgage loans may be negatively impacted by an unfavorable change in or increased uncertainty regarding delinquency rates, and refinancing opportunities.availability. In addition, commercial mortgages are sensitive to the strength of the related underlying mortgage loans, the U.S. economy, and the supply and demand for commercial real estate. The value of our investments in mortgage loans and determination in loss allowances regarding such investments may be negatively impacted by declining loan to value ratios, especially with respect to loan to value ratios that exceed 80%. For the year ended December 31, 2021, our commercial mortgage loans investment portfolio had approximately $5.2 million in loans at or exceeding an 80% loan-to-value ratio compared to zero for the preceding year. Deterioration in the performance of the residential and commercial mortgage sector,
20
including as a result of the COVID-19 pandemic or additional risk of loss in connection with increasing loan-to-value ratios, could cause declines in the value of that portion of our investment portfolio. The carrying value of our mortgage loans on real estate as of December 31, 2021 and 2020, was $183.2 million and $95.0 million.million, respectively. See “Management’s Discussion of Financial Condition and Results of Operations.”
Changes in regulations regarding suitability of product sales and fiduciary/best interest standards may affect our operations and profitability.
Our annuity sales practices are subject to strict regulation. State insurance regulators are becoming more active in adopting and enforcing suitability standards with respect to sales of annuities. In addition, our insurance operations may be impacted by actions taken by the National Association of Insurance Commissioners (the “NAIC”),NAIC, the U.S. standard setting and regulatory support organization created and governed by the chief insurance regulatory authorities of the 50 states, the District of Columbia and the five U.S. territories. If the NAIC adopts amendments to its model annuity suitability rule incorporating a best interest standard, it is probable that they will be adopted by multiple states. Some states have already enacted or proposed legislation to impose new or expanded fiduciary/best interest standards on broker dealers, investment advisors and/or insurance agents providing services to retail investors. Additionally, some state regulators have recently adopted or signaled they will be pursuing rule-making in this space. For example, on August 1, 2018 the New York Department of Financial Services (“NY DFS”) adopted “best interest” amendments to its existing annuity suitability regulation and expanded its scope to include “in force” recommendations and life insurance policies. In June 2019, the SEC adopted Regulation Best Interest, which requires broker dealers to act in the best interest of “retail” customers when making a recommendation of any securities transaction or investment strategy involving securities.customers. Any material changes to the standards governing our sales practices, including applicable laws and regulations, could adversely affect our business, results of operations and financial condition.
20
The inability to obtain upgrades to our financial strength and other ratings from A.M. Best, or the possibility of a downgrade in our ratings, may have a material adverse effect on our competitive position, the marketability of our annuity product offerings, and our liquidity, operating results, financial condition and prospects.
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. Many insurance buyers, agents, brokers, and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. American Life currently has an A.M. Best financial strength rating of B++ (Good) and long-term issuer credit rating of bbb+. A.M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances, and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk, and event risk. On an ongoing basis, rating agencies such as A.M. Best review the financial performance and condition of insurers and can downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital, a reduced confidence in management or a host of other considerations that may or may not be under the insurer’s control. All ratings are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on our competitiveness, the marketability of our product offerings, and our ability to grow in the marketplace.
Our new insurance products and other products we may develop may not achieve market penetration.
As discussed elsewhere in this Annual Report on Form 10-K, our marketing strategy is focused on the sale of MYGA and FIA products through IMOs. These products may not achieve market acceptance or penetration to any meaningful degree, and any significant sales of these products cannot be assured, nor can we assure that any other insurance products we attempt to sell will achieve any degree of sustained marketing success. We are seeking to streamline the costs of developing and placing insuranceour annuity products into the marketplace to be sold by IMOs. We may encounter unexpected development costs or lack of IMO acceptance of our products;products, in which case our financial results would be disappointing.
We are highly dependent upon Georgette Nicholas and Michael Minnich, A. Michael Salem and Mark A. Oliver, and the loss of any of these officers could materially and adversely affect our business.
Our ability to operate successfully is dependent primarily upon the efforts of Georgette Nicholas and Mike Minnich, A. Michael Salem, and Mark A. Oliver,our key executive officers of American Life.officers. The loss of the services of any of these individuals could have a material adverse effect on our ability to pursue our business plan and the business of American Life.plan. We have employment agreements with Messrs.Ms. Nicholas and Mr. Minnich and Salem and an “at will” agreement with Mr. Oliver. Wewe have limited “key man”person” life insurance on Messrs.Mr. Minnich, and Salem. Midwest is a holding company and has limited ability to generate meaningful revenues other than payments from its subsidiaries, primarily American Life.but there are no restrictions on their termination of employment with us.
21
Midwest is a holding company whose principal operating subsidiary is American Life.
Midwest depends primarily on reimbursement of costs from American Life, Seneca Re, and 1505 Capital and has no other significant source of revenue. Our change in control that occurred in 2018 with the infusion of capital from Xenith, discussed above, along with net proceeds of 2020 public offering of our voting common stock, may not provide adequate long-term financing to support our contemplated expansion of American Life’s business or any continued reimbursements to Midwest. If there is not a substantial expansion of American Life’s business, it may not be able to provide funds to Midwest to enable Midwest to meet its obligations. American Life is also restricted by state insurance laws as to fund transfers, by way of dividends or otherwise, to Midwest.
Our investment adviser subsidiary is subject to numerous laws and regulations with substantial compliance costs.
Our wholly owned investment adviser subsidiary, 1505 Capital LLC, is subject to substantial regulation. It is registered with the SEC as an investment adviser and is required to file detailed reports with the SEC concerning its business. It is subject to the Investment Advisers Act of 1940 as well as other state securities laws regarding the conduct of its business. Compliance with these regulations is time consuming and is a burden on the operations of 1505 Capital LLC. It is also subject to examination by the SEC. There can be no assurance that our investment adviser subsidiary will not be adversely affected by the results of any future examination.
21
We have experienced significant operating losses and may not be able to reverse them in the foreseeable future.
We commenced our business plan in mid-2018 and introduced our first annuity products in 2019. We made progress towards profitability onincurred a GAAP basissubstantial operating loss in 20192021 and 2020; however,2020 and there can be no assurance of our future profitability. Because ceding commissions from reinsurance are amortized over the life of the policy, we expect several years of insurance policy sales growth will be necessary until we achieve net income on a GAAP basis.
American Life may encounter regulatory difficulties or fail as a result of being inadequately capitalized.
American Life must have adequate capital and surplus capital, calculated in accordance with statutory accounting principles (“SAP”) prescribed by state insurance regulatory authorities to meet regulatory requirements in Nebraska, the state of domicile of American Life. It had approximately $75$74 million of capital and surplus (based upon SAP) as of December 31, 2020.2021. Because we have embarked upon a business plan under which we write new insurance business and seek to cede a substantial amount of the risk to third-party reinsurers, the NDOI may require additional amounts of capital and surplus to support the expanded business of American Life going forward. The amount of capital and surplus of American Life ultimately required will be based on certain “risk-based capital” standards established by statute and regulation administered by the NDOI. The “risk-based capital” system establishes a framework for evaluating the adequacy of the minimum amount of capital and surplus, calculated in accordance with SAP, 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 American Life fails to maintain required capital levels in accordance with the “risk-based capital” system, its ability to conduct business would be compromised and our ability to expand our insurance business would be significantly reduced absent a prompt infusion of capital into American Life.
We may execute an acquisition strategy, which could cause our business and future growth prospects to suffer.
We may at some time pursue acquisitions of insurance-related companies. If we were to pursue acquisitions, we would compete with other companies, most of which have greater financial and other resources than us. Further, if we were to 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 have to assume liabilities that were not disclosed or exceed estimates; |
● | we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational, and other benefits in a timely manner; |
22
● | 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 |
● | of the potential for loss of customers and key employees of any acquired company. |
Risks Related to Our Voting Common Stock
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, speculative investment in a business that has incurred substantial losses to date and expects to continue to incur losses in the foreseeable future. No assurance can be given that any of the potential benefits envisioned by our business plan will prove to be available to our stockholders, nor can any assurance be given as to the financial return, if any, which may result from ownership of our voting common stock. The entire value of your shares of Midwest voting common stock may be lost.
22
The market price and trading volume of our voting common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
Trading and prices of our voting common stock may bewas highly volatile in 2021 and could be subject to wide fluctuations.fluctuations in the future. There are many factors that will impact our stock price and trading volume, including, but not limited to, the factors listed above under “Risks Related to Our Business.” In addition, the low trading volume in our voting common stock may fluctuate and cause significant price variations to occur. If the market price of our voting common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our voting common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our voting common stock include:
● | operating results that vary from the expectations of investors and securities analysts; |
● | significant sales of our voting common stock or other securities in the open market; |
● | lack of interest in our voting common stock from institutions, securities analysts, and retail investors; |
● | quarterly variations in our operating results; |
● | changes in investment valuations; |
● | changes in the industries in which we operate; |
● | announcements by us or companies in our industries of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments, plans, prospects, service offerings or operating results; |
● | additions or departures of key personnel; |
● | future sales of our securities; |
● | developments in the financial markets and worldwide or regional economies; |
● | announcements of innovations or new products, solutions or services by us or our competitors; |
● | variations in interest rates; and |
23
● | changes in accounting principles. |
Stock markets in the United States have experienced significant price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as the global COVID-19 pandemic and the associated economic and market disruption, acts of terrorism, war, prolonged economic uncertainty, a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our voting common stock.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our voting common stock.
Our shares of voting common stock are listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements, Nasdaq may take steps to delist our voting common stock. Such a delisting would likely have a negative effect on the price of our voting common stock, and would impair your ability to sell our voting common stock when you wish to do so. In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our voting common stock
23
to become listed again, stabilize the market price or improve the liquidity of our voting common stock, or prevent future non-compliance with Nasdaq’s listing requirements.
As a smaller reporting company, we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations and financial prospects.
Currently, we are a “smaller reporting company,” which generally means that our outstanding common stock held by non-affiliates had a market value of less than $250 million as of the last business day of our second fiscal quarter. As a “smaller reporting company,” we are able to provide simplified executive compensation disclosures in our filings; are exempt from the provisions of Section 404(b) of the Sarbanes Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in our filings with the SEC, including being required to provide only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects. Furthermore,Further, a material weakness in internal controls may remain undetected for a longer period because of our extended exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act.
There may be future issuances or resales of our voting common stock which may materially and adversely affect the market price of our voting common stock.
Subject to any required state insurance regulatory approvals, we are not restricted from issuing additional shares of our voting common stock in the future, including securities convertible into, or exchangeable or exercisable for, shares of our voting common stock. Our issuance of additional shares of voting common stock in the future will dilute the ownership interests of our then existing stockholders.
The sale of a substantial number of shares of our voting common stock or securities convertible into, or exchangeable or exercisable for, shares of our voting common stock, whether directly by us in this offering or future offerings or by our existing stockholders in the secondary market, the perception that such issuances or resales could occur or the availability for future issuances or resale of shares of our voting common stock or securities convertible into, or exchangeable or exercisable for, shares of our voting common stock could materially and adversely affect the market price of our voting common stock and our ability to raise capital through future offerings of equity or equity-related securities on attractive terms or at all.
In addition, our board of directors is authorized to designate and issue preferred stock without further stockholder approval, and we may issue other equity and equity-related securities that are senior to our voting common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios, and to comply with any future changes in regulatory standards.
Our executive officers and directors own a substantial number of shares of our voting common stock. This will enable them to significantly influence the vote on all matters submitted to a vote of our stockholders.
As of December 31, 2020,2021, our executive officers and directors beneficially owned 1,133,011954,081 shares of our voting common stock, representing approximately 30.3%25.3% of the outstanding shares of our voting common stock.
24
Accordingly, our executive officers and directors, through their beneficial ownership of our voting common stock, will be able to significantly influence the vote on all matters submitted to a vote of our stockholders, including the election of directors, amendments to our certificate of incorporation or bylaws, mergers or other business combination transactions, and certain sales of assets outside the regular course of business. The interests of our executive officers and directors may not coincide with the interests of our other stockholders, and they could take actions that advance their own interests to the detriment of our other stockholders.
The indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against them.
Our certificate of incorporation and Delaware law provide for broad indemnification of our directors, officers and employees. We have also entered into indemnification agreements with each of our directors. Our indemnification obligations could result in us incurring substantial expenditures to cover the costs of settlement or damage awards against directors, officers and employees, which we may be
24
unable to recoup. These provisions and resultant costs may also discourage us from bringing an action against our directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors or officers even though such actions, if successful, might otherwise benefit us and our stockholders.
We do not expect to pay any cash dividends to stockholders.
To date, we have never declared or paid any cash dividends to our stockholders and do not expect to do so for the foreseeable future. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial conditions, operating and capital requirements, and other factors as the board of directors considers relevant. In addition, our ability to pay cash dividends depends, in part, upon on the ability of American Life to provide us with payments from its operations, which are subject to prior regulatory approval for the most part. American Life, as an insurance subsidiarycompany is subject to significant regulatory restrictions limiting its ability to declare and make payments to Midwest, such as dividends.
If securities or industry analysts do not publish research or reports about our business, or if they issue adverse or misleading opinions regarding us, our voting common stock price and trading value could decline.
The trading market for our voting common stock is influenced by research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model or our voting common stock performance, or if our target operating results fail to meet the expectations of analysts, our voting common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price ofand trading volume to decline.
Anti-takeover provisions and the regulations to which we may be subject may make it more difficult for a third-party to acquire control of us, even if the change in control would be beneficial to our stockholders.
We are a holding company incorporated in Delaware. Anti-takeover provisions in Delaware law and our certificate of incorporation and bylaws, as well as regulatory approvals required under state insurance laws, could make it more difficult for a third-party to acquire control of us and may prevent stockholders from receiving a premium for their shares of voting common stock. Our certificate of incorporation provides that our board of directors may issue up to 2,000,000 shares of preferred stock, in one or more series, without stockholder approval and with such terms, preferences, rights and privileges as the board of directors may deem appropriate. These provisions, the control of our executive officers and directors over the election of our directors, and other factors may hinder or prevent a change in control, even if the change in control would be beneficial to, or sought by, our stockholders.
SevenNine individuals currently serve on our board of directors, which is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, a class of directors is to be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. As a result, a portion of our board of directors will be elected each year. Our certificate of incorporation authorizes our board of directors to fix the number of directors from time to time by a resolution of the majority of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control. Between stockholder meetings, directors may be removed by our stockholders only for cause, and the board of directors may appoint new directors to fill
25
the vacancies. These provisions may prevent a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the resulting vacancies with its own nominees. Consequently, the existence of these provisions may have the effect of deterring hostile takeovers, which could depress the market price of our voting common stock.
General Risks
The ongoing events resulting from the outbreak of the COVID-19 pandemic, and the uncertainty regarding future similar events, could have an adverse impact on our financial condition, results of operations, cash flows, liquidity and prospects.
We continue to closely monitor developments related to the coronavirus (COVID-19) pandemic to assess potential adverse impacts on our business. Due to the evolving and highly uncertain nature of this pandemic, it currently is not possible provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations,
25
financial condition or liquidity. Management implemented the Company’s business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. Operations continued as normal despite a sharp increase in sales during the period. We continue to monitor the Centers for Disease Control and Prevention and Nebraska guidelines regarding employee safety.
If the COVID-19 pandemic and associated economic slowdown continues it could adversely impact our future results of operations, financial condition, cash flows, liquidity and prospects in a number of ways, including:
● | Our investment portfolio (and, specifically, the valuations of investment assets we hold) could be materially, adversely affected as a result of market developments from the pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a slowdown in the U.S. or global economic conditions may also adversely affect the values and cash flows of these assets. Our investments in mortgages and asset-backed securities could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed by governmental authorities. Further, extreme market volatility may leave us unable to react to market events in a prudent manner consistent with accepted investment practices in dealing with more orderly markets; |
● | Potential impacts on our operations due to efforts to mitigate the pandemic, including government mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures, which could result in an adverse impact on our ability to conduct our business, including our ability to sell policies, and adjust certain claims; |
● | Potential impacts on morbidity could adversely affect the potential profitability of our annuity products; |
● | We also outsource certain critical business activities to third parties such as our IMOs. As a result, we rely upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While we monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside our control. If one or more of the third parties on whom we rely for critical business activities experience operational difficulties or failures as a result of the impacts from the spread of COVID-19, it may have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows; and |
● | Potential impacts of COVID-19 on reinsurers and the cost and availability of reinsurance. |
Additionally, there is risk that the current efforts underway by governmental and non-governmental organizations to combat the spread and severity of COVID-19 and related public health issues may not be effective or may be prolonged. Finally, we cannot predict how legal and regulatory responses to concerns about COVID-19 and related public health issues, will impact our business. The continued spread of COVID-19 and its variants has led to disruption and volatility in the global capital markets which could increase our funding costs and limit our access to the capital markets. Accordingly, we may in the future have difficulty accessing capital on attractive terms, or at all, which could have a material adverse effect on our business, results of operations, financial condition and liquidity.
26
Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability.
Claims resulting from catastrophic events could harm our financial results, profitability, and financial condition. Catastrophic events could impact our insurance business by significantly impacting our assumptions as to mortality, morbidity, and other rates, as well as product sales. Catastrophic events may also reduce economic activity in affected areas, which could harm our prospects for new business. In addition, catastrophes could cause unanticipated financial strain on our insureds as well as increase the cost of reinsurance to us and decrease the availability of reinsurance, which could in turn harm our business, results of operations or financial condition.
Claims loss reserves may be inadequate.
We maintain loss reserves to cover estimated liabilities for unpaid losses and loss expenses, including legal and other fees, as well as other claims and settlement costs for reported and unreported claims incurred as of the end of each accounting period. Loss reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and
26
administration of claims will cost. These estimates, which generally involve actuarial projections, are based on the assessment of facts and circumstances then known, as well as estimates of future trends in claims severity, frequency, and other factors. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, economic inflation, judicial and litigation trends and legislative changes. Many of these items are not directly quantifiable in advance. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.
Reserve estimates are continually refined as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events, including for example the uncertainties relating to the COVID-19 pandemic. Accordingly, the ultimate settlement of losses may be significantly greater or less than the loss and loss expense reserves as of the date of the balance sheet. If our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination with a corresponding decrease in our profitability. If the increase in loss reserves is large enough, we could incur a net loss and a net reduction of our capital.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and access the capital required to operate our business.
In the insurance industry, liquidity refers to the ability of an insurance company to generate adequate amounts of cash from its normal operations, including from its investment portfolio, in order to meet its financial commitments, which are principally obligations under the insurance policies it has written.
The capital and credit markets have been experiencingexperienced significant volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional capital to pay our operating expenses, or increase the amount of insurance that we seek to underwrite, or otherwise grow our business, our ability to obtain such capital may be limited and the cost of any such capital may be significant. In addition, the availability of additional financing will depend on a variety of factors, including capital and credit market conditions, the availability of credit generally and specifically to the financial services industries, market liquidity, our creditworthiness, as well as the possibility that customers or capital providers could develop a negative perception of our long or short-term financial prospects if we incur large investment losses or if our level of business activity decreases. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and we may not be able to successfully obtain additional financing on favorable terms, or at all. As such, we may be forced to issue securities with terms and conditions that may be unfavorable to us, to accept an unattractive cost of capital or to sell certain assets, any of which could decrease our profitability and significantly reduce our financial flexibility. If a combination of these factors occurs, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on terms favorable to us.
Potential changesThe transition from LIBOR to alternative reference “benchmark” interest rates is uncertain and could adversely affect the manner in whichvalue of or the London Inter-bank Offered Rate (“LIBOR”) is determinedinterest rates on our investments and the potential for the replacement or discontinuation ofobligations indexed to LIBOR, as a benchmark interest rate may affect our cost of capitalwell as the revenue and net investment income.expenses associated with those assets and obligations.
LIBOR is an interest rate benchmark that underpins hundreds of trillions of dollars ofhas been widely used in financial contracts around the world. It is available in five currencies and a range of tenors. Onworld for decades. In July 27, 2017, the U.K.United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced
27
that it intended to phase out LIBOR by the end of 2021. Following discussions with the FCA and other official sector bodies, the Intercontinental Exchange Benchmark Administration announced in March 2021 the publication of certain USD LIBOR settings will no longer persuade or compel LIBOR panel banks to submit LIBOR quotes after 2021. It remains unclear if, how, and in what form, LIBOR may continue to exist after that date.through June 30, 2023. The U.S.Alternative Reference Rates Committee of the Federal Reserve Board (“Federal Reserve”ARRC”), based on the recommendationsa group of the New York Federal Reserve’s Alternative Reference Rate Committee (constituted of major derivative market participants and their regulators), has begun publishingconvened to help ensure a Secured Overnight Funding Rate (“SOFR”) that is intended to replace U.S. dollar LIBOR, and SOFR-based investment products that have been issued in the U.S. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. Markets are slowly developing in response to these new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which we have exposure or the activities in our business will vary depending on a variety of factors. Accordingly, it is difficult to predict the full impact of thesuccessful transition away from LIBOR, on floatinghas recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative reference rate and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR.
We are in the process of analyzing and identifying our population of securities, financial instruments and contracts that utilize LIBOR (collectively “LIBOR Instruments”) to determine if we have any material exposure to the transition from LIBOR. To the extent we hold and any other assets, liabilities, models, assumptions, andLIBOR Instruments, the cost of capital, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitabilityterms of these instruments may have fallback provisions that provide for an alternative reference rate when LIBOR ceases to exist. For securities without adequate fallback provisions already in place, legislation governing securities under New York law has been enacted to provide a safe harbor for transition to the recommended alternative reference rate. In addition, federal legislation has been introduced to provide the same protection for securities not governed by New York law.
Notwithstanding, in preparation for the phase out of LIBOR, we may need to renegotiate our LIBOR Instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our LIBOR Instruments. Furthermore, the discontinuation of LIBOR may adversely affected.impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments.
27
TableAs a result, the transition of Contentsour LIBOR Instruments to alternative reference rates may result in adverse changes to the net investment income, fair market value and return on those investments. We intend to continue to evaluate and monitor the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR, monitoring the market adoption of alternative reference rates and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the overall impact of this change at this time.
The insurance industry is subject to numerous laws and regulations, and compliance costs and/or changes in the regulatory environment that could adversely affect our business.
Our insurance operations are subject to government regulation in each of the states in which we conduct business. Such regulatory authority is vested in state agencies that are concerned primarily with the protection of policyholders rather than shareholders. These state insurance regulatory authorities have broad administrative powerpowers dealing with all aspects of the insurance business, including, among other areas, regulation of the advertising and marketing of insurance, privacy of policyholders, acquisitions of regulated insurance entities, payment of dividends, reinsurance, the form and content of insurance policies (including pricing), operating and agent licenses, regulation of premium rates, premium tax increases, rating and underwriting restrictions and limitations, asset and reserve valuation requirements, enterprise risk management, surplus requirements, the type or amount of investments, accounting standards, Risk-Based Capital (“RBC”) requirements, statutory reserve and capital requirements, assessments by guaranty associations, affiliate transactions, and unfair trade and claims practice.
In addition, our insurance operations may be impacted by actions taken by the NAIC. A primary mandate of the NAIC is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC also provides standardized insurance industry accounting and reporting guidance through the NAIC Accounting Manual. However, model insurance laws and regulations are only effective when adopted by the states, and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the NAIC Accounting Manual or modifications by the various state insurance departments may adversely affect the statutory capital and surplus of American Life. See “Regulation” for further discussion.
The 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 American Life will be able to satisfy the regulatory requirements of the NDOI or a similar department in any other state in which it transacts business. A significant component of our new business plan is to reinsure substantially all of our new insurance business. It should be assumed that state regulators will monitor carefully the financial strength of any third-party reinsurer and in certain instances may require that sufficient funds be reserved by us in order to alleviate risks associated with reinsurers being unable to meet their financial
28
commitments in the case of claims on insurance policies with a reinsurer. This oversight may result in our operations being less economically successful than we are seeking and could adversely affect our result of operations and therefore the value of our voting common stock.
Individual state guaranty associations assess insurance companies to pay benefits to policyholders of insolvent or failed insurance companies. The impact of these 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.
The insurance industry is highly regulated and our activities are restricted as a result. We spend substantial amounts of time and incur significant expenses in connection with complying with applicable regulations, and we are subject to the risk that more burdensome regulations could be imposed on us.
Compliance with insurance regulation by us is costly and time consuming. In addition to their domiciliary states, insurance companies in the U.S. are subject to extensive regulation in the states where they are licensed to do business. This regulatory regime primarily seeks to protect an insurance company’s policyholders rather than its shareholders. Among other items, these regulations require:
28
American Life is subject to these regulations in each state in the U.S. in which it is licensed to do business and compliance with such regulations involves significant costs and restricts operations. We cannot predict the form of any future regulatory initiatives.
In addition, as the owner of a life insurance subsidiary, Midwest is itself regulated by the NDOI and, to a lesser extent, by the various state insurance regulatory authorities of those U.S. jurisdictions where American Life is licensed. All U.S. states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding company system to register with the insurance regulatory authority of the insurance company’s state of domicile (in the case of American Life, Nebraska and also commercially domiciled in Texas) and to furnish annually financial and other information concerning the operations of companies within the holding company system that materially affect the operations, management or financial condition of the insurers within such system (generally referred to as “insurance holding company acts”). Under such laws, among other requirements, transactions between Midwest and its regulated insurance subsidiaries and affiliates must be fair and reasonable and, if material or of a specified category, they require prior notice and approval or non-disapproval by the state of domicile of each insurance company that is party to the transaction. In addition, under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in its state.
In addition, American Life generally may not pay dividends without giving prior notice thereof to the NDOI and the Texas Department of Insurance and generally may not pay extraordinary dividends without obtaining the prior approval or non-disapproval of such regulators. Generally, theThe laws and regulations of most jurisdictions prohibit an insurer from, without regulatory approval, paying an “extraordinary” dividend, which is generally defined as any dividend paid from other than earned surplus or exceeding certain thresholds specified in the applicable state insurance laws of the various states.laws.
As a component of its ongoing efforts to remain compliant with the U.S. insurance regulatory regime, we file detailed annual reports with respect to American Life with the NDOI and all of the states in which American Life is licensed. Also, the business and accounts of American Life are subject to examination by the NDOI, as well as inquiries including investigations of the various insurance regulatory authorities of the states in which American Life isare licensed.
Development of annuity and life insurance products involves the use of certain assumptions, and the inaccuracy of these assumptions could adversely affect profitability.
In our insurance business, we must make certain assumptions as to expected mortality, lapse rates, and other factors in developing the pricing and other terms of 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 rates, and crediting rates. Unforeseen events like epidemics or pandemics could arise and have an adverse effect on our assumptions as to morbidity and mortality. If we underestimate future policy benefits, we will incur additional expenses at the time we become aware of the inadequacy. As a result, our losses would increase and our ability to achieve profits would suffer.
Fluctuations in interest rates could adversely affect our business.
Interest rate fluctuations can 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 products expose us to the risk that changes in interest rates will reduce any
29
spread, or the difference between the amounts that American Life is required to pay under the contracts and the amounts American Life is able to earn on its investments intended to support its obligations under its annuity contracts. Spread is a key component of net 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 annuity contracts may increase as contract holders seek to purchase products with perceived higher returns. This process may result in cash outflows requiring that American 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.
29
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. American Life, therefore, may have to accept a lower spread and thus lower profitability or face a decline in sales and greater surrender of existing annuity contracts.
We are subject to extensive regulation.
As stated above, we are subject to extensive state regulatory oversight in the jurisdictions in which we do business, as well as federal oversight with respect to certain portions of our business. Changes in state regulations, or in the interpretation or application of existing state laws or regulations, may adversely impact our pricing, capital requirements, reserve adequacy or exposure to litigation and could increase the costs of our regulatory compliance.
Changes are often implemented by state regulators in order to benefit policyholders to the detriment of insurers. State insurance regulators and the NAIC continually reexamine existing laws and regulations and may impose changes in the future that put further regulatory burdens on us and, thus, could have an adverse effect on our results of operations and financial condition.
In addition, state insurance laws, rather than federal bankruptcy laws, govern the liquidation or restructuring of insurance companies. Virtually all states in which we operate require that we bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies via participation in state guaranty associations. In addition, in various states, we must participate in mandatory arrangements to provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase that coverage from private insurers. A few states also require us to purchase reinsurance from mandatory reinsurance funds, which can create a credit risk for insurers if such funds are not adequately funded by the state. Also, in some cases, the existence of a reinsurance fund could adversely affect the prices that we can charge for our policies. The effect of these and similar arrangements could reduce our profitability in any given period and/or limit our ability to grow our business. Finally, any changes to these programs or the inabilitysome insurers of the programs or associations to make payments to insureds for losses could have a material adverse effect on our results of operations and financial condition.
From time to time, increased scrutiny has been placed upon the U.S. insurance regulatory framework, and a number of state legislatures have considered or enacted legislative measures that alter, and in many cases increase, state authority to regulate insurance and reinsurance companies. In addition to legislative initiatives of this type, the NAIC and insurance regulators are regularly involved in a process of reexamining existing laws and regulations and their application to insurance and reinsurance companies.
This state regulatory oversight and various proposals at the federal level could in the future adversely affect our ability to sustain adequate returns in certain lines of business. We cannot predict the effect that any proposed or future legislation or change in the interpretation or application of existing laws or regulations may have on our financial condition or results of operations.
A failure to comply with rules and regulations in a jurisdiction could lead to disciplinary action, the imposition of fines or the revocation of the license, permission or authorization necessary to conduct our businesses in that jurisdiction, all of which could have a material adverse effect on the continued conduct of business in a particular jurisdiction.
The impact on potential customers and vendors of sustained or significant deterioration in economic conditions could adversely affect our business.
We are exposed to risks associated with the potential financial instability of our customers, many of whom may be adversely affected by an economic slowdown. As a result of macroeconomic challenges currently or potentially affecting the economy of the U.S.
30
and other parts of the world, customers may experience serious cash flow problems and other financial difficulties. In addition, events in the U.S. or foreign markets, such as the outbreak of the COVID-19 pandemic and the United Kingdom’s exit from the EU, may continue to impact the global economy and capital markets. The impact of such events is difficult to predict. As a result, customers and potential customers may modify, delay, or cancel plans to purchase our products. Additionally, if customers are not successful in generating sufficient incomes, they may not be able to pay, or may delay payment of, premiums and other amounts that are owed to us. Any liability of current or potential customers to pay us for our products may adversely affect our earnings and cash flow.
A general economic slowdown could potentially adversely affect us in the form of consumer behavior, particularly through decreased demand for our products. In addition, we are susceptible to risks associated with the potential financial instability of the vendors on which we rely to provide services or to whom we delegate certain functions. The same conditions that may affect our customers also could adversely affect our vendors, causing them to significantly and quickly increase their prices or reduce their output. Our business depends on our ability to perform, in an efficient and uninterrupted fashion, our necessary business functions, and any interruption in the services provided by third parties could also adversely affect us.
30
Defaults on commercial mortgage loans and volatility in performance may adversely affect our results of operations and financial condition.
A decline in the commercial real estate market within the U.S. resulting from changes in interest rates, real estate market conditions or an economic downturn including as a result of the COVID-19 pandemic or otherwise, may have a negative impact on the value of our commercial mortgage loan portfolio. Negative developments across a certain property type or the occurrence of a negative event within a geographic region may have a significant negative impact, based on concentration within that property type or geographic region. Our operations and financial condition may be adversely affected from an increase in borrower defaults within our commercial mortgage loan portfolio. See “Management’s Discussion of Financial Condition and Results of Operations.”
The determinationOur valuation of investments and the determinations of the amount of allowances and impairments taken on our investments may include methodologies, estimations and assumptions that are judgmentalsubject to differing interpretations and, if changed, could materially impactadversely affect our results of operations or financial position.condition.
Fixed maturities, equity securities and derivatives represent the majority of assets and liabilities reported at fair value on our Consolidated Statements of Financial Position. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time. Considerable judgment is often required to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
As an example, our registered independent accounting firm has identified the valuation of embedded derivatives of fixed indexed annuities as a critical audit matter. Our FIA contracts allow the policyholder to elect a fixed interest rate return or an equity market component for which interest credited is based on the performance of certain stock market indices. The equity market option is an embedded derivative. The fair value of the embedded derivatives is computed as the present value of death, surrender and partial withdrawal benefits attributable to the excess of the projected policy contract values over the projected minimum guaranteed contract values. The projections of policy contract values are based on assumptions for future policy growth, which included assumptions for expected index credits on the next policy anniversary date, future equity option cost developed based on the participation rate, cap rate, strike rate, volatility assumption, time to expiration, and risk-free rates using the Black Scholes formula and grow at the risk-free interest rates over the term of the index period, guaranteed minimum renewal interest rate, and policyholder assumptions including mortality, lapses, partial withdrawal rates, and the utilization of benefit riders. Because of the significant subjectivity and estimation of the valuation inputs, the valuation of our embedded derivatives could vary significantly as conditions change and new information and becomes available. Decreases in value may have a material adverse effect on our results of operation or financial condition.
Our determination of the amount of allowances and impairments varies by investment type and is based on our periodic evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and make changes in allowances and impairments in operations. Market volatility, including as a result of the COVID-19 pandemic, can make it more difficult to value our securities if trading in such securities becomes less frequent. In addition, a forced sale by holders of large amounts of a security, whether due to insolvency, liquidity or other issues with respect to such holders, could result in declines in the price of a security. There can be no guarantee that we have accurately assessed the level of impairments taken and allowances reflected in theour financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Impairments result in charges to earnings in the period taken, and historical trends may not be indicative of future impairments or allowances.
A breach of information security or other unauthorized data access could have an adverse impact on our business and reputation.
In the ordinary course of business, we collect, process, transmit, and store large quantities of personally identifiable information, customer financial and health information, and proprietary business information (collectively referred to herein as “Sensitive Information”).Sensitive Information. The secure processing, storage, maintenance, and transmission of Sensitive Information are vital to our operations and business strategies. Although we undertake substantial efforts to reasonably protect (“Sensitive Information,Information”), including internal processes and technological defenses that are preventative, and other commercially reasonable controls designed to provide multiple layers of security and detection, Sensitive Information maintained by us may be vulnerable to attacks by computer hackers, to physical theft by other third-party criminals, or to other compromise due to employee error or malfeasance. Attacks may include both sophisticated cyber-attacks perpetrated by organized crime groups, “activists,” or state sponsored groups, as well as non-technical attacks ranging from sophisticated social
31
engineering to simple extortion or threats, which can lead to unauthorized access or disclosure, disruption or further attacks. Such events may expose us to civil and criminal liability, regulatory action, harm our reputation among customers, deter people from purchasing our products, cause system interruptions, require significant technical, legal, and other remediation expenses, and otherwise have an adverse impact on our business. Third parties to whom we outsource certain functions are also subject to the risks outlined above, and if such a third-party suffers a breach of information security involving our Sensitive Information, the breach may result in substantial costs and other negative consequences, including a material adverse effect on our business, financial condition,
31
results of operations and liquidity. We offer no guarantees that we will be able to implement information security measures to prevent all breaches of information security.
Employee error, misconduct, or excessive risks may be difficult to detect and prevent and could adversely affect us.
Persons who conduct our business, including executive officers and other members of management, other employees and our IMOs and their sales agents, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining what assets to purchase for investment and when to sell them, deciding which business opportunities to pursue, and other business decisions. Losses may result from, among other things, excessive risk, fraud, errors, failure to document transactions properly, failure to obtain proper internal authorization, or failure to comply with regulatory requirements. Although we employ controls and procedures designed to monitor business decisions and prevent us from taking excessive risks, it is not always possible to deter or prevent employee misconduct or errors in judgment, and the precautions that we take to prevent and detect this activity may not be effective in all cases. The impact of those losses and excessive risks could harm our reputation and have a material adverse effect on our financial condition and business operations.
We face a risk of noncompliance with and enforcement action under the anti-money laundering statutes and regulations.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra territorial jurisdiction of the United States, and by expanding the categories of financial institutions to which such laws and regulations apply to include some categories of insurance companies. Certain financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high risk clients and implement a written client identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions without notifying the affected clients. Regulatory authorities routinely examine financial institutions to ensure that they have policies and procedures reasonably designed to comply with applicable requirements and for compliance with the policies and procedures and these substantive obligations. Failure of a financial institution to maintain and implement adequate programs, including policies and procedures, to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. We and our subsidiaries are subject to anti-money laundering statutes and certain regulations, and our compliance obligations under these rules may result in increased costs and allocation of internal resources.
Litigation or regulatory actions could have a material adverse impact on us.
Current and future litigation or regulatory investigations and actions in the ordinary course of operating our business, including class action lawsuits, may negatively affect us by resulting in the payment of substantial awards or settlements, increasing legal and compliance costs, requiring us to change certain aspects of our business operations, diverting management attention from other business issues, harming our reputation with customers or making it more difficult to retain current customers and to recruit and retain employees or IMOs.
Guarantees within certain of our products may adversely affect our financial condition or results of operations.
We offer guarantees which can include a return of no less than the total deposits made on the contract less any customer withdrawals, total deposits made on the contract less any customer withdrawals plus a minimum return, or the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees can also include benefits payable in the event of death, upon annuitization, upon periodic withdrawal or at specified dates during the accumulation period.
32
Periods of significant and sustained downturns in equity markets, increased equity volatility, and/or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction of our potential profitability. We use risk management techniques including product design, asset liability management, reinsurance and hedge strategies to manage the risk associated with liability exposures and the volatility of net income associated with these liabilities.
32
We remain ultimately liable for the specific guaranteed benefits and are subject to the risk that reinsurers or derivative counterparties are unable or unwilling to pay. In addition, we are subject to the risk that hedging and other risk management procedures prove ineffective, or the estimates and assumptions made in connection with their use fail to reflect or correspond to the actual liability exposure, or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. We are also subject to the risk that the cost of hedging these guaranteed minimum benefits may materially increase. These risks, individually or collectively, may have a material adverse effect on our financial condition or results of operations.
We regularly analyze overall risk position at the enterprise level and decide how much risk to retain (that is, to hold capital) and how much risk to transfer off the balance sheet. This decision considers the cost of transferring risk, the concentration of the risk, and our tolerance for volatility. Residual risk for which we hold capital may lead to earnings volatility. We cannot assure you that our hedging strategy will successfully mitigate any risks we may hedge.
Deviations from assumptions regarding future persistency, mortality, morbidity, and interest rates used in calculating reserve amounts could have a material adverse impact on our results of operations or financial condition.
Our profitability depends significantly upon the extent to which the actual experience is consistent with the assumptions we use in setting prices for our products and establishing liabilities for future policy benefits and claims. Such amounts are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. The process of calculating reserve amounts for a life insurance company involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality (the likelihood of death or the likelihood of survival), morbidity (likelihood of sickness or disability) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts).
Pricing of our annuity products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within our annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of our annuity products being higher than current account values, in light of poor equity market performance or extended periods of low interest rates, as well as other factors. Persistency could be adversely affected generally by developments affecting client perceptions of us, including perceptions arising from adverse publicity. Many of our products also provide our customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value.
Some of our products and services are complex and are sold through IMOs and their agents, and a failure of the IMOs and their agents to properly explain our products and services or their misrepresentation in connection therewith could have an adverse effect on our business, results of operations and financial condition.
Some of our products are complex and are sold through IMOs and their agents. Therefore, we are primarily reliant on our IMOs and their agents primarily in our distribution channel to describe and explain our products to potential customers. The intentional or unintentional misrepresentation of our products and services in advertising materials or other external communications, or inappropriate activities by the IMOs or their agents, could adversely affect our business reputation and prospects, as well as lead to potential regulatory actions or litigation.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
33
We currently lease approximately 10,13115,831 square feet of office space at 2900 South 70th Street, SuiteSuites 350 and 400, Lincoln, Nebraska 68506. This lease was executed October 17, 201316, 2021 and expires on January 31, 2024.October 16, 2031. We also rent approximately 455 square feet of office space at 405 Lexington Ave, Floor 9, New York, New York, 10174. This rental agreement was executed September 1, 2021 and renews on a month to month basis.
33
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 adversely affect our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
34
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Historically our voting common stock was listed on the OTCQB Marketplace under the symbol “MDWT’’ but had experienced very limited trading. On August 27, 2020, we completed a 500 for one reverse stock split and there was minimal trading of our voting common stock occurred after that date. As ofdate until December 17, 2020, when our voting common stock was listed on the Nasdaq Capital Market under the symbol “MDWT.” The following table shows the high and low bid prices of our voting common stock as reported by the OTCQB through December 17, 2020 and afterward as reported by Nasdaq.
| | | | | | | | | | | | | | | | |
| | | | Bid Price | | | | Bid Price | ||||||||
Period |
| Year |
| High |
| Low |
| Year |
| High |
| Low | ||||
First Quarter | | 2019 | | $ | 75.00 | | $ | 25.00 | | 2020 | | $ | 35.00 | |
| 33.00 |
Second Quarter | | 2019 | | | 30.00 | | | 27.00 | | 2020 | | | 41.25 | |
| 25.00 |
Third Quarter |
| 2019 | | | 30.00 | | | 15.50 |
| 2020 | | | 52.50 | |
| 18.25 |
Fourth Quarter |
| 2019 | |
| 47.50 | | | 15.50 |
| 2020 | |
| 63.00 | |
| 25.00 |
| | | | | | | | | | | | | | | | |
First Quarter |
| 2020 | |
| 35.00 | |
| 33.00 |
| 2021 | |
| 50.29 | |
| 49.14 |
Second Quarter |
| 2020 | |
| 41.25 | |
| 25.00 |
| 2021 | |
| 39.81 | |
| 39.21 |
Third Quarter |
| 2020 | |
| 52.50 | |
| 18.25 |
| 2021 | | �� | 39.80 | |
| 38.90 |
Fourth Quarter |
| 2020 | |
| 63.00 | |
| 25.00 |
| 2021 | |
| 17.56 | |
| 16.73 |
On March 24, 2022, there were approximately 4,195 holders of record of our voting common stock.
Dividend Policy
Holders of our voting common stock are entitled to cash dividends when, as, and if declared by our board of directors out of funds legally available therefor. We have never paid cash dividends on our voting common stock. Future dividend policy will be subject to the discretion of our board of directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that future cash dividends of any kind will be paid to holders of our voting common stock. Our ability to pay cash dividends depends, in part, upon on the ability of American Life to pay cash dividends to us. American Life, as an insurance subsidiary is subject to significant regulatory restrictions limiting its ability to declare and pay cash dividends. These restrictions are related to surplus and net investment income.
34
Securities Authorized for Issuance under Equity Compensation Plans
The table below sets forth certain information regarding options and restricted stock awards granted to our employees, including officers, under our stock incentive plans for 2020.2021.
| | | | | | | | |
| | 2020 Long-Term Incentive Plan(1) | | 2019 Long-Term Incentive Plan(1) | | 2020 Long-Term Incentive Plan(1) | | 2019 Long-Term Incentive Plan(1) |
|
| | | |
| | | |
Options granted in 2019 | | - | | 17,900 | | - | | 17,900 |
Options granted in 2020 | | 168,002 | | 68,025 | | 168,002 | | 67,325 |
Options granted in 2021 | | 139,028 | | 24,000 | ||||
Restricted stock granted in 2020 | | — | | 18,597 | | 18,597 | | 5,089 |
Vested | | (77,175) | | (8,782) | ||||
Forfeited | | — | | (3,550) | | (12,100) | | (24,667) |
Vested | | — | | (200) | ||||
Non-vested at December 31, 2020 |
| 168,002 | | 100,772 | ||||
Non-vested at December 31, 2021 |
| 236,352 | | 80,865 |
Reflects reverse stock split
35
Table of 500:1 as of August 27, 2020.Contents
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
None.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included in this Annual Report on Form 10-K. However, these10-K and it includes many forward-looking statements which involve many risks and uncertainties including those referred to herein. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, such as those set forth herein under “Summary of Risks Associated with our Business and Voting Common Stock” and “Risk Factors”.Factors.” We are under no duty to update any of the forward-looking statements after the date of this registration statementannual report to conform these statements to actual results.
Overview
We were formedMidwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of becomingoperating a financial services company. We redomesticated from the State of Nebraska to the State of Delaware on August 27, 2020. We are in the annuity insurance business and operate through our business primarily through threewholly owned subsidiaries, American Life & Security Corp. (“American Life”), 1505 Capital LLC (“1505 Capital”), and our sponsored captive reinsurance company, Seneca Re. Reinsurance Company, LLC (“Seneca Re”).
Management evaluates the Company as one reporting segment in the life insurance industry. We are primarily engaged in the underwriting and marketing of annuity products through American Life, and then reinsuring such products with third-party reinsurers, and since May 13, 2020, with Seneca Re protected cells as described below. American Life presently offers five annuity products, two MYGAs, a FIA, and two bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products. American Life’s legacy product offerings consisted of a multi-benefit life insurance policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product.
American Life is a Nebraska-domiciled life insurance company, which is also commercially domiciled in Texas, that is currently licensed to sell, underwrite, and market life insurance and annuity products in 2122 states and the District of Columbia and has pending applications in additional states. We also provideColumbia.
In early 2020, Seneca Re, a Vermont limited liability company, was formed by us to operate as a Vermont licensed sponsored captive insurance company administrative services through a division known as “m.pas” that was formed in 2019. 1505 Capital provides investment advisory and related asset management services. Seneca Re reinsuresto reinsure various types of the life insurance risks on behalf of American Life and third party capital providers through one or more single purposesspecial purpose entities or “cells.”
In 2018, we began implementation of a new business plan with the purpose of leveraging technology and reinsurance to distribute insurance products through IMOsknown as described elsewhere in this Form 10-K.
American Life’s sales force continues to grow, with eight third-party IMOs presently offering our products. American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2020. A. M. Best also upgraded American Life's long-term issuer credit rating to bbb+ from bbb in December 2020.
Beginning in mid-2019, American Life began ceding portions of its MYGA and FIA annuity business to third-party insurance companies and Seneca Re that we refer to us as “quota shares.” For detailed information see “Note 8 — Reinsurance” to our Consolidated Financial Statements included in this Form 10-K.
35
Effective March 12, 2020, we formed Seneca Re for the purpose of reinsuring various types of risks through one or more single purpose entitles, or “protected cells.” On March 30,April 15, 2020, Midwest entered into an operating agreement with Seneca Re received its certificate of authority to transact business as a captive insurance company. On May 12, 2020, we contributed $300,000 to Seneca Re for a 100% ownership interest. Seneca Re has one protected cell, cell 2020-01 (“SRC1”)and as of December 31, 2020. We contributed a total2021, Seneca Re had two protected cells, Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Incorporated Cell, LLC 2021-03 (“SRC3”) and both of $15.0 million through December 31, 2020 to capitalize SRC1, which isare consolidated in our financial statements.
Effective
1505 Capital LLC (“1505 Capital”), a Delaware limited liability company, is an SEC registered investment adviser. Its financial results have been consolidated with ours since the date of its acquisition on June 15, 2020. . At December 31, 2021, 1505 Capital had approximately $405 million total third-party assets under management.
On April 24, 2020, we raised capital of $5,227,000 from various third-party investors and issued 231,655 shares of voting common stock at $22.50 per share. Also, on April 24, 2020, we signedentered into a securities purchase agreementSecurities Purchase Agreement with Crestline for additional capital of $10.0 millionAssurance Holdings LLC, a Delaware limited liability company (“Crestline Assurance”), Xenith Holdings LLC, and issuedVespoint LLC, pursuant to which Crestline Assurance purchased 444,444 shares of our voting common stock, to Crestline at $22.50 per share.
On August 10,share for $10.0 million. With the net proceeds we contributed $5.0 million to American Life. Also, effective as of April 24, 2020, Midwest filed Articles of Amendment of Amended and Restated Articles of Incorporation (“Amendment”) that changed the total number of shares that it is authorized to issue to 22,000,000in a separate transaction, we sold 231,655 shares of common stock of which 20,000,000 were designated as voting common stockto various investors in a private placement at $22.50 per share for $5.227 million
On July 27, 2020, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a par valuenew protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2020-02 (“SRC2”)). SRC2 was capitalized by Crestline Management, L.P. (“Crestline”), a significant shareholder of $0.001 per share and 2,000,000 shares were designated as non-voting common stock withMidwest via a par value of $0.001 per share.Crestline subsidiary, Crestline Re SPC1. The Amendment also provides for 2,000,000 shares of authorized preferred stock with a par value of $0.001 per share. The Amendment provided that upon effectiveness, each 500 shares of common stock either issued or outstanding would be converted into one share of voting common stock through a reverse stock split. The AmendmentReinsurance Agreement, which was effective as of August 27, 2020. Fractional shares were not issued in connectionApril 24, 2020, and was entered into pursuant to a Master Letter Agreement (the “Master Agreement”) dated and effective as of April 24, 2020, among American Life, Seneca Re and Crestline. The Reinsurance Agreement supports American Life’s new business
36
production by providing reinsurance capacity for American Life to write certain kinds of FIAs and MYGAs. Concurrently with the reverse stock split butReinsurance Agreement, American Life and SRC2 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and American Life and SRC2 entered into a trust agreement whereby SRC2 maintains for American Life’s benefit a trust account that supports the reinsured business.
Under the Master Agreement, Crestline agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from MYGAs and a quota share percentage of 40% for American Life’s FIAs. The Master Agreement expires on April 24, 2023.
In addition, pursuant to the Master Agreement, agreed to enter into a separate agreement whereby, among other things and subject to certain conditions, American Life will agree to reinsure additional new business production to one or more reinsurers formed and/or capitalized by Crestline, Midwest or an appropriate affiliate will refer potential advisory clients to Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline.
Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, for and on behalf of Crestline Re SP1, under which the above-described reinsurance, trust and related asset management agreements were paid in cash. The Company paid approximately $175,000 for those fractional sharesnovated and is now holding treasury stock representedreplaced with substantially similar agreements entered into by that amount. Outstanding shares as ofAmerican Life and Crestline Re SP1.
In December 31, 2020, were 3,737,564 and as restated for December 31, 2019 were 2,042,670. All prior periods disclosed in this 10-Q have been restated to reflect the reverse stock split per share amounts.
On December 21, 2020, Midwestwe completed a public offering of 1,000,000 shares of itsour voting common stock offered by the Company at a pricefor gross proceeds of $70.0 million (see Note 17 to the public of $70.00 per share. On December 17, 2020, Midwest votingConsolidated financial statements herein). In connection therewith, our common stock was listedapproved for listing and began trading on the Nasdaq Capital Market under the ticker symbol “MDWT.” The aggregate net proceeds to
On June 26, 2021, the Company were approximately $65.1 million, after deducting underwriting discounts and commissions.
Midwest used the net proceedsNebraska Department of Insurance (‘NDOI”) issued its non-disapproval of the offering to support the growthModified Coinsurance Agreement (“Modco AEG Agreement”) of its insurance subsidiaries, American Life with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement closed on June 30, 2021.
Under the Modco AEG Agreement, American Life cedes to AEG, on a capital contributionmodified coinsurance basis, 20% quota share of $50.0certain liabilities with respect to its MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its FIA products. American Life has established a Modco Deposit Account to hold the assets for the Modco Agreement. The initial settlement included net premium income of $37.5 million and net statutory reserves of $34.8 million for the modified coinsurance account. The amount paid to the Modified Deposit Account from AEG was $2.4 million.
On November 10, 2021, Midwest purchased 1,000 shares of Common Stock, $.01 par value per share for a total purchase price of $5.7 million for 100% ownership in an intermediary holding company. Also, on November 10, 2021, Seneca Re withProtected Cell 2021-03 (“SRC3”) was granted a Certificate of Authority by the Vermont Department of Financial Regulation. The intermediary holding company contributed capital contribution of $7.5$5.5 million to purchase 100% of SRC3 Class A and B capital stock. Also, on November 10, 2021, American Life and SRC3 entered into a Funds Withheld and Modified Coinsurance Agreement, whereby, SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA and quota share percentage of 45% of American Life’s FIA products.
On December 30, 2021, Midwest closed the sale of approximately 70% of SRC1 to a subsidiary of ORIX Corporation USA for $15.0 million. Under the terms of the agreement, Midwest holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, will be the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital LLC.
COVID-19
We continue to closely monitor developments related to the COVID-19 pandemic to assess any potential adverse impact on our business. Due to the evolving and highly uncertain nature of this pandemic, it currently is not possible to provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations, financial condition or liquidity. Management implemented the Company’sour business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. Operations continued as normal despite a sharp increase in sales during the period. We continue to monitor the Center for Disease Control and Prevention and State of Nebraska guidelines regarding employee safety.
Our management will continuecontinues to monitor our investments and cash flows to evaluate the impact as this pandemic evolves.
37
Unrealized Losses; Embedded DerivativesIndustry Trends and Market Conditions
American Life has agreementsInterest Rate Environment
Overall, interest rates remained at historically low levels in 2021, however the Federal Reserve is expected to begin increasing short-term interest rates in early 2022. We seek to address our interest rate risk through managing the duration of the liabilities and purchasing and holding high quality, long-term assets that mirror that duration.
Competition
We are operating in a highly competitive market with several third-party reinsurersvarious sizes of diversified financial institutions, established insurance and reinsurance companies. Our annuity market is being impacted by the growing aging population and the need to evaluate their retirement options. We believe our technology and customer service along with our ability to structure solutions position us to provide value to annuity consumers through various distribution channels.
Discontinuation of Libor
The Financial Conduct Authority (“FCA”), the U.K. regulator of the London Interbank Offered Rate ("LIBOR"), previously indicated that it intends to stop persuading or compelling panel banks to submit quotes used to determine LIBOR after 2021. On November 30, 2020, the Intercontinental Exchange (“ICE”) Benchmark Administration (“IBA”), the administrator of LIBOR, announced a consultation regarding its intention to cease the publication of one week and two-month U.S. Dollar LIBOR settings at the end of December 2021, but to extend the publication of the remaining U.S. Dollar LIBOR settings (overnight and one, three, six and 12 month U.S. Dollar LIBOR) until the end of June 2023. The IBA intends to share the results of the consultation with the FCA and publish a summary of the responses. U.S. bank regulators acknowledged the announcement and, subject to certain limited exceptions, advised banks to cease writing new U.S. Dollar LIBOR contracts by the end of 2021.
We are in the process of analyzing and identifying our population of securities, financial instruments and contracts that utilize LIBOR (collectively “LIBOR Instruments”) to determine if we have funds withheld (“FW”) and modified coinsurance (“Modco”) coinsurance provisions under which the assets relatedany material exposure to the reinsured business are maintained by American Life as collateral; however, ownershiptransition from LIBOR. To the extent we hold LIBOR Instruments, the terms of the assets and the total return on the asset portfolios belongthese instruments may have fallback provisions that provide for an alternative reference rate when LIBOR ceases to exist. For securities without adequate fallback provisions already in place, legislation governing securities under New York law has been enacted to provide a safe harbor for transition to the third-party reinsurers. Under GAAP, this arrangement is considered an embeddedrecommended alternative reference rate. In addition, federal legislation has been introduced to provide the same protection for securities not governed by New York law.
Notwithstanding, in preparation for the phase out of LIBOR, we may need to renegotiate our LIBOR Instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our LIBOR Instruments. Furthermore, the discontinuation of LIBOR may adversely impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative as discussed in “Note 5 — Derivative Instruments” to our Consolidated Financial Statements. instruments.
As a result, the transition of price increasesour LIBOR Instruments to alternative reference rates may result in 2020, assets carried as investmentsadverse changes to the net investment income, fair market value and return on American Life’s financial statements forthose investments. We intend to continue to evaluate and monitor the third-party reinsurers contained unrealized gains of approximately $2.9 million as of December 31, 2020. The terms of the contractsrisks associated with the third-party reinsurers provide that unrealized gains onLIBOR transition which include identifying and monitoring our exposure to LIBOR, monitoring the portfolios accruemarket adoption of alternative reference rates and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the third-party reinsurers. We account for these unrealized gains by recording equivalent realized losses on our income statement. Accordingly, the unrealized gains on the assets held by American Life on behalfoverall impact of the third-party reinsurers were offset by recording an embedded derivative loss of $2.9 million. If prices of investments recover, the unrealized losses of the third-party reinsurers may be reduced; therefore, the associated embedded derivative gain recognized by us for 2020, would be reduced accordingly.this change at this time.
36
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America (“GAAP”).GAAP. Preparation of our consolidatedConsolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is a summary of our significant accounting policies and 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. Our accounting policies, judgments and estimates have not changed significantly over our disclosed accounting periods. For further discussion of our accounting policies and estimates see “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” to our Consolidated Financial Statements.financial statements.
38
Valuation of Investments
The type and amount of investments that 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. American Life has adopted investment policies in compliance with the insurance laws of the State of Nebraska. We have a significant amount of investments on our balance sheets that are held as collateral for our reinsurers.
American Life has a long-term investment policy aimed at protecting capital and earning attractive risk adjusted returns while maintaining compliance with Nebraska’s insurance investment laws. Our investments are managed by our senior management team, who have many years of asset management experience, along with the advice of 1505 Capital, which was established in 2018 to provide financial and investment advisory and management services to clients and related investment, trading and financial activities, including American Life.
Our investment portfolio expanded in 2019 to include a broader class ofAll fixed maturities (including collateralized loan obligations, corporate, asset-backedowned by the Company are considered available-for-sale and mortgage-backed securities), mortgage loans, derivatives and other investments including assets we hold as collateral for reinsurance entitles. Fixed maturities, which are classified as available-for-sale, are carriedincluded in the Consolidated financial statements at their fair value inas of the consolidated balance sheets, with unrealizedfinancial statement date. Premiums and discounts on fixed maturity debt instruments are amortized using the scientific-yield method over the term of the bonds. Realized gains orand losses recordedon 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 accumulated other comprehensive income (loss). Mortgage loans are carried at unpaid principle which is also used for their fair value in the consolidated balance sheets. Derivatives are carried at fair market value with the realized gains or losses recorded in realized gains (losses) on the comprehensive income statement. We utilize external independent third-party pricing services to determine the fair values on investment securities available-for-sale. We have processes and controls in place to review prices received from service providers and unusual 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 that have previously demonstrated knowledge and experience of the subject security. Trades are cleared through independent brokers after competitive prices are solicited.income.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declinesDeclines in the fair value of investments that are other-than-temporary involves consideration of several factors including (a) the time or period and extent to which the fair value has been less than theavailable-for-sale securities below their amortized cost basis, (b) adverse conditions specifically relatedare evaluated to a security, industry or geographic area, (c)assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the historicalCompany considers severity of impairment, duration of impairment, forecasted recovery period, issuer credit ratings, and implied volatilitythe intent and ability of the fair valueCompany to hold the investment until the recovery of a security, (d) payment structure of a security, (e) failure of issuer of a security to make interest payments, (f) changes to the rating of a security, and (g) possible recoveries or additional declines in the fair value after the balance sheet date. cost.
The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to athe specific security. If we intendthe Company intends to sell a security or it is more likely than not that wethe 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 statement as an other-than-temporary impairment. As it relates to debt securities, if we doIf the Company does not expect to recover the amortized basis, dodoes not plan to sell the security, and if it is not more likely than not that wethe Company would be required tosell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. We recognizeThe Company recognizes the credit loss portion through earnings in the income statementas realized losses 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 ourthe 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 derived usingdriven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.
37
Table As of ContentsDecember 31, 2020, the Company analyzed its securities portfolio and determined that an impairment of approximately $35,000 should be recorded for one debt security, an impairment of $500,000 was recognized on a preferred stock, and a valuation allowance of $777,000 established on one lease. The valuation allowance on the lease of $777,000 was released as of March 31, 2021 due to the sale of the investment. The Company had no impairment to recognize as of December 31, 2021.
Investment income consists of interest, dividends, gains and losses from the equity method of accounting for certain investments, and real estate income, which are recognized on an accrual basis along with the amortization of premiums and discounts.
Certain available-for-sale investments are maintained as collateral under funds withheld (“FW”) and modified coinsurance (“Modco”) agreements but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. American Life has treaties with several third-party reinsurers that have FW and Modco provisions. In a Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a FW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers to reduce the potential credit risk. The unrealized gains/losses on those investments are passed through to the third-party reinsurers, through the fair value of our total return swap, as either a realized gain or loss on the Consolidated Statements of Comprehensive Loss.
Intangibles
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.
Our indefinite-lived intangible assets consist of American Life’s state licenses. We compared the carrying value to the current costs of obtaining licenses in those states. As of December 31, 2020,2021, the sum of the fair value of those licenses exceeded the carrying value of the indefinite-lived intangible assets.
39
Reinsurance
We expect to reinsure most of the risks associated with our issued annuities. Our reinsurers may be domestic, foreign or capital markets investors seeking to assume U.S. insurance business. In most reinsurance transactions, American Life will remain exposed to the credit risk of reinsurers, or the risk that one or more reinsurers may become insolvent or otherwise unable or unwilling to pay for policyholder claims. We seek to mitigate the credit risk relating to reinsurers by generally either requiring that the reinsurer post substantial collateral or make other financial commitments as a security for the reinsured risks. Under these reinsurance agreements, there typically is a monthly or quarterly settlement of premiums, claims, surrenders, collateral, and other administration fees.
In a typical reinsurance transaction, we receive a ceding commission and reimbursement of certain expenses at the time liabilities are reinsured, plus ongoing fees for the administration of the business ceded. Our reinsurers are typically not “accredited” or qualified as reinsurers under Nebraska law. In order to receive credit for reinsurance for transactions with these reinsurers and to reduce potential credit risk, we usually hold collateral from the reinsurer on a funds withheldFW basis or require the reinsurer to maintain a trust that holds assets backing up its obligation to pay claims on the business it assumes. In some cases, the reinsurer may appoint an investment manager to manage these assets pursuant to guidelines approved by us that are consistent with state investment statutes and regulations relating to reinsurance. OurWhen our investment advisor subsidiary, 1505 Capital, is appointed to manage these assets, and we receive additional ongoing asset management fees via 1505 Capital.fees.
Future Policy Benefits
We establish liabilities for amounts payable under our policies, including annuities. Generally, amounts are payable over an extended period of time. Under GAAP, our annuities are treated as deposit liabilities, where we use account value in lieu of future policy reserves. Our FIA reserves are calculated by an independent consulting actuary and our MYGA reserves equal the account value from our policy administration system. We currently do not offer traditional life insurance productsproducts.
Income Taxes
Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. The principal assets and liabilities giving rise to suchthese differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such tax assets would be realized. We have no uncertain tax positions that we believe are more-likely-than not that the benefit will not be realized.
Recognition of Revenues
Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits.deposit-type contract liabilities. Annuity premiums are shown as a financing activity in the consolidated statement of cash flows. Revenues from these contracts are comprised of fees earned for administrative and policyholder services, which are recognized over the period of the annuity contracts and included in other revenue. Through our reinsurance contracts, revenues are earned through ceding commissions, which are capitalized, and our independent consulting actuary determines the amounts to be recognized as income over the period of the annuity contracts. Deferred coinsurance ceding commissions are shown as an operating activity in the consolidated statement of cash flows. Revenues from asset management services are recognized as earned.
38
Derivative Instruments
Derivatives are used to hedge the risks experienced in our ongoing operations, such as equity, interest rate, and cash flow risks, or for other risk management purposes, which primarily involve managing liability risks associated with our FIA product and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the consolidatedConsolidated balance sheets.
To qualify for hedge accounting, at the inception of the hedging relationship, we formally document our designation of the hedge as a cash flow or fair value hedge and our risk management objective and strategy for undertaking the hedging transaction identifying how the hedging instrument is expected to hedge the designated risks related to the hedged item, the method to retrospectively, and prospectively assess the hedging instrument’s effectiveness and the method to be used to measure ineffectiveness. A derivative
40
designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is also assessed periodically throughout the life of the designated hedging relationship.
In the late 2019, we began investing in options to hedge our interest rate risks on our FIA product. Options typically do not qualify for hedge accounting; therefore, we chose not to use hedge accounting for the related options that we currently have. We value our derivatives at fair market value with the offset being recorded on our incomeconsolidated statement of comprehensive loss as a realized gain or (loss).
Additionally, reinsurance agreements written on a funds withheldFW basis contain embedded derivatives on our FIA product. Gains or (losses) associated with the performance of assets maintained in the relevant deposit and funds withheld accounts are reflected as realized gains or (losses) in our consolidated statement of comprehensive loss.
Derivatives
The Company entered into derivative instruments to hedge FIA products that guarantee the income statement.return of principal to the policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options. The change in fair value of the derivatives for hedging the FIA index credits and the related embedded derivative liability fluctuated from period to period based on the change in the market interest rates. The indexed reserves are measured at fair value for the current period and future periods. We hedge with options that align with the terms of our FIA product which is between three and seven years. We have analyzed our hedging strategy on our FIA product and believe it is effective as of December 31, 2021.
American Life also has agreements with several third-party reinsurers that have FW and Modco provisions under which the assets related to the reinsured business are maintained by American Life as collateral; however, ownership of the assets and the total return on the asset portfolios belong to the third-party reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in “Note 5 — Derivative Instruments” to our Consolidated financial statements. Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains as of December 31, 2021 and 2020, of approximately $ 161,000 and $2.9 million, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party reinsurers. We account for these unrealized gains by recording equivalent realized gains or losses on our consolidated statement of comprehensive loss. Accordingly, the unrealized gains on the assets held by American Life on behalf of the third-party reinsurers were offset by recording an embedded derivative gain of $2.7 million and loss of $2.9 million as of December 31, 2021 and 2020, respectively. If prices of investments fluctuate, the unrealized gains or losses of the third-party reinsurers may also fluctuate; therefore, the associated embedded derivative gain (loss) recognized by us would be increased or decreased accordingly.
Net Loss
NetIn this section, unless otherwise noted the discussion below first compares the year ended December 31, 2021 to the like year ended December 31, 2020.
We incurred a comprehensive loss of $20.1 million in 2021 compared with a comprehensive loss of $6.6 million in 2020. Our revenues increased to $30.1 million from $10.6 million driven by an overall increase in investment income and realized gains along with fee revenue. But our expenses increased by an even greater amount in dollar terms – to $41.9 million from $21.4 million. Driving the increase in expenses was significant increases in our salaries and benefits and in our other operating expenses. The increase in expenses were to support potential growth of the business from increases costs to attract talent, legal and consulting to support transactions, investment structures, and state expansion along with technology initiatives.
41
Other reasons for 2021’s increase in consolidated statement of comprehensive loss:
1) | Taxes. Our GAAP effective tax rate was 35.6 % in 2021 compared with 14.7 % in 2020. Note 8 to our financial statements provides further information related to this increase in tax rate. |
2) | Change in Unrealized Investment Gains. This change was $4.4 million in 2021 compared with $7.4 million in 2020. The decline in interest rates in 2020 increased the value of our fixed-income investments to a much greater extent than was the case in 2021. |
Our FIA products have three components influencing our consolidated statement of comprehensive loss:
The derivatives we purchase to hedge stock market risk we would otherwise face from our FIA. We carry these derivatives at fair value on our balance sheet, recording the change in fair value in our consolidated statement of comprehensive loss as either a realized gain or realized loss. In 2021, the increase in the market value of the derivative assets was $2.7 million compared to the market value of the derivative assets of $3.5 million in 2020 compared to 2019 primarily due to the following:
Increases to Net Loss:
in our net realized gain on investments.
2) | The option budget reinsurers pay us to purchase derivative assets. We mark these assets to market each period. Separately, we record a payable to the |
a reinsurer when a policy is surrendered, an annuitant dies, or a policy lapses. We compare what the reinsurer paid for the original option budget to the market value at the end of the period. The |
39
Decreaseschanges in interest rates, assets held on behalf of the third-party reinsurers had unrealized gains of approximately $161,000 and $2.9 million at December 31, 2021 and 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolio accrue to Net Loss:
Consolidated Results of Operations - Years Ended December 31, 20202021 and 20192020
Revenues
The following summarizes the sources of our revenue:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2020 |
| 2019 | ||
Premiums | | $ | 24 | | $ | (152) |
Investment income, net of expenses | |
| 4,047,184 | |
| 120,581 |
Net realized gains on investments (See Note 4) | |
| 2,550,396 | |
| 353,602 |
Amortization of deferred gain on reinsurance | |
| 1,835,505 | |
| 2,643,801 |
Service fee revenue, net of expenses | | | 1,960,092 | | | 230,454 |
Other revenue | |
| 188,688 | |
| 51,502 |
| | $ | 10,581,889 | | $ | 3,399,788 |
| | | | | | |
| | Year ended December 31, | ||||
(In thousands) |
| 2021 |
| 2020 | ||
Investment income, net of expenses | | $ | 15,737 | | $ | 4,047 |
Net realized gains on investments (See Note 4) | |
| 7,752 | |
| 2,550 |
Amortization of deferred gain on reinsurance | |
| 3,022 | |
| 1,836 |
Service fee revenue, net of expenses | | | 2,343 | | | 1,960 |
Other revenue | |
| 1,209 | |
| 189 |
| | $ | 30,063 | | $ | 10,582 |
Premium revenue: The introduction of our MYGA and FIA products discussed above generated a large volume of new business;business in 2021 and 2020; however, these products are defined as investment contracts andunder U.S. GAAP requires that premiums be deferred as deposit-type liabilitiesGAAP. Accordingly the funds we received from our customers under these contracts were recorded on our balance sheet. American Life expects to introduce additional versions of these products in 2021 primarily in the annuity business. The table below shows premium issued under statutory accounting principles (“SAP”) on our two annuity products:
| | | | | | | | | | | |
| Year ended December 31, | ||||||||||
| 2020 | | 2019 | ||||||||
| | MYGA | | | FIA | | | MYGA | | | FIA |
| Premium(1) | | Premium(1)(2) | | Premium(1) | | Premium(1)(2) | ||||
First quarter | $ | 31,565,506 | | $ | 16,249,504 | | $ | 8,292,617 | | $ | — |
Second quarter | | 27,400,367 | | | 72,270,636 | | | 29,946,263 | | | — |
Third quarter | | 27,537,077 | | | 104,514,068 | | | 41,261,292 | | | — |
Fourth quarter | | 28,158,140 | | | 107,866,003 | | | 66,247,565 | | | 15,616,831 |
Total issued | $ | 114,661,090 | | $ | 300,900,211 | | $ | 145,747,737 | | $ | 15,616,831 |
(2) We began selling the FIA product in November 2019.
4042
Investment income, net of expenses: The components of net investment income for 20202021 and 20192020 were as follows:
| | | | | | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Fixed maturities | | $ | 3,661,098 | | $ | 292,453 | | $ | 16,443 | | $ | 3,661 |
Mortgage loans | |
| 992,300 | |
| — | |
| 185 | |
| 992 |
Other | |
| 102,801 | |
| 38,397 | ||||||
Other invested assets | | | 665 | | | 103 | ||||||
Other interest income | |
| 298 | |
| — | ||||||
Gross investment income | |
| 4,756,199 | |
| 330,850 | |
| 17,591 | |
| 4,756 |
Less investment expenses | |
| (709,015) | |
| (210,269) | ||||||
Less: investment expenses | |
| (1,854) | |
| (709) | ||||||
Investment income, net of expenses | | $ | 4,047,184 | | $ | 120,581 | | $ | 15,737 | | $ | 4,047 |
The increase inInvestment income, net of expenses consisted of investment income for 2020 over 2019generated from our retained investment assets that are not ceded to reinsurers. The increase was due to the investment income earned on theour bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period. Our investment portfolio grew to $518,194,579period, as well as deployment of excess cash towards credit investments with attractive yields and risk-return profiles. As of December 31, 2021 and 2020, compared to $138,602,143 as of December 31, 2019,on a gross consolidated basis, our investment portfolio (excluding cash) was $975.5 million and $518.2 million, respectively, as a result of proceeds from our MYGA and FIA product sales. American Life ceded $228.1 million of premiums to reinsurers and transferred approximately $7.7 million of investment income related to the ceded premiums as required by the terms of its reinsurance agreements.
Net realized gains on investments: The netNet realized gains on investments for the year ended December 31, 2020 was $2,550,396were $7.8 million in 2021 compared with $2.6 million in 2020. The latter figure included a gain of $2.7 million and included a loss of $2,910,608$2.9 million from ana total return swap embedded derivative in 2021 and $3,466,272 of2020, respectively. In 2021, there were net realized gains of $2.7 million related to derivatives utilizedwe own to hedge the obligations to FIA policyholders; the net realizedsuch gains related to derivatives utilized to hedge the obligations to FIA policyholders iswere partially offset by expenses, includingan increase in the mark-to-market change in embedded derivative liability within interest credited expensesexpense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expensesexpenses. The increasechange in net realized gains on investments was primarily due to favorable trading activity.fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.
The embedded derivative is a total return swap related to coinsurance agreements with our reinsurers. American Life has treaties with several reinsurers that have funds withheld coinsurance provisions, under which the assets backing the treaties are maintained by American Life as collateral but the assets and total return on the asset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 5 — Derivative Instruments to our Consolidated Financial Statements.financial statements. The change in fair value of the total return swap is included in net realized gains or losses on investments. As a result of price increases in 2020, assetsAssets carried as investments on American Life’s financial statements for the third partythird-party reinsurers contained unrealized gains of approximately $161,000 and $2.9 million as offor years ended December 31, 2020.2021 and 2020, respectively. The terms of the contracts with the third partythird-party reinsurers provide that unrealized gains or losses on the portfolios accrue to the third partythird-party reinsurers. We account for these unrealized gains by recording equivalent realized losses on our income statement. Accordingly,recorded the unrealized gains on the assets held by American Life on behalfaccruing to third-party reinsurers via a total return swap resulting in a realized gain of the third party reinsurers were offset by recording an embedded derivative$2.7 million and a realized loss of $2.9 million.million in 2021 and 2020, respectively.
Amortization of deferred gain on reinsurance: The decreaseincrease in 2021 to $3.0 million from $1.8 million in 2020 was due to the indemnity coinsurance convertedhigher deferred gain on reinsurance, driven in part by a third-party reinsurer to assumptive reinsurance of approximately $305,600 and approximately $2.6 million for the years ended December 31, 2020 and 2019, respectively. Under assumptive reinsurance we no longer have a legal obligation for policies subject to such agreement that became assumptive with the reinsurer. This decrease was offset by the amortization of the ceding commission deferred from the reinsurance agreements with other reinsurers which were not in effect in 2019.
higher reinsured premiums during 2021.
Service fee revenue, net of expenses: For financial statement purposes,Service fee revenue, net of expenses, consists of fee revenue generated by 1505 Capital, for asset management services provided to third-party clients, some of whom are our investment adviser subsidiary became consolidated into Midwest as of April 2, 2019.reinsurers. The increase in this revenue, to $2.3 million in 2021 from $1.9 million in 2020, was due primarily to the increase inlevel of asset management services provided to our third-party reinsurers and purchasing the remaining 49% interest inby 1505 Capital in June of 2020.
to third-party clients.
Other revenue: The increase inOther revenue consists of revenue generated by us for providing ancillary services such as third-party administration (“TPA”) fees earnedto clients. The increase in 2021 was due to us providing other administrativean increased provision of ancillary services, including TPA, to clients.clients and policy charges.
4143
Expenses
Our expenses for the periods indicated are summarized in the table below:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2020 |
| 2019 | ||
Interest credited | | $ | 4,224,828 | | $ | 6,584 |
Benefits | | | (4,953) | | | 34,436 |
Increase in benefit reserves | |
| — | |
| 34,500 |
Amortization of deferred acquisition costs | |
| 670,233 | |
| — |
Salaries and benefits | |
| 6,347,751 | |
| 2,701,314 |
Other operating expenses | |
| 10,199,629 | |
| 5,997,955 |
| | $ | 21,437,488 | | $ | 8,774,789 |
| | | | | | |
| | Year ended December 31, | ||||
(In thousands) |
| 2021 |
| 2020 | ||
Interest credited | | $ | 7,012 | | $ | 4,225 |
Benefits | | | 6 | | | (5) |
Amortization of deferred acquisition costs | |
| 2,886 | |
| 670 |
Salaries and benefits | |
| 16,926 | |
| 6,347 |
Other operating expenses | |
| 15,104 | |
| 10,200 |
| | $ | 41,934 | | $ | 21,437 |
Interest credited: The increase was primarily due to the increaseinterest credited in the retention on the sales of the new MYGA and FIA products during the year of 2020 compared2021 relating to the 5% retention on theMYGA product of $2.8 million. Interest credited related to our retained FIA product only in 2019 thatpolicies was classified as deposit-type funds.approximately positive $4.2 million and $3.4 million for 2021 and 2020, respectively. The increase is also due to the consolidation of the SRC1 entity which includes theFIA interest credited for the deposit-type contracts held on its books.
Death and other benefits: Death benefits decreased due to the reduction of the amount of our estimate during 2020is related to the escheatmentfair market value of agedthe embedded derivative which is owed to policyholders. This was partially offset by the realized gain on our total return swap that is included in the net realized gain on investment above.
Benefits: This refers to death claims.
Increasebenefits, on legacy life insurance policies, which did not change significantly in benefit reserves: The change in benefit reserves was due to the annuity products that were classified on the balance sheet under deposit-type contracts.2021 compared with 2020’s death benefits.
Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs (”DAC”) deferred onrelating to the sale of American Life’s MYGA and FIA products where we retained that were not cededapproximately 50% of the business in 2021 compared to third-party reinsurers.the 45% retained in 2020. These figures include the Seneca Re protected cells, SRC1 and SRC3, DAC amortization.
Salaries and benefits: benefitsThe significant increase to $16.9 million compared with $6.4 million was due to the addition ofcosts incurred to attract and add personnel to service our new business growth.growth and the cost related to non-cash stock consideration. We are hiring more in-house expertise to service our growth initiatives.initiatives and reduce the reliance on third-party providers. Salaries and benefits in 2021 included non-cash stock consideration of approximately $5.0 million relating to the vesting of stock options of a former Co-CEOs, upon resigning from our Company. The remaining increase in salaries and benefits was related to bonuses to paid to retain talent.
Other operating expenses: Other operating expenses were approximately $4.2$4.9 million higher than prior year. The primary items of this increase are:
Increases:due primarily to:
● | Our FIA product has embedded derivatives included in the account value. Those derivatives are market driven. The reinsurers that reinsure the FIA products pay an option allowance to American Life to purchase derivatives. As of December 31, |
● | Increases in other expenses related to legal fees of $2.1 million related primarily to regulatory matters and consultation on execution of potential reinsurance transactions partially or not completed. |
● |
Decreases:Taxes
Income tax expense increased by $3.2 million to $4.8 million in 2021 from $1.6 million in 2020. This change in primarily driven by the change in the reinsurance modified coinsurance tax reserves.
4244
Investments
Most investments on our Consolidated balance sheets are held on behalf of our reinsurers as collateral under our reinsurance agreements. As a result, our investment allocations are largely a function of our collective reinsurer investment allocations. While the reinsurers own the investment risk on these assets, we typically restrict their investment allocations via control over the selection of the asset manager as well as asset restrictions set forth in investment guidelines. Additionally, inguidelines and control over the investment manager. In many of our reinsurance agreements, our affiliate investment manager, 1505 Capital is selectedacts as the asset manager.manager for a fee.
TheOur investment guidelines typically include U.S. government bonds, corporate bonds, commercial mortgages, asset backed securities, municipal bonds, and collateral loans. The duration of our investments is 5 to 10 years in line with that of our liabilities. We do allow non-U.S. dollar denominated investments where the foreign exchange risk is hedged back to U.S. dollars.
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 as of December 31, 20202021 and 2019.2020. Increases in fixed maturity securities primarily resulted from the sale of our new MYGA and FIA products during 2020. Most of the investments as of December 31, 2020 are held as collateral for our reinsurers.2021.
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| ||||||
| | Carrying | | Percent | | Carrying | | Percent |
| ||
(In thousands) |
| Value |
| of Total |
| Value |
| of Total |
| ||
Fixed maturity securities: |
| |
|
|
|
| |
|
|
| |
Bonds: | | | | | | | | | | | |
U.S. government obligations | | $ | 1,882 |
| 0.2 | % | $ | 6,164 |
| 0.9 | % |
Mortgage-backed securities | |
| 55,280 |
| 4.9 | |
| 14,757 |
| 2.2 | |
Asset-backed securities | | | 24,951 | | 2.2 | | | 7,450 | | 1.1 | |
Collateralized loan obligation | | | 274,523 | | 24.6 | | | 214,324 | | 32.0 | |
States and political subdivisions -- general obligations | |
| 114 |
| — | |
| 118 |
| — | |
States and political subdivisions -- special revenue | |
| 5,612 |
| 0.5 | |
| 6,202 |
| 0.9 | |
Corporate | |
| 37,139 |
| 3.3 | |
| 125,863 |
| 18.9 | |
Term Loans | | | 267,468 | | 23.9 | | | — | | — | |
Trust preferred | | | 2,237 | | 0.2 | | | 2,285 | | 0.3 | |
Redeemable preferred stock | | | 14,090 | | 1.3 | | | — | | - | |
Total fixed maturity securities | |
| 683,296 |
| 61.1 | |
| 377,163 |
| 56.3 | |
Mortgage loans on real estate, held for investment | | | 183,203 | | 16.4 | | | 94,990 | | 14.2 | |
Derivatives | | | 23,022 | | 2.1 | | | 11,361 | | 1.7 | |
Equity securities | | | 21,869 | | 2.0 | | | - | | — | |
Other invested assets | | | 35,293 | | 3.2 | | | 21,897 | | 3.3 | |
Investment escrow | | | 3,611 | | 0.3 | | | 3,174 | | 0.5 | |
Federal Home Loan Bank (FHLB) stock | | | 500 | | — | | | — | | — | |
Preferred stock | | | 18,686 | | 1.7 | | | 3,898 | | 0.6 | |
Notes receivable | | | 5,960 | | 0.5 | | | 5,666 | | 0.8 | |
Policy Loans | |
| 87 |
| — | |
| 46 |
| — | |
Cash and cash equivalents | | | 142,013 | | 12.7 | | | 151,679 | | 22.6 | |
Total investments, including cash and cash equivalents | | $ | 1,117,540 |
| 100.0 | % | $ | 669,874 |
| 100.0 | % |
| | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| ||||||
| | Carrying | | Percent | | Carrying | | Percent |
| ||
|
| Value |
| of Total |
| Value |
| of Total |
| ||
Fixed maturity securities: |
| |
|
|
|
| |
|
|
| |
U.S. government obligations | | $ | 6,164,983 |
| 0.9 | % | $ | 2,081,224 |
| 1.1 | % |
Mortgage-backed securities | |
| 14,757,414 |
| 2.2 | |
| 798,608 |
| 0.4 | |
Asset-backed securities | | | 221,773,609 | | 33.1 | | | 95,247,824 | | 52.2 | |
States and political subdivisions - general obligation | |
| 117,330 |
| - | |
| 249,282 |
| 0.1 | |
States and political subdivisions - special revenue | |
| 6,202,204 |
| 0.9 | |
| 25,291 |
| — | |
Trust preferred | | | 2,284,816 | | 0.3 | | | — | | — | |
Corporate | |
| 125,863,002 |
| 18.9 | |
| 18,839,632 |
| 10.4 | |
Total fixed maturity securities | |
| 377,163,358 |
| 56.3 | |
| 117,241,861 |
| 64.2 | |
Mortgage loans on real estate, held for investment | | | 94,989,970 | | 14.2 | | | 13,810,041 | | 7.6 | |
Derivatives | | | 11,361,034 | | 1.7 | | | 575,294 | | 0.3 | |
Other invested assets | | | 21,897,130 | | 3.3 | | | 2,468,947 | | 1.4 | |
Preferred stock | | | 3,897,980 | | 0.6 | | | 500,000 | | 0.3 | |
Investment escrow | | | 3,174,047 | | 0.5 | | | 3,899,986 | | 2.1 | |
Notes receivable | | | 5,665,487 | | 0.8 | | | — | | — | |
Cash and cash equivalents | | | 151,679,274 | | 22.6 | | | 43,716,205 | | 24.0 | |
Policy Loans | |
| 45,573 |
| — | |
| 106,014 |
| 0.1 | |
| | $ | 669,873,853 |
| 100.0 | % | $ | 182,318,348 |
| 100.0 | % |
4345
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | December 31, 2021 | | December 31, 2020 |
| ||||||||||||
| | Carrying | | | | Carrying | | |
| | Carrying | | | | Carrying | | |
| ||||
|
| Value |
| Percent |
| Value |
| Percent |
| |||||||||||||
(In thousands) |
| Value |
| Percent |
| Value |
| Percent |
| |||||||||||||
AAA and U.S. Government | | $ | 3,070,750 |
| 0.8 | % | $ | 2,885,004 |
| 2.5 | % | | $ | 2,674 |
| 0.4 | % | $ | 3,071 |
| 0.8 | % |
AA | |
| 5,818,163 |
| 1.5 | |
| 6,658,274 |
| 5.7 | | |
| 482 |
| 0.1 | |
| 5,818 |
| 1.5 | |
A | |
| 49,445,266 |
| 13.1 | |
| 23,812,502 |
| 20.3 | | |
| 168,141 |
| 24.6 | |
| 49,445 |
| 13.1 | |
BBB | |
| 247,635,730 |
| 65.7 | |
| 79,996,081 |
| 68.2 | | |
| 462,699 |
| 67.7 | |
| 247,636 |
| 65.7 | |
Total investment grade | |
| 305,969,909 |
| 81.1 | |
| 113,351,861 |
| 96.7 | | |
| 633,996 |
| 92.8 | |
| 305,970 |
| 81.1 | |
BB and other | |
| 71,193,449 |
| 18.9 | |
| 3,890,000 |
| 3.3 | | |
| 49,300 |
| 7.2 | |
| 71,193 |
| 18.9 | |
Total | | $ | 377,163,358 |
| 100.0 | % | $ | 117,241,861 |
| 100.0 | % | | $ | 683,296 |
| 100.0 | % | $ | 377,163 |
| 100.0 | % |
Reflecting the quality of securities maintained by us, 81.1%92.8% and 96.7%81.1% of all fixed maturity securities were investment grade as of December 31, 20202021 and 2019,2020, respectively.
We expect that our MYGA and FIA products sales will causeresult in an increase in investable assets in future periods.
Market Risks of Financial Instruments
The primary market risks affecting the investment portfolio are interest rate risk, credit risk and liquidity risk. With respect to investments that we hold on our balance sheet as collateral, our reinsurers bear the market risks related to these investments, while we bear the market risks on any net retained investments.
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 fixed 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. Our liabilities also have interest rate risk though GAAP does not require our liabilities to be marked to market. We mitigate interest rate risk by monitoring and matching the duration of assets compared to the duration of liabilities.
Credit Risk
We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty 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. We manage our credit risk through diversification of investments amongst many corporations and numerous industries. Additionally, our investment policy limits the size of holding in any particular issuer.
Liquidity Risk
We are exposed to liquidity risk when liabilities come due. In order to pay a policyholder, we may need to liquidate assets. If our assets are illiquid assets, we might be unable to convert an asset into cash without giving up capital and income due to a lack of buyers or an inefficient market. We seek to mitigate this risk by keeping a portion of our investment portfolio in liquid investments.
Statutory Accounting and Regulations
Our primary insurance subsidiary, American Life, is required to prepare statutory financial statements in accordance with SAP prescribed by the NDOI. SAP primarily differs from GAAP by charging policy acquisition costs to expense as incurred, establishing future benefit liabilities using actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. For further discussion regarding SAP as well as net income (loss) of American Life under SAP, see Note 1614 to our
4446
Consolidated Financial Statements.consolidated financial statements. As of December 31, 2021, American Life maintainsmaintained sufficient capital and surplus to comply with regulatory requirements as of December 31, 2020.requirements.
State insurance laws and regulations govern the operations of all insurers and reinsurers such as our insurance and reinsurance company subsidiaries. These various laws and regulations require that insurance companies maintain minimum amounts of statutory surplus as regards policyholders and risk-based capital and determine the dividends that insurers can pay without prior approval from regulators. The statutory net income of American Life is one of the primary sources of additions to our statutory surplus as regards policyholders, in addition to capital contributions from us.
We have reported our insurance subsidiaries’ assets, liabilities and results of operations in accordance with GAAP, which varies from SAP. The following items are principal differences between SAP and GAAP:GAAP. SAP:
● | requires that we exclude certain assets, called non-admitted assets, from the balance sheet. |
● | requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer and amortize policy acquisition costs over the estimated life of the policies. |
● | dictates how much of a deferred income tax asset that we can admit on a statutory balance sheet. |
● | requires that we record certain investments at cost or amortized cost, while we record other investments at fair value; however, GAAP requires that we record all investments at fair value. |
● | allows bonds to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair value for GAAP. |
● | allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period. |
● | requires that we record reserves in liabilities and expense for policies written, while we record all transactions related to the annuity products under GAAP as a deposit-type contract liabilities. |
● | requires a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over 90 days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance affiliate’s domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity. |
● | requires an additional admissibility test outlined in Statements on Statutory Accounting Principles, No. 101 and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP. Our insurance subsidiaries must file with the insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholders’ equity under GAAP. |
47
The table below sets forth our SAP net income (loss) for 2021 and surplus as regards policyholders, which is called stockholders’ equity under2020 for each of our insurance subsidiaries and then reconciled to GAAP.
| | | | | |
| Year ended December 31, | ||||
(In thousands) | 2021 | | 2020 | ||
Consolidated GAAP net loss | $ | (16,637) | | $ | (12,440) |
Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re) | | (6,961) | | | (342) |
GAAP net loss of statutory insurance entities | $ | (9,676) | | $ | (12,098) |
| | | | | |
GAAP net loss by statutory insurance entity: | | | | | |
American Life | $ | (8,742) | | $ | (15,970) |
Seneca Re Protected Cell 01 | | (321) | | | 3,872 |
Seneca Re Protected Cell 03 | | (613) | | | — |
SAP net loss | $ | (9,676) | | $ | (12,098) |
| | | | | |
Reconciliation of GAAP and SAP | | | | | |
GAAP net loss of American Life | | (8,742) | | | (15,970) |
Increase (decrease) due to: | | | | | |
Deferred acquisition costs | | (34,451) | | | (30,787) |
Coinsurance transactions | | 171,687 | | | 91,331 |
Carrying value of reserves | | (133,028) | | | (42,389) |
Foreign exchange and derivatives | | - | | | (3,944) |
Gain on sale of investments, net of asset valuation reserve | | (1,861) | | | 7,160 |
Other | | 40 | | | (19) |
SAP net (loss) income of American Life | $ | (6,355) | | $ | 5,382 |
| | | | | |
GAAP net (loss) income of Seneca Re Protected Cell 01 | | (321) | | | 3,872 |
Increase (decrease) due to: | | | | | |
Deferred acquisition costs | | (3,343) | | | (17,808) |
Coinsurance transactions | | 37,763 | | | 147,503 |
Carrying value of reserves | | (36,995) | | | (138,999) |
Gain on sale of investments, net of asset valuation reserve | | 1,847 | | | (4,001) |
Other | | 45 | | | — |
SAP net loss of Seneca Re Protected Cell | $ | (1,004) | | $ | (9,433) |
| | | | | |
GAAP net income of Seneca Re Protected Cell 03 | | (613) | | | — |
Increase (decrease) due to: | | | | | |
Deferred acquisition costs | | (10,325) | | | — |
Coinsurance transactions | | 88,704 | | | — |
Carrying value of reserves | | (84,865) | | | — |
Gain on sale of investments, net of asset valuation reserve | | 282 | | | — |
Other | | (34) | | | — |
SAP net loss of Seneca Re Protected Cell 03 | $ | (6,851) | | $ | — |
| | | | | |
SAP net loss of statutory insurance entities | $ | (14,210) | | $ | (4,051) |
45
| | | | | |
| Year ended December 31, | ||||
| 2020 | | 2019 | ||
Consolidated GAAP net loss | $ | (12,440,368) | | $ | (5,733,658) |
Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re) | | (342,015) | | | (1,209,873) |
GAAP net loss of statutory insurance entities | $ | (12,098,353) | | $ | (4,523,785) |
| | | | | |
GAAP net income (loss) by statutory insurance entity: | | | | | |
American Life | $ | (15,970,405) | | $ | (4,523,785) |
Seneca Re Protected Cell | | 3,872,052 | | | — |
| $ | (12,098,353) | | $ | (4,523,785) |
| | | | | |
Reconciliation of GAAP and SAP | | | | | |
GAAP net gain (loss) of American Life | | (15,970,405) | | | (4,523,785) |
Increase (decrease) due to: | | | | | |
Deferred acquisition costs | | (30,787,296) | | | (6,000,656) |
Coinsurance transactions | | 91,331,486 | | | 13,862,116 |
Carrying value of reserves | | (42,389,480) | | | (1,798,627) |
FX and derivatives | | (3,944,250) | | | — |
Gain on sale of investments, net of asset valuation reserve | | 5,450,671 | | | (133,633) |
Other | | 202,315 | | | (87,530) |
SAP net income of American Life | $ | 3,893,041 | | $ | 1,317,885 |
| | | | | |
GAAP net income of Seneca Re Protected Cell | | 3,872,052 | | | — |
Increase (decrease) due to: | | | | | |
Deferred acquisition costs | | (17,807,739) | | | — |
Coinsurance transactions | | 147,501,837 | | | — |
Carrying value of reserves | | (138,998,742) | | | — |
Gain on sale of investments, net of asset valuation reserve | | (4,000,717) | | | |
Other | | | | | |
SAP net loss of Seneca Re Protected Cell | | (9,433,309) | | | — |
| | | | | |
SAP net income (loss) of statutory insurance entities | $ | (5,540,268) | | $ | 1,317,885 |
Non-GAAP Financial Measures
We discuss below certain non-GAAP financial measures that our management uses in conjunction with GAAP financial measures as an integral part of managing our business and to, among other things:
• monitor and evaluate the performance of our business operations and financial performance;
• facilitate internal comparisons of the historical operating performance of our business operations;
• review and assess the operating performance of our management team;
• analyze and evaluate financial and strategic planning decisions regarding future operations; and
• plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
Non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, our operating performance measures as prescribed by GAAP.
4648
Operating Metric – Annuity Premiums
We monitor annuity premiums as a key operating metric in evaluating the performance of our business. Annuity premiums, also referred to as sales or direct written premiums, do not correspond to revenues under GAAP, but are relevant metrics to understand our business performance. Under statutory accounting practices or SAP, our annuity premiums received are treated as premium revenue. Our premium metrics include all sums paid into an individual annuity in a given period. We typically transfer all or a substantial portion of the premium and policy obligations to reinsurers. Ceded premium represents the premium we transfer to reinsurers in a given period. Retained premium represents the portion of premium received during a given period that was not ceded to reinsurers and will either be reinsured in a subsequent period or retained by us. We typically retain premiums prior to transferring them to reinsurers to facilitate block and other reinsurance transactions involving portfolios of annuity premiums.
The following table sets forth premiums received under SAP. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue is accounted under GAAP as deposit-type liabilities on our Consolidated balance sheetsheets and is not recognized in our income statement.
| | | | | |
| Year ended December 31, | ||||
| 2020 | 2019 | |||
Annuity Premiums (SAP) | | | | | |
Annuity direct written premiums | $ | 415,561,301 | | $ | 161,364,568 |
Ceded premiums | | (228,125,337) | | | (160,493,727) |
Net premiums retained | $ | 187,435,964 | | $ | 870,841 |
Adjusted Revenue
Our adjusted revenue represents the revenue we receive and retain taking into account the reinsurance transactions we complete. We define adjusted revenue as revenue including the impactconsolidated statement of reinsurance transactions completed during the relevant period and excluding the total return on the asset portfolios that are owned by reinsurers but held by us, whichcomprehensive loss
| | | | | |
| Year ended December 31, | ||||
(In thousands) | 2021 | | 2020 | ||
Annuity Premiums (SAP) | | | | | |
Annuity direct written premiums | $ | 471,646 | | $ | 415,561 |
Ceded premiums | | (237,411) | | | (228,125) |
Net premiums retained | $ | 234,235 | | $ | 187,436 |
The increase in annuity direct written premiums reflect strong sales in the table below isfirst half of 2021, while the net realized (gains) lossesthird and fourth quarters encountered a challenging sales environment, in which competitors were pricing rates on investments.annuity products aggressively. We hold these assets primarilysell annuities through the IMO channel. We aim to reduce potential credit riskgrow annuity direct written premiums by further developing our relationships with existing IMOs and increasing the number of IMO partners that distribute our annuity products, as well as increasing the reinsurers. Under our agreements with reinsurers, the assets backing the reinsurance agreements are typically maintained by us as collateral but the assets and the total return on the asset portfolios are received by the reinsurers. We receive ceding commissions from reinsurers based on ceded premium in a given period, the products reinsured and the termsnumber of the reinsurance agreements. The revenue we receive from ceding commissions is recognized and earned immediately under SAP upon the completion of a reinsurance transactionstates in which we haveare licensed to sell our annuity products. We also aim to distribute to new channels, including the registered investment advisor (RIA) channel as well as the bank and broker-dealer channels. The increase in ceded premiums was attributable primarily to reinsurers. There is no collectability risk as the commissions are paid to usincrease in full in cash when the policies areannuity direct written and there are no further expenses associated with the collected premiums. The adjustmentpremiums discussed above.
Operating Metric – Fees Received for deferred coinsurance ceding commission is a line item entry derived directly from our GAAP consolidated statements of cash flows in our Consolidated Financial Statements. Our management uses adjusted revenue as an internal measure of our underlying business performance and it provides useful insights into our results of operations.Reinsurance
| | | | | | |
| | Year ended December 31, | ||||
(In thousands) | | 2021 |
| 2020 | ||
Fees received for reinsurance(1) | | | | | | |
Fees received for reinsurance - total | | $ | 13,412 | | $ | 12,457 |
Under GAAP, ceding commissions are deferred on our balance sheet as a deferred gain on coinsurance transactions and are subsequently amortized through(1) Consists of: 1) amortization of deferred gain on reinsurance, onwhich is a line item from our GAAP Consolidated Statements of Comprehensive Loss; and 2) deferred coinsurance ceding commission, which is a line item from our GAAP Consolidated Statements of Cash Flows.
Fees received for reinsurance is defined as the income statement over the period of the policy contracts.
The following table sets forth a reconciliation of total revenue to adjusted revenuenet fees received for the years ended December 31, 2020 and 2019, respectively:
| | | | | |
| Year ended December 31, | ||||
| 2020 | 2019 | |||
Total revenue - GAAP | $ | 10,581,889 | | $ | 3,399,788 |
Adjustments: | | | | | |
Net realized gains on investments | | 2,910,608 | | | — |
Deferred coinsurance ceding commission | | 10,620,562 | | | 3,678,196 |
Adjusted revenue | $ | 24,113,059 | | $ | 7,077,984 |
47
Adjusted Net Income (Loss)
Adjusted net income (loss) is management’s evaluation of the impact of revenue we receive and retain taking into account the reinsurance transactions we complete. Under these provisions with third party reinsurers, the assets backing the treaties are maintained by American Life as collateral and are carried on the balance sheet for American Life, but the assets are owned by the third party reinsurer; thus, the total return on the asset portfolio belongs to the third party reinsurers. Under GAAP this is considered an embedded derivative but is not designated as a hedge. We make an income statement adjustment for net realized losses on investments related to the embedded derivative. The net realized losses on investments related to the embedded derivative is included in GAAP net loss but is reversed dollar for dollar in the calculation of GAAP other comprehensive income through a reclassification adjustment for net realized gains on investments. We define adjusted net income (loss) as net income (loss) including the impact of reinsurance transactions completed during the period and excludingincludes ceding commission. We calculate fees received for reinsurance by summing two components: 1) amortization of deferred gain on reinsurance, which is a line item from our GAAP Consolidated Statements of Comprehensive Loss; and 2) deferred coinsurance ceding commission, which is a line item from our GAAP Consolidated Statements of Cash Flows.
For the year ended December 31, 2021, fees received for reinsurance increased by $1.0 million compared to the prior year period due to higher ceded premiums. For the year ended December 31, 2021, the components of fees received for reinsurance included $3.0 million of amortization of deferred gain on reinsurance from our GAAP Consolidated Statements of Comprehensive (Loss) Income and $10.4 million of deferred coinsurance ceding commission from our GAAP Consolidated Statements of Cash Flows.
49
Reconciliation – Management Expenses to GAAP Expenses
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Management Expenses | | |
|
| |
|
G&A | | $ | 24,632 | | $ | 12,942 |
| | | | | | |
Management interest credited | | | 8,757 | | | 2,098 |
Amortization of deferred acquisition costs | | | 2,886 | | | 670 |
Expenses related to retained business | | | 11,643 | | | 2,768 |
Management expenses - total | | $ | 36,275 | | $ | 15,710 |
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
G&A | | | | | | |
Salaries and benefits - GAAP | | $ | 16,926 | | $ | 6,347 |
Other operating expenses - GAAP | | | 15,104 | | | 10,200 |
Subtotal | | | 32,030 | | | 16,547 |
Adjustments: | | | | | | |
Less: Stock-based compensation | | | (4,981) | | | (164) |
Less: Mark-to-market option allowance | | | (2,417) | | | (3,441) |
G&A | | $ | 24,632 | | $ | 12,942 |
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Management Interest Credited | | | | | | |
Interest credited - GAAP | | $ | 7,012 | | $ | 4,225 |
Adjustments: | | | | | | |
Less: FIA interest credited - GAAP | | | (4,169) | | | (3,432) |
Add: FIA options cost - amortized | | | 5,914 | | | 1,305 |
Management interest credited | | $ | 8,757 | | $ | 2,098 |
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Reconciliation - Management Expenses to GAAP Expenses | | | | | | |
Total expenses - GAAP | | $ | 41,934 | | $ | 21,437 |
Adjustments: | | | | | | |
Less: Benefits | | | (6) | | | 5 |
Less: Stock-based compensation | | | (4,981) | | | (164) |
Less: Mark-to-market option allowance | | | (2,417) | | | (3,441) |
Less: FIA interest credited - GAAP | | | (4,169) | | | (3,432) |
Add: FIA options cost - amortized | | | 5,914 | | | 1,305 |
Management expenses - total | | $ | 36,275 | | $ | 15,710 |
50
Operating Metric – Management and G&A Expenses
In addition to total return onexpenses, we utilize management expenses as an economic measure to evaluate our financial performance. Management expenses consist of total GAAP expenses adjusted to eliminate items that fluctuate from quarter to quarter in a manner unrelated to core operations, which we believe are useful in analyzing operating trends. The most significant adjustments to arrive at management expenses include the asset portfolios that are owned by reinsurers and held by us. These items have no direct expenseuse of management interest credited (as discussed below), the exclusion of stock-based compensation and the tax effectexclusion of these adjustments is already includedthe mark-to-market option allowance expense (included in our tax basis, which is similarother operating expenses) payable to our Adjusted Net Income. Ourreinsurers to cover their obligations under FIA policies we have reinsured with them. We believe the combined presentation and evaluation of total expenses together with management uses adjusted net income (loss) asexpenses provides information that can enhance an internal measureinvestor’s understanding of our underlying business performance and because it provides useful insights into our results of operations.operating results.
The following table sets forth a reconciliation of net loss to adjusted net income (loss) forFor the yearsyear ended December 31, 20202021, GAAP general and 2019, respectively:
| | | | | |
| Year ended December 31, | ||||
| 2020 | 2019 | |||
Net loss attributable to Midwest Holding Inc. - GAAP | $ | (12,440,368) | | $ | (5,733,658) |
Adjustments: | | | | | |
Net realized gains on investments | | 2,910,608 | | | — |
Deferred coinsurance ceding commission | | 10,620,562 | | | 3,678,196 |
Total adjustments | | 13,531,170 | | | 3,678,196 |
Income tax (expense) benefit adjustment(1) | | — | | | — |
Adjusted net income (loss) | $ | 1,090,802 | | $ | (2,055,462) |
administrative expenses totaled $41.9 million compared to $21.4 million for the prior year. For the year ended December 31, 2021, as disclosed above, included in these expenses is mainly salaries, benefits and other operating expenses, along with $5.0 million of non-cash stock-based compensation and $2.4 million of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A.
(1) All adjustmentsOperating Metric – Management Interest Credited
We utilize management interest credited, a component of management expenses, as an economic measure to evaluate our financial performance. GAAP interest credited contains significant technical considerations related to fair value accounting with respect to the mark-to-market change in the FIA embedded derivative liability and change in actuarial valuation of the FIA reserve, both of which are sensitive to changes in the market as well as changes in actuarial assumptions. Due to these technical considerations that we believe are less meaningful to management and investors, we exclude the GAAP interest credited expense related to our FIA products and include the amortized cost of options we purchase to service our FIA policy obligations. The sum of GAAP interest credited related to our multi-year guaranteed annuity (“MYGA”) products and the amortized cost of options we purchase to service our FIA products constitutes management interest credited.
For the year ended December 31, 2021, GAAP interest credited totaled $7.0 million compared to $4.2 million for the prior year. For the year ended December 31, 2021, as disclosed above, do not have any tax impact.included in these expenses is GAAP interest credited related to our retained FIA policies of approximately positive $4.2 million. For the year ended December 31, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
At December 31, 2021 and 2020, we had cash and cash equivalents totaling $151,679,274. Approximately $15,227,000 of the increase in cash was due to the completion of private sales of our voting common stock in April 2020 and approximately $65,000,000 was due to the completion of a public offering completed on December 21, 2020.$142.0 compared $151.7 million, respectively. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital transaction expenditures for the foreseeable future. We have not seen an impact on our cash flows related to the COVID-19 pandemic during the last two years. As our state expansion continues, we expect an increase in our sales of our MYGA and FIA products.
The NAIC has established minimum capital requirements in the form of RBC that factors the type of business written by an insurance company, the quality of its assets and various other aspects of its business to develop a minimum level of capital known as “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under SAP, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. As of December 31, 2020,2021, and 2019,2020, the RBC ratio of American Life was 1,092,205%764.069% and 840%1,092,205%, respectively. In December, 2020, Midwest contributed $50.0 million of the capital raise which was reflected in the high 2020 RBC ratio.
American Life had a legacy block of business that was ceded off to a third-party reinsurer on July 1, 2018 through an indemnity reinsurance agreement that transferred 90% to the assumptive reinsurer, resulting in American Life transferring all the risk and financial obligations of those policyholders to the third-party reinsurer.
51
Comparative Cash Flows
Cash flow is an important component of our business model because we receive annuity premiums and invest them upon receipt for our reinsurers and us and for the benefit of our policyholders.
48
The following table summarizes our cash flows from operational, investing and financing activities for the periods indicated. See the Consolidated Statements of Cash Flow in our Consolidated Financial Statementsfinancial statements for more detailed information.
| | | | | | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | ||||||||
| | 2020 |
| 2019 | | 2021 |
| 2020 | ||||
| | | | | ||||||||
| | | | | | | ||||||
Net cash used by operating activities | | $ | (16,243,887) | | $ | (2,457,176) | ||||||
(In thousands) | | | | | ||||||||
Net cash used in operating activities | | $ | (25,338) | | $ | (16,244) | ||||||
Net cash used in investing activities | | | (367,481,662) | | | (117,890,852) | | | (452,407) | | | (367,482) |
Net cash provided by financing activities | | | 491,688,618 | | | 161,231,666 | | | 468,079 | | | 491,689 |
Net increase in cash and cash equivalents | | | 107,963,069 | | | 40,883,638 | ||||||
Net (decrease) increase in cash and cash equivalents | | | (9,666) | | | 107,963 | ||||||
Cash and cash equivalents: | | | | | | | | | | | | |
Beginning of period | | | 43,716,205 | | | 2,832,567 | | | 151,679 | | | 43,716 |
End of period | | $ | 151,679,274 | | $ | 43,716,205 | | $ | 142,013 | | $ | 151,679 |
Cash Used in Operating Activities
Net cash used for operating activities was $16,243,887$25.3 million for the year ended December 31, 2020,2021, which was comprised primarily of an increase in receivable and payable for securities $14.2 million, capitalized DAC of $14.0 million, net realized gain on investments of $7.8 million, accrued investment income of $6.8 million, and amounts recoverable from reinsurers of $6.4 million, and. These were offset by deposit-type liabilities of $24.4 million, and an increase in deferred coinsurance ceding commission due to a third-party reinsurance transaction of $10,620,562, an increase in policy liabilities of $10,042,046 primarily due to the increase in deposit type contracts ceded to reinsurers, an increase in our other assets and liabilities due to a payable for securities of $1,525,320. These were offset by capitalized deferred acquisition costs of $13,974,666, accrued investment income of $5,295,636, and the amounts recoverable from reinsurers of $4,477,126.$10.4 million.
Cash Used in by Investing Activities
Net cash used for investing activities for 20202021 was $367,481,662.$452.4 million. The primary source of cash used was from our purchase of investments from sales of the MYGA and FIA products of $530,786,864.$977.8 million. Offsetting this use of cash was our sale of investments of $163,314,094.$525.7 million.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities in 20202021 was $491,688,618.$468.1 million. The primary source of cash was net receipts on the MYGA and FIA products of $413,052,257 and capital raises, net of related expenses, of $79,311,805.$453.2 million.
Off-Balance Sheet Arrangements
We do not have any 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company’s audited consolidatedConsolidated financial statements are included as a part of this report beginning on page F-1.
4952
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 to the other members of our senior management and the Board.
Management, (with the participation of our co-principalchief executive officersofficer and principal financial officer), carried out an evaluation 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 of 1934, as amended (the “Exchange Act”) as of December 31, 2020.2021. Based on this evaluation, our co-principalprincipal executive officers and financial officers concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were 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 time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our co-principal-principal executive officersofficer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
None.
5053
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth, as of December 31, 2020,2021, certain information regarding our directors and executive officers.
| | | | | | | | | | | | |
Name |
| Age | | Position |
| Director/Officer Since |
| Age | | Position |
| Director/Officer Since |
Georgette Nicholas |
| 57 | | Chief Executive Officer, Interim Chief Financial Officer, |
| 2021 | ||||||
| | | | Director | | | ||||||
| | | | | | | ||||||
Michael Minnich |
| 49 | | Co-Chief Executive Officer, Director |
| 2019 |
| 50 | | President, Chief Investment Officer, Director |
| 2019 |
| | | | | | | ||||||
A. Michael Salem | | 39 | | Co-Chief Executive Officer, Director | | 2019 | ||||||
| | | | | | | ||||||
Mark A. Oliver |
| 62 | | President |
| 2010 | ||||||
| | | | | | | | | | | | |
Shyamal Somaroo | | 50 | | Chief Technology Officer | | 2020 | | 51 | | Chief Technology Officer | | 2020 |
| | | | | | | | | | | | |
Deb Havranek |
| 64 | | Chief Financial Officer and Treasurer |
| 2015 |
| 65 | | Chief Accounting Officer and Treasurer |
| 2015 |
| | | | | | | | | | | | |
Eric J. Del Monaco | | 43 | | Chief Risk Officer | | 2020 | | 44 | | Chief Risk Officer | | 2020 |
| | | | | | | | | | | | |
Richard Vecchiolla | | 55 | | Chief Executive Officer, 1505 Capital | | 2020 | | 57 | | Head of Structuring 1505 Capital | | 2020 |
| | | | | | | | | | | | |
John T. Hompe | | 59 | | Director | | 2015 | | 60 | | Director and Independent Board Chair | | 2015 |
| | | | | | | | | | | | |
Firman Leung | | 62 | | Director | | 2016 | | 64 | | Director | | 2016 |
| | | | | | | | | | | | |
Jack Theeler | | 74 | | Director | | 2012 | | 76 | | Director | | 2012 |
| | | | | | | | | | | | |
Sachin Goel | | 38 | | Director | | 2019 | | 40 | | Director | | 2019 |
| | | | | | | | | | | | |
Douglas K. Bratton | | 61 | | Director | | 2020 | | 62 | | Director | | 2020 |
| | | | | | | | | | | | |
Nancy Callahan | | 61 | | Director | | 2021 | ||||||
| | | | | | | ||||||
Diane Davis | | 54 | | Director | | 2021 |
Georgette Nicholas. Ms. Nicholas has more than 30 years experience in the global financial services industry including insurance, reinsurance and capital markets. She has acommitment to developing strong culture and leadership in organizations, supporting diversity and inclusion to grow engagement. Ms. Nicholas previously held the position of CEO and Managing Director for Genworth Mortgage Insurance Australia, a publicly listed ASX company in Sydney, Australia. She also held various roles with Genworth Financial, Inc. in investor relations, chief financial officer roles in the mortgage insurance business and controllership. Ms. Nicholas also worked in public accounting, including as a firm director with Deloitte.
Michael Minnich. Mr. Minnich has over 25 years of experience in insurance, a private investment company, technology, risk-management, and investing. He was named Executive ChairmanChair of Midwest on April 30, 2019 and Co-Chief Executive Officer on November 16, 2020. Mr. Minnich was named President and a member of the Board of American Life in June 2018. Mr. In November of 2021, Mr. Minnich transitioned from the Co-Chief Executive officer of Midwest and Executive Chair of Midwest, to the President and Chief Investment officer. Minnich is a Founder and has been Co-Chief Executive of Vespoint Capital LLC along with Mr. Salem, since 2018. Since July 2010, he has been managing member of Rendezvous Capital LLC, a New York firm advising insurers on capital and investments. From February 2013 to May 2017, he was Chief Investment Officer of A-Cap, an insurance holding and investment company. Mr. Minnich graduated with a Bachelor of Science degree in Electrical Engineering in 1994 and an MBA in 1995 from the Massachusetts Institute of Technology.
A. Michael Salem. Mr. Salem has over 16 years of experience in insurance distribution, insurance investing, and technology. He was appointed Chief Executive Officer and a Director of Midwest on April 30, 2019 and Co-Chief Executive Officer on November 16, 2020. He has served as Chairman of American Life since June 2018. Mr. Salem is a Founder and has been Co-Chief Executive Officer of Vespoint Capital LLC since 2018. In addition, he has served as managing member of AMS Advisors LLC since January 2011. From July 2013 to August 2017, he was Co-Founder, Managing Principal and Co-Head of Advisory Capital at Vanbridge LLC, an investment management firm. Mr. Salem graduated with a Bachelor of Science degree in Computer Science from Brown University in 2003 and obtained a Master’s degree in Electrical Engineering from Stanford University in 2005.
Mark A. Oliver. Mr. Oliver serves as President of Midwest, a position he has held since 2010. Mr. Oliver is also currently the Vice President and Secretary and a member of the Board of Directors of American Life. He served as CEO since that company received its Certificate of Authority from the NDOI on September l, 2009 through June 2018. He was elected Chairman of American Life in March 2017 and served in that capacity until June 2018. He served as a member of the board of the Company from 2010 until April 2020. He served as Chairman and CEO of the Company from 2015 until June 2018. From 1984 until June 2007, Mr. Oliver was employed by Citizens, Inc., a publicly traded company listed on the New York Stock Exchange and life insurance holding company with principal
51
offices in Austin, Texas, serving as its President and in various other executive capacities from 1997 through 2007. Mr. Oliver graduated with a B.B.A. majoring in Accounting from Baylor University in 1981.
Shyamal Somaroo. Mr. Somaroo is our Chief Technology Officer and has over 20 years of experience across technology and quantitative finance. Prior to joining Midwest, he was the head of valuations at Barclays Africa where he oversaw valuations for all
54
derivative positions across all African trading desks. Prior to Barclays, Mr. Somaroo was a Director at Merrill Lynch in New York overseeing valuations for the global credit derivative portfolio. Prior to that, he was a consultant at McKinsey & Co and a technology scout at Pfizer’s Discovery Technology Center in Cambridge, MA. Mr. Somaroo received his Ph.D. from Cambridge University (UK) and has held post-doctoral positions at Harvard and M.I.T.
Debra K. Havranek. Ms. Havranek is our Vice President, Chief FinancialAccounting Officer and Treasurer and has worked for us since 2014. She has more than 2527 years of experience in Corporate Reporting in the life insurance, banking, and consumer packed goods industries. Previously, she served from April 2006 to June 2014 as Manager of Finance at Conagra Brands, a large publicly traded corporation. Ms. Havranek holds a B.S.B.A. in Accounting from the University of Nebraska Omaha and is a Certified Public Accountant.
Eric J. Del Monaco. Mr. Del Monaco is our Chief Risk Officer and has over 21 years of broad financial services experience. Prior to joining Midwest, Mr. Del Monaco was Head of Global Markets for Natixis Management Services-North America, a global asset management company from January 2019 to October 2020. He has also held senior positions at Nomura where he served on Nomura Americas Global Markets executive committee from 2009 to 2015. Prior to his employment with Nomura, he ran Credit Structuring at Lehman Brothers and Barclays Capital in New York, where his specialties included credit derivatives, counterparty risk and complex repackagings. Mr. Del Monaco also spent five years as part of Citigroup’s European Structured Credit business in London from 2001 to 2006 where he focused on clients in Southern Europe, Turkey and the Middle East. He started his career at Chase Manhattan Bank. Mr. Del Monaco holds a Bachelor of Science in Quantitative Economics from Tufts University.
Richard Vecchiolla. Mr. Vecchiolla is the CEO and co-founderhead of structuring at 1505 Capital. He has been dedicated to the development of innovative solutions at financial companies for more than twenty-five years. RichardMr. Vecchiolla was formerly a principal on an insurance holding company & asset management platform with more than $2 billion in insurance product AUM. During his tenure, RichardMr. Vecchiolla headed up multiple acquisitions, reinsurance treaties and formed Haymarket Insurance Company. Richard’sMr. Vecchiolla prior experience also included: (i) Managing Director at Swiss Re (ii) VP at Morgan Stanley and (iii) legal counsel at Greenwich NatWest and Rogers & Wells. Richard has a JD from Georgetown University, an MBA from Pepperdine University and an MS from Temple University.
John T. Hompe. Mr. Hompe was the Managing Partner and co-founder of J.P. Charter Oak Advisors LLC, a private investment firm focused on the financial services industry from 2012 to 2019. Mr. Hompe has worked in the financial services sector for more than 35 years. He has held numerous board positions with insurance companies during his career. From 2003 through 2012, Mr. Hompe worked in investment banking and asset management (KBW Asset Management from 2011 through 2012 as a Managing Director and Keefe Bruyette & Woods, Inc. from 2003 to 2011 as Co-Head of Insurance and Asset Management Investment Banking). Mr. Hompe served as an observer on the Board of Directors of International Planning Group, Ltd., an international life insurance broker, and Preparis Inc., a provider of business continuity services. From 2010 to 2012, he was an independent director of Island Capital, a Bermuda investment company. He also was a director and a member of the executive committee of Island Capital’s predecessor company, EIC Corporation Ltd., a Bermuda-domiciled insurance holding company, and Exporters Insurance Company, a New York-based trade credit insurer from 2005 to 2010. He was an outside director of North American Insurance Leaders, Inc. (Nasdaq: NAIL), a special purpose acquisition corporation focused on the insurance distribution sector in 2007. He also served as a director of FIHC, a Barbados-domiciled insurance holding company, and Facility Insurance Company, a Texas workers compensation company from 2001 to 2003. Mr. Hompe was a Board Member of American Life from 2015 through June 2018. Mr. Hompe received a Bachelor of Arts degree in Politics (cum laude) from Princeton in 1983, with distinction in American Studies. Mr. Hompe was recently named Chair of the Board of Directors for both Midwest and American Life.
Firman Leung. Mr. Leung has over 30 years of experience in the financial services industry as an Investment and Capital Markets Banker in New York, London and Hong Kong. From 2016 through November 2020, he served as the Managing Principal of Columbus Circle Capital, LLC in New York, and the Executive Managing Director of Investment Banking and Capital Markets at American Capital Partners, LLC, also in New York. From 2012 to 2015, he served as Managing Director, Investment Banking and Capital Markets at RCS Capital Corporation, New York. From 2002 to 2012, he was Managing Director, Capital Raising, at Sandler O’ Neill & Partners, L.P., New York. Mr. Leung received his BS in Economics from The Wharton School at University of Pennsylvania and his MBA degree from The Amos Tuck School at Dartmouth College.
52
Jack Theeler. Mr. Theeler is a partner in the Morgan Theeler law firm of Mitchell, South Dakota where he has been employed since 1971. He has a bachelor’s degree in accounting (1968) and a law degree (1971) from the University of South Dakota. In law school he was Editor in Chief of the South Dakota Law Review. He was the first ChairmanChair of the South Dakota Lottery Commission, serving from 1986 to 1992. He is a member of American Bar Association, the State Bar of South Dakota, the Association of Defense Trial Attorneys,
55
the South Dakota Defense Lawyers Association and an associate in the American Board of Trial Advocates. He was a founding board member of Great Plains Financial Corp. and Great Plains Life Assurance, he is also a board member of American Life.
Sachin Goel. Mr. Goel is a Certified Financial Analyst and serves as a Managing Director on the investment team and leads the capital markets activity for Brightwood Capital Advisors, LLC in New York. He joined Brightwood in 2013. Prior to joining Brightwood, Mr. Goel was a Managing Director in Macquarie Capital USA’s credit trading division from 2009-2013, where he was responsible for a portfolio of distressed and high-yield corporate credits. Mr. Goel received a Bachelor of Arts in Economics from the University of Chicago in 2003 and earned his Certified Financial Analyst Charter in 2006.
Douglas K. Bratton. Mr. Bratton is the Founder, President, Chief Investment Officer and majority owner of Crestline Investors, Inc., the general partner of Crestline Management, L.P., an institutional alternative investment management firm. Mr. Bratton is also sole director of Bratton Capital, Inc., which is the general partner of Bratton Capital Management L.P. Mr. Bratton has been an investment professional specializing in alternative asset strategies since 1983 and has managed assets on behalf of the Bass family of Fort Worth, Texas, since 1988. Mr. Bratton has served on the Board of Directors of Bounty Minerals Corporation, a private company, since 2014, and the Board of Visitors of Duke University’s Fuqua School of Business since 2013. Mr. Bratton has served on the Board of Directors of Aquestive Therapeutics, Inc. (Nasdaq: AQST) since January 2004. Mr. Bratton received a B.S. from North Carolina State University in 1981 and an M.B.A. with Honors from Duke University in 1984
Nancy Callahan. Ms. Callahan has over 25 years of experience acting as a versatile business leader, delivering market differentiation through profit and loss oversight, general management, strategy, corporate governance, product development and business development. She is currently serving, and has been since 2021, as Global VP of Next-Generation Cloud Delivery for SAP Customer Success Services in St. Petersburg, FL. From 2017 to 2021, Ms. Callahan served as Global VP of Strategy for SAP Customer Success Services, and previously, Global VP of Strategy and Growth for SAP Digital Business Services, positions she has held since 2017. From 2015 to 2017, Ms. Callahan served as Chief of Staff to an SAP Board Member for the SAP Business Networks and Applications Group. During 2014, she served as Chief of Staff to the President and COO of Concur Technologies (“Concur”). From 2013 to 2014, Ms. Callahan served as Senior Director of Platform and Web Services at Concur. From 2010 to 2012, she served as Senior Director of Product Development and Mobile Strategy with Concur. From 2001 to 2009, Ms. Callahan worked at American International Group (“AIG”), serving in many capacities including VP of Commercial Insurance with the Financial Institutions Division, VP of the Professional Liability Division and VP of Business Development in the AIG Identity Theft & Fraud Division. Prior to that, she was President of Reuters Futures Services, Inc., a business unit of Reuters Group which is now part of Thomson Reuters. Ms. Callahan received her BS in Systems Engineering from the School of Engineering and Applied Sciences at the University of Virginia and her MBA in Finance from the University of Virginia’s Darden School of Business. Additionally, she has completed the Women Board Directors Development Program with the Foster School of Business at the University of Washington.
Diane Davis. Ms. Davis has nearly 20 years of experience in executive positions utilizing her practical background in data governance, risk management, finance and leadership to be an engaged and thoughtful board member. She is currently serving, and has been since March 2020, as a Board Member with First Financial Northwest Bank. Additionally, Ms. Davis is currently serving, since 2014, as Board Member of the Habitat for Humanity for Seattle-King County. In this capacity, she serves as the Secretary and Governance Committee Chair. From 2016 to 2019, Ms. Davis served as President and CEO of Farmers New World Life Insurance Company. From 2013 to 2016, she served as Chief Risk Officer of Zurich Insurance Company’s Global Life North America region. From 2010 to 2013, Ms. Davis served as Chief Risk Officer of Farmers New World Life Insurance Company. From 2003 to 2010, she served in various senior executive roles at Kemper Investors Life Insurance Company. Prior to that, she gained experience through actuarial, marketing, distribution and strategic finance positions. Ms. Davis received her BS in Actuarial Science from the University of Illinois at Urbana-Champaign and her MBA from the University of Washington. She is a Fellow of the Society of Actuaries.
Family Relationships and Other Arrangements
There are no family relationships among our directors and executive officers.
Board Composition
Our board currently consists of sevennine members. In accordance with our certificate of incorporation, our board is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting of stockholders following election. OurAs of December 31, 2021, our directors will bewere divided among the three classes as follows:
56
● | the Class I directors are Firman Leung, Nancy Callahan and Diane Davis, and their terms will expire at the annual meeting of stockholders to be held in 2024; |
● | the Class II directors are John Hompe, Sachin Goel and Jack Theeler, and their terms will expire at the annual meeting of stockholders to be held in |
● |
the Class III directors are Michael Minnich, |
We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.
Director Independence
Under the rules of the Nasdaq Capital Market, independent directors must comprise a majority of our board as a public company within one year of listing.
Our board has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board has determined that Sachin Goel, John Hompe, Firman Leung, and Jack Theeler, Diane Davis, and Nancy Callahan do not have
53
any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements of the Nasdaq Listing Rules. In making this determination, our board considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. These foursix independent directors constitute a majority of the board.
Our board has determined that Michael Minnich and A. Michael SalemGeorgette Nicholas are not independent due to their executive officer and employee positions with our company, and their personal and shared beneficial stock ownership makes them our largest stockholders. In addition, our board has determined that Douglas K. Bratton is not independent by virtue of his affiliation with one of our largest stockholders.
Board Meetings and Committees
The Board meets at such times as are necessary and generally on the dates of regularly scheduled Board meetings and at such other times as may be necessary.
There are three standing committees appointed by the Board: the Audit Committee, a Compensation Committee and a Nominating/Nominating and Corporate Governance Committee. Each committee has the power to employ the services of outside consultants and to have discussions and interviews with personnel of the Company and others. The principal functions of the committees are summarized as follows:
Audit Committee
The primary purposes of our Audit Committee are to:
● | review and provide oversight regarding the integrity of our financial statements; |
● | assess the qualifications and independence of our independent auditors and our internal financial and accounting controls; |
● | appoint, and oversee compensation, retention (including termination) and oversight of our independent auditors, with our independent auditors reporting directly to the Audit Committee; and |
● | prepare the audit committee report required to be included in our annual proxy statement. |
Our Audit Committee consists of John Hompe, Firman Leung, Jack Theeler and Jack Theeler.Diane Davis. Our board has determined that all members are independent under the Nasdaq Listing Rules and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee Audit Committee
57
is John Hompe.Diane Davis. Our board has determined that John HompeDiane Davis is an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K. Our board has also determined that each member of our audit committee can read and understand fundamental financial statements, in accordance with applicable requirements. In arriving at these determinations, the board has examined each Audit Committee member’s scope of experience and the nature of their employment in the corporate finance and investment sector. The Audit Committee is governed by a charter that complies with the rules of Nasdaq.
Compensation Committee
The Compensation Committee of our board approves the compensation objectives for the Company, the compensation of our co-chiefchief executive officersofficer and approves, or recommends to our board for approval, the compensation for other executives. The Compensation Committee reviews all compensation components, including base salary, bonus, benefits and other perquisites.
Our Compensation Committee consists of John Hompe, Firman Leung, Sachin Goel, and Sachin Goel.Nancy Callahan. Our board has determined that all of its members are independent under the Nasdaq Listing Rules and are “nonemployee directors” as defined in Rule 16b-3 promulgated under the Exchange Act. The chair of our Compensation Committee is Sachin Goel. The Compensation Committee is governed by a charter that complies with the rules of Nasdaq.
54
Nominating and Corporate Governance Committee
The board will also consider director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders). Our stockholders that wish to nominate a director for election to our board of directors should follow the procedures set forth in our bylaws.
On January 28, 2021, our Board of Directors formed a Nominating and Corporate Governance Committee. The primary purposes of our Nominating and Corporate Governance Committee are to assist the Board in:
● | identifying, screening and reviewing individuals qualified to serve as directors and recommending to the Board candidates for nomination for election at the annual meeting of stockholders or to fill vacancies on the Board; |
● | developing and recommending to the Board and overseeing implementation of our corporate governance guidelines; |
● | coordinating and overseeing the annual self-evaluation of the Board, its committees, individual directors and management in the governance of Midwest; and |
● | reviewing on a regular basis our overall corporate governance and recommending improvements as and when necessary. |
• identifying, screening and reviewing individuals qualified to serve as directors and recommending to the Board candidates for nomination for election at the annual meeting of stockholders or to fill vacancies on the Board;
• developing and recommending to the Board and overseeing implementation of our corporate governance guidelines;
• coordinating and overseeing the annual self-evaluation of the Board, its committees, individual directors and management in the governance of Midwest; and
• reviewing on a regular basis our overall corporate governance and recommending improvements as and when necessary.
Our Nominating and Corporate Governance Committee consists of Jack T. Theeler, John Hompe, Nancy Callahan, and John T. Hompe.Diane Davis. Our board has determined that bothall of its members are independent under Nasdaq Listing Rules and are “nonemployee directors” as defined in Rule 16b-3 promulgated under the Exchange Act. The chair of our Nominating and Corporate Governance Committee is John Hompe.Nancy Callahan.
The Nominating and Corporate Governance Committee is governed by a charter that complies with the rules of Nasdaq. As this committee was recently formed, it did not hold any meetings in 2020.
Board’s Role in Risk Oversight
Our board has an active role in overseeing the management of our risks. Our board is responsible for general oversight of risks and regular review of information regarding our risks, including liquidity risks and operational risks. This oversight responsibility of the board is enabled by management reporting processes that are designed to provide visibility to the board about the identification, assessment and management of critical risks. This reporting is designed to focus on areas that include strategic, operational, financial and reporting, compensation, compliance and other risks. For example, the board regularly receives reports regarding the investments and securities held by our insurance subsidiaries, as well as other reports regarding their insurance business.
Our board of directors is also responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The audit committee is responsible for overseeing the management of risks relating to accounting matters and financial reporting. Although the audit committee is responsible for evaluating certain risks and overseeing the management of such risks, the
58
entire board is regularly informed through discussions from audit committee members about such risks. Our board believes its administration of its risk oversight function has not negatively affected our board’s leadership structure.
Stockholder Nominations for the Board of Directors
Midwest has not made any material changes to the procedures by which stockholders may recommend nominees to the Board of Directors.
Code of Ethics and Conflicts of Interest Policy
We have adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all of our executive officers, including our principal executive officer, principal financial officer, principal accounting officer and controller and persons performing similar functions in accordance with applicable federal securities laws. The full textOur Code of Ethics provides general statements of our codeexpectations regarding ethical standards that we expect our directors, officers and employees to adhere to while acting on our behalf. Our board is responsible for overseeing the Code of business conductEthics and ethicsgranting any waivers applicable to any director, officer or employee.
The Code of Ethics is postedpublicly available on our website at https://www.midwestholding.com/wp-content/uploads/2019/07/MWH-Audit-Committee-Charter-2019_05_23.pdf. Our board is responsible for overseeing our Code of Ethics and any waivers applicable to any director, executive officer or employee.midwestholding.q4cdn.com/816399992/files/doc_downloads/gov_docs/MWH-Code-of-Business-Conduct-and-Ethics-2019_05_21.pdf.
55
We have also adopted a Code of Conduct and Conflicts of Interest Policy thatfor all Members of the Boards of Directors of Midwest Holding Inc. and American Life & Security Corp. (“Conflicts of Interest Policy”), which includes provisions covering related personsperson transactions. In general, any transaction, or proposed transaction, toin which the Company (including any of its subsidiaries) is or will be a participant and any director, executive officer, more than 5% stockholder or immediate family member of any such persons had, has or will have a direct or indirect interest must be reviewed and approved or ratified by our auditthe nominating and corporate governance committee of theour board.
The Conflicts of Interest Policy is publicly available on our website at https://midwestholding.q4cdn.com/816399992/files/doc_downloads/gov_docs/MWH-Conflicts-of-Interest-Policy-2019_05_21.pdf.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act of 1934, as amended, requires our Directors, officers and persons who beneficially own more than 10% of our Common Stock to file certain reports of beneficial ownership with the Securities and Exchange Commission. These reports show the Directors’,Directors,’ officers’ and greater than 10% stockholders' ownership and the changes in ownership of our common stock and other equity securities. The SEC regulations also require that a copy of all such Section 16(a) forms filed must be furnished to us by the person or entity filing the report. To the Company’s knowledge, during the fiscal year ended December 31, 2020,2021, all reports required to be filed pursuant to Section 16(a) were filed on a timely basis, except for the following:
● |
John T. Hompe, Board member, filed a late Form 4 on March 9, 2021, which reported the purchase of voting common stock on December 17, 2020. |
● | Debra Havranek, our Chief Financial Officer at the time, filed a late Form 4 on April 21, 2021 in connection with an employee stock option granted by the Company on March 11, 2021. |
Interlocks
The Compensation Committee members are not officers or employees of our company, and there is not, nor was there during fiscal 2020,2021, any compensation committee interlock (in other words, no executive of Midwest serves as a Director or on the compensation committee of a company that has one or more executives serving on our Board of Directors or our Compensation Committee).
59
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued in the years indicated by Midwest to its co-Principal Executive Officers ("PEO"), Michael Minnich and A. Michael Salem and two other highest paidnamed executive officers of Midwest. Our Compensation Committee reviews executive officer compensation on an annual basis.officers.
SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | | |
Name and Principal Position |
| Year | | | Salary | |
| Bonus | | �� | Option Awards | | | | All Other | | | | Total |
Michael Minnich, Co-Chief Executive Officer, |
| 2020 | | $ | 256,250 | | $ | 250,000 | (7) | $ | 111,285 | (6) | | $ | 16,505 | (8) | | $ | 634,040 |
| | 2019 | | | 250,000 | | | - | | | - | | | | 3,074 | (3) | | | 253,074 |
| | | | | | | | | | | | | | | | | | | |
A. Michael Salem, Co-Chief Executive Officer, | | 2020 | | $ | 256,250 | | $ | 250,000 | (7) | $ | 111,285 | (6) | | $ | 7,987 | (3) | | $ | 625,522 |
| | 2019 | | | 250,000 | | | - | | | - | | | | - | | | | 250,000 |
| | | | | | | | | | | | | | | | | | | |
Mark A. Oliver, President (2) |
| 2020 | | $ | 250,000 | | $ | 100,000 | (7) | $ | 10,551 | (4) | | $ | 24,800 | (5) | | $ | 385,351 |
| | 2019 | | | 250,000 | | | 50,000 | | | 7,300 | (4) | | | 25,400 | (5) | | | 332,700 |
| | | | | | | | | | | | | | | | | | | |
Richard Vecchiolla, Chief Executive Officer, 1505 Capital(9) | | 2020 | | $ | 568,343 | | $ | - | | $ | - | | | $ | 8,550 | (3) | | $ | 576,893 |
| | | | | | | | | | | | | | | | | | | |
Name and Principal Position |
| Year | | | Salary | |
| Bonus | | | Option Awards/ | | | | All Other | | | | Total |
Georgette Nicholas, Chief Executive Officer, Chief Financial Officer, |
| 2021 | | $ | 94,000 | | $ | 150,000 | (4) | $ | 73,000 | (5) | | $ | 1,000 | (6) | | $ | 318,000 |
| | 2020 | | | — | | | — | | | — | | | | — | | | | — |
| | | | | | | | | | | | | | | | | | | |
Michael Minnich, President, Chief Investment Officer, |
| 2021 | | $ | 300,000 | | $ | 225,000 | (4) | $ | - | | | $ | 11,000 | (6) | | $ | 536,000 |
| | 2020 | | | 256,250 | | | 250,000 | | | 111,285 | (5) | | | 16,505 | | | | 634,040 |
| | | | | | | | | | | | | | | | | | | |
Richard Vecchiolla, Chief Executive Officer, 1505 Capital | | 2021 | | $ | 335,000 | | $ | 273,000 | (4) | $ | — | | | $ | 15,000 | (6) | | $ | 623,000 |
| | 2020 | | $ | 568,343 | | $ | — | | $ | — | | | $ | 8,530 | (6) | | $ | 576,873 |
| | | | | | | | | | | | | | | | | | | |
Eric Del Monaco, Chief Risk Officer | | 2021 | | $ | 250,000 | | $ | 250,000 | | $ | — | | | $ | — | | | $ | 500,000 |
| | 2020 | | $ | 250,000 | | $ | 41,667 | | $ | 113,907 | (7) | | $ | — | | | $ | 405,574 |
| | | | | | | | | | | | | | | | | | | |
A. Michael Salem, Former Co-Chief Executive Officer, Director(3) | | 2021 | | $ | 267,000 | | $ | 240,000 | | $ | — | | | $ | 14,000 | (6) | | $ | 521,000 |
| | 2020 | | $ | 256,250 | | $ | 250,000 | | $ | 111,285 | (5) | | $ | 7,987 | (6) | | $ | 625,522 |
56
Indicates option awards granted under the 2019 and 2020 Long-Term Incentive |
Represents contributions to executive officers’ 401K and reimbursement for health insurance premiums. |
We sponsor a 401(k) Plan for all eligible employees who complete one year of employment with us.employees. The Plan was amended in December 2020 to allow for us to contribute 3% of the employee’s salary to the employee’s 401(k) and match up to 4% of the employee contributions up to the maximum allowed by law.
Outstanding Equity Awards at 2020 Fiscal Year End
On July 19, 2019, options to purchase 17,900 shares of our voting common stock with an exercise price of $25.00 per share were granted to our officers, directors, and employees. On July 31, 2020, September 28, 2020, and November 16, 2020, options to purchase 22,900, 6,667 and 35,058, additional shares, respectively of our voting common stock were granted under the 2019 Plan. The grants had an exercise price of $25.00, $32.00 and $41.25 per share, respectively. On November 16, 2020, 18,597 shares were awarded as a restricted grant under the 2019 Plan. On November 16, 2020, options to purchase 168,002 shares of our voting common stock our voting common stock were awarded with an exercise price of $41.25 per share under the 2020 Plan. The consideration for the options under the 2020 Plan is recorded once the shareholders approve the 2020 Plan at the next shareholder meeting.
5760
The following table sets forth the options granted to its Co-CEOs, Mike Minnich and A. Michael Salem and two other highest paid executive offices of Midwest.
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Incentive Plans
We have adopted two equity incentive plans the Midwest Holding Inc. 2019 Long-Term Incentive Plan and the 2020 Long-Term Incentive Plan (collectively, the “Plans”). The 2019 Plan was approved by our stockholders at our annual meeting of stockholders in June 2019. We intend to seek approval of ourThe 2020 Plan was approved by the shareholders at our annual meeting of stockholders in 2021.
The terms of the Plans are essentially the same except the 2019 Plan provides that a maximum of 102,0000102,000 shares of our voting common stock (“common stock”) may be issued in conjunction with awards granted under the 2019 Plan while the 2020 Plan provides that a maximum of 350,000 shares of our common stock may be issued in conjunction with awards granted under the 2020 Plan. In addition, the 2019 Plan will expire on March 26, 2029, while the 2020 Plan expires on November 16, 2030. However, the terms and conditions of the Plans will continue to apply after the relevant expiration dates to all 2019 and 2020 Plan awards granted prior to relevant expiration date until they are no longer outstanding pursuant to the terms of such awards.
The purposes of the Plans are to create incentives which are designed to motivate participants to put forth maximum effort toward our success and growth and to enable us to attract and retain experienced individuals who, by their position, ability and diligence are able to make important contributions to our success, and thereby to enhance shareholder value.
Under the Plans, we may grant stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards to our employees or those of our subsidiaries or affiliates. We may also grant nonqualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, stock awards and other incentive awards to any persons rendering consulting or advisory services and non-employee directors.
.
Executive Outstanding Equity Awards at 2021 Fiscal Year End
The following table sets forth the options granted to Georgette Nicholas, and Mike Minnich and one other highest paid executive offices of Midwest.
| | | | | | | | |
| | Option Awards | ||||||
Name | | Number of Securities Underlying Unexercised Options (#) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#) | | Option exercise price($) | | Option expiration date |
Michael Minnich | | — | | 74,751(1) | | $41.25 | | 11/16/2030 |
Georgette Nicholas | | — | | 30,000(2) | | $16.37 | | 12/22/2031 |
A. Michael Salem(3) | | — | | 74,751(3) | | $41.25 | | 11/16/2030 |
(1) | The options vest in equal installments 60 days after each of the first five anniversaries of the date of grant (11/16/2020), subject to accelerated vesting under certain circumstances. |
(2) | The 43,000 stock options vest in equal installments 60 days after each of the first seven anniversaries of the date of grant (9/08/2021), subject to accelerated vesting under certain circumstances. The 30,000 will vest in five equal installments beginning on November 19, 2022, subject to the terms of the Midwest Holding Inc. 2020 Long-Term Incentive Plan and related stock option agreement and the Reporting Person's continuous employment with the Company through the applicable vesting dates. |
(3) | Mr. Salem resigned as an employee and director on November 19, 2022. In connection with his resignation, all of his options became fully vested. |
61
Executive Employment Agreements
On September 8, 2021, we entered into an employment agreement with Georgette Nicholas, Chief Executive Officer. On November 16, 2020, we entered into an employment agreementsagreement with A. Michael Salem and Michael Minnich, our Co-Chief Executive Officers. The terms and conditions of these employment agreements are identical and are set forth in our Report on Form 8-K dated November 18, 2020.President. A summary description of the employment agreement is set forth below. Among other things, the employment agreements are “at will” and provide:
a) | that |
58
b) | Ms. Nicholas’ base salary of $300,000 per year plus eligibility to receive an annual target bonus of 50% of the base salary, with the annual bonus range from 0% to a maximum of 100% of the base salary, with each bonus to be determined based upon achievements of performance goals established by the compensation committee of our board; |
c) | that Mr. Minnich’s agreement, as the President and Chief Investment Officer of the Company, is for a three-year term that will be extended automatically for one-year periods beginning on the third anniversary of the term unless notice is given by either party; |
d) | Mr. Minnich’s base salary of $300,000 per year plus eligibility to receive an annual target bonus of 75% of the base salary, with the annual bonus range from 0% to a maximum of 150% of the base salary, with each bonus to be determined based upon achievements of performance goals established by the compensation committee of our board; |
customary benefits including health insurance and other fringe benefits and expense reimbursements; |
stock options as summarized above under “2020 Long-Term Incentive Plan”; |
for termination of the employment agreement upon the executive’s death, disability or for good cause (as defined therein) in which event he will be entitled only to his base salary through the date of termination; |
for executive’s resignation without good reason (as defined therein) or retirement in which event |
for executive’s resignation for good reason or upon a change in control of the Company (as defined therein) or |
customary confidentiality, non-compete and other provisions. |
We are also a party to an amended employment agreement with Mark A. Oliver, our President. Among other things, the employment agreement provides that Mr. Oliver is an “at will” employee and:
Director Compensation
In 2020, directors who were not our employees received $1,000 for each meetingAs approved, per the recommendation of the board they attended in person and $350 perCompensation Committee, by the Board during its meeting they attend via telephone. Directors received an annual retaineron March 11, 2021:
Each non-employee member of $5,000. Directors also are reimbursed for reasonable expenses related to their personal attendance at meetings. Our board reviews director compensation on an annual basis. Additionally, in 2019, outside directors received an award of options to purchase 100 shares of our voting common stock. The options vest one third in 2021 and two thirds in 2023 and are exercisable for a period of 10 years at $25.00 per share.the Board shall receive:
● | An annual retainer of $30,000; |
● | For every committee other than the Audit Committee, each member (other than the Chair) shall receive an additional $2,000 annually and the Chair shall instead receive an additional $4,000 per annum; |
5962
● | Each member (other than the Chair) of the Audit Committee shall receive an additional $3,000 annually and the Chair shall instead receive an additional $6,000 per annum; |
● | $30,000 restricted stock units or equivalent equity ownership, with one-year cliff vesting; |
● | A stock ownership guideline of three times the annual cash retainer (i.e., $90,000), with a 100% retention requirement until this threshold is met; |
● | Initially resulting in total annual compensation of $60,000, in addition to committee fees. |
The following table sets forth the compensation paid or accrued by us to our directors, other than directors who are also named executive officers, for the last completed fiscal year.
| | | | | | | | | |
Name |
| Year | | | Fees Earned or |
| | Option Awards(1) | |
John Hompe | | 2020 | | $ | 19,219 | | $ | 91 | |
| | | | | | | | | |
Firman Leung | | 2020 | | | 18,187 | | | 91 | |
| | | | | | | | | |
Jack Theeler | | 2020 | | | 14,850 | | | 91 | |
| | | | | | | | | |
Sachin Goel (2) | | 2020 | | | 17,567 | | | 91 | |
| | | | | | | | | |
Douglas Bratton(3) | | 2020 | | | 15,600 | | | - | |
| | | | | | | | | |
(In thousands, except option awards) | | | | | | | | | |
Name |
| Year | | | Fees Earned or |
| | Restricted Stock Unit Awards(1) | |
John Hompe | | 2021 | | $ | 58,150 | | | 727 | |
| | | | | | | | | |
Firman Leung | | 2021 | | | 44,500 | | | 727 | |
| | | | | | | | | |
Jack Theeler | | 2021 | | | 52,050 | | | 727 | |
| | | | | | | | | |
Sachin Goel | | 2021 | | | 41,750 | | | 727 | |
| | | | | | | | | |
Douglas Bratton | | 2021 | | | 36,000 | | | 727 | |
| | | | | | | | | |
Nancy Callahan(2) | | 2021 | | | 34,000 | | | 727 | |
| | | | | | | | | |
Diane Davis(2) | | 2021 | | | 35,000 | | | 727 | |
Each outside director received |
63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of December 31, 20202021 regarding the beneficial ownership of our voting common stock by (i) each officer and director, and (ii) all of our executive officers and directors as a group, and (iii) each person who we believe to be the beneficial owner of more than 5% of our outstanding voting common stock. Unless otherwise indicated, the address of each beneficial owner is c/o Midwest Holding, Inc., 2900 South 70th Street, Suite 400, Lincoln, Nebraska 68506.
| | | | | | | | |
| | Voting Common Stock | | Voting Common Stock | ||||
Name |
| Number of Shares Beneficially Owned | | Percentage of Shares Beneficially Owned |
| Number of Shares Beneficially Owned | | Percentage of Shares Beneficially Owned |
Named Executive Officers and Directors: | | | | | | | | |
Michael Minnich(1) | | 415,961 | | 11.1% | ||||
Georgette Nicholas(1) | | — | | * | ||||
| | | | | | | | |
A. Michael Salem(2) | | 203,298 | | 5.5% | ||||
| | | | | ||||
Mark A Oliver | | 501 | | * | ||||
Michael Minnich(2) | | 439,796 | | 11.7% | ||||
| | | | | | | | |
Eric J. Del Monaco(3) | | 64,155 | | 1.7% | | 64,155 | | 1.7% |
| | | | | | | | |
John T. Hompe | | 100 | | * | ||||
Debra Havranek(4) | | 1,000 | | * | ||||
| | | | | | | | |
Firman Leung(4) | | — | | * | ||||
Shyamal Somaroo(5) | | — | | * | ||||
| | | | | | | | |
Jack Theeler | | 108 | | * | ||||
Richard Vecchiolla | | — | | * | ||||
| | | | | | | | |
Sachin Goel(5) | | 4,444 | | * | ||||
John T. Hompe(9) | | 133 | | * | ||||
| | | | | | | | |
Douglas K. Bratton(6) | | 444,444 | | 12.0% | ||||
Firman Leung(6,9) | | 33 | | * | ||||
| | | | | ||||
Jack Theeler(9) | | 33 | | * | ||||
| | | | | ||||
Sachin Goel(7,9) | | 4,477 | | * | ||||
| | | | | ||||
Douglas K. Bratton(8) | | 444,454 | | 11.9% | ||||
| | | | | ||||
Nancy Callahan(10) | | — | | * | ||||
| | | | | ||||
Diane Davis(10) | | — | | * | ||||
| | | | | | | | |
Named Executive Officers and Directors as a Group | | | | | | | | |
(8 persons): | | 1,133,011 | | 30.3% | ||||
(10 persons): | | 954,081 | | 25.3% | ||||
| | | | | | | | |
Beneficial Owners of More than Five Percent: | | | | | | | | |
Crestline Assurance Holding LLC(6) | | 444,444 | | 12.0% | ||||
Crestline Assurance Holding LLC(8) | | 444,454 | | 11.9% | ||||
A. Michael Salem(11) | | 278,049 | | 7.44% | ||||
Knott Partners, L.P.(12) | | 243,937 | | 6.53% | ||||
Wellington Management Group LLP, NA(13) | | 238,095 | | 6.37% | ||||
Wellington Trust Company, National Association Multiple Common trust Funds Trust, | | | | | ||||
Micro Cap Equity Portfolio(14) | | 202,600 | | 5.42% |
* Represents beneficial ownership of less than 1%.
60
Ms. Nicholas has stock options granted of 73,000. None have vested or exercised as of December 31, 2021. |
2) | Consists of |
64
Includes 18,597 shares of voting common stock subject to vesting requirements pursuant to a restricted stock award granted to Mr. Del Monaco under the Company’s equity incentive plan. |
Represents 1,000 shares underlying a vested stock option. Does not include 2,500 shares underlying outstanding but unvested stock options. |
5) | Does not include 4,200 shares underlying outstanding but unvested stock options. |
6) | Mr. Leung’s address is 241 Central Park West, New York, NY 10024 |
Held by the Goel Family LTD Partnership II, a family investment partnership, in which Mr. Goel’s father is the general partner and Mr. Goel is one of three limited partners. |
The following information was obtained from a Schedule 13D filed by Douglas K. Bratton, Crestline Investors, Inc., Crestline Management, L.P. and Crestline Assurance Holdings LLC with the SEC on May 4, 2020. These securities are held directly by Crestline Assurance Holdings LLC (“Crestline”). The Manager of Crestline is Douglas K. Bratton and the sole member of Crestline is Crestline Management, L.P. (“Crestline Management”). Crestline Investors, Inc. (“Crestline Investors”) is the general partner of Crestline Management. Douglas K. Bratton is the sole director of Crestline Investors. Mr. Bratton has voting and investment power over all securities held by Crestline, except for, with respect to voting power, the 175,030 shares of voting common stock covered by the proxy granted to Vespoint LLC pursuant to the Stockholders Agreement described under “Certain Shareholder Relationships and Related Transactions” below. Crestline Management, Crestline Investors and Mr. Bratton may each be deemed to beneficially own the securities held by Crestline. Therefore, Crestline, Crestline Management, Crestline Investors and Mr. Bratton share the power to (i) vote and direct the vote of 269,414 shares of our voting common stock beneficially owned by Crestline and (ii) dispose of and direct the disposition of the 444,444 shares of voting common stock beneficially owned by Crestline. Mr. Bratton is a member of our board of directors. The address of Crestline is 201 Main Street, Suite 1900, Fort Worth, Texas 76102. |
9) | Does not include 67 shares underlying outstanding but unvested stock options and 727 shares underlying outstanding but unvested restricted stock units. |
10) | Does not include 727 shares underlying outstanding but unvested restricted stock units. |
11) | Consists of 203,298 shares of voting common stock indirectly owned through AMS Advisors, LLC an entity which Mr. Salem controls and owns. Mr. Salem’s and AMS Advisors, LLC’s address is 1075 Old Post Road, Bedford, New York 10507. Also includes 74,751 shares underlying vested outstanding stock options at $41.25 per share. |
12) | As reported in Amendment No. 1 to Schedule 13G filed with the Securities and Exchange Commission on February 11, 2022. The address of the filer is 485 Underhill Boulevard, Suite 205, Syosset, New York 11791. |
13) | As reported in Schedule 13G filed with the Securities and Exchange Commission on February 4, 2022. The address of the filer is c/o Wellington Management Company LLP, 280 Congress Street, Boston, MA 02210. |
14) | As reported in Amendment No. 1 to Schedule 13G filed with the Securities and Exchange Commission on February 4, 2022. The address of the filer is c/o Wellington Management Company LLP, 280 Congress Street, Boston, MA 02210 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Xenith
On June 28, 2018, we underwent a change in control as a result of the closing of the Xenith Agreement. On June 18, 2019, Xenith converted preferred stock and loans of $20,600,000 into 2,001,070 shares of our voting common stock. Xenith is a controlled subsidiary of Vespoint, which is also the manager of Xenith. In August 2020, shares of our voting common stock owned by Xenith were distributed to its members, including Vespoint. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company (“AMS”), and Rendezvous Capital LLC, a New York limited liability company (“Rendezvous”). On November 10, 2020, shares of
65
our voting common stock owned by Vespoint were distributed to its members, including AMS and Rendezvous. Each of Vespoint, AMS and Rendezvous is a private investment company controlled by Michael Minnich and A. Michael Salem, who are the co-chief executive officers of Vespoint and who are now executive officers and directors of the Company.
Minnich.
Crestline
On April 24, 2020, we entered into a Securities Purchase Agreement (the “Crestline Agreement”) with Xenith, Vespoint and Crestline. Pursuant to the Crestline Agreement, Crestline purchased 444,444 shares of our voting common stock, at a purchase price of $22.50 per share for $10.0 million. In connection with the Crestline Agreement, on April 24, 2020, we entered into a stockholders agreement (the “Stockholders Agreement”) with Xenith, Vespoint, Michael Minnich (“Minnich”), A. Michael Salem (“Salem”) and Crestline.
We also entered into a customary director’s indemnification agreement with Douglas K. Bratton, a principal of Crestline, who, at the closing of the Agreement, was appointed as a director of both our board of directors and the board of directors of our life insurance subsidiary, American Life.
Among other things, the Stockholders Agreement provides:
Constituency and election to our board. As long as Crestline and its affiliates own at least 10% of our outstanding voting common stock, Vespoint, Xenith and Messrs.Mr. Minnich and Salem and theirhis affiliates (the “Vespoint Stockholders”) have agreed to vote their
61
Company shares for one Crestline representative on our board of directors and, subject to reasonable committee member suitability standards and applicable regulatory qualification requirements, any committee thereof, with board of directors observer rights provided for an additional Crestline representative, and we appointed one Crestline designated member and a Crestline selected observer to the board of directors of American Life. Crestline agreed, so long as it and its affiliates own at least 10% of our outstanding voting common stock, to vote its shares for the election of Messrs.Mr. Minnich and Salem to our board of directors as long as each of themhe separately owns at least 3% of the outstanding shares of our voting common stock and each is an executive officer of the Company.
Proxy. Crestline currently owns 444,444 shares of our voting common stock (the “Crestline Owned Shares”), which represent approximately 16.3%11.9% of our outstanding shares of voting common stock. However, Crestline has only full investment and voting authority with respect to the proportion of the Crestline Owned Shares which represent 9.9% of our outstanding voting common stock (the “Voting Threshold”). While Crestline currently holds the Crestline Owned Shares above the Voting Threshold as an economic investment, all voting authority with respect to such shares has been delegated to Vespoint under a voting proxy (the “Proxy”) granted to such entity pursuant to the Stockholders Agreement. As of November 16, 2020, 269,41374,000 Crestline Owned Shares are subject to the Proxy (the “Proxy Shares”).Proxy.
This proxy will automatically terminate upon (a) receipt of Form A approval from the NDOI permitting Crestline to exercise full investment and voting authority with respect to all Crestline Owned Shares above the Voting Threshold or (b) the sale or transfer of Proxy Shares by Crestline to a third-party, but any such termination will be only with respect to the Proxy Shares.
Preemptive and First Rights of Refusal. For a period of three years following the date of the Stockholders Agreement, (i) the Company granted Crestline a pro rata preemptive right to purchase equity securities the Company may issue, (ii) Crestline granted us a right of first refusal to purchase our voting common stock owned by Crestline (including shares it may subsequently acquire) that it may offer to sell, and (iii) the Vespoint Stockholders granted Crestline a right of first refusal to purchase their shares of voting common stock they currently own or subsequently acquire that they may offer to sell.
Co-Sale Rights. For the earlier of (i) ten years following April 24, 2020 or (ii) the date on which Crestline and its affiliates own less than 5% of the outstanding shares of voting common stock of the Company, the Vespoint Stockholders granted Crestline a right of co-sale with respect to the Company shares they currently own or subsequently acquire. Pursuant to the provision, if a Vespoint Stockholder desires to transfer or sell shares to a third-party and to the extent such shares have not been purchased by Crestline pursuant to the right of first refusal described above but subject to the conditions indicated below, then Crestline has the right, on a pro rata basis, to participate in the transfer or sale on the same terms and conditions as being offered to a Vespoint Stockholder. However, Crestline may only exercise its co-sale right if (i) the amount of shares to be transferred or sold by the Vespoint Stockholder is equal to or exceeds, together with all sales of our shares sold by such stockholder within the preceding three months of the date of such proposed transfer, 1% of the total outstanding shares of our voting common stock (which shall be increased to 3% of the total outstanding voting common stock in the event that we consummate a firm commitment underwritten public offering of our common stock which nets at least $15 million of proceeds to us) and (ii) our voting common stock is listed for trading on the NYSE or the Nasdaq Capital Market. Completion of this offering will trigger the increase from 1% to 3%.
66
Registration Rights. We granted customary demand and piggyback registration rights to Crestline and the Vespoint Stockholders to register future public sales of their voting common stock subject to certain terms and conditions.
Master Agreement. On July 27, 2020, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with SRC2, a newly-formed protective cell of Seneca Re that was capitalized by Crestline.
The Reinsurance Agreement, which was effective as of April 24, 2020, was entered into pursuant to a three-year Master Letter Agreement (the “Master Agreement”) dated and effective as of April 24, 2020, among American Life, Seneca Re and Crestline. The purpose of the Reinsurance Agreement is to support American Life’s new business production by providing reinsurance capacity for American Life to write MYGA and FIA products. Concurrently with the Reinsurance Agreement:
● | American Life and SRC2 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and |
● | American Life and SRC2 entered into a trust agreement whereby SRC2 maintains for American Life’s benefit a trust account that supports the reinsured business. |
62
In addition, pursuant to the Master Agreement, the parties agreed to enter into a separate agreement whereby, among other things and subject to certain conditions, American Life will agree to reinsure additional new business production to one or more reinsurers formed and/or capitalized by Crestline, Midwest or an appropriate affiliate will refer potential advisory clients to Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline. Through December 31, 2020,2021, American Life had ceded $130.5$273.7 million, inception to date, face amount of annuities to SRC2CL Re and/or its successor (which was funded with $40 million in capital by Crestline). American Life received ceding fees under SAP of $6,242,612$12.9 million and expense reimbursements under SAP of $11,798,718$24.6 million in connection with these reinsurance transactions during the year ended December 31, 2020.2021. Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline SP1, a segregated portfolio company of Crestline Re SPC, under which the above described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1SP1.
Director Independence
See Item 10 above for information concerning Director independence.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The principal independent registered public accounting firm utilized by Midwest during 20202021 and 20192020 was Mazars USA LLP (“Mazars”). Midwest has signed engagement letters with Mazars outlining the expenses for both the audit work and the tax compliance services were approved by Midwest’s board of directors.
The aggregate fees billed by Mazars to Midwest for the fiscal years ended December 31, 20202021 and 20192020 were as follows:
| | | | | | | | | | | | |
| | | | | | | | | ||||
|
| Fiscal 2020 |
| Fiscal 2019 |
| Fiscal 2021 |
| Fiscal 2020 | ||||
Audit Fees(1) | | $ | 436,998 |
| $ | 220,000 | | $ | 432,781 |
| $ | 436,998 |
Audit-Related Fees(2) | |
| 92,818 |
| | 8,671 | |
| 62,449 |
| | 92,818 |
Tax Fees(3) | |
| 45,510 |
| | 30,000 | |
| 72,235 |
| | 45,510 |
| | $ | 575,326 |
| $ | 258,671 | | $ | 567,465 |
| $ | 575,326 |
Represents the aggregate fees billed and expenses for professional services rendered by the principal accountant for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q, and services that are normally provided by an independent registered public accounting firm in connection with statutory or regulatory filings or engagements for those fiscal years. |
67
Represents the aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under "audit fees." |
Represents the aggregate fees billed for professional services provided by the principal accountant for tax compliance, tax advice and tax planning. |
6368
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 No. | | Description |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
3.6 | | |
4.1 | | |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | |
10.6 | | |
| | |
| | |
6469
Exhibit No. | | Description |
| | |
|
| |
| | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
|
|
|
65
|
|
|
|
| |
| | |
| | |
| | |
70
| | |
Exhibit No. | | Description |
10.24† | | |
10.25† | | |
14.1* | | |
15.1* | | |
21.1* | | |
24 | | Power of Attorney (see Signature Page to this Report on Form 10-K.) |
31.1* | | |
31.2* | | |
32.1* | | |
32.2* | | |
101.INS | | Inline XBRL Instance Document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
104 | | Cover Page Interactive Data File. Formatted as Inline XBRL and contained in Exhibit 101. |
* Filed herewith.
† Management contract or compensatory plan or arrangement.
None.
6671
SIGNATURES
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 15, 202124, 2022
MIDWEST HOLDING INC. | ||
| ||
By: | /s/ | |
Name: |
| |
Title: |
| |
|
We, the undersigned, hereby severally constitute and appoint Michael Minnich and A. Michael Salem, and each of them singly,Georgette Nicholas, our true and lawful attorneysattorney with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signaturesher signature as theyshe may be signed by our said attorneysattorney to any and all amendments to said Annual Report on Form 10-K.
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/ Georgette Nicholas | | Chief Executive Officer, Chief Financial Officer, | | March 24, 2022 |
Georgette Nicholas | | Director (Principal Executive Officer) | | |
| | | | |
/s/ Michael Minnich | |
| | March |
Michael Minnich | |
| | |
| | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Debra Havranek | | Chief | | March |
Debra Havranek | | and Treasurer (Principal Financial Officer) | | |
| |
| | |
|
|
|
|
|
/s/ John T. Hompe | | Director and Independent Board Chair | | March |
John T. Hompe | | | | |
| | | | |
/s/ Firman Leung | | Director | | March |
Firman Leung | | | | |
| | | | |
/s/ Jack Theeler | | Director | | March |
Jack Theeler | | | | |
| | | | |
/s/ Sachin Goel | | Director | | March |
Sachin Goel | | | | |
| | | | |
/s/ Douglas K Bratton | | Director | | March |
Douglas K Bratton | | | | |
| | | | |
/s/Nancy Callahan | | Director | | March 24, 2022 |
Nancy Callahan | | | | |
| | | | |
/s/Diane Davis | | Director | | March 24, 2022 |
Diane Davis | | | | |
6772
MIDWEST HOLDING INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm(Mazars USA LLP, Fort Washington, PA, PCAOB ID 339) |
| F-2 |
Consolidated Balance Sheets at December 31, | F-4 | |
F-5 | ||
F-6 | ||
Consolidated Statements of Cash Flows for the years ended December 31, | F-7 | |
F-8 |
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Midwest Holding Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Midwest Holding Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 20202021 and 2019,2020, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020,2021, and the related notes and the schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of embedded derivatives of fixed indexed annuities
As described in Notes 1 and 5 to the consolidated financial statements, the Company issues fixed indexed annuity products that contain embedded derivatives, valued at $84.5$123.7 million as of December 31, 2020.2021. Fixed indexed annuity contracts allow the policyholder to elect a fixed interest rate return or an equity market component for which interest credited is based on the performance of certain stock market indices. The equity market option is an embedded derivative. The fair value of the embedded derivatives is computed as the present value of death, surrender and partial withdrawal benefits attributable to the excess of the projected policy contract values over the projected minimum guaranteed contract values. The projections of policy contract values are based on assumptions for future policy growth, which included assumptions for expected index credits on the next policy anniversary date, future equity option cost developed based on the participation rate, cap rate, strike rate, volatility assumption, time to expiration, and risk-free rates using the Black Scholes
F-2
formula and grow at the risk-free interest rates over the term of the index period, guaranteed minimum renewal interest rate, and policyholder assumptions including mortality, lapses, partial withdrawal rates, and the utilization of benefit riders.
The principal considerations for our determination that performing procedures relating to the valuation of embedded derivatives of fixed indexed annuities is a critical audit matter are (i) the significant judgment by management in estimating the fair value of embedded derivatives, specifically the significant policyholder behavior assumptions related to deaths, lapses, partial withdrawals, and the utilization of benefit riders, which in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating the audit evidence relating to the significant assumptions, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing the completeness and accuracy of key data underlying the development of the significant assumptions, and the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the valuation of embedded derivatives for fixed indexed annuities, which included (i) evaluating the appropriateness of the methods used in the valuation of the embedded derivatives of fixed indexed annuities, and (ii) evaluating the reasonableness of management’s significant assumptions of policyholder behavior assumptions related to deaths, lapses, partial withdrawals, and the use of benefit riders.
/s/ Mazars USA LLP
We have served as the Company’s auditor since May 2019.
Fort Washington, Pennsylvania
March 15, 202124, 2022
F-3
Midwest Holding Inc. and Subsidiaries
December 31, 20202021 and 20192020
| | | | | | |
|
| December 31, 2020 |
| December 31, 2019 | ||
| | | | | | |
Assets |
| |
|
| |
|
Investments, available for sale, at fair value fixed maturities | | $ | 377,163,358 | | $ | 117,241,861 |
Mortgage loans on real estate, held for investment | |
| 94,989,970 | |
| 13,810,041 |
Derivative instruments (See Note 5) | | | 11,361,034 | | | 575,294 |
Other invested assets | | | 21,897,130 | | | 2,468,947 |
Investment escrow | | | 3,174,047 | | | 3,899,986 |
Preferred stock | | | 3,897,980 | | | 500,000 |
Notes receivable | | | 5,665,487 | | | — |
Policy loans | |
| 45,573 | |
| 106,014 |
Total investments | |
| 518,194,579 | |
| 138,602,143 |
Cash and cash equivalents | |
| 151,679,274 | |
| 43,716,205 |
Deferred acquisition costs, net | | | 13,456,303 | | | — |
Premiums receivable | | | 313,601 | | | 355,959 |
Accrued investment income | | | 6,806,836 | | | 1,511,200 |
Reinsurance recoverables (See Note 8) | | | 32,146,042 | | | 30,579,524 |
Intangible assets | |
| 700,000 | |
| 700,000 |
Property and equipment, net | |
| 103,964 | |
| 85,395 |
Operating lease right of use assets | | | 348,198 | | | 470,132 |
Other assets | |
| 1,533,179 | |
| 241,580 |
Assets associated with business held for sale (See Note 2) | |
| 1,118,783 | |
| 3,653,748 |
Total assets | | $ | 726,400,759 | | $ | 219,915,886 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Benefit reserves | | $ | 12,775,773 | | $ | 16,319,912 |
Policy claims | |
| 161,703 | |
| 225,228 |
Deposit-type contracts (See note 10) | |
| 597,868,472 | |
| 171,168,785 |
Advance premiums | |
| 2,541 | |
| 261 |
Deferred gain on coinsurance transactions | |
| 18,198,757 | |
| 7,578,195 |
Lease liabilities (See Note 13): | | | | | | |
Finance lease | | | — | | | 1,860 |
Operating lease | | | 396,911 | | | 524,248 |
Other liabilities | | | 9,552,791 | | | 6,291,782 |
Liabilities associated with business held for sale (See Note 2) | |
| 1,114,312 | |
| 3,646,867 |
Total liabilities | |
| 640,071,260 | |
| 205,757,138 |
Contingencies and Commitments (See Note 12) | |
|
| |
|
|
Stockholders’ Equity: | |
| | |
| |
Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of December 31, 2020 or December 31, 2019 | |
| — | |
| — |
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 and 2,042,670 shares issued and outstanding as of December 31, 2020 and 2019, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding at December 31, 2020 or 2019 | |
| 3,738 | |
| 2,042 |
Additional paid-in capital | |
| 133,592,605 | |
| 54,494,355 |
Treasury stock | | | (175,333) | | | — |
Accumulated deficit | |
| (53,522,078) | |
| (41,081,710) |
Accumulated other comprehensive income | |
| 6,430,567 | |
| 619,584 |
Total Midwest Holding Inc.'s stockholders' equity | | | 86,329,499 | | | 14,034,271 |
Noncontrolling interest | | | — | | | 124,477 |
Total stockholders' equity | |
| 86,329,499 | |
| 14,158,748 |
Total liabilities and stockholders' equity | | $ | 726,400,759 | | $ | 219,915,886 |
See Notes to Consolidated Financial Statements.
F-4
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2020 and 2019
| | | | | | | |
| | Year ended December 31, | | ||||
|
| 2020 |
| 2019 | | ||
Revenues | | |
|
| |
| |
Premiums | | $ | 24 | | $ | (152) | |
Investment income, net of expenses | |
| 4,047,184 | |
| 120,581 | |
Net realized gains on investments (See Note 4) | |
| 2,550,396 | |
| 353,602 | |
Amortization of deferred gain on reinsurance | | | 1,835,505 | | | 2,643,801 | |
Service fee revenue, net of expenses | | | 1,960,092 | | | 230,454 | |
Other revenue | |
| 188,688 | |
| 51,502 | |
Total revenues | |
| 10,581,889 | |
| 3,399,788 | |
Expenses | |
|
| |
|
| |
Interest credited | |
| 4,224,828 | |
| 6,584 | |
Benefits | | | (4,953) | | | 34,436 | |
Increase in benefit reserves | | | — | | | 34,500 | |
Amortization of deferred acquisition costs | |
| 670,233 | |
| — | |
Salaries and benefits | |
| 6,347,751 | |
| 2,701,314 | |
Other operating expenses | |
| 10,199,629 | |
| 5,997,955 | |
Total expenses | |
| 21,437,488 | |
| 8,774,789 | |
Loss from continuing operations before taxes | |
| (10,855,599) | |
| (5,375,001) | |
Income tax expense (See Note 7) | |
| (1,584,769) | |
| (234,180) | |
Net loss from continued operations | |
| (12,440,368) | |
| (5,609,181) | |
Less: Gain attributable to noncontrolling interest | | | — | | | (124,477) | |
Net loss attributable to Midwest Holding. Inc. | | | (12,440,368) | | | (5,733,658) | |
Comprehensive income: | |
|
| |
|
| |
Unrealized gains on investments arising during period, net of offsets, net of tax ($1,709,391 and $118,765, respectively) | |
| 7,398,432 | |
| 2,645,015 | |
Unrealized losses on foreign currency | | | (146,185) | | | 146,185 | |
Less: reclassification adjustment for net realized gains on investments, net of tax ($383,121) | |
| (1,441,264) | |
| (353,602) | |
Other comprehensive income | |
| 5,810,983 | |
| 2,437,598 | |
Comprehensive loss | | $ | (6,629,385) | | $ | (3,296,060) | |
Net loss per common share | | | | | | | |
Basic | | $ | (4.88) | | $ | (4.99) | |
Diluted | | $ | (4.42) | | $ | (4.98) | |
See Notes to Consolidated Financial Statements.
F-5
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | ||
| | | | | | | | Additional | | | | | | | | | Total | ||||
| | Treasury | | Common | | Paid-In | | Accumulated | | | | Noncontrolling | | Stockholders’ | |||||||
|
| Stock |
| Stock |
| Capital |
| Deficit |
| AOCI* |
| Interests |
| Equity (Deficit) | |||||||
Balance, December 31, 2018 | | $ | — | | $ | 41 | | $ | 33,029,075 | | $ | (35,348,052) | | $ | (1,818,014) | | $ | — | | $ | (4,136,950) |
Net loss | |
| — | |
| — | |
| — | |
| (5,733,658) | |
| — | |
| — | |
| (5,733,658) |
Xenith note interest waived | |
| — | |
| — | |
| 845,536 | |
| — | |
| — | |
| — | |
| 845,536 |
Xenith note conversion | |
| — | |
| 1,855 | |
| 19,098,145 | |
| — | |
| — | |
| — | |
| 19,100,000 |
Class C preferred stock conversion | | | | | | 146 | | | 1,499,854 | | | — | | | — | | | — | | | 1,500,000 |
Employee stock options | |
| — | |
| — | |
| 21,745 | |
| — | |
| — | |
| — | |
| 21,745 |
Change in equity of noncontrolling interests | | | — | | | — | | | — | | | — | | | — | | | 124,477 | | | 124,477 |
Unrealized gains on investments, net of taxes | | | | | | — | | | — | | | — | | | 2,291,413 | | | — | | | 2,291,413 |
Unrealized gains on foreign currency, net of taxes | |
| — | |
| — | |
| — | |
| — | |
| 146,185 | |
| — | |
| 146,185 |
Balance, December 31, 2019 | | | — | | | 2,042 | | | 54,494,355 | | | (41,081,710) | | | 619,584 | | | 124,477 | | | 14,158,748 |
Net loss | |
| — | |
| — | |
| — | |
| (12,440,368) | |
| — | |
| — | |
| (12,440,368) |
Capital raise, net of $5,914,995 related expenses | | | — | | | 1,696 | | | 79,310,109 | | | — | | | — | | | — | | | 79,311,805 |
Reverse stock split fractions retired | | | (175,333) | | | — | | | — | | | — | | | — | | | — | | | (175,333) |
Employee stock options | | | | | | — | | | 163,664 | | | — | | | — | | | — | | | 163,664 |
Purchase of remaining 49% of 1505 Capital LLC | | | — | | | — | | | (375,523) | | | — | | | — | | | (124,477) | | | (500,000) |
Unrealized gains on investments, net of taxes | | | — | | | — | | | — | | | — | | | 5,957,168 | | | — | | | 5,957,168 |
Unrealized gains on foreign currency, net of taxes | | | — | | | — | | | — | | | — | | | (146,185) | | | — | | | (146,185) |
Balance, December 31, 2020 | | $ | (175,333) | | $ | 3,738 | | $ | 133,592,605 | | $ | (53,522,078) | | $ | 6,430,567 | | $ | — | | $ | 86,329,499 |
* Accumulated other comprehensive income (loss)
See Notes to Consolidated Financial Statements.
F-6
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
(In thousands, except share information) | | | | | | |
Assets |
| |
|
| |
|
Fixed maturities, available for sale, at fair value | | $ | 683,296 | | $ | 377,163 |
Mortgage loans on real estate, held for investment | |
| 183,203 | |
| 94,990 |
Derivative instruments (See Note 5) | | | 23,022 | | | 11,361 |
Equity securities, at fair value (cost: $22,158 in 2021 and 0 in 2020) | | | 21,869 | | | — |
Other invested assets | | | 35,293 | | | 21,897 |
Investment escrow | | | 3,611 | | | 3,174 |
Federal Home Loan Bank (FHLB) stock | | | 500 | | | — |
Preferred stock | | | 18,686 | | | 3,898 |
Notes receivable | | | 5,960 | | | 5,666 |
Policy loans | |
| 87 | |
| 46 |
Total investments | |
| 975,527 | |
| 518,195 |
Cash and cash equivalents | |
| 142,013 | |
| 151,679 |
Deferred acquisition costs, net | | | 24,530 | | | 13,456 |
Premiums receivable | | | 354 | | | 314 |
Accrued investment income | | | 13,623 | | | 6,807 |
Reinsurance recoverables (See Note 9) | | | 38,579 | | | 32,146 |
Intangible assets | |
| 700 | |
| 700 |
Property and equipment, net | |
| 386 | |
| 104 |
Operating lease right of use assets | | | 2,360 | | | 348 |
Receivable for securities sold | | | 19,732 | | | — |
Other assets | |
| 2,113 | |
| 1,533 |
Assets associated with business held for sale (See Note 2) | |
| — | |
| 1,119 |
Total assets | | $ | 1,219,917 | | $ | 726,401 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Benefit reserves | | $ | 12,941 | | $ | 12,776 |
Policy claims | |
| 237 | |
| 162 |
Deposit-type contracts (See note 11) | |
| 1,075,439 | |
| 597,868 |
Advance premiums | |
| 1 | |
| 2 |
Deferred gain on coinsurance transactions | |
| 28,589 | |
| 18,199 |
Lease liabilities (See Note 13): | | | | | | |
Operating lease | | | 2,364 | | | 397 |
Payable for securities purchased | | | 5,546 | | | — |
Other liabilities | | | 9,044 | | | 9,553 |
Liabilities associated with business held for sale (See Note 2) | |
| — | |
| 1,114 |
Total liabilities | |
| 1,134,161 | |
| 640,071 |
Contingencies and Commitments (See Note 12) | |
|
| |
|
|
Stockholders’ Equity: | |
| | |
| |
Preferred stock, $0.001 par value; authorized 2,000,000 shares; 0 shares issued and outstanding as of December 31, 2021 or December 31, 2020 | |
| — | |
| — |
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 shares issued and outstanding as of December 31, 2021 and 2020, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; 0 shares issued and outstanding December 31, 2021 and 2020, respectively | |
| 4 | |
| 4 |
Additional paid-in capital | |
| 138,452 | |
| 133,592 |
Treasury stock | | | (175) | | | (175) |
Accumulated deficit | |
| (70,159) | |
| (53,522) |
Accumulated other comprehensive income | |
| 2,634 | |
| 6,431 |
Total Midwest Holding Inc.'s stockholders' equity | | | 70,756 | | | 86,330 |
Noncontrolling interests | | | 15,000 | | | — |
Total stockholders' equity | |
| 85,756 | |
| 86,330 |
Total liabilities and stockholders' equity | | $ | 1,219,917 | | $ | 726,401 |
Years Ended December 31, 2020 and 2019
| | | | | | |
|
| Year ended December 31, | ||||
| | 2020 |
| 2019 | ||
Cash Flows from Operating Activities: |
| |
|
| |
|
Net loss | | $ | (12,440,368) | | $ | (5,733,658) |
Adjustments to arrive at cash provided by operating activities: | |
|
| |
|
|
Net premium and discount on investments | |
| (423,300) | |
| 113,880 |
Depreciation and amortization | |
| 57,419 | |
| 58,761 |
Stock options | |
| 163,664 | |
| 21,745 |
Net transfers to noncontrolling interest | | | — | | | 124,477 |
Amortization of deferred acquisition costs | | | 463,826 | | | — |
Deferred acquisition costs capitalized | | | (13,974,666) | | | — |
Net realized (gains) losses on investments | |
| (2,550,396) | |
| (353,602) |
Deferred coinsurance ceding commission | |
| 10,620,562 | |
| 3,678,196 |
Notes payable interest accrued | | | — | | | 845,536 |
Changes in operating assets and liabilities: | |
|
| |
|
|
Reinsurance recoverables | | | (4,477,126) | | | (7,478,880) |
Interest and dividends due and accrued | |
| (5,295,636) | |
| (1,310,492) |
Premiums receivable | |
| 42,358 | |
| (9,089) |
Policy liabilities | |
| 10,042,046 | |
| 2,963,219 |
Other assets and liabilities | |
| 1,525,320 | |
| 4,745,274 |
Other assets and liabilities - discontinued operations | |
| 2,410 | |
| (122,543) |
Net cash used by operating activities | |
| (16,243,887) | |
| (2,457,176) |
Cash Flows from Investing Activities: | |
|
| |
|
|
Securities available for sale: | |
|
| |
|
|
Purchases | |
| (339,281,650) | |
| (103,078,444) |
Proceeds from sale or maturity | |
| 89,135,618 | |
| 5,780,475 |
Mortgage loans on real estate, held for investment purchases | |
| | |
| |
Purchases | | | (99,356,435) | | | (15,036,179) |
Proceeds from sale | | | 18,391,849 | | | 1,226,138 |
Derivatives | | | | | | |
Purchases | | | (8,588,537) | | | (490,831) |
Proceeds from sale | | | 1,269,069 | | | — |
Other invested assets | | | | | | |
Purchases | | | (73,996,775) | | | (20,533,761) |
Proceeds from sale | | | 54,517,558 | | | 14,849,555 |
Notes receivable for Chelsea Midwest | | | (5,665,487) | | | (500,000) |
Preferred stock | | | (3,897,980) | | | — |
Net change in policy loans | |
| 60,441 | |
| (62,171) |
Net purchases of property and equipment | |
| (69,333) | |
| (45,634) |
Net cash used in investing activities | |
| (367,481,662) | |
| (117,890,852) |
Cash Flows from Financing Activities: | |
|
| |
|
|
Finance lease | | | (111) | | | (444) |
Capital contribution | | | 79,311,805 | | | — |
Repurchase of common stock | | | (175,333) | | | — |
Acquisition of noncontrolling interest | | | (500,000) | | | — |
Receipts on deposit-type contracts | |
| 415,561,302 | |
| 161,392,700 |
Withdrawals on deposit-type contracts | |
| (2,509,045) | |
| (160,590) |
Net cash provided by financing activities | |
| 491,688,618 | |
| 161,231,666 |
Net increase in cash and cash equivalents | |
| 107,963,069 | |
| 40,883,638 |
Cash and cash equivalents: | |
|
| |
|
|
Beginning | |
| 43,716,205 | |
| 2,832,567 |
Ending | | $ | 151,679,274 | | $ | 43,716,205 |
| | | | | | |
Supplementary information | |
|
| |
|
|
Cash paid for taxes | | $ | 350,400 | | $ | — |
Conversion of notes payable and preferred stock | | | | | | |
Book value of note payable | | | — | | | (19,100,000) |
Book value of preferred stock | | | | | | (1,500,000) |
Common stock, note payable ($927,680) and preferred stock ($72,855) | | | — | | | 1,000,535 |
Additional paid in capital, note payable ($18,172,320) and preferred stock ($1,427,145) | | | — | | | 19,599,465 |
See Notes to Consolidated Financial Statements.
F-7F-4
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2021 and 2020
| | | | | | | |
| | Year ended December 31, | | ||||
(In thousands, except per share data) |
| 2021 |
| 2020 | | ||
Revenues | | |
|
| |
| |
Investment income, net of expenses | | $ | 15,737 | | $ | 4,047 | |
Net realized gain on investments (See Note 4) | |
| 7,752 | |
| 2,550 | |
Amortization of deferred gain on reinsurance transactions | | | 3,022 | | | 1,836 | |
Service fee revenue, net of expenses | | | 2,343 | | | 1,960 | |
Other revenue | |
| 1,209 | |
| 189 | |
Total revenue | |
| 30,063 | |
| 10,582 | |
Expenses | |
|
| |
|
| |
Interest credited | |
| 7,012 | | | 4,225 | |
Benefits | | | 6 | | | (5) | |
Amortization of deferred acquisition costs | |
| 2,886 | |
| 670 | |
Salaries and benefits | |
| 16,926 | |
| 6,347 | |
Other operating expenses | |
| 15,104 | |
| 10,200 | |
Total expenses | |
| 41,934 | |
| 21,437 | |
Loss from continuing operations before taxes | |
| (11,871) | |
| (10,855) | |
Income tax expense (See Note 8) | |
| (4,766) | |
| (1,585) | |
Net loss attributable to Midwest Holding, Inc. | | | (16,637) | | | (12,440) | |
Comprehensive income (loss): | |
|
| |
|
| |
Unrealized gains on investments arising during the year ended December 31, 2021 and 2020, net of offsets, (net of tax ($378) and $1.7 million, respectively) | |
| (1,422) | |
| 7,398 | |
Unrealized losses on foreign currency | | | — | | | (146) | |
Less: Reclassification adjustment for net realized gains on investments, net of offsets (net of tax $631 and $383, respectively) | |
| (2,375) | |
| (1,441) | |
Other comprehensive (loss) income | |
| (3,797) | |
| 5,811 | |
Comprehensive loss | | $ | (20,434) | | $ | (6,629) | |
Loss per common share | | | | | | | |
Basic | | $ | (4.45) | | $ | (4.88) | |
Diluted | | $ | (4.45) | | $ | (4.42) | |
See Notes to Consolidated Financial Statements.
F-5
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |||||||||||||||||||
| | | | | | | | Additional | | | | | | | | | | | | | |
| | Treasury | | Common | | Paid-In | | Retained | | | | Noncontrolling | | Total | |||||||
(In thousands) |
| Stock |
| Stock |
| Capital |
| Earnings |
| AOCI* |
| Interest |
| Equity | |||||||
Balance, December 31, 2019 | | $ | — | | $ | 2 | | $ | 54,494 | | $ | (41,082) | | $ | 620 | | $ | 124 | | $ | 14,158 |
Net loss | | | — | | | — | | | — | | | (12,440) | | | — | | | — | | | (12,440) |
Capital raise, net of $5.9 million related expenses | | | — | | | 2 | | | 79,310 | | | — | | | — | | | — | | | 79,312 |
Reverse stock split fractions retired | | | (175) | | | — | | | — | | | — | | | — | | | — | | | (175) |
Employee stock options | | | — | | | — | | | 164 | | | — | | | — | | | — | | | 164 |
Purchase of remaining 49% of 1505 Capital LLC | | | — | | | — | | | (376) | | | — | | | — | | | (124) | | | (500) |
Unrealized gains on investments, net of taxes | | | — | | | — | | | — | | | — | | | 5,957 | | | — | | | 5,957 |
Unrealized losses on foreign currency | | | — | | | — | | | — | | | — | | | (146) | | | — | | | (146) |
Balance, December 31, 2020 | | $ | (175) | | $ | 4 | | $ | 133,592 | | $ | (53,522) | | $ | 6,431 | | $ | — | | $ | 86,330 |
Net loss | |
| — | |
| — | |
| — | |
| (16,637) | |
| — | |
| — | |
| (16,637) |
Additional capital raise related expenses | | | — | | | — | | | (121) | | | — | | | — | | | — | |
| (121) |
Employee stock options | | | — | | | — | | | 4,981 | | | — | | | — | | | — | | | 4,981 |
Unrealized losses on investments, net of taxes | | | — | | | — | | | - | | | — | | | (3,797) | | | — | | | (3,797) |
Noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 15,000 |
Balance, December 31, 2021 | | $ | (175) | | $ | 4 | | $ | 138,452 | | $ | (70,159) | | $ | 2,634 | | $ | 15,000 | | $ | 85,756 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
* Accumulated other comprehensive income (loss)
See Notes to Consolidated Financial Statements.
F-6
Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021 and 2020
| | | | | | |
|
| Year ended December 31, | ||||
(In thousands) | | 2021 |
| 2020 | ||
Cash Flows from Operating Activities: |
| |
|
| |
|
Loss attributable to Midwest Holding, Inc. | | $ | (16,637) | | $ | (12,440) |
Adjustments to arrive at cash provided by operating activities: | |
|
| |
|
|
Net premium and discount on investments | |
| (1,244) | |
| (423) |
Depreciation and amortization | |
| 50 | |
| 57 |
Stock options | |
| 4,981 | |
| 164 |
Amortization of deferred acquisition costs | | | 2,886 | | | 464 |
Deferred acquisition costs capitalized | | | (14,018) | | | (13,975) |
Net realized gain on investments | |
| (7,752) | |
| (2,550) |
Deferred gain on coinsurance transactions | |
| 10,390 | |
| 10,621 |
Changes in operating assets and liabilities: | |
|
| |
|
|
Reinsurance recoverables | | | (6,434) | | | (4,477) |
Interest and dividends due and accrued | |
| (6,816) | |
| (5,296) |
Premiums receivable | |
| (40) | |
| 42 |
Deposit-type liabilities | | | 24,371 | | | — |
Policy liabilities | |
| 239 | |
| 10,042 |
Receivable and payable for securities | | | (14,185) | | | — |
Other assets and liabilities | |
| (1,133) | |
| 1,525 |
Other assets and liabilities - discontinued operations | |
| 4 | |
| 2 |
Net cash used in operating activities | |
| (25,338) | |
| (16,244) |
Cash Flows from Investing Activities: | |
|
| |
|
|
Fixed maturities available for sale: | |
|
| |
|
|
Purchases | |
| (660,059) | |
| (339,282) |
Proceeds from sale or maturity | |
| 356,820 | |
| 89,136 |
Mortgage loans on real estate, held for investment | |
| | |
| |
Purchases | | | (160,714) | | | (99,356) |
Proceeds from sale | | | 72,064 | | | 18,392 |
Derivatives | | | | | | |
Purchases | | | (23,944) | | | (8,589) |
Proceeds from sale | | | 14,578 | | | 1,269 |
Purchase of equity securities | | | (22,097) | | | — |
Other invested assets | | | | | | |
Purchases | | | (95,529) | | | (73,997) |
Proceeds from sale | | | 82,272 | | | 54,517 |
Purchase of restricted common stock in FHLB | | | (500) | | | — |
Preferred stock | | | (14,926) | | | (3,898) |
Notes receivable | | | - | | | (5,665) |
Net change in policy loans | |
| (41) | |
| 60 |
Net purchases of property and equipment | |
| (331) | |
| (69) |
Net cash used in investing activities | |
| (452,407) | |
| (367,482) |
Cash Flows from Financing Activities: | |
|
| |
|
|
Net transfer to noncontrolling interest | | | 15,000 | | | — |
Capital contribution | | | (121) | | | 79,312 |
Repurchase of common stock | | | - | | | (175) |
Acquisition of noncontrolling interest | | | - | | | (500) |
Receipts on deposit-type contracts | |
| 471,646 | |
| 415,561 |
Withdrawals on deposit-type contracts | |
| (18,446) | |
| (2,509) |
Net cash provided by financing activities | |
| 468,079 | |
| 491,689 |
Net (decrease) increase in cash and cash equivalents | |
| (9,666) | |
| 107,963 |
Cash and cash equivalents: | |
|
| |
|
|
Beginning | |
| 151,679 | |
| 43,716 |
Ending | | $ | 142,013 | | $ | 151,679 |
| | | | | | |
Supplementary information | |
|
| |
|
|
Cash paid for taxes | | $ | 6,450 | | $ | 350 |
See Notes to Consolidated Financial Statements.
F-7
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of operations:
Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of operating a financial services company. The Company redomesticated from the State of Nebraska to the stateState of Delaware on August 27, 2020. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiaries, American Life & Security Corp. (“American Life”), and 1505 Capital LLC (“1505 Capital”). and as well as through its sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).
American Life is a Nebraska-domiciled life insurance company, which is also commercially domiciled in Texas, that is currently licensed to sell, underwrite, and market life insurance and annuity products in 2122 states and the District of Columbia. As discussed in Note 3, on June 28, 2018, the Company underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement (the “Xenith Agreement”) with a then non-affiliated third-party, Xenith Holdings LLC (“Xenith”). Xenith was a wholly controlled subsidiary of Vespoint LLC (“Vespoint”), which was also the manager of Xenith. Vespoint is owned and managed by investment funds controlled by Michael Minnich and A. Michael Salem. Pursuant to the Xenith Agreement, the Company issued Series C Preferred Stock and convertible senior secured notes to Xenith between June and December 2018. Of the funds received from Xenith, we contributed $20.5 million to American Life through capital contributions. At the closing of the Xenith Agreement, Messrs. Minnich and Salem were subsequently appointed as executive officers of American Life and later as our Executive Chairman and Chief Executive Officer, respectively, in 2019.
On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment activities. On June 15, 2020, we purchased the remaining 49% ownership in 1505 Capital for $500,000. 1505 Capital’s financial results have been consolidated with the Company’s since the date of its acquisition.
Effective March 12, 2020, Seneca Reinsurance Company, LLC (“Seneca Re”),Re, a Vermont limited liability company, was formed by Midwest to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of risks of its participants through one or more protected cells and to conduct any other business or activity that is permitted for sponsored captive insurance companies under Vermont insurance regulations. On March 30, 2020, Seneca Re received its Certification of Authority to transact the business of a captive insurance company. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of December 31, 2021, Seneca Re has two incorporated cells, Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Re Protected Cell 2021-03 (“SRC3”) which are consolidated in our financial statements. On May 12, 2020, Midwest contributed $300,000 to Seneca Re for a 100% ownership interest. As of December 31, 2020, Seneca Re had established Protected Cell-2020-01 (“SRC1”). Midwest contributed $3,000,000 to capitalize SRC1. Crestline Management, L.P. (“Crestline”),
On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited partnership, owns approximately 12% of our voting common stock. On July 23, 2020, the Nebraska Department of Insurance (“NDOI”) approved the Funds Withheld Coinsuranceliability company, that was established in 2018 to provide financial and Modified Coinsurance Agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”) of Seneca Re, now known as Crestline SP1.Effective December 8, 2020, American Life entered into a novation agreement with SRC2investment advisory and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline SP1, a segregated portfolio company of Crestline Re SPC, under which the above described reinsurance, trustmanagement services to clients and related asset management agreements were novated and replacedinvestment activities. On June 15, 2020, we purchased the remaining 49% ownership in 1505 Capital for $500,000. 1505 Capital’s financial results have been consolidated with substantially similar agreements entered into by American Life and Crestline SP1.the Company’s since the date of its acquisition.
On April 24, 2020, Midwest entered into a Securities Purchase Agreement with Crestline Assurance Holdings LLC, (“Crestline”), a Delaware limited liability company (“Crestline”Crestline Assurance”), Xenith Holdings LLC, and Xenith, Vespoint LLC, a Delaware limited liability company (“Vespoint”), and Pursuantpursuant to the Agreement,which Crestline Assurance purchased 444,444 shares of the Company’s voting common stock, par value $0.001 per share (“common stock”), at a purchase price of $22.50 per share for $10.0 million. Under the agreement, the Company contributed $5.0 million to American Life. Also, effective as of April 24, 2020, in a separate transaction, Midwest sold 231,655 shares of common stock to various investors in a private placement at $22.50 per share for $5.227 million.
Under the Crestline agreement, the Company contributed $5.0 million toOn July 27, 2020, American Life and the remaining proceeds are to be used for general working capital and corporate purposes.
Also,entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2020-02 (“SRC2”)). SRC2 was capitalized by Crestline Management, L.P. (“Crestline”), a significant shareholder of Midwest via a Crestline subsidiary, Crestline Re SPC1. The Reinsurance Agreement, which was effective as of April 24, 2020, American lifeand was entered into pursuant to a Master Letter Agreement with(the “Master Agreement”) dated and effective as of April 24, 2020, among American Life, Seneca Re and Crestline regarding a flowCrestline. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed and multi-year guaranteed annuity reinsurance and related assetproducts. Concurrently with the Reinsurance Agreement:
● | American Life and SRC2 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and |
● | American Life and SRC2 entered into a trust agreement whereby SRC2 maintains for American Life’s benefit a trust account that supports the reinsured business. |
Under the Master Agreement, Crestline agreed to provide reinsurereinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its multi-year guaranteed annuities (“MYGA”) and a quota share percentage of 40% for American Life’s fixed indexed annuity (“FIA”) products. This agreementThe Master Agreement expires on April 24, 2023.
In addition, pursuant to the Master Agreement, the parties thereto have agreed to enter into a separate agreement whereby, among other things and subject to certain conditions, American Life will agree to reinsure additional new business production to one or more
F-8
reinsurers formed and/or capitalized by Crestline, Midwest or an appropriate affiliate will refer potential advisory clients to Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline.
Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, for and on behalf of Crestline Re SP1, under which the above-described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline Re SP1.
In December 2020, the Company completed a public offering of its voting common stock for gross proceeds of $70,000,000$70.0 million (see Note 17). In connection therewith, the Company's voting common stock was approved for listing and began trading on the Nasdaq Capital Market (“NASDAQ”) upon the closing of the public offering.
On June 26, 2021, the Nebraska Department of Insurance (‘NDOI”) issued its non-disapproval of the Modified Coinsurance Agreement (“Modco AEG Agreement”) of American Life with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement closed on June 30, 2021.
Under the Modco AEG Agreement, American Life cedes to AEG, on a modified coinsurance basis, 20% quota share of certain liabilities with respect to its MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its FIA products. American Life has established a Modco Deposit Account to hold the assets for the Modco Agreement. The initial settlement included net premium income of $37.5 million and net statutory reserves of $34.8 million for the modified coinsurance account. The amount paid to the Modified Deposit Account from AEG was $2.4 million.
On November 10, 2021, Midwest purchased 1,000 shares of Common Stock, $.01 par value per share for a total purchase price of $5.7 million for 100% ownership in an intermediary holding company. The intermediary holding company contributed capital of $5.5 million to purchase 100% of SRC3 Class A and B capital stock. Also, on November 10, 2021, American Life and SRC3 entered into a Funds Withheld and Modified Coinsurance Agreement, whereby, SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA and quota share percentage of 45% of American Life’s FIA products.
As discussed above, Midwest owned 100% in SRC1 by contributing a total of $21.4 million. On December 30, 2021, Midwest closed the sale of approximately 70% of Seneca Incorporate Cell, LLC 2020-01 (“SRC1”) to a subsidiary of ORIX Corporation USA “ORIX USA”) for $15.0 million. Under the terms of the agreement, Midwest holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, will be the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital LLC.
Management evaluates the Company as one1 reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of annuity products and life insurance through American Life, and then reinsuring such products with third-party reinsurers, and since April 24,May 13, 2020, with the SRC1 entity. The Company’s historicalSeneca Re protected cells. American Life’s legacy product offerings consisted of a multi-benefit life insurance policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product. These product offerings were underwritten, marketed, and managed as a group of similar products on an overall portfolio basis. American Life presently offers five5 annuity products, two multi-year guaranteed annuities (“MYGAs”), a fixed indexed annuity (“FIA”),2 MYGAs, 2 FIAs, and two2 bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products.
Basis of presentation:
These consolidated financial statements for the year ended December 31, 20202021 and 20192020 have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is a summary of our significant accounting policies and 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. 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.
F-9
InvestmentsFixed Maturities
All fixed maturities 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 premiumsPremiums and discounts on fixed maturity instruments are amortized using the scientific-yield method over the term of the bonds.bonds, trust preferred, and redeemable preferred stock. 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 accumulated other comprehensive income.
Declines in the fair value of available-for-sale fixed maturity 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, the 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.
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 statementas realized losses and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other than-temporaryother-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. TheAs of December 31, 2020, the Company has analyzed theits securities portfolio and determined that aan impairment of approximately $35,000 should be recorded for one1 debt security, an impairment of $500,000 was recognized on a preferred stock, and a valuation allowance should beof $777,000 established on one1 lease. The valuation allowance on the lease of $777,000 was released as of March 31, 2021 due to the sale of the investment. The Company believed the remaining investments were not impaired as of December 31, 2020. The Company had no0 impairment recognized atto recognize as of December 31, 2019.2021.
Investment income consists of interest, dividends, gains and losses from equity method investments, and real estate income, which are recognized on an accrual basis andalong with the amortization of premiums and discounts.
Certain available-for-salesavailable-for-sale investments are maintained as collateral under funds withheldFW and modified coinsuranceModco agreements but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. American Life has treaties with several third-party reinsurers that have funds withheldFW and modified coinsuranceModco provisions. In a modified coinsurance arrangement (“Modco”),Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a funds withheld coinsuranceFW agreement,
F-9
(“FW”); assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers to reduce the potential credit risk. The unrealized gains/losses on those investments are passed through to the third-party reinsurers as either a realized gain or loss on the consolidated statementConsolidated Statements of income.Comprehensive Loss.
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 settlements 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. NoNaN such valuation allowance was established as of December 31, 20202021 or 2019, respectively.
Investment escrow
The Company held in escrow $3,174,047 and $3,899,986 as of December 31, 2020 and 2019, respectively. The cash was used to settle other invested assets that closed in January 2021 and a mortgage loan that closed in January 2020, respectively.
Other invested assetsF-10
The Company purchases and sells equipment leases in its investment portfolio. Other invested assets also includes loans held for investments. The Company entered into a fund investment originated by Crestline Management LLP. Table of Contents
Derivative Instruments
Derivatives are used to hedge the risks experienced in our ongoing operations, such as equity, interest rate and cash flow risks, or for other risk management purposes, which primarily involve managing liability risks associated with our indexed annuity products and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the consolidated balance sheets.
To qualify for hedge accounting, at the inception of the hedging relationship, we would formally document our designation of the hedge as a cash flow or fair value hedge and our risk management objective and strategy for undertaking the hedging transaction. In this documentation, we would identify how the hedging instrument is expected to hedge the designated risks related to the hedged item, the method that would be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which would be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship.
In the late 2019, the Company began investing in options to hedge our interest rate risks on our FIA product. We did not have the formal documentation and hedge effectiveness completed at the time we entered into those equity options; therefore, they do not qualify for hedge accounting. The options fair market values were recorded on our incomeconsolidated statement of comprehensive loss as realized gains or (losses).
During the last quarter of 2020, the Company began investing in foreign currency futures to hedge the fluctuations in the foreign currency. The formal documentation and hedge effectiveness was also not completed at the date we entered into those futures contracts; therefore, they do not qualify for hedge accounting. The futures fair market values were recorded on our incomeconsolidated statement of comprehensive loss as realized gains or (losses).
Additionally, reinsurance agreements written on a funds withheldFW or Modco basis contain embedded derivatives on our fixed indexed annuity product. Gains or (losses) associated with the performance of assets maintained in the modified coinsurance deposit and funds withheld accounts are reflected as realized gains or (losses) in the income statement.consolidated statement of comprehensive loss.
Equity Securities
Equity securities at December 31, 2021, consisted of exchange traded funds (“ETFs”). The ETF’s are carried at fair value with the change in fair value recorded through realized gains and losses in Consolidated Statements of Comprehensive Loss. As of December 31, 2021, we held $21.9 million of ETFs and 0 as of December 31, 2020.
Federal Home Loan Bank (FHLB) stock
American Life purchased Federal Home Loan Bank of Topeka (��FHLB”) common stock on May 5, 2021. This investment was to solidify our membership with FHLB Topeka. The carrying value of FHLB stock approximates fair value since the Company can redeem the stock with FHLB at cost. As a member of the FHLB, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity securities.
Membership allows access to various funding arrangements to provide a source of additional liquidity. As of December 31, 2021, there were no outstanding funding arrangements.
Other Invested Assets
Other invested assets consists of approximately $35.3 million of various investments. Of this total, approximately $18.9 million are primarily collateral loans, private credit, and equipment leases. Also, at December 31, 2020, we had a $19.7 million investment in a private fund. Effective January 2021, this investment was repackaged into a special purpose vehicle between American Life and an unaffiliated entity, PF Collinwood Holdings, LLC (“PFC”), with American Life owning 100% of the entity. NaN gain or loss was recognized from the repackaging of PFC. The fair value or statement value of PFC as of December 31, 2021 was $14.5 million with gains and losses being recorded in equity on the balance sheet.
F-10F-11
Investment escrow
The Company held in escrow $3.6 million and $3.2 million as of December 31, 2021 and 2020, respectively. The cash held at year end was used to purchased mortgages in January 2022 and 2021, respectively.
Preferred Stock
Preferred stock ofThe Company impaired in full a non-affiliated company was purchased for $500,000 during the third quarter of 2019. An impairment analysis of the preferred stock was performedinvestment as of June 30, 2020, due to a change in valuation of an invested asset held by the non-affiliated company. The investment asset had collateral supporting the investment that was less than the book value of the asset; therefore, the Company impaired the full amount of $500,000.December 31, 2020. This was recorded as a reduction of the asset on the Consolidated balance sheetsheets of $500,000 and a bad debt expensecorresponding loss on impairment on the Consolidated Statements of Comprehensive Loss. There was no impairment
The company held a perpetual preferred stock investment of preferred stock$10.0 million as of December 31, 2019.2021. This investment is carried at fair market value.
The CompanyIn 2020 American Life entered into a series of transaction between American Life andtransactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”), an investment originated by Crestline Management LLP.. One of the transactions involved the acquisition of GBP 3,642,090Pound Sterling (“GBP”) 3.6 million of preferred equity in Ascona Group Holdings LtdLimited (“the Preferred Equity”) along with warrants bearing no initial assigned value as of September 28, 2020.(the “Warrants”). American Life initially created a special purpose vehicle, called Ascona Asset Holding LLC (“AAH”)., to hold the Preferred Equity and Warrants, and later created Ascona Collinwood HoldCo LLC (“ACH”) to be the sole member of AAH. American Life and Crestline Re SP1 own 74% and 26%, respectively, of AAH.
ACH. We are carrying the preferred equity at a market value of $8.7 million as of December 31, 2021 and $3.9 million of December 31, 2020. The preferred stock and warrants had a market value of $4.9 million and $3.8 million, respectively, as of December 31, 2021 and 0 value as of December 31, 2020. The market value of the preferred stock and warrants was recorded in net investment income on the Consolidated Statements of Comprehensive Loss.
Notes receivable
The Company held in notes receivable carried at fair value of $6.0 million and $5.7 million as of December 31, 2021 and 2020, a note of $5,665,487respectively, between American Life and a related partyparty. The note receivable has an annual interest rate of 5% which is paid in kind (“PIK”) interest per annum that increases the outstanding note balance. This note was rated BBB+ by a nationally recognized statistical rating organization (“NRSRO”).organization. This note is being carried at the fair market value. The Company did not hold any notes receivable as of December 31, 2019.matures on June 18, 2050.
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.
Cash and cash equivalents
The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. AtAs of December 31, 20202021 and 2019, the Company had no cash equivalents. At December 31, 2020, and December 31, 2019, the Company held approximately 505,349GBP 2.2 million and 1.8 millionGBP 500,000 in Pound Sterling (“GBP”) in several of our custody accounts, respectively. The USD equivalent held was approximately $690,787$3.0 million and $2.3 million,$700,000, respectively. As of December 31, 2021 and 2020, the Company held approximately 87,633 in Euro 9.3 million and none as of December 31, 2019.90,000, respectively. The USD equivalent held was approximately $107,000.$10.6 million and $110,000, respectively. As of December 31, 2021 and 2020, we had realized gains of approximately $45,000$2.0 million and approximately $50,000, respectively, related to the change in the foreign currency exchange rate of the GBP and Euro that waswere recorded in realized (losses) gains on investments onin the income statement.Consolidated Statements of Comprehensive Loss. The Company had 0 money market investments of approximately $100.6 million and $26.2 million as of December 31, 20202021 and 2019,$100.6 million at December 31, 2021 and 2020, respectively.
Deferred acquisition costs
Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to third-party 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. These costs 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
F-12
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. TheA recovery analysis is completed by our Company had reinsurance contractsthird-party actuaries during their year-end processes and have found that no impairment existed in conjunction with commission and administration allowances from each reinsurer that offset allthe recovery of the DAC costs incurred during 2019, as a result not DAC was recorded and no recovery analysis was deem necessary as of December 31, 2019. The Company performed a recoverability analysis during the fourth quarter of 2020 and determined that all DAC balances were recoverable as of December 31, 2020.balances.
F-11
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 3three to 7seven years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $47,853$49,000 and $40,000$48,000 for the years ended December 31, 20202021 and 2019,2020, respectively. The accumulated depreciation net of disposals totaled $1,023,334$1.1 million and $975,480$1.0 million as of December 31, 2021 and 2020, respectively.
During the first quarter of 2021, the Company began the implementation of a new cloud-based enterprise resource planning and 2019, respectively.enterprise performance management system. The Company expects to capitalize related consultation and support expenses relating to this system and will begin amortizing these fees over a period of five years from the date of implementation. The useful life of the system has been estimated at five years in accordance with guidance in ASC 350, Intangibles – Goodwill and Other (as updated by ASU 2018-15). As December 31, 2021, the Company had capitalized approximately $1.2 million of expenses incurred. The expected date of implementation is first quarter 2022.
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 any single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidatedConsolidated 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 recoverablerecoverables as appropriate. There were no0 allowances established as of December 31, 20202021 or 2019.2020.
We expect to reinsure substantially all of our new insurance policies with a variety of reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral, and other administration fees. We believe this strategy will help preserve American Life’s capital while supporting its growth because American Life will have lower capital requirements when its business is reinsured due to lower overall financial exposure versus retaining the insurance policy business itself. See Note 89 below for further discussion of our reinsurance activities.
F-13
There are two main categories of reinsurance transactions: 1) “indemnity,” where we cede a portion of our risk but retain the legal responsibility to our policyholders should our reinsurers not meet their financial obligations; and 2) “assumption,” where we transfer the risk and legal responsibilities to the reinsurers. The reinsurers are required to acquire the appropriate regulatory and policyholder approvals to convert indemnity policies to assumption policies.
Our reinsurers may be domestic or foreign capital markets investors or traditional reinsurance companies seeking to assume U.S. insurance business. We plan to mitigate the credit risk relating to reinsurers generally by requiring other financial commitments from the reinsurers to secure the reinsured risks, (suchsuch as posting substantial collateral).collateral. It should be noted that under indemnity reinsurance agreements American Life remains exposed to the credit risk of its reinsurers. If one or more reinsurers become insolvent or are otherwise unable or unwilling to pay claims under the terms of the applicable reinsurance agreement, American Life retains legal responsibility to pay policyholder claims, which, in such event would likely materially and adversely affect the capital and surplus of American Life.
As indicated above under “Nature of operations,” Midwest formed Seneca Re in early 2020. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of December 31, 2020, Seneca Re had one ProtectedIncorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Incorporate Cell, LLC 2021-03 (“SRC3”) which iswere consolidated in our financial statements.
F-12
EffectiveSRC1 to a ORIX Corporation USA on December 8, 2020, 30, 2021 and retained 30% ownership. Midwest maintains control over SRC1 so we are still consolidating in our financial statements.
American Life entered into a novation agreement with SRC2 and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline SP1, a segregated portfolio company of Crestline Re SPC,SP1, under which the above describedabove-described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline Re SP1.
Some reinsurers are not and may not be “accredited” or qualified as reinsurers under Nebraska Law.law and regulations. In order to enter into reinsurance agreements with such reinsurers and to reduce potential credit risk, American Life holds a deposit or withholds funds from the reinsurer or requires the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business it assumes. The reinsurer may also appoint an investment manager for such funds, which in some cases may be our investment adviser subsidiary, 1505 Capital, to manage these assets pursuant to guidelines adopted by us that are consistent with stateNebraska investment statutes and reinsurance regulations.
American Life currently has treaties with several third-party reinsurers and one related party reinsurer. Of the third-party reinsurers, only threefour have funds withheldFW or modified coinsuranceModco provisions. In a modified coinsurance arrangement,Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a funds withheld coinsuranceFW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers, to reduce the potential credit risk. Under those provisions with third-party reinsurers, the assets backing the treaties are maintained by American Life as investments but the assets and total returns or losses on the investments are owned by the reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in Comprehensive Loss and Note 5 below. As a result of recent market volatility, assets
Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately $161,000 and $2.9 million as of December 31, 2020.2021 and 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the unrealized gains on the assets held by American Life were offset by a lossgains in the embedded derivative of $2.7 million and losses of $2.9 million.million as of December 31, 2021 and 2020, respectively. We account for this unrealized lossgain (loss) pass-through by recording equivalent realized lossesgains or (losses) on our income statementConsolidated Statements of Comprehensive Loss and in amount payable to our third-party reinsurers on ourthe Consolidated balance sheet.sheets. For further discussion see Note 5. Derivative Instruments below.
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.
F-14
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.
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.
Notes payable
Notes payable consist of the convertible notes entered into due to the Xenith transaction and were recorded net of issuance costs. The notes were converted into our voting common stock on June 18, 2019.
Deferred gain on ceding commissionsreinsurance transactions
American Life has entered into several indemnity reinsurance contracts where it is earning ceding commissions. These ceding commissions are recorded as a deferred liability and amortized over the life of the business ceded. American Life receives commission, administrative, and option allowances from reinsurance transactions that represent recovery of acquisition costs. These allowances first
F-13
reduce the DAC associated with that reinsured block of business with the remainder being included in the deferred gain on ceding commissionsreinsurance transactions to also be amortized.
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 2016.2018. The Company is not currently under examination for any open years. 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 it 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.
Revenue recognition and related expenses
Amounts received as payment for annuities 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 statements of cash flows.
Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.
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 expected life of the annuity contracts.
Revenues on serviceService fee revenue is comprised of third-party administration (“TPA”) fees and third-party administration fees are recorded as income when incurred.investment management fees:
● | The TPA fees are related to accounting services performed based on service agreements with varying lengths. Revenue associated with TPA fees are only recognized when the services are performed, which is typically on a monthly or quarterly basis. |
● | Fees for investment management fees are based on the total assets managed for each client at a contracted rate. The length of term on the contracts varies by client. The Company accrues investment advisory fees and recognizes revenue based on the market value of the client’s assets at the end of the applicable period, at the client’s contracted rate. |
F-15
Comprehensive loss
Comprehensive lossLoss is comprised of net loss and other comprehensive income.loss. Other comprehensive incomeloss includes unrealized gains and losses from marketable securitiesfixed maturities classified as available for sale and unrealized gains and losses from foreign currency transactions, net of applicable taxes. American Life has treaties with several third-party reinsurers that have funds withheldFW and modified coinsuranceModco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but are owned by the third-party reinsurers, thus, the total return on the asset portfolio belongs to the third-party reinsurers. Under GAAP this is considered an embedded derivative as discussed above under “Reinsurance” and in Note 5 below. As a result of recent market volatility, the
The investments carried by American Life for the third-party reinsurers contained unrealized gains of approximately $161,000 and $2.9 million as of December 31, 2020.2021 and 2020, respectively. The terms of the contracts with the third-party reinsurers provided that unrealized gains and losses on the portfolios accrue to the third-party reinsurers. We account for thisa gain as a pass through to the third-party reinsurer by booking equivalent embedded derivative realized losses or gains in our Consolidated Statements of Comprehensive Loss. Accordingly, as ofFor the years ended December 31, 2021 and 2020, such realized gains of $2.7 million and losses of $2.9 million, respectively, were $2.9 million.recorded. The remaining investments retained by American Life as of December 31, 2021 and 2020, had unrealized gains of approximately $1.2 million and $5.1 million, respectively, that included unrealized gains from assets held for SRC1.SRC1 and SRC3.
Basic loss per share as of December 31, 2020 was ($4.88) which included the aforementioned loss of $2.9 million. Basic loss per share as of December 31, 2020 without the aforementioned gain was ($3.68).
Common and preferred stock and loss per share
The par value per each Company share is $0.001 with 20,000,000 voting common shares authorized, 2,000,000 non-voting common shares authorized, and 2,000,000 preferred shares authorized. On June 18, 2019, Xenith exercised the right to convert its 1,500,000 Series C preferred stock and the $19,100,000 notes payable to voting common stock at the conversion rate of approximately $10.29 per
F-14
common share. With the infusion of capital and the issuance of voting common stock in the Crestline transaction mentioned above under “Nature of operations,” the Company had 3,737,564 voting common shares issued and outstanding at December 31, 2020.
The Series C preferred shares were converted by Xenith to voting common shares on June 18, 2019 at a rate of approximately $10.29 per share for 145,709 voting common shares. The stated annual dividend rate on the Series C preferred shares was 8%. At the time of the conversion, Xenith forgave all previously accrued dividends from June 28, 2018 through the conversion date.
Loss per basic share attributable to the Company’s voting common stock was computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the year ended 2020 and 2019 were 2,547,003 and 1,149,042, respectively.
Loss per diluted share attributable to the Company’s voting common stock was computed based on the average shares outstanding and options granted under our 2020 and 2019 Long-Term Incentive Plans (“LTIPs”), as if all were vested and exercised. The weighted average number of diluted shares outstanding during the year ended December 31, 2021 and 2020 was ($4.24) and 2019 were 2,816,177($4.86), respectively, which included the aforementioned gain of $2.7 million and 1,150,936,loss of $2.9 million, respectively.
Adoption of New Accounting Standards
In November 2019,January 2020, the FASB issued ASU No. 2019-08,2020-1, Compensation – Stock CompensationEquity Securities (Topic 321), Investments-Equity Method and Revenue from Contracts with CustomersJoint Ventures . This(Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this update requiresclarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to measure and classify share-based payment awardspurchase securities that, are granted to customersupon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 718 whereby the amount recorded is measured as the fair value on the grant date. On June 19, 2019, July 30, 2020 and September 15, 2020, the Company granted stock options which were recorded in accordance with this ASU at fair value on grant date.
In February 2016, the825, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, 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 lease liability is measured at the present value of the lease payments over the lease term with the right-of-use asset measured as the lease liability amount and including adjustments for certain lease incentives and initial direct costs. Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP.Instruments. This ASU permitted a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption. Onamendment was adopted effective January 1, 2019, the Company adopted this standard using a modified retrospective adoption approach. The adoption resulted in the Company identifying three operating leases and one financial lease which were subject to this guidance. The2021 with no impact to the Consolidated Statements of Comprehensive Loss was minimal. We identified four leases with net assets of $348,198 and $470,132 and lease liabilities of $396,911 and $526,108 for the years ended December 31, 2020 and 2019, respectively.
On February 14, 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for whichour financial statements have not yet been issued. The Company has evaluated the impact of this update and has determined that this does not impact us currently due to not recording unrealized losses or gains net of tax. The Company has incurred net operating losses since inception so it does not record deferred tax assets or deferred tax liabilities due to establishing a valuation allowance.statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement That is a Service Contract. Under ASU No. 2018-15, the amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. In order to determine which costs can be capitalized, we are to follow the guidance in Subtopic 350-40. Cost for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and the post-implementation stage are expensed as the activities are performed. The amendments in this update are effective for
F-15
public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this update during 2020 and analyzed all cloud-based computer agreements and determined that none qualified to be capitalized as of December 31, 2020. As of December 31, 2021, the Company had analyzed and capitalized $1.2 million of cloud-based software cost.
Future adoption of New Accounting Standards
In January 2020, the FASB issued ASU No. 2020-1, Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are unable to determine the impact at this time of ASU No. 2020-1 as we are still in the process of evaluating the standard.
In November 2019, the FASB issued ASU No. 2019-10, Financials Services Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (topic 842). The board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies and all other entities. For business entities that meet the definition of a smaller reporting company (“SRC”), the amendments in ASU 2018-12 are effective for fiscal years beginning after December 15, 2021. In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944). This update 1) modifies the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, 2) simplifies the accounting for certain market-based options or guarantees associated with deposit contracts, 3) simplifies the amortization of deferred acquisition costs, and 4) addresses the effectiveness of the required disclosures. This ASU becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2023. We anticipate that the adoption of ASU 2018-12 will have a broad impact on our consolidated financial statements and related disclosures and will require us to make changes to certain of our processes, systems and controls. We are unable to determine the impact at this time of ASU No. 2018-12 as we are still in the process of evaluating the standard.
In December 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (Topic(Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09, Financial Services —Insurance (Topic 944). The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long-durationlong duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new
F-16
standard becomes effective after December 15, 2023 ,2024, and interim periods within fiscal years beginning after December 15, 2024 for companies eligible as smaller reporting companies. Early application of the amendments in Update 2018-12 is permitted. We anticipate that the adoption of ASU 2018-12 will have a broad impact on our consolidated financial statements and related disclosures and will require us to make changes to certain of our processes, systems and controls. We are unable to determine the impact at this time of ASU No. 2018-12 as we are still in the process of evaluating the standard
In November 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this update include items brought to the Board’sFASB’s attention by stakeholders to clarify the guidance in the amendments in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) which was issued in June 2016. These updated amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Under ASU 2016-13, 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 an incurred loss to an expected credit loss. An allowance for the expected 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 adjustment to the allowance can be made. The new standard becomes effective after December 15, 2022. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
F-16
Note 2. Assets and Liabilities Associated with Business Held for Sale
On November 30, 2018, American Life entered into an Assumption and Indemnity Reinsurance Agreement (“Reinsurance Agreement”) with Unified Life Insurance Company (“Unified”), a Texas domiciled stock insurance company. The Reinsurance Agreement provides that American Life ceded and Unified agreed to reinsure, on an indemnity reinsurance basis, 100% of the liabilities and obligations under substantially all of American Life’s life, annuity and health policies (“Policies”). The Agreement closed on December 10, 2018, as previously disclosed in Midwest’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2018. The effective date of the Agreement was July 1, 2018.
After the closing of the Reinsurance Agreement, Unified began the process of preparingprepared and deliveringdelivered certificates of assumption and other materials to policyholders of American Life in order to effect an assumption of the Policies by Unified such that all of American Life’s rights and obligations under the policies arising on and after July 1, 2018 would be completely assumed by Unified without further indemnification or other obligations, except for liabilities, claims and obligations incurred before July 1, 2018.Unified. Unified is obligated to indemnify American Life against all liabilities and claims and all of its policy obligations from and after July 1, 2018.
As of December 31, 2020, and 2019, Unified estimated that 80% to 90% and 79%, respectively, of the indemnity policies were convertedpolicyholder would convert to assumptive policies thereby releasing American Life from its legal obligations related to those policies.
by the end of 2019.
The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was $3,500,000$3.5 million (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the Statutory Reserves and Liabilities, as defined in the Reinsurance Agreement, directly related to the policies, to Unified.
The Ceding Commission is being amortized on a straight-line basis over the life of the policies. When the policies are converted to assumptive, meaning American Life has no liability exposure for those policies, the remaining Ceding Commission will be recognized in our income statement.consolidated statement of comprehensive loss.
Our balance sheet was requiredAs of December 31, 2021, and 2020, 90% of the indemnity policies were converted to be restated for all periods shown with the assets and liabilities which were ceded byassumptive policies thereby releasing American Life from its legal obligations related to Unified into separate line items asthose policies.
An assessment of the assets and liabilities held for sale. sale was performed as of December 31, 2021 and management believes that the remaining policyholder contracts will not be converted; therefore, those remaining policy contracts should be reclassified to continuing operations and no longer called out as discontinued operations.
F-17
The table below summarizes the assets and liabilities that arewere included in discontinued operations as of December 31, 20202021 and 2019:2020:
| | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | | As of December 31, | | As of December 31, | ||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Carrying amounts of major classes of assets included as part of discontinued operations: |
| |
|
| |
|
| |
|
| |
|
Policy loans | | $ | 33,161 | | $ | 50,387 | | $ | — | | $ | 33 |
Reinsurance recoverables | |
| 1,061,979 | |
| 3,569,849 | |
| — | |
| 1,062 |
Premiums receivable | |
| 23,643 | |
| 33,512 | |
| — | |
| 24 |
Total assets held for sale in the Consolidated Balance Sheets | | $ | 1,118,783 | | $ | 3,653,748 | ||||||
Total assets held for sale in the consolidated balance sheets | | $ | — | | $ | 1,119 | ||||||
| | | | | | | | | | | | |
Carrying amounts of major classes of liabilities included as part of discontinued operations: | |
|
| |
|
| |
|
| |
|
|
Benefit reserves | | $ | 594,710 | | $ | 1,403,953 | | $ | — | | $ | 595 |
Policy claims | |
| 35,302 | |
| 28,203 | |
| — | |
| 35 |
Deposit-type contracts | |
| 482,966 | |
| 2,209,195 | |
| — | |
| 483 |
Advance premiums | |
| 71 | |
| 2,226 | ||||||
Accounts payable and accrued expenses | |
| 1,263 | |
| 3,290 | |
| — | |
| 1 |
Total liabilities held for sale in the Consolidated Balance Sheets | | $ | 1,114,312 | | $ | 3,646,867 | ||||||
| | | | | | | ||||||
Total assets held for sale in the consolidated balance sheets | | $ | — | | $ | 1,114 |
There were no items in 20202021 or 20192020 that were reclassified as discontinued operations in the income statement.consolidated statement of comprehensive loss.
Note 3. Non-controlling Interest
Purchase
On April 2, 2019, Midwest entered into a contract to acquire a 51% controlling ownership in 1505 Capital LLC (“1505 Capital”), a Delaware limited liability company.Capital. 1505 Capital was organized to provide financial and investment advisory and management services to clients and any related investment, trading, or financial activities. Midwest purchased for $1.00 its 51% ownership and on June 15, 2020, we purchased the remaining 49% ownership in 1505 Capital for $500,000.
Disposal
On December 30, 2021, Midwest closed the sale of approximately 70% of SRC1 to a subsidiary of ORIX Corporation USA for $15.0 million. Under the terms of the agreement, Midwest holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, will be the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital LLC. Midwest is recognizing the $15.0 million as Noncontrolling interest in the equity section of the Consolidated balance sheets.
F-17F-18
Midwest used the equity method of accounting for the purchase of the controlling interest eliminating the non-controlling interest and recording the difference to additional paid in capital. Midwest had consolidated the 1505 Capital income of $252,113 into its consolidated financials from April 2, 2019, through December 31, 2019. Midwest’s portion of income was $127,636 and the non-controlling interest income was $124,477.
Note 4. Investments
The amortized cost and estimated fair value of investments classified as available-for-sale as of December 31, 20202021 and 20192020 are as follows:
| | | | | | | | | | | | |
| | Cost or | | Gross | | Gross | | | | |||
| | Amortized | | Unrealized | | Unrealized | | Estimated | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2020: |
| |
|
| |
|
| |
|
| |
|
Fixed maturities: |
| |
|
| |
|
| |
|
| |
|
U.S. government obligations | | $ | 5,744,221 | | $ | 426,427 | | $ | 5,665 | | $ | 6,164,983 |
Mortgage-backed securities | |
| 14,638,299 | |
| 276,219 | |
| 157,104 | |
| 14,757,414 |
Asset-backed securities | | | 216,500,672 | | | 5,623,083 | | | 350,146 | | | 221,773,609 |
States and political subdivisions -- general obligations | |
| 106,528 | |
| 10,802 | |
| — | |
| 117,330 |
States and political subdivisions -- special revenue | |
| 5,293,365 | |
| 908,986 | |
| 147 | |
| 6,202,204 |
Trust preferred | | | 2,218,142 | | | 66,674 | | | — | | | 2,284,816 |
Corporate | |
| 124,654,841 | |
| 1,379,513 | |
| 171,352 | |
| 125,863,002 |
Total fixed maturities | | $ | 369,156,068 | | $ | 8,691,704 | | $ | 684,414 | | $ | 377,163,358 |
Mortgage loans on real estate, held for investment | | | 94,989,970 | | | — | | | — | | | 94,989,970 |
Derivatives | | | 8,532,252 | | | 3,257,069 | | | 428,287 | | | 11,361,034 |
Other invested assets | | | 21,897,130 | | | — | | | — | | | 21,897,130 |
Investment escrow | | | 3,174,047 | | | — | | | — | | | 3,174,047 |
Preferred stock | | | 3,897,980 | | | — | | | — | | | 3,897,980 |
Notes receivable | | | 5,665,487 | | | — | | | — | | | 5,665,487 |
Policy loans | | | 45,573 | | | — | | | — | | | 45,573 |
Total fixed maturities | | $ | 507,358,507 | | $ | 11,948,773 | | $ | 1,112,701 | | $ | 518,194,579 |
| | | | | | | | | | | | |
December 31, 2019: | |
|
| |
|
| |
|
| |
|
|
Fixed maturities: | | | | | | | | | | | | |
U.S. government obligations | | | 2,091,710 | | | 7,073 | | | 17,559 | | | 2,081,224 |
Mortgage-backed securities | | | 819,678 | | | — | | | 21,070 | | | 798,608 |
Asset-backed securities | | | 95,006,241 | | | 646,335 | | | 404,752 | | | 95,247,824 |
States and political subdivisions -- general obligations | | | 240,494 | | | 8,788 | | | — | | | 249,282 |
States and political subdivisions -- special revenue | | | 25,112 | | | 179 | | | — | | | 25,291 |
Corporate | | | 18,493,077 | | | 501,022 | | | 154,467 | | | 18,839,632 |
Total fixed maturities | | | 116,676,312 | | | 1,163,397 | | | 597,848 | | | 117,241,861 |
Mortgage loans on real estate, held for investment | | | 13,810,041 | | | — | | | — | | | 13,810,041 |
Derivatives | | | 490,831 | | | 87,684 | | | 3,221 | | | 575,294 |
Other invested assets | | | 2,468,947 | | | — | | | — | | | 2,468,947 |
Investment escrow | | | 3,899,986 | | | — | | | — | | | 3,899,986 |
Preferred stock | | | 500,000 | | | — | | | — | | | 500,000 |
Policy loans | | | 106,014 | | | — | | | — | | | 106,014 |
Total fixed maturities | | $ | 137,952,131 | | $ | 1,251,081 | | $ | 601,069 | | $ | 138,602,143 |
| | | | | | | | | | | | |
| | | | Gross | | Gross | | | | |||
| | Amortized | | Unrealized | | Unrealized | | Estimated | ||||
(In thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2021: |
| |
|
| |
|
| |
|
| |
|
Fixed maturities: |
| |
|
| |
|
| |
|
| |
|
Bonds: | | | | | | | | | | | | |
U.S. government obligations | | $ | 1,855 | | $ | 32 | | $ | 5 | | $ | 1,882 |
Mortgage-backed securities | |
| 55,667 | |
| 368 | |
| 755 | |
| 55,280 |
Asset-backed securities | | | 24,675 | | | 443 | | | 167 | | | 24,951 |
Collateralized loan obligation | | | 272,446 | | | 2,928 | | | 851 | | | 274,523 |
States and political subdivisions -- general obligations | |
| 105 | |
| 9 | |
| — | |
| 114 |
States and political subdivisions -- special revenue | |
| 4,487 | |
| 1,129 | |
| 4 | |
| 5,612 |
Corporate | |
| 35,392 | |
| 1,846 | |
| 99 | |
| 37,139 |
Term Loans | | | 268,794 | | | 441 | | | 1,767 | | | 267,468 |
Trust preferred | | | 2,218 | | | 19 | | | — | | | 2,237 |
Redeemable preferred stock | | | 14,282 | | | 53 | | | 245 | | | 14,090 |
Total fixed maturities | | $ | 679,921 | | $ | 7,268 | | $ | 3,893 | | $ | 683,296 |
Mortgage loans on real estate, held for investment | | | 183,203 | | | — | | | — | | | 183,203 |
Derivatives | | | 18,654 | | | 6,391 | | | 2,023 | | | 23,022 |
Federal Home Loan Bank (FHLB) stock | | | 500 | | | — | | | — | | | 500 |
Equity securities | | | 22,158 | | | — | | | 289 | | | 21,869 |
Other invested assets | | | 34,491 | | | 813 | | | 11 | | | 35,293 |
Investment escrow | | | 3,611 | | | - | | | — | | | 3,611 |
Preferred stock | | | 14,885 | | | 3,801 | | | — | | | 18,686 |
Notes receivable | | | 5,960 | | | — | | | — | | | 5,960 |
Policy loans | | | 87 | | | — | | | — | | | 87 |
Total investments | | $ | 963,470 | | $ | 18,273 | | $ | 6,216 | | $ | 975,527 |
| | | | | | | | | | | | |
December 31, 2020: | |
|
| |
|
| |
|
| |
|
|
Fixed maturities: | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | |
U.S. government obligations | | $ | 5,744 | | $ | 426 | | $ | 6 | | $ | 6,164 |
Mortgage-backed securities | | | 14,638 | |
| 276 | |
| 157 | | | 14,757 |
Asset-backed securities | | | 7,277 | | | 173 | | | — | | | 7,450 |
Collateralized loan obligation | | | 209,224 | | | 5,450 | | | 350 | | | 214,324 |
States and political subdivisions -- general obligations | | | 107 | |
| 11 | |
| — | | | 118 |
States and political subdivisions -- special revenue | | | 5,293 | |
| 909 | |
| — | | | 6,202 |
Corporate | | | 17,401 | |
| 1,379 | |
| 171 | | | 18,609 |
Term Loans | | | 107,254 | | | — | | | — | | | 107,254 |
Trust preferred | | | 2,218 | | | 67 | | | — | | | 2,285 |
Total fixed maturities | | $ | 369,156 | | $ | 8,691 | | $ | 684 | | $ | 377,163 |
Mortgage loans on real estate, held for investment | | | 94,990 | | | — | | | — | | | 94,990 |
Derivatives | | | 8,532 | | | 3,257 | | | 428 | | | 11,361 |
Other invested assets | | | 21,897 | | | — | | | — | | | 21,897 |
Investment escrow | | | 3,174 | | | — | | | — | | | 3,174 |
Preferred stock | | | 3,898 | | | — | | | — | | | 3,898 |
Notes receivable | | | 5,666 | | | — | | | — | | | 5,666 |
Policy loans | | | 46 | | | — | | | — | | | 46 |
Total investments | | $ | 507,359 | | $ | 11,948 | | $ | 1,112 | | $ | 518,195 |
F-18F-19
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2021 and 2020.
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| ||||||
| | Carrying | | | | Carrying | | |
| ||
(In thousands) |
| Value |
| Percent |
| Value |
| Percent |
| ||
AAA and U.S. Government | | $ | 2,674 |
| 0.4 | % | $ | 3,071 |
| 0.8 | % |
AA | |
| 482 |
| 0.1 | |
| 5,818 |
| 1.5 | |
A | |
| 168,141 |
| 24.6 | |
| 49,445 |
| 13.1 | |
BBB | |
| 462,699 |
| 67.7 | |
| 247,636 |
| 65.7 | |
Total investment grade | |
| 633,996 |
| 92.8 | |
| 305,970 |
| 81.1 | |
BB and other | |
| 49,300 |
| 7.2 | |
| 71,193 |
| 18.9 | |
Total | | $ | 683,296 |
| 100.0 | % | $ | 377,163 |
| 100.0 | % |
Reflecting the quality of securities maintained by us, as of December 31, 2021 and 2020, 92.8% and 81.1%, respectively, of all fixed maturity securities were investment grade.
The following table summarizes, for all securities in an unrealized loss position at December 31, 20202021 and 20192020 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, 2021 | | December 31, 2020 | ||||||||||||||
| | | | | Gross | | Number | | | | | Gross | | Number | ||||
| | Estimated | | Unrealized | | of | | Estimated | | Unrealized | | of | ||||||
(In thousands) |
| Fair Value |
| Loss |
| Securities(1) |
| Fair Value |
| Loss |
| Securities(1) | ||||||
Fixed Maturities: | | | | | | | | | | | | | | | | | | |
Less than 12 months: |
| |
|
| |
|
|
|
|
| |
|
| |
| |
|
|
U.S. government obligations | | $ | 104 | | $ | 2 |
|
| 1 | | $ | 55 | | $ | — | |
| 2 |
Mortgage-backed securities | |
| 35,403 | |
| 755 |
|
| 35 | |
| 5,708 | |
| 157 | |
| 5 |
Asset-backed securities | | | 12,355 | | | 167 | | | 13 | | | 14,878 | | | 247 | | | 19 |
Collateralized loan obligation | | | 90,731 | | | 851 | | | 115 | | | — | | | — | | | — |
States and political subdivisions -- special revenue | |
| 217 | | | 4 |
|
| 0 | |
| 6 | |
| — | |
| 1 |
Term loans | | | 105,677 | | | 1,767 | | | | | | — | | | — | | | — |
Redeemable preferred stock | | | 10,837 | | | 245 | | | 6 | | | — | | | — | | | — |
Corporate | |
| 2,367 | |
| 73 |
|
| 9 | |
| 3,860 | |
| 104 | |
| 7 |
Greater than 12 months: | |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
|
U.S. government obligations | |
| 66 | |
| 3 |
|
| 3 | |
| 120 | |
| 6 | |
| 4 |
Collateralized loan obligations | |
| — | |
| — |
|
| — | |
| 7,020 | |
| 103 | |
| 6 |
Corporate | |
| 324 | | | 26 |
|
| 2 | |
| 287 | | | 67 | |
| 3 |
Total fixed maturities | | $ | 258,081 | | $ | 3,893 |
|
| 184 | | $ | 31,934 | | $ | 684 | | | 47 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | ||||||||||||||
| | | | | Gross | | Number | | | | | Gross | | Number | ||||
| | Estimated | | Unrealized | | of | | Estimated | | Unrealized | | of | ||||||
|
| Fair Value |
| Loss |
| Securities(1) |
| Fair Value |
| Loss |
| Securities(1) | ||||||
Fixed Maturities: | | | | | | | | | | | | | | | | | | |
Less than 12 months: |
| |
|
| |
|
|
|
|
| |
|
| |
| |
|
|
U.S. government obligations | | $ | 54,910 | | $ | 180 |
|
| 2 | | $ | 1,518,772 | | $ | 14,935 | |
| 9 |
Asset-backed securities | | | 14,878,370 | | | 246,969 | | | 19 | | | 39,114,732 | | | 404,752 | | | 26 |
Mortgage-backed securities | |
| 5,707,617 | |
| 157,104 |
|
| 5 | |
| 160,010 | |
| 4,844 | |
| 4 |
States and political subdivisions -- special revenue | |
| 5,584 | |
| 147 |
|
| 1 | |
| — | |
| — | |
| — |
Corporate | |
| 3,859,616 | |
| 104,262 |
|
| 7 | |
| 2,800,815 | |
| 13,618 | |
| 4 |
Greater than 12 months: | |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
|
U.S. government obligations | |
| 119,700 | |
| 5,485 |
|
| 4 | |
| 353,834 | |
| 2,624 | |
| 2 |
Asset-backed securities | |
| 7,020,479 | |
| 103,177 |
|
| 6 | |
| — | |
| — | |
| — |
Mortgage-backed securities | | | — | | | — | | | — | | | 638,598 | | | 16,226 | | | 14 |
Corporate | |
| 287,473 | | | 67,090 |
|
| 3 | |
| 2,201,658 | |
| 140,849 | |
| 13 |
Total fixed maturities | | $ | 31,933,749 | | $ | 684,414 |
|
| 47 | | $ | 46,788,419 | | $ | 597,848 | | | 72 |
| | | | | | | | | | | | | | | | | | |
Due to market price increases in 2020, ourOur securities positions resulted in a gross unrealized gainsloss position as of December 31, 2020.2021 that was greater than the gross unrealized loss position at December 31, 2020 due to a decline in market values. We performed an analysis of the unrealized losses and determined that there were no indicators that we would record approximately $35,000should perform a cash flow testing analysis and 0 impairment on onewas required as of our fixed maturities.December 31, 2021. During the impairment analysis performed at year-end,as of December 31, 2020 one of our assets had been in a loss position for over two years and had a decrease in its credit rating since 2019. Management performed2019; cashflow testing on that security and determined an impairment exists. Management believesexisted so we recorded an impairment of $35,000. As of December 31, 2021, management believed the Company willwould fully recover its cost basis in the remaining securities
F-20
and management doesdid not have the intent to sell, nor iswas it more likely than not that the Company will be required to sell, such securities until they recover or mature.
The majority of the unrealized losses are related to our collateralized loan obligations (“CLOs”). CLOs are typically illiquid and are intended to be held to maturity. Thus, risk of loss is minimal. The Company has monitored the underlying unrealized losses and believes they pose little chance of loss in the long-term due to the quality of the underlying credits.
See the discussion above under “Comprehensive loss” in Note 1 regarding unrealized gains/losses on investments that are owned by our reinsurers and the corresponding offset carried as a gain in the associated embedded derivative.derivatives.
The Company purchases and sells equipment leases in its investment portfolio. As of December 31, 2020,2021, the Company owned several leases. An impairment test, as of December 31, 2020,analysis was completed on the only non-performing lease in the portfolio as of June 30, 2020 and it was determined that the underlying collateral value was substantially less than the outstanding remaining lease payments of $3.6 million. The Company establishedrecognized a valuation allowance as of June 30, 2020 of $777,000 on that asset. During March 2021, the non-performing asset was sold for a loss of $776,973 and will continue to monitor the value the underlying collateral.$2.4 million. The valuation allowance was recorded asreleased and a bad debt expense;loss of $2.4 million was recognized; however, this asset is owned bywas held on behalf of a third-party reinsurer. Therefore, due to the valuation allowanceterms of the reinsurance agreements, the loss was passed through as a receivable fromto the reinsurers, offsetting the valuation allowance.third-party reinsurer by reducing its investment income earned.
F-19
The amortized cost and estimated fair value of fixed maturities at December 31, 2020,2021, 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. No securities are due in the next year to further support management’s decision not to recognize an other-than-temporary impairment.
| | | | | | |
| | Amortized | | Estimated | ||
|
| Cost |
| Fair Value | ||
Due in one year or less | | $ | 24,785,681 | | $ | 24,846,859 |
Due after one year through five years | |
| 122,361,585 | |
| 123,915,080 |
Due after five years through ten years | |
| 196,058,708 | |
| 200,370,657 |
Due after ten years through twenty years | | | 13,424,333 | | | 13,869,258 |
Due after twenty years | | | 12,525,761 | | | 14,161,504 |
| | $ | 369,156,068 | | $ | 377,163,358 |
| | | | | | |
| | Amortized | | Estimated | ||
(In thousands) |
| Cost |
| Fair Value | ||
Due in one year or less | | $ | 43,011 | | $ | 42,868 |
Due after one year through five years | |
| 286,283 | |
| 286,068 |
Due after five years through ten years | |
| 240,093 | |
| 242,341 |
Due after ten years through twenty years | | | 63,986 | | | 64,206 |
Due after twenty years | | | 44,748 | | | 46,076 |
No maturity | | | 1,800 | | | 1,737 |
| | $ | 679,921 | | $ | 683,296 |
The Company is required to hold assets on deposit for the benefit of policyholders in accordance with insurance rules and regulations. At December 31, 20202021 and 2019,2020, these required deposits had a total amortized cost of $3,406,950$3.0 million and $3,611,292$3.4 million, respectively, and fair values of $3,598,352$3.0 million and $3,612,844,$3.6 million, respectively.
The following table presents a reconciliationMortgage loans consist of the beginning balance for the mortgage loan investments measured at fair value on a recurring basis using Level 3 (See Note #6) inputs at December 31, 2020 and 2019:following:
| | | | | | | | | |
|
| | |||||||
| | | Carrying Value | | | Interest Income | | | Interest Income |
December 31, 2020: | | | | | | | | | |
Industrial | | $ | 1,250,000 | | $ | 38,097 | | $ | 136,365 |
Commercial mortgage loan - multi-family | | | 66,916,151 | | | 2,224,689 | | | 3,767,725 |
Other | | | 26,823,819 | | | 572,716 | | | 626,540 |
Total mortgage loans | | $ | 94,989,970 | | $ | 2,835,502 | | $ | 4,530,630 |
December 31, 2019: | | | | | | | | | |
Industrial | | $ | 500,000 | | $ | — | | $ | 15,889 |
Commercial mortgage loan - multi-family | | | 11,320,924 | | | 116,860 | | | 329,684 |
Other | | | 1,989,117 | | | 195,168 | | | 7,386 |
Total mortgage loans | | $ | 13,810,041 | | $ | 312,028 | | $ | 352,959 |
| | | | | | |
(In thousands) | | | December 31, 2021 | | | December 31, 2020 |
Industrial | | $ | — | | $ | 1,250 |
Commercial mortgage loan - multi-family | | | 101,809 | | | 66,916 |
Residential | | | 50,000 | | | — |
Retail | | | 13,824 | | | — |
Other | | | 17,570 | | | 26,824 |
Total mortgage loans | | $ | 183,203 | | $ | 94,990 |
Geographic Locations:
As of December 31, 2021, the commercial mortgages loans were secured by properties geographically dispersed (with the largest concentrations in loans secured by properties in Delaware (34%) New York (32%), Arizona (4%), California (4%), and non-US (9%). As of December 31, 2020, the commercial mortgages loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in New York (28%), Pennsylvania (14%), California (14%)) and included loans secured by properties in Europe (12%)).
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances.
F-21
Commercial Mortgage Loans
| | | | | |
| | ||||
| December 31, 2020 | | December 31, 2019 | ||
Loan-to-Value Ratio: | | | | | |
0%-59.99% | $ | 49,279,601 | | $ | 7,164,476 |
60%-69.99% | | 22,349,295 | | | 3,249,234 |
70%-79.99% | | 23,361,074 | | | 3,396,331 |
80% or greater | | — | | | — |
Total mortgage loans | $ | 94,989,970 | | $ | 13,810,041 |
F-20
| | | | | |
(In thousands) | December 31, 2021 | | December 31, 2020 | ||
Loan-to-Value Ratio: | | | | | |
0%-59.99% | $ | 91,104 | | $ | 49,280 |
60%-69.99% | | 42,819 | | | 22,349 |
70%-79.99% | | 44,106 | | | 23,361 |
80% or greater | | 5,174 | | | — |
Total mortgage loans | $ | 183,203 | | $ | 94,990 |
The components of net investment income for the years ended December 31, 20202021 and 20192020 are as follows:
| | | | | | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Fixed maturities | | $ | 3,661,098 | | $ | 292,453 | | $ | 16,443 | | $ | 3,661 |
Mortgage loans | | | 992,300 | | | — | | | 185 | | | 992 |
Other | |
| 102,801 | |
| 38,397 | ||||||
Other invested assets | | | 665 | | | 103 | ||||||
Other interest income | |
| 298 | |
| — | ||||||
Gross investment income | |
| 4,756,199 | |
| 330,850 | |
| 17,591 | |
| 4,756 |
Less: investment expense | |
| (709,015) | |
| (210,269) | ||||||
Less: investment expenses | |
| (1,854) | |
| (709) | ||||||
Investment income, net of expenses | | $ | 4,047,184 | | $ | 120,581 | | $ | 15,737 | | $ | 4,047 |
Proceeds for the years ended December 31, 20202021 and 20192020 from sales of investments classified as available-for-sale were $89,135,618$356.8 million, and $5,752,910,$89.1 million, respectively. Gross gains of $2,212,818$6.0 million and $268,848$2.2 million and gross losses of $388,434$1.4 million and $30,885$388,000 were realized on sales and the realized losses on sales during the yearyears ended December 31, 20202021 and 2019,2020, respectively.
The proceeds included those assets associated with the third-party reinsurers. The gains and losses relate only to the assets retained by Midwest.
Note 5. Derivative Instruments
The Company entered into derivative instruments to hedge fixed indexed annuity products that guarantee the return of principal to the policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options.
The following is a summary of the asset derivatives not designated as hedges embedded derivatives in our FIA product as of December 31, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | December 31, 2020 | | December 31, 2019 |
| | December 31, 2021 | | December 31, 2020 | ||||||||||||||||||||||||
| | Location in the | | | | | | | | | | | | | Location in the | | | | | | | | | | | | ||||||||
| | Consolidated | | | | | | | | | | | | | | | | |||||||||||||||||
(In thousands, except number of contracts) | | Consolidated | | | | | | | | | | | | | | | | |||||||||||||||||
Derivatives Not Designated | | Statement of | Notional | | Number of | | Estimated | | Notional | | Number of | | Estimated | | Statement of | Notional | | Number of | | Estimated | | Notional | | Number of | | Estimated | ||||||||
as Hedging Instruments | | Balance Sheets | Amount | | Contracts | | Fair Value | | Amount | | Contracts | | Fair Value | | Balance Sheets | Amount | | Contracts | | Fair Value | | Amount | | Contracts | | Fair Value | ||||||||
Equity-indexed options | | Derivatives | $ | 272,853,853 | | 252 | | $ | 11,361,034 | | $ | 9,698,863 | | 24 | | $ | 575,294 | | Derivatives | $ | 526,096 | | 482 | | $ | 23,766 | | $ | 272,854 | | 252 | | $ | 11,361 |
Equity-indexed | | Deposit-type | | 311,964,195 | | 2,101 | | | 84,501,492 | | | 10,720,324 | | 108 | | | 576,634 | |||||||||||||||||
Equity-indexed | | Deposit-type | | 525,548 | | 4,205 | | | 123,692 | | | 311,964 | | 2,101 | | | 84,501 |
ForAt December 31, 2020 reporting, the methodology used to bifurcate the GAAP liability into host contract and embedded derivative was refined. In prior reporting periods a simplified approach was followed given the size of the block, which set2021, the value of the embedded derivative equal to the market value of the options held to provide for the current indexed crediting obligation. At December 31, 2020, the value of the embedded derivative now considers all amounts projected to be paid in excess of the minimum guarantee (the amounts payable without any indexation increases) over future periods. The host contract reflects the minimum guaranteed values. For informational purposes only, the GAAP liability at December 31, 2020 under the old approach would have been $320,306,031, split as $308,608,885 host contract and $11,697,146 embedded derivative.
Due to significant price increaseschanges in the capital markets, our securities positions resulted in a substantialdecreased unrealized gains at December 31, 2021, compared to 2020, reported in accumulated other comprehensive income on the balance sheet. The embedded derivative related to the asset portfolio belonging to the third-party reinsurers offset these unrealized losses by recording a realized loss in other comprehensive income.
gains. The unrealized gains as of December 31, 2021 was $161,000 compared to unrealized gains of $2.9 million as of December 31, 2020.
F-21F-22
The following table summarizes the impact of those embedded derivatives related to the funds withheld provision where the total return on the asset portfolio belongs to the third-party reinsurers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| December 31, 2020 |
| December 31, 2021 | | December 31, 2020 | |||||||||||||||||||||
| | | | | | | | | |||||||||||||||||||
| | Book Value of | | | Market Value of | | | Total Return | |||||||||||||||||||
(In thousands, except number of contracts) | | Book Value | | Market Value | | Total Return | | Book Value | | Market Value | | Total Return | |||||||||||||||
Portfolio | | Assets | | | Assets | | | Swap Value | | Assets | | Assets | | Swap Value | | Assets | | Assets | | Swap Value | |||||||
American Republic Insurance Company | | $ | 74,983 | | $ | 74,670 | | $ | 313 | | $ | — | | $ | — | | $ | — | |||||||||
Crestline Re SP1 | | | 228,560 | | | 228,450 | | | 110 | | | 62,163 | | | 63,131 | | | (968) | |||||||||
Ironbound | | $ | 98,714,156 | | $ | 99,747,812 | | $ | (1,033,656) | | | 154,867 | | | 155,755 | | | (888) | | | 98,714 | | | 99,748 | | | (1,034) |
SDA | | | 27,224,279 | | | 27,479,836 | | | (255,557) | ||||||||||||||||||
Ascendent Re | | | 56,246 | | | 56,078 | | | 168 | | | 27,224 | | | 27,480 | | | (256) | |||||||||
US Alliance | | | 35,707,207 | | | 36,360,501 | | | (653,294) | | | 46,221 | | | 46,085 | | | 136 | | | 35,707 | | | 36,360 | | | (653) |
Crestline Re SP 1 | | | 62,162,766 | | | 63,130,867 | | | (968,101) | ||||||||||||||||||
Total | | $ | 223,808,408 | | $ | 226,719,016 | | $ | (2,910,608) | | $ | 560,877 | | $ | 561,038 | | $ | (161) | | $ | 223,808 | | $ | 226,719 | | $ | (2,911) |
| | | | | | | | | |
The total return swap value was recorded as a decrease in our amounts recoverable from reinsurers of $2,910,608$161,000 compared to an increase of $2.9 million on our balance sheet and a realized loss of $2,910,608 on our income statement. No total return swap value was recorded as of December 31, 2019.2021 and 2020, respectively, and a realized gain of $2.7 million compared to realized loss of $2.9 million on our income statement for the years ended December 31, 2021 and 2020.
Note 6. 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. |
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.
Level 1 measurements
Cash equivalents: The carrying value ofMoney market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents and short-term investments approximateas Level 1 measurements in the fair value because of the short maturity of the instruments.table below.
F-22F-23
Level 2 measurements
Cash: The carrying value of cash approximates the fair value because of the short maturity of the instruments.
Investment escrow: The Company holds inhad escrow funds of as of December 31, 2021 and 2020, cash that will beof $3.6 million and $3.2 million, respectively. These escrow funds were used to settle a mortgage loanloans that did not close until January 2022 and 2021. The money held in escrow at December 31, 2021and 2020 was carried at cost.
Fixed maturities:maturity securities: Fixed maturitiesmaturity securities are recorded at fair value on a recurring basis utilizing a third-party pricing source such as the Clearwater AVS+ SVOAutomated Valuation Service (“AVS”) Securities Valuation Office (“SVO”) pricing. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services. For the yearyears ended December 31, 20202021 and 2019,2020, 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.
Derivatives: Derivatives are reported at fair market value utilizing a third-party pricing source such as the Standard & Poor’s (“S&P’&P”) 500 index and the S&P Multi-Asset Risk Control (“MARC”) 5% index.
Equity securities: Equity securities at December 31, 2021 consist of exchange traded funds (“ETFs”). The ETF’s are considered equity securities and recorded at fair value on a recurring basis utilizing a third-party pricing source with the change in fair value recorded through realized gains and losses on the statement of operations. As of December 31, 2021 we had purchased $21.9 million of ETFs and NaN as of December 31, 2020.
Notes receivable: The Company held in notes receivable as of December 31, 2021 and 2020, a note of $5,665,487,$6.0 million and $5.7 million, respectively, that includes paid-in-kind (“PIK”) interest,interest. The note receivable is between American Life and a third-partyChelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a NRSRO.nationally recognized statistical rating organization (“NRSRO”). This note is being carried at the fair market value.
Level 3 measurements
Fixed maturities:Term loans: The carrying value of assets classified as fixed maturitiesterm loans are generally carried asat unpaid principle. These fixed maturities include term loans.principal net of amortization of discount or accretion, which approximates fair value or carried at fair market value based on a valuation using market standard valuation methodologies. The inputs used to measure the fair value of these assets are classified as Level 3 within the fair value hierarchy.
Embedded derivative for equity-indexed contracts: The Company has embedded derivatives in our policyholder contracts. These embedded derivatives are being carried at the fair market value as of December 31, 2020.
Mortgage loans on real estate, held for investment: Mortgage loans are generally stated at principal amounts outstanding, net of deferred expenses and allowance for loan loss. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on an effective yield basis over the term of the loan. Impaired loans are generally carried on a non-accrual status. Loans are ordinarily placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due.
Other invested assets: The carrying value of assets classified as other investments approximates fair value. Other invested assets include collateral loans, private credit investments, equipment leases, and a private fund investment. The collateral loans, private credit investments, and equipment leases are carried at amortized cost which approximates fair value. The private fund investment and loans held for investments.is carried at statement value with approximates fair value of the fund. The inputs used to measure the fair value of these assets are classified as Level 3 within the fair value hierarchy.
PreferredFederal Home Loan Bank (FHLB) stock: American Life purchased Federal Home Loan Bank of Topeka (“FHLB”) common stock on May 5, 2021. This investment was to solidify our membership with FHLB Topeka. The carrying value of FHLB stock approximates fair value since the Company can redeem such stock with FHLB at cost. As a member of the FHLB, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity and warrants: The preferred equity and warrants investments were recorded at its principal value as there was no traded market values for the equity and warrants.
securities.
Preferred stock: The perpetual preferred stock investmentof $10.0 million is carried at fair market. As of December 31, 2021, the fair market value of the Ascona preferred stock and warrants was recorded at its principal value as there$4.9 million and $3.8. million, respectively. The Ascona preferred stock and warrants have no readily available market value; therefore a valuation of the investments was no traded market values for this stock.prepared by a third-party.
F-24
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.
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. The fair values for insurance contracts other than deposit-type contracts are not required to be disclosed.
Embedded derivative for equity-indexed contracts: The Company has embedded derivatives in its FIA policyholder obligations. These embedded derivatives are carried at the fair market value as of December 31, 2021 and 2020. The fair value of the embedded derivative component of our FIA obligation is estimated at each valuation date by projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and discounting the excess of projected contract value amounts at the applicable risk-free interest rates adjusted for our nonperformance risk related to those obligations. The projections of FIA policy contract values are based on best estimate assumptions for future policy growth and decrements including lapse, partial withdrawal and mortality rates. The best estimate assumptions for future policy growth include assumptions for expected index credits on the next policy anniversary date which are derived from fair values of the underlying equity call options purchased to fund such index credits and the present value of expected costs of annual call options purchased in the future by us to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as assumptions used to project policy contract values.
F-23F-25
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, 20202021 and 2019.2020.
| | | | | | | | | | | | |
| | | | | Significant | | | | | | | |
| | Quoted | | Other | | Significant | | | | |||
| | In Active | | Observable | | Unobservable | | Estimated | ||||
| | Markets | | Inputs | | Inputs | | Fair | ||||
(In thousands, except number of contracts) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | ||||
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
Financial assets | | | | | | | | | | | | |
Fixed maturity securities: |
| |
|
| |
|
| |
|
| |
|
Bonds | | | | | | | | | | | | |
U.S. government obligations | | $ | — | | $ | 1,882 | | $ | — | | $ | 1,882 |
Mortgage-backed securities | | | — | | | 55,280 | | | — | | | 55,280 |
Asset-backed securities | | | — | | | 24,951 | | | — | | | 24,951 |
Collateralized loan obligation | | | — | | | 274,523 | | | — | | | 274,523 |
States and political subdivisions — general obligations | |
| — | |
| 114 | |
| — | |
| 114 |
States and political subdivisions — special revenue | |
| — | |
| 5,612 | |
| — | |
| 5,612 |
Corporate | |
| — | |
| 37,139 | |
| — | |
| 37,139 |
Term Loans | | | — | | | — | |
| 267,468 | |
| 267,468 |
Trust preferred | | | — | | | 2,237 | | | — | | | 2,237 |
Redeemable preferred stock | | | — | | | 14,090 | | | — | | | 14,090 |
Total fixed maturity securities | | | — | | | 415,828 | | | 267,468 | | | 683,296 |
Mortgage loans on real estate, held for investment | | | — | | | — | | | 183,203 | | | 183,203 |
Derivatives | | | — | | | 23,022 | | | — | | | 23,022 |
Equity securities | | | — | | | 21,869 | | | — | | | 21,869 |
Other invested assets | | | — | | | — | | | 35,293 | | | 35,293 |
Investment escrow | | | — | | | 3,611 | | | — | | | 3,611 |
Federal Home Loan Bank (FHLB) stock | | | — | | | — | | | 500 | | | 500 |
Preferred stock | | | — | | | — | | | 18,686 | | | 18,686 |
Notes receivable | | | — | | | 5,960 | | | — | | | 5,960 |
Policy loans | | | — | | | — | | | 87 | | | 87 |
Total Investments | | $ | — | | $ | 470,290 | | $ | 505,237 | | $ | 975,527 |
Financial liabilities | | | | | | | | | | | | |
Embedded derivative for equity-indexed contracts | | $ | — | | $ | — | | $ | 123,692 | | | 123,692 |
| | | | | | | | | | | | |
December 31, 2020 | |
|
| |
|
| |
|
| |
| |
Fixed maturity securities: |
| |
|
| |
|
| |
|
| |
|
Bonds | | | | | | | | | | | | |
U.S. government obligations | | $ | — | | $ | 6,164 | | $ | — | | $ | 6,164 |
Mortgage-backed securities | | | — | | | 14,757 | | | — | | | 14,757 |
Asset-backed securities | | | — | | | 7,450 | | | — | | | 7,450 |
Collateralized loan obligation | | | — | | | 214,324 | | | — | | | 214,324 |
States and political subdivisions — general obligations | |
| — | |
| 118 | |
| — | |
| 118 |
States and political subdivisions — special revenue | |
| — | |
| 6,202 | |
| — | |
| 6,202 |
Corporate | |
| — | |
| 18,609 | |
| — | |
| 18,609 |
Term loans | | | — | | | — | | | 107,254 | | | 107,254 |
Trust preferred | | | — | | | 2,285 | | | — | | | 2,285 |
Total fixed maturity securities | | | — | | | 269,909 | | | 107,254 | | | 377,163 |
Mortgage loans on real estate, held for investment | | | — | | | — | | | 94,990 | | | 94,990 |
Derivatives | | | — | | | 11,361 | | | — | | | 11,361 |
Other invested assets | | | — | | | — | | | 21,897 | | | 21,897 |
Investment escrow | | | — | | | 3,174 | | | — | | | 3,174 |
Preferred stock | | | — | | | — | | | 3,898 | | | 3,898 |
Notes receivable | | | — | | | 5,666 | | | — | | | 5,666 |
Policy loans | | | — | | | — | | | 46 | | | 46 |
Total Investments | | $ | — | | $ | 290,110 | | $ | 228,085 | | $ | 518,195 |
Financial liabilities | | | | | | | | | | | | |
Embedded derivative for equity-indexed contracts | | $ | — | | $ | — | | $ | 84,501 | | | 84,501 |
| | | | | | | | | | | | |
| | | | | Significant | | | | | | | |
| | Quoted | | Other | | Significant | | | | |||
| | In Active | | Observable | | Unobservable | | Estimated | ||||
| | Markets | | Inputs | | Inputs | | Fair | ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | ||||
December 31, 2020 |
| |
|
| |
|
| |
|
| |
|
Financial assets | | | | | | | | | | | | |
Fixed maturities: |
| |
|
| |
|
| |
|
| |
|
U.S. government obligations | | $ | — | | $ | 6,164,983 | | $ | — | | $ | 6,164,983 |
Mortgage-backed securities | | | — | | | 14,757,414 | | | — | | | 14,757,414 |
Asset-backed securities | | | — | | | 221,773,609 | | | — | | | 221,773,609 |
States and political subdivisions — general obligations | |
| — | |
| 117,330 | |
| — | |
| 117,330 |
States and political subdivisions — special revenue | |
| — | |
| 6,202,204 | |
| — | |
| 6,202,204 |
Trust preferred | | | — | | | 2,284,816 | | | — | | | 2,284,816 |
Corporate | |
| — | |
| 18,608,995 | |
| 107,254,007 | |
| 125,863,002 |
Total fixed maturities | | | — | | | 269,909,351 | | | 107,254,007 | | | 377,163,358 |
Mortgage loans on real estate, held for investment | | | — | | | — | | | 94,989,970 | | | 94,989,970 |
Derivatives | | | — | | | 11,361,034 | | | — | | | 11,361,034 |
Other invested assets | | | — | | | — | | | 21,897,130 | | | 21,897,130 |
Investment escrow | | | — | | | 3,174,047 | | | — | | | 3,174,047 |
Preferred stock | | | — | | | — | | | 3,897,980 | | | 3,897,980 |
Notes receivable | | | — | | | 5,665,487 | | | — | | | 5,665,487 |
Policy loans | | | — | | | — | | | 45,573 | | | 45,573 |
Total Investments | | $ | — | | $ | 290,109,919 | | $ | 228,084,660 | | $ | 518,194,579 |
Financial liabilities | | | | | | | | | | | | |
Embedded derivative for equity-indexed contracts | | $ | — | | $ | 84,501,492 | | $ | — | | | 84,501,492 |
| | | | | | | | | | | | |
December 31, 2019 | |
|
| |
|
| |
|
| |
| |
Fixed maturities: | |
| — | |
|
| |
|
| |
| |
U.S. government obligations | | | — | | | 2,081,224 | | | — | | | 2,081,224 |
Mortgage-backed securities | | | — | | | 798,608 | | | — | | | 798,608 |
Asset-backed securities | | | — | | | 95,247,824 | | | — | | | 95,247,824 |
States and political subdivisions — general obligations | | | — | | | 249,282 | | | — | | | 249,282 |
States and political subdivisions — special revenue | | | — | | | 25,291 | | | — | | | 25,291 |
Corporate | | | — | | | 18,839,632 | | | — | | | 18,839,632 |
Total fixed maturities | | | — | | | 117,241,861 | | | — | | | 117,241,861 |
Mortgage loans on real estate, held for investment | | | — | | | — | | | 13,810,041 | | | 13,810,041 |
Derivatives | | | — | | | 575,294 | | | — | | | 575,294 |
Investment escrow | | | — | | | 3,899,986 | | | — | | | 3,899,986 |
Other invested assets | | | — | | | — | | | 2,468,947 | | | 2,468,947 |
Preferred stock | | | — | | | — | | | 500,000 | | | 500,000 |
Policy loans | | | — | | | — | | | 106,014 | | | 106,014 |
Total Investments | | $ | — | | $ | 121,717,141 | | $ | 16,885,002 | | $ | 138,602,143 |
Financial liabilities | | | | | | | | | | | | |
Embedded derivative for equity-indexed contracts | | $ | — | | $ | 576,634 | | $ | — | | | 576,634 |
| | | | | | | | | | | | |
F-26
There were no reclassifications0 transfers of financialinstrumentsbetween Level 1, Level 2, and Level 3any levels during the yearsyear ended December 31, 2021. For the year ended December 31, 2020 or 2019.we transferred third-party term loans in the aggregate amount of $107.2 million between from level 2 to level 3 as there is no active market for unrated term loans.
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
F-24
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.
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, 20202021 and 2019,2020, respectively:
| | | | | | | | | | | | | | | |
| | December 31, 2021 | |||||||||||||
| | | | | Fair Value Measurements Using | ||||||||||
| | | | | Quoted Prices in | | | | | | | | | | |
| | | | | Active Markets | | Significant Other | | Significant | | | | |||
| | | | | for Identical Assets | | Observable | | Unobservable | | | | |||
| | Carrying | | and Liabilities | | Inputs | | Inputs | | Fair | |||||
(In thousands, except number of contracts) |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | |||||
Assets: | | | | | | | | | | | | | | | |
Policy loans | | $ | 87 | | $ | — | | $ | — | | $ | 87 | | $ | 87 |
Cash equivalents | |
| 142,013 | |
| — | |
| 142,013 | |
| — | |
| 142,013 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Policyholder deposits (deposit-type contracts) | |
| 1,075,439 | |
| — | |
| — | |
| 1,075,439 | |
| 1,075,439 |
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | | | | Fair Value Measurements Using | ||||||||||
| | | | | Quoted Prices in | | | | | | | | | | |
| | | | | Active Markets | | Significant Other | | Significant | | | | |||
| | | | | for Identical Assets | | Observable | | Unobservable | | | | |||
| | Carrying | | and Liabilities | | Inputs | | Inputs | | Fair | |||||
(In thousands, except number of contracts) |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | |||||
Assets: | | | | | | | | | | | | | | | |
Policy loans | | $ | 46 | | $ | — | | $ | — | | $ | 46 | | $ | 46 |
Cash equivalents | |
| 151,679 | |
| 100,567 | |
| 51 | |
| — | |
| 151,679 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Policyholder deposits (deposit-type contracts) | |
| 597,868 | |
| — | |
| — | |
| 597,868 | |
| 597,868 |
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | | | | Fair Value Measurements Using | ||||||||||
| | | | | Quoted Prices in | | | | | | | | | | |
| | | | | Active Markets | | Significant Other | | Significant | | | | |||
| | | | | for Identical Assets | | Observable | | Unobservable | | | | |||
| | Carrying | | and Liabilities | | Inputs | | Inputs | | Fair | |||||
|
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | |||||
Assets: | | | | | | | | | | | | | | | |
Policy loans | | $ | 45,573 | | $ | — | | $ | — | | $ | 45,573 | | $ | 45,573 |
Cash and cash equivalents | |
| 151,679,274 | |
| 100,566,580 | |
| 51,112,694 | |
| — | |
| 151,679,274 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Policyholder deposits (Deposit-type contracts) | |
| 597,868,472 | |
| — | |
| — | |
| 597,868,472 | |
| 597,868,472 |
F-27
| | | | | | | | | | | | | | | |
| | December 31, 2019 | |||||||||||||
| | | | | Fair Value Measurements Using | ||||||||||
| | | | | Quoted Prices in | | | | | | | | | | |
| | | | | Active Markets | | Significant Other | | Significant | | | | |||
| | | | | for Identical Assets | | Observable | | Unobservable | | | | |||
| | Carrying | | and Liabilities | | Inputs | | Inputs | | Fair | |||||
|
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Value | |||||
Assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Policy loans | | $ | 106,014 | | $ | — | | $ | — | | $ | 106,014 | | $ | 106,014 |
Cash and cash equivalents | |
| 43,716,205 | |
| 26,230,027 | |
| 17,486,178 | |
| — | |
| 43,716,205 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Policyholder deposits (Deposit-type contracts) | |
| 171,168,785 | |
| — | |
| — | |
| 171,168,785 | |
| 171,168,785 |
| | | | | | | | | | | | | | | |
The following table presents a reconciliation from the opening balances to the closing balances with separate disclosure of changes during the period attributable to (a) total gains or losses for the period recognized in earnings and the line item(s) in the statement of comprehensive income in which such gains or losses are recognized; (b) total gains or losses for the period recognized in other comprehensive income and the line item(s) in other comprehensive income in which such gains or losses are recognized; (c) purchases, sales, issues, and settlements, with each type disclosed separately; and (d) the amounts of any transfers into or out of Level 3, the reasons for such transfers, and the policy for determining when transfers between levels have occurred during the year ended December 31, 2021:
| | | | | | | | | | | | |
| | | | | | | | | | | ||
| | As of | | | | | | | | As of | ||
| | December 31, | | | | | | | | | December 31, | |
(In thousands, except number of contracts) |
| 2020 |
| Additions |
| Sales |
| 2021 | ||||
Assets |
| |
|
| |
|
| |
|
| |
|
Term loans | | $ | 107,254 | | $ | 231,089 | | $ | 70,875 | | | 267,468 |
Mortgage loans on real estate, | | | | | | | | | | | | |
held for investment | | | 94,990 | | | 160,277 | | | 72,064 | | | 183,203 |
Federal Home Loan Bank (FHLB) stock | | | — | | | 500 | | | — | | | 500 |
Other invested assets | | | 21,897 | | | 96,339 | | | 82,943 | | | 35,293 |
Preferred stock | | | 3,898 | | | 14,788 | | | - | | | 18,686 |
Total Investments | | $ | 228,039 | | $ | 502,993 | | $ | 225,882 | | $ | 505,150 |
The following tables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the yearsyear ended December 31, 2020 and 2019.2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | As of | | | | | | | | | | | | | As of | ||||||||
| | Beginning | | | | | | | | | | | | Ending | | December 31, | | | | | | | | | Valuation | | | | | December 31, | ||||||
| | Balance | | | | | | | | | | | | | Balance | |||||||||||||||||||||
| | As of | | | | | | | | | | | | | As of | |||||||||||||||||||||
| | December 31, | | | | | | | | | Valuation | | | | | December 31, | ||||||||||||||||||||
|
| 2019 |
| Additions |
| Sales |
| | Allowance | | Impairment | | 2020 | |||||||||||||||||||||||
(In thousands, except number of contracts) |
| 2019 |
| Additions |
| Sales |
| | Allowance | | Impairment | | 2020 | |||||||||||||||||||||||
Assets |
| |
|
| |
|
| |
|
| | | | |
| | |
|
| |
|
| |
|
| |
|
| | | | |
| | |
|
Policy loans | | $ | 106,014 | | $ | — | | $ | 60,441 | | $ | — | | $ | — | | $ | 45,573 | ||||||||||||||||||
Mortgage loans on real estate, | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
held for investment | | | 13,810,041 | | | 99,356,435 | | | 18,176,506 | | | — | | | — | | | 94,989,970 | ||||||||||||||||||
Term loans | | $ | — | | $ | 107,254 | | $ | — | | $ | — | | $ | — | | $ | 107,254 | ||||||||||||||||||
Mortgage loans on real | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
estate, held for investment | | | 13,810 | | | 99,357 | | | 18,177 | | | — | | | — | | | 94,990 | ||||||||||||||||||
Other invested assets | | | 2,468,947 | | | 78,620,694 | | | 54,517,558 | | | (776,973) | | | | | | 25,795,110 | | | 2,469 | | | 74,723 | | | 54,518 | | | (777) | | | — | | | 21,897 |
Fixed maturities | | | — | | | 107,254,007 | | | — | | | — | | | — | | | 107,254,007 | ||||||||||||||||||
Investment escrow | | | — | | | 3,174,047 | | | — | | | — | | | — | | | 3,174,047 | ||||||||||||||||||
Preferred stock | | | 500,000 | | | 3,897,980 | | | — | | | — | | | (500,000) | | | 3,897,980 | | | 500 | | | 3,898 | | | — | | | — | | | (500) | | | 3,898 |
Total Investments | | $ | 16,885,002 | | $ | 292,303,163 | | $ | 72,754,505 | | $ | (776,973) | | $ | (500,000) | | $ | 235,156,687 | | $ | 16,779 | | $ | 285,232 | | $ | 72,695 | | $ | (777) | | $ | (500) | | $ | 228,039 |
| | | | | | | | | | | | | | | | | | |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, preferred stock, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
F-25
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:
Nonperformance risk – For contracts we issue, we use the credit spread, relative to the US Department of the Treasury (Treasury) curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. |
Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth. |
Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products. |
F-28
Preferred equity and warrants – Significant unobservable inputs we use in include surrender rate, discount rates, and EBITA Multiples.
The following summarizes the unobservable inputs for AFS and trading securities and the embedded derivatives of fixed indexed annuities:annuities and preferred stock (with associated datable warrants):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2021 | ||||||||||||||||||||||||
(In millions, except for percentages) | | Fair value | | Valuation technique | | Unobservable inputs | | Minimum | | Maximum | | Weighted average* | | Impact of an increase in the input on fair value | | Fair value | | Valuation technique | | Unobservable inputs | | Minimum | | Maximum | | Weighted average* | | Impact of an increase in the input on fair value |
Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives | | $84.5 | | Option Budget Method | | Nonperformance risk | | 0.3% | | 1.3% | | 0.7% | | Decrease | | $123.7 | | Option Budget Method | | Nonperformance risk | | 0.3% | | 1.1% | | 0.6% | | Decrease |
| | | | | | Option budget | | 2.6% | | 3.4% | | 2.7% | | Increase | | | | | | Option budget | | 1.1% | | 3.4% | | 2.4% | | Increase |
| | | | | | Surrender rate | | 0.5% | | 15% (base) | | 7.6% | | Decrease | | | | | | Surrender rate | | 0.5% | | 15% (base) | | 7.7% | | Decrease |
Preferred equity | | $4.9 | | Yield analysis | | Discount rates | | 17.5% | | 19.5% | | 18.5% | | Increase | ||||||||||||||
Detachable warrants | | $2.8 | | Market Approach - GPCM | | EBITA Multiple | | 9.0x | | 10.0x | | 100.0% | | Increase | ||||||||||||||
* Weighted by account value | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||||
(In millions, except for percentages) | | Fair value | | Valuation technique | | Unobservable inputs | | Minimum | | Maximum | | Weighted average* | | Impact of an increase in the input on fair value |
Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives | | $84.5 | | Option Budget Method | | Nonperformance risk | | 0.3% | | 1.3% | | 0.7% | | Decrease |
| | | | | | Option budget | | 2.6% | | 3.4% | | 2.7% | | Increase |
| | | | | | Surrender rate | | 0.5% | | 15% (base) | | 7.6% | | Decrease |
* Weighted by account value | | | | | | | | | | | | | | |
F-26F-29
Note 7. Earnings Loss Per Share
The Company has 20.0 million voting common shares authorized, two million non-voting common shares authorized, and two million preferred shares authorized. There were 3,737,564 voting common shares issued and outstanding as of December 31, 2021 and 2020.
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
(in thousands, except per share amounts) | | | | | | |
Numerator: | | | | | | |
Net loss attributable to Midwest Holding, Inc. | | $ | (16,637) | | $ | (12,440) |
| | | | | | |
Denominator: | | | | | | |
Weighted average common shares outstanding | | | 3,737,564 | | | 2,547,003 |
Effect of dilutive securities: | | | | | | |
Stock options and deferred compensation agreements | | | — | | | 40,850 |
Denominator for earnings (loss) per common share | | | 3,737,564 | | | 2,587,853 |
| | | | | | |
Loss per common share | | $ | (4.45) | | $ | (4.88) |
Note 7.8. Income Tax Matters
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 20202021 and 20192020 are as follows:
| | | | | | | | | | | | |
|
| December 31, 2020 |
| December 31, 2019 | ||||||||
(in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||||||||
Deferred tax assets: |
| |
|
| |
|
| |
|
| |
|
Loss carryforwards | | $ | 1,556,855 | | $ | 436,777 | | $ | 2,244 | | $ | 1,557 |
Capitalized costs | |
| 174,364 | |
| 221,918 | |
| 127 | |
| 175 |
Stock option granted | | | 14,270 | | | 4,566 | | | 1,060 | | | 14 |
Unrealized losses on investments | |
| 1,534,332 | |
| — | |
| 1,534 | |
| 1,534 |
Policy acquisition costs | | | 2,243,267 | | | 1,468,030 | | | 3,640 | | | 2,243 |
Charitable contribution carryforward | | | 2,490 | | | 1,020 | | | — | | | 2 |
Property and equipment | | | — | | | 15,508 | ||||||
General business credits | | | 6 | | | — | ||||||
Derivative option allowance | | | 510 | | | — | ||||||
Sec 163(j) limitation | | | 153,809 | | | — | | | 171 | | | 154 |
Benefit reserves | |
| 3,568,914 | |
| 848,643 | |
| 5,186 | |
| 3,569 |
Property and equipment | | | 33 | | | — | ||||||
Other | | | 1,464 | | | — | ||||||
Total deferred tax assets | |
| 9,248,301 | |
| 2,996,462 | |
| 15,975 | |
| 9,248 |
Less valuation allowance | |
| (7,001,687) | |
| (2,618,741) | |
| (14,431) | |
| (7,002) |
Total deferred tax assets, net of valuation allowance | |
| 2,246,614 | |
| 377,721 | |
| 1,544 | |
| 2,246 |
Deferred tax liabilities: | |
|
| |
|
| |
|
| |
|
|
Unrealized losses on investments | |
| 1,994,232 | |
| 116,088 | |
| 1,084 | |
| 1,994 |
Due premiums | |
| 81,789 | |
| 81,789 | |
| — | |
| 82 |
Intangible assets | |
| 147,000 | |
| 147,000 | |
| 147 | |
| 147 |
Policy loans | |
| — | |
| 32,844 | ||||||
Bond Discount | | | 20,556 | | | — | | | 313 | | | 20 |
Property and equipment | |
| 3,037 | |
| — | |
| — | |
| 3 |
Total deferred tax liabilities | |
| 2,246,614 | |
| 377,721 | |
| 1,544 | |
| 2,246 |
Net deferred tax assets | | $ | — | | $ | — | | $ | — | | $ | — |
At December 31, 20202021 and 2019,2020, the Company recorded a valuation allowance of $7,001,687$14.4 million and $2,618,741,$7.0 million, 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 carry forwards are expected to be available to reduce taxable income.
F-30
There was income tax expense of $1,584,769$4.8 million and $234,180$1.6 million for the years ended December 31, 2020,2021, and 2019.2020. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pretax income, as a result of the following:
| | | | | | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||
Computed expected income tax benefit | | $ | (2,237,592) | | $ | (1,154,890) | | $ | (2,815) | | $ | (2,238) |
Increase (reduction) in income taxes resulting from: | |
| | |
|
| |
| | |
|
|
State tax net of federal benefit | | | 158,316 | | | — | | | — | | | 158 |
IMR and reinsurance | | | 25,571 | | | — | | | 157 | | | 26 |
Nondeductible expenses | | | 5,321 | | | 6,170 | | | 9 | | | 5 |
Gain on sale of SRC1 | | | 368 | | | — | ||||||
Change in valuation allowance | |
| 4,048,477 | | | 1,196,724 | |
| 7,429 | | | 4,049 |
Dividends received deduction | | | (10,308) | | | — | | | — | | | (10) |
COD Interest | | | — | | | 177,563 | ||||||
Amended Return - 2019/2020 | | | 339 | | | | ||||||
Adjustment to payable | | | (110) | | | — | ||||||
Deferred tax adjustment | | | (382) | | | — | ||||||
Prior year true-up | |
| (405,016) | |
| 8,613 | |
| (229) | |
| (405) |
Subtotal of increases | |
| 3,822,361 | |
| 1,389,070 | |
| 7,581 | |
| 3,823 |
Tax expense | | $ | 1,584,769 | | $ | 234,180 | | $ | 4,766 | | $ | 1,585 |
F-27
Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control, which occurred on June 28, 2018. As of December 31, 2020,2021, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $7,798,793.$9.8 million. The federal NOLs generated prior to June 28, 2018 which are subject to Section 382 limitation can be carried forward. If not utilized, the NOLs of $798,236$907,363 prior to 2017 will expire through the year of 2032, and the NOLs generated from June 28, 2018 to December 31, 20202021 do not expire and will carry forward indefinitely, but their utilization in any carry forward year is limited to 80% of taxable income in that year. The Company believes that it is more likely than not that the benefit from federal NOL
carryforwards will not be realized; thus, we have recorded a full valuation allowance of $5,080,148$2.1 million on the deferred tax assets related to these federal NOL carryforwards.
Loss carry forwards for tax purposes as of December 31, 2020, have expiration dates that range from 2024 through 2040.
Note 8.9. Reinsurance
A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of December 31, 20202021 and 20192020 and for the years ended December 31, 20202021 and 2019,2020, is as follows (excluding Unified):follows:
| | | | | | |
(in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Assets: |
| |
|
| |
|
Reinsurance recoverables | | $ | 38,579 | | $ | 32,146 |
Liabilities: | | | | | | |
Deposit-type contracts | | | | | | |
Direct | | $ | 1,075,439 | | | 597,868 |
Reinsurance ceded | | | (647,632) | | | (405,981) |
Retained deposit-type contracts | | $ | 427,807 | | $ | 191,887 |
| | | | | |
| Year ended December 31, | ||||
| 2021 |
| 2020 | ||
(in thousands) | |
|
| |
|
Premiums | | | | | |
Direct | $ | 258 | | $ | 884 |
Reinsurance ceded | | (258) | | | (884) |
Total Premiums | $ | — | | $ | — |
Future policy and other policy benefits | | | | | |
Direct | $ | 159 | | $ | 233 |
Reinsurance ceded |
| (159) | |
| (233) |
Total future policy and other policy benefits | $ | — | | $ | — |
| | | | | | |
|
| December 31, 2020 |
| December 31, 2019 | ||
Balance sheets: |
| |
|
| |
|
Benefit and claim reserves ceded | | $ | 32,146,042 | | $ | 30,579,524 |
F-31
The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer except for Unified as it is accounted for as discontinued operations as of December 31, 2021:
| | | | | |
| Year ended December 31, | ||||
| 2020 |
| 2019 | ||
Statements of comprehensive (loss) income: | |
|
| |
|
Premiums ceded | $ | 884,266 | | $ | 996,711 |
Benefits ceded |
| 222,834 | |
| 201,823 |
Commissions ceded |
| 10,163 | |
| 10,445 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Recoverable/ | | | | | Total Amount | ||
| | | | | Recoverable | | Recoverable | | (Payable) on Benefit | | Ceded | | Recoverable/ | |||||
(in thousands) | | AM Best | | on Paid | | on Unpaid | | Reserves/Deposit- | | Due | | (Payable) to/from | ||||||
Reinsurer |
| Rating |
| Losses |
| Losses |
| type Contracts |
| Premiums |
| Reinsurer | ||||||
Ironbound Reinsurance Company Limited | | | NR | | $ | — | | $ | — | | $ | (3,561) | | $ | — | | $ | (3,561) |
Optimum Re Insurance Company |
| | A | | | — | | | — | | | 561 | | | — | | | 561 |
Sagicor Life Insurance Company |
| | A- | |
| — | |
| 157 | |
| 10,901 | |
| 303 | |
| 10,755 |
Ascendant Re | | | NR | | | — | | | — | | | 1,550 | | | — | | | 1,550 |
Crestline SP1 | | | NR | | | — | | | — | | | 18,288 | | | — | | | 18,288 |
American Republic Insurance Company | | | A | | | — | | | — | | | 4,885 | | | — | | | 4,885 |
Unified Life Insurance Company | | | NR | | | — | | | 45 | | | 1,013 | | | 21 | | | 1,037 |
US Alliance Life and Security Company |
| | NR | |
| — | |
| — | |
| 5,090 | |
| 26 | |
| 5,064 |
| | | | | $ | — | | $ | 202 | | $ | 38,727 | | $ | 350 | | $ | 38,579 |
The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer except for Unified as it is accounted for as discontinued operations as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 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 | ||||||||||||||||||||||||
(in thousands) | | 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 | ||||||||||||
Ironbound Reinsurance Company Limited | | | NR | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | ||||||||||||||||||
Optimum Re Insurance Company |
| | A | | | — | | | — | | | 524,734 | | | — | | | 524,734 |
| | A | | $ | — | | $ | — | | $ | 525 | | $ | — | | $ | 525 |
Sagicor Life Insurance Company |
| | A- | |
| — | |
| 141,107 | |
| 11,285,364 | |
| 276,596 | |
| 11,149,875 |
| | A- | |
| — | |
| 141 | |
| 11,286 | |
| 277 | |
| 11,150 |
SDA Annuity & Life Re | | | NR | | | — | | | — | | | 3,540,697 | | | — | | | 3,540,697 | ||||||||||||||||||
Crestline SP 1 | | | NR | | | — | | | — | | | 9,695,427 | | | — | | | 9,695,427 | ||||||||||||||||||
Ascendant Re | | | NR | | | — | | | — | | | 3,541 | | | — | | | 3,541 | ||||||||||||||||||
Crestline SP1 | | | NR | | | — | | | — | | | 9,695 | | | — | | | 9,695 | ||||||||||||||||||
US Alliance Life and Security Company |
| | NR | |
| — | |
| — | |
| 7,264,229 | |
| 28,920 | |
| 7,235,309 |
| | NR | |
| — | |
| — | |
| 7,264 | |
| 29 | |
| 7,235 |
| | | | | $ | — | | $ | 141,107 | | $ | 32,310,451 | | $ | 305,516 | | $ | 32,146,042 | | | | | $ | — | | $ | 141 | | $ | 32,311 | | $ | 306 | | $ | 32,146 |
| | | | | | | | | | | | | | | | | | |
F-28
The following table provides a summary ofOur securities positions resulted in changes in the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer except for Unified as it is accounted for as discontinued operationsunrealized gains position as of December 31, 2019:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Recoverable on | | | | | Total Amount | ||
| | | | | Recoverable | | Recoverable | | Benefit | | Ceded | | Recoverable | |||||
| | AM Best | | on Paid | | on Unpaid | | Reserves/Deposit- | | Due | | from | ||||||
Reinsurer |
| Rating |
| Losses |
| Losses |
| type Contracts |
| Premiums |
| Reinsurer | ||||||
Ironbound Reinsurance Company Limited | | | NR | | $ | — | | $ | — | | $ | 4,213,699 | | $ | — | | $ | 4,213,699 |
Optimum Re Insurance Company |
| | A | | | — | | | — | | | 489,770 | | | — | | | 489,770 |
Sagicor Life Insurance Company |
| | A- | |
| — | |
| 130,538 | |
| 11,347,962 | |
| 270,273 | |
| 11,208,227 |
SDA Annuity & Life Re | | | NR | | | — | | | — | | | 2,506,911 | | | — | | | 2,506,911 |
US Alliance Life and Security Company |
| | NR | |
| — | |
| 23,000 | |
| 12,207,079 | |
| 69,162 | |
| 12,160,917 |
| | | | | $ | — | | $ | 153,538 | | $ | 30,765,421 | | $ | 339,435 | | $ | 30,579,524 |
Due2021 compared to the market price increases in 2020, certain assets that were carried on our balance sheet have resulted in approximately $8.0 million of unrealized gains as of December 31, 2020.2020, reported in accumulated other comprehensive income on the Consolidated balance sheets. As discussed in “Note. 1. Nature of Operations and Basis of Presentation – Comprehensive loss,”Note 1, American Life has treaties with several third-party reinsurers that have funds withheldFW and modified coinsuranceModco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 5. As a result of the market volatility, theThe assets had unrealized gains of approximately $161,000 and $2.9 million as of December 31, 2020.2021 and 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the unrealized gains on the assets held by American Life were offset by a lossgain in the embedded derivative of $2.7 million and a loss of $2.9 million.million, respectively. We account for this gain pass through by recording equivalent realized losses on our income statement.
Effective July 25, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco Ironbound Agreement”) with Ironbound Reinsurance Company Limited, an unaffiliated reinsurance company organized under the lawsConsolidated Statements of Barbados (“Ironbound”). Under the FW/Modco Ironbound Agreement, American Life ceded to Ironbound, on a funds withheld coinsurance and modified coinsurance basis, an initial 95% quota share of certain liabilities with respect to its MYGA business. Starting on March 1, 2020, the quota share dropped to 30% and then again on March 11, 2020 the quota share dropped to 0%. American Life has established two accounts to hold the assets for the FW/Modco Ironbound Agreement, a Funds Withheld Account and a Modco Deposit Account.
In addition, a trust account was established on June 30, 2019 among American Life, Ironbound and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the Funds Withheld Account and the Modco Deposit Account for any shortage in required reserves.
The initial settlement included net premium income of $45,005,536 (gross premiums of $46,568,321 minus gross commissions paid of $1,562,786) and net statutory reserves of $44.904,704. The initial settlement for the Funds Withheld Account was $24,928,934 and for the Modco Deposit Account was $16,619,289 and the reserves required were $26,944,622 and $17,963,081, respectively. The amount owed by Ironbound to the Funds Withheld Account and the Modco Deposit Account from the trust account was $2,015,688 and $1,343,792, respectively which was funded at the closing of the Ironbound transaction.
Effective November 7, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco SDA Agreement”) with SDA Annuity & Life Re (“SDA”), a Cayman Islands-domiciled reinsurance company. Under the FW/Modco SDA Agreement, American Life cedes to SDA, on a funds withheld coinsurance and modified coinsurance basis, 5% quota share of certain liabilities with respect to its multi-year guaranteed annuity MYGA business and an initial 95% quota share of certain liabilities with respect to its fixed indexed annuity FIA through December 31, 2019 and thirty 30% through September 30, 2020. American Life has established two accounts to hold the assets for the FW/Modco Agreement, a Funds Withheld Account and a Modco Deposit Account.
F-29
In addition, a trust account was established on November 7, 2019 among American Life, SDA and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the SDA Funds Withheld Account and the SDA Modco deposit account for any shortage in required reserves.
The initial settlement included net premium income of $3,970,509 and net statutory reserves of $3,986,411. The initial settlement for the funds withheld account was $2,256,802 and for the Modified coinsurance deposit was $1,504,535 and the reserves required was $2,391,847 and $1,594,564, respectively. The amount owed to the funds withheld account and the Modified coinsurance deposit account from the trust account was $135,044 and $90,029, respectively which was funded at the closing of the SDA transaction. Effective August 25, 2020, the quota share was reduced to 0% for both MYGA and FIA products.Comprehensive Loss.
Effective April 15, 2020, American Life entered into a Funds Withheld and Funds Paid Coinsurance Agreement (“US Alliance Agreement”) between American Life andwith US Alliance Life and Security Company, a Kansas reinsurance company (“US Alliance”). Under the US Alliance Agreement, American Life will cede to US Alliance, on a funds withheld and funds paid coinsurance basis, an initial 49% quota share of certain liabilities with respect to American Life’s FIA business effective January 1, 2020 through March 31, 2020. Effective from March 1, 2020 through March 10, 2020, American Life will cedeceded a 45.5% quota share of certain liabilities with respect to its MYGA business to US Alliance. Effective March 11, 2020 through March 31, 2020, on a funds withheld and funds paid coinsurance basis, the quota share will increaseincreased to 66.5% of certain liabilities with respect to its MYGA business. Effective April 1, 2020, the FIA quota share was reduced to 40% and the MYGA quota share was reduced to 25%. American Life has established a US Alliance Funds Withheld Account to hold the assets for the US Alliance Agreement.
In addition, a trust account was established among American Life, US Alliance and Capitol Federal Savings Bank, for the sole benefit of American Life to fund the Funds Withheld Account for any shortage in required reserves.
F-32
The initial settlement included net premium income of $13,542,325$13.5 million and net statutory reserves of $14,706,862.$14.7 million. The initial settlement for the Funds Withheld Account was $12,729,785$12.7 million and to the trust account was $812,539$800,000 from American Life and $5,000,000$5.0 million from US Alliance. Effective June 30, 2020, the FIA quota share was reduced to 0%0 and effective July 1, 2020, the MYGA quota share was reduced to 0%.0.
Effective April 24, 2020, American life entered into a Master Letter Agreement with Seneca Re and Crestline Management regarding a flow of annuity reinsurance and related asset management, whereby Crestline Management agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from the MYGA and a quota share percentage of 40% of the FIA products. This agreement expires on April 24, 2023.
On July 23,24, 2020, the Nebraska Department of Insurance (“NDOI”) approvedissued its non-disapproval of the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”) of Seneca Re, now known as Crestline RE SP1. The agreement closed on July 27, 2020. Under the agreement, American Life ceded to SRC2, on a Funds Withheld and Modified Coinsurance basis, an initial 25% quota share of certain liabilities with respect to American Life’s MYGA business and 40% quota share of certain liabilities with respect to American Life’s FIA business effective April 24,2020.24, 2020. Effective July 1, 2021, the quota share for FIA decreased from 40% to 25%. American Life has established a SRC2 Funds Withheld Account and a Modified Coinsurance Account to hold the assets pursuant to the agreement. The NDOI approved the inclusion of the SRC2 coinsurance in American Life’s September 30,March 31, 2020 statutory financial statements.
EffectiveIn addition, a trust account was established on July 1, 2018,23, 2020 among American Life, entered into an assumptiveSRC2 and indemnity coinsurance transaction with UnifiedU.S. Bank, National Association for the sole benefit of American Life to transfer 100%fund the SRC2 Funds Withheld Account and the SRC2 Modco deposit account for any shortage in required reserves.
On June 26, 2021, the NDOI issued its non-disapproval of the risk relatedModified Coinsurance Agreement (“Modco AEG Agreement”) with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement closed on June 30, 2021. Under the Modco AEG Agreement, American Life cedes to AEG, on a modified coinsurance basis, 20% quota share of certain liabilities with respect to its multi-year guaranteed annuity MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its fixed indexed annuity FIA. American Life has established a Modco Deposit Account to hold the assets for the Modco Agreement. The initial settlement included net premium income of $37.5 million and net statutory reserves of $34.8 million for the modified coinsurance account. The amount paid to the remaining legacy block of business, see Note 2 above for further discussion. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to Unified for cash of $14,320,817, whichModified coinsurance deposit account from AEG was net of a ceding allowance of $3,500,000 plus$2.4 million.
On November 10, 2021, the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. Unified assumed certain responsibilities for incurred claims, surrenders and commission from the effective date.
The ceding commission of $3,500,000 was recorded netNDOI issued its non-disapproval of the difference between statutoryFunds Withheld and GAAP net adjusted reserves, the eliminationModified Coinsurance Agreement SRC3, whereby, SRC3 agreed to provide reinsurance funding for a quota share percentage of DAC of $1,890,013, value of business acquired (“VOBA“) of $338,536, and the remaining deferred profit from our legacy business of $26,896. The remaining $3,069,690 was reflected as a deferred gain and will be recognized into income over the expected duration45% of the legacy blocksliabilities of business. As of December 31, 2020, Unified had converted 90% of the indemnity coinsurance to assumptive coinsurance. American Life had amortization incomearising from its MYGA products and a quota share percentage of 45% of American Life’s FIA products. American Life has established a FW and Modco Deposit Account to hold the assets for the year ended December 31, 2020FW and Modco Agreement. The initial settlement included net premium income of $305,959 as a result$37.5 million and net statutory reserves of the assumption of the additional 11% of the indemnity policies compared to the 79% assumed as of December 31, 2019. The ending deferred ceding commission at December 31, 2020 and 2019 was $276,935 and $582,894, respectively.$43.6 million.
F-30
Under GAAP, ceding commissions are deferred on the Consolidated balance sheetsheets and are amortized over the period of the policyholder contracts. The tables below shows the ceding commissions from the reinsurers excluding SRC1 and what was earned on a GAAP basis:basis for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, | |||||||||||||||||||||||
| | | | 2020 | | 2019 | |||||||||||||||||||||
Reinsurer |
| Effective Date | | Gross Ceding Commission | | Expense | | Interest on Ceding Commissions | | Earned | | Gross Ceding Commission | | Expense | | Interest on Ceding Commissions | | | Earned | ||||||||
Ironbound Reinsurance Company Limited | | July 2019 | | $ | 688,110 | | $ | 703,163 | | $ | 220,635 | | $ | 435,366 | | $ | 4,843,120 | | $ | 4,734,926 | | $ | 77,800 | | | $ | 126,429 |
SDA Annuity & Life Re |
| November 2019 | | | 1,354,304 | | | 2,616,888 | | | 67,246 | | | 78,012 | | | 996,701 | | | 1,734,184 | | | 27,827 | | | | 45,220 |
US Alliance Life and Security Company(2) |
| November 2019 | | | 2,278,511 | | | 4,030,614 | | | 38,719 | | | 139,313 | | | — | | | — | | | — | | | | — |
Crestline SP 1 | | July 2020 | | | 6,242,612 | | | 11,798,718 | | | 48,419 | | | 190,477 | | | — | | | — | | | — | | | | — |
| | | | $ | 10,563,537 | | $ | 19,149,383 | | $ | 375,019 | | $ | 843,168 | | $ | 5,839,821 | | $ | 6,469,110 | | $ | 105,627 | | | $ | 171,649 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | ||||||||||||||||||||||
(in thousands) | | 2021 | | 2020 | ||||||||||||||||||||
Reinsurer | | Gross Ceding Commission | | Expense | | Interest on Ceding Commission | | Earned | | Gross Ceding Commission | | Expense | | Interest on Ceding Commission | | Earned | ||||||||
Unified Life Insurance Company | | $ | - | | $ | — | | $ | — | | $ | 35 | | $ | — | | $ | — | | $ | — | | $ | — |
Ironbound Reinsurance Company Limited | | | — | | | (461) | | | 211 | | | 684 | | | 688 | | | 703 | | | 221 | | | 435 |
Ascendant Re | | | 498 | | | 904 | | | 93 | | | 367 | | | 1,354 | | | 2,617 | | | 67 | | | 78 |
US Alliance Life and Security Company | | | 2 | | | (75) | | | 60 | | | 401 | | | 2,279 | | | 4,030 | | | 39 | | | 139 |
Crestline SP1 | | | 6,699 | | | 12,321 | | | 255 | | | 1,185 | | | 6,243 | | | 11,799 | | | 48 | | | 191 |
American Republic Insurance Company | | | 3,971 | | | 7,039 | | | 26 | | | 350 | | | — | | | — | | | — | | | — |
| | $ | 11,170 | | $ | 19,728 | | $ | 645 | | $ | 3,022 | | $ | 10,564 | | $ | 19,149 | | $ | 375 | | $ | 843 |
(1) Includes: acquisition and administrative expenses, commission expense allowance and product development fees.
(2) US Alliance Life and Security Company funds withheld and funds paid treaty
The tables below shows the ceding commissions deferred on each reinsurance transaction on a GAAP basis:
| | | | | | | | |
| | | | December 31, 2020 | | December 31, 2019 | ||
Reinsurer |
| Effective Date | | Deferred Ceding Commission | | Deferred Ceding Commission | ||
US Alliance Life and Security Company(1) |
| September 2017 | | $ | 172,297 | | $ | 858,675 |
Unified Life Insurance Company(1) |
| July 2018 | | | 276,935 | | | 582,894 |
Ironbound Reinsurance Company Limited(2) | | July 2019 | | | 5,642,095 | | | 5,060,359 |
SDA Annuity & Life Re(2) |
| November 2019 | | | 2,703,496 | | | 1,076,267 |
US Alliance Life and Security Company(3) | | April 2020 | | | 2,472,559 | | | — |
Crestline SP 1 | | July 2020 | | | 6,931,375 | | | — |
| | | | $ | 18,198,757 | | $ | 7,578,195 |
| | | | | | | | |
F-33
| | | | | | |
(in thousands) | | December 31, 2021 | | December 31, 2020 | ||
Reinsurer |
| Deferred Gain on Reinsurance Transactions | | Deferred Gain on Reinsurance Transactions | ||
US Alliance Life and Security Company(1) |
| $ | 162 | | $ | 172 |
Unified Life Insurance Company(1) |
| | 242 | | | 277 |
Ironbound Reinsurance Company Limited(2) | | | 5,137 | | | 5,642 |
Ascendant Re |
| | 3,101 | | | 2,703 |
US Alliance Life and Security Company(2) | | | 2,286 | | | 2,473 |
American Republic Insurance Company(2) | | | 4,146 | | | — |
Crestline SP1(2) | | | 13,515 | | | 6,932 |
| | $ | 28,589 | | $ | 18,199 |
These reinsurance transactions on our legacy life insurance business received gross ceding commissions on the effective dates of the transaction. The difference between the statutory net adjusted reserves and the GAAP adjusted reserves plus the elimination of DAC and value of business acquired |
These reinsurance transactions include the ceding commissions and expense allowances which are accounted for as described in (1). |
The use of reinsurance does not relieve American 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 for all blocks of business except what is included in the Unified transaction. The reinsurance agreement with Unified discharges American Life’s responsibilities once all the policies have changed from indemnity to assumptive reinsurance. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.
American 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 American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, separate contingency reserves may be established. At December 31, 2021 and 2020, and 2019, no0 contingency reserves were established.
American Life expects to reinsure substantially all of its new insurance policies with a variety of reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. American Life may retain some business with the intent to reinsure some or all at a future date.
F-31F-34
Note 9. Notes Payable
On June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred StockRetained and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third-party, Xenith. Vespoint LLC, a Delaware limited liability company (“Vespoint”), owns 100% of the voting stock of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these companies is a private investment company; they are controlled by Michael Minnich and A. Michael Salem, who are Co-Chief Executive Officers of Vespoint and Executive Officers of Midwest and American Life.
At closing of the Agreement with Xenith, it loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with interest of 8% per annum with 4% payable quarterly and another 4% accrued and payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. The Agreement further provided that Xenith, in its sole discretion, could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into Midwest’s voting common stock at $10.29 per share. Xenith contributed an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares. All loans were later converted into Midwest voting common stock on June 18, 2019. Any additional borrowing capacity was terminated by written mutual consent in April 2020.
Reinsurer Balance Sheets
The Company had total accrued interest of $845,536 ontables below shows the Xenith notes through June 18, 2019. All interest on the notes from inception through June 18, 2019 was waived by Xenith. The accrued interest was accounted for as an additional capital contribution. The legal fees of $161,000 associated with the Xenith transaction were capitalizedretained and subsequently written off when the notes were converted.reinsurance consolidated balance sheets:
| | | | | | | | | | | | | | | | | | |
|
| December 31, 2021 | | December 31, 2020 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
(in thousands) | | Retained | | Reinsurance | | Consolidated | | Retained | | Reinsurance | | Consolidated | ||||||
Assets |
| | |
|
| |
| | | | | | | | | | | |
Total investments | | $ | 414,418 | | $ | 561,109 | | $ | 975,527 | | $ | 185,368 | | $ | 332,827 | | $ | 518,195 |
Cash and cash equivalents | | | 95,406 | | | 46,607 | | | 142,013 | | | 102,335 | | | 49,344 | | | 151,679 |
Accrued investment income | | | 3,853 | | | 9,770 | | | 13,623 | | | 1,956 | | | 4,851 | | | 6,807 |
Deferred acquisition costs, net | | | 24,530 | | | — | | | 24,530 | | | 13,456 | | | — | | | 13,456 |
Reinsurance recoverables | | | — | | | 38,579 | | | 38,579 | | | — | | | 32,146 | | | 32,146 |
Other assets | | | 27,834 | | | (2,189) | | | 25,645 | | | 2,685 | | | 1,433 | | | 4,118 |
Total assets | | $ | 566,041 | | $ | 653,876 | | $ | 1,219,917 | | $ | 305,800 | | $ | 420,601 | | $ | 726,401 |
Liabilities and Stockholders’ Equity | | |
| | |
| | |
| | |
| | |
| | |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Policyholder liabilities | | $ | 427,807 | | $ | 660,811 | | $ | 1,088,618 | | $ | 191,887 | | $ | 418,921 | | $ | 610,808 |
Deferred gain on coinsurance transactions | | | 28,589 | | | — | | | 28,589 | | | 18,199 | | | — | | | 18,199 |
Other liabilities | | | 23,889 | | | (6,935) | | | 16,954 | | | 9,384 | | | 1,680 | | | 11,064 |
Total liabilities | | $ | 480,285 | | $ | 653,876 | | $ | 1,134,161 | | $ | 219,470 | | $ | 420,601 | | $ | 640,071 |
Stockholders’ Equity: | | |
| | |
| | |
| | | | | | | | | |
Voting common stock | | | 4 | | | — | | | 4 | | | 4 | | | — | | | 4 |
Additional paid-in capital | | | 138,277 | | | — | | | 138,277 | | | 133,417 | | | — | | | 133,417 |
Accumulated deficit | | | (70,159) | | | — | | | (70,159) | | | (53,522) | | | — | | | (53,522) |
Accumulated other comprehensive income | | | 2,634 | | | — | | | 2,634 | | | 6,431 | | | — | | | 6,431 |
Total Midwest Holding Inc.'s stockholders' equity | | $ | 70,756 | | $ | — | | $ | 70,756 | | $ | 86,330 | | $ | — | | $ | 86,330 |
Noncontrolling interest | | | 15,000 | | | — | | | 15,000 | | | — | | | — | | | — |
Total stockholders' equity | | | 85,756 | | | — | | | 85,756 | | | 86,330 | | | — | | | 86,330 |
Total liabilities and stockholders' equity | | $ | 566,041 | | $ | 653,876 | | $ | 1,219,917 | | $ | 305,800 | | $ | 420,601 | | $ | 726,401 |
The following table sets forth information regarding loans made to us by Xenith and the number of shares of voting common stock each loan was converted into on June 18, 2019:
| | | | | |
| | | | | Shares of Common |
| | | | Stock into which | |
| | Loan | | Loans Were | |
| | Principal | | Converted | |
Date of Loan |
| Amount |
| As Restated | |
June 28, 2018 | | $ | 500,000 |
| 48,570 |
June 28, 2018 | |
| 100,000 |
| 9,714 |
October 10, 2018 | |
| 1,000,000 |
| 97,139 |
December 7, 2018 | |
| 17,500,000 |
| 1,699,938 |
Total | | $ | 19,100,000 |
| 1,855,361 |
As of December 31, 2020, Midwest had no notes outstanding to Xenith.
Note 10. Long-Term Incentive Plans
2019 Plan
On June 11, 2019, our Board of Directors approved the Midwest Holding Inc. Long-Term Incentive Plan (the ”2019“2019 Plan”) that reserves up to 102,000 shares of our voting common stock for award issuances. It provides for the grant of options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards to eligible employees, consultants and eligible directors, subject to the conditions set forth in the 2019 Plan. Shareholder approval of the plan occurred on June 11, 2019. All awards are required to be established, approved, and/or granted by the compensation committee of our Board.
On July 19, 2019, we granted stock options for 17,900November 16, 2020, our Board of Directors adopted a new equity incentive plan titled the 2020 Long-Term Incentive Plan (the "2020 Plan") that reserves up to 350,000 shares of voting common stock underfor award issuances. The terms of the 2020 Plan are essentially the same as the 2019 Plan. On June 29, 2021, the 2020 Plan that arewas approved by the shareholders.
In accordance with the stockholder-approved equity incentive plans above, we granted stock options to employees and directors for the purchase of common stock at exercise prices at the date of the grants. We calculate the fair value and compensation at grant date using the Black Scholes Model. Stock options become exercisable during a ten-year periodunder various vesting schedules (typically two to four years) and generally expire in ten years after the date of grant atgrant. Using the Black Scholes Model, we calculate compensation expense for option share units on a price of $25.00 per share, with one-third exercisable after July 17, 2021 and two-thirds exercisable after July 17, 2023.straight-line basis over the requisite service periods, accounting for forfeitures as they occur. The fair market value of the shares was $8.00 per share at the grant date. Management consideredrestricted stock compensation expense is calculated using the stock options as compensation. Using the BlackScholes Model we determined the compensation expense was $143,200. The factors we used to determine the expense were: the weighted average fair market value at grant date of $8.00 per share, the exercise price of $25.00 per share, the option term of 10 years, an annual risk-free interest rate of 1.84% based upon the 10-year U.S. Treasury rate at
F-32
grant date, volatility of the price of the stock before the date of the grants, the amount of shares and the closely held nature of the stock before the grants.
On July 21, 2020, we granted stock options for 26,300 shares of voting common stock. Management considered the stock options as compensation. Using the BlackScholes Model we determined the compensation expense was $334,950. The factors we used to determine the expense were: the weighted average fair market value at grant date of $14.50 per share, the exercise price of per share, the time to maturity of 10 years, an annual risk-free interest rate of .55% based upon the 10-year U.S. Treasury rate at grant date and a 60% volatility basedamortizing on a valuation by an outside evaluator relatingstraight-line basis over the requisite service periods.
The table below identifies the assumptions used in the Black Scholes Model to the grants of these options.
On September 15, 2020, we granted stock options for 6,667 shares of voting common stock at an exercise price of $25.00 per share. Management considered the stock options grants as compensation expense. Using the BlackScholes Model we determinedcalculate the compensation expense was $144,014. The factors we used to determine the expense were: the weighted average fair market value at grant dateexpense:
| | | | |
| | December 31, | ||
| | 2021 | | 2020 |
Expected volatility | | 4.4% - 66.3% | | 60% - 200% |
Weighted-average volatility | | 38.9% | | 98.1% |
Expected term (in years) | | 2 - 7 | | 2 - 5 |
Risk-free rate | | .8% - 1.5% | | .9% - 1.8% |
F-35
On November 16, 2020, we granted stock options for 35,058 shares of voting common stock at an exercise price of $41,25 per share. Management considered the stock options grant as compensation expense. Using the BlackScholes Model we determined the compensation expense was $1,032,458. The factors we used to determine the expense were: the weighted average fair market value at grant date of $29.45 per share, the exercise price of $41.25 a per share, the time to maturity of 10 years, an annual risk-free interest rate of .91% based upon the 10-year U.S. Treasury rate at grant date and a 66.3% volatility based on a valuation by an outside evaluator relating to the grant of these options.
Also ,on November 16, 2020 we granted an award of restricted stock for 18,597 shares of voting common stock to an officer. Management considered the restricted stock grant as compensation expense. Using the BlackScholes Model we determined the compensation expense was $547,682. The factors we used to determine the expense were: the weighted average fair market value at grant date of $29.45 per share, the exercise price of $41.25 per share, an annual risk-free interest rate of .91% based upon the 10-year U.S. Treasury rate at grant date and a 66.3% volatility based on a valuation by an outside evaluator relating to this restricted stock grant.
On May 1, 2020, stock options for 200 shares with a fair market value of $8.0 per share, became vested in connection with the resignation of two Board members. For the yearyears ended December 31, 20202021 and 2019,2020, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants on the three dates above, over the two and four year vesting tranches as an expensewhich resulted in expenses and an increase in additional paid in capital of $163,664approximately $5.0 million and $21,745,$164,000, respectively.
The tabletables below shows the remaining non-vested shares under the 2019 Planand 2020 Plans as of December 31, 20202021 and 2019,2020, respectively:
| | | | | | | | | | | ||
| | Year ended December 31, |
| Decmeber 31, 2021 | ||||||||
| | 2020 | | 2019 | | Stock Options/ | | Weighted Average Grant-Date Fair Value | | Weighted Average Excise Price | ||
|
| Stock Options/ | | Stock Options | ||||||||
Beginning balance | | 17,900 | | — | ||||||||
Nonvested stock options at December 31, 2020 | | 100,972 | | $ | 22.91 | | $ | 34.70 | ||||
Options granted | | 68,025 | | 17,900 | | 333,880 | | 19.25 | | 42.84 | ||
Restricted stock granted | | 18,597 | | — | | 5,089 | | 24.34 | | 24.34 | ||
Vested | | (85,957) | | | 17.32 | | | 30.20 | ||||
Forfeited | | (3,350) | | — | | (36,767) | | 23.91 | | 40.42 | ||
Vested | | (200) | | — | ||||||||
Ending Balance |
| 100,972 | | 17,900 | ||||||||
|
| | | | ||||||||
Ending Balance at December 31, 2021 |
| 317,217 | | $ | 25.80 | | $ | 40.13 |
| | | | | | | | |
|
| Decmeber 31, 2020 | ||||||
| | Stock Options/ | | Weighted Average Grant-Date Fair Value | | Weighted Average Excise Price | ||
Nonvested stock options at December 31, 2019 | | 17,900 | | $ | 8.00 | | $ | 25.00 |
Options granted | | 68,025 | | | 21.85 | | | 33.13 |
Restricted stock granted | | 18,597 | | | 41.02 | | | 41.02 |
Vested | | (200) | | | 8.00 | | | 25.00 |
Forfeited | | (3,350) | | | 11.25 | | | 25.00 |
Ending Balance at December 31, 2020 |
| 100,972 | | $ | 22.91 | | $ | 34.70 |
F-33
Note 11. 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, 20202021 and 2019:2020:
| | | | | | |
| | | | | ||
|
| As of | | As of | ||
(In thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Beginning balance | | $ | 597,868 | | $ | 171,169 |
US Alliance | |
| 1,873 | |
| (3,308) |
Unified Life Insurance Company | | | 468 | | | — |
Ironbound Reinsurance Company Limited | |
| 6,579 | |
| 6,080 |
Ascendant Re | | | 2,880 | | | 3,053 |
Crestline SP1 | | | 4,834 | | | 3,607 |
American Republic Insurance Company | | | 1,567 | | | — |
Deposits received | |
| 471,646 | |
| 415,561 |
Investment earnings (includes embedded derivative) | |
| 7,012 | |
| 4,215 |
Withdrawals | |
| (18,446) | |
| (2,509) |
Policy charges | | | (842) | | | — |
Ending balance | | $ | 1,075,439 | | $ | 597,868 |
| | | | | | |
| | | | | ||
|
| | | | | |
|
| December 31, 2020 |
| December 31, 2019 | ||
Beginning balance | | $ | 171,168,785 | | $ | 7,234,927 |
US Alliance | |
| (3,307,587) | |
| 657,986 |
Ironbound Reinsurance Company Limited | |
| 6,080,196 | |
| 1,839,551 |
SDA Annuity & Life Re (includes MVA adjustment and embedded derivative) | | | 3,053,160 | | | 194,940 |
Crestline SP 1 | | | 3,606,833 | | | — |
Deposits received | |
| 415,561,302 | |
| 161,392,700 |
Investment earnings (includes embedded derivative) | |
| 4,214,828 | |
| 9,271 |
Withdrawals | |
| (2,509,045) | |
| (160,590) |
Ending balance | | $ | 597,868,472 | | $ | 171,168,785 |
F-36
Note 12. Commitments and Contingencies
Contingent Commitments: We have entered into commitments related to certain investments, where draws or additional funding can be requested under the terms of the agreements. These commitments are inclusive of third-party reinsurer commitments, and were approximately $145.9 million as of December 31, 2021. Of the approximately $145.9 million in unfunded commitments at 12/31/2021, approximately $23.3 million related to American Life. The remaining $122.6 million represented commitments that have been made by our reinsurance partners. The table shows when different dollar amounts of commitments will expire. The ability of borrowers to request additional funds under these lending agreements varies considerably from loan to loan.
| | |
| Unfunded | |
(In thousands) | Commitment | |
Due in one year or less | $ | 19,245 |
Due in two years |
| 26,753 |
Due in three years |
| 4,705 |
Due in four years | | 8,741 |
Due in five years and after | | 86,497 |
| $ | 145,941 |
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 Matters: State regulatory bodies 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 matters. American Life received a Certificate of Authority to conduct business in Iowa during the first quarter of 2019. American Life received a Certificate of Authority to conduct business during 2020 from each of the following states and the District of Columbia: Utah, Montana, Louisiana and Ohio. American Life has pending applications in six additional states that are expected to be approved by the end of 2020.states. The Nebraska Department of Insurance (“NDOI”)NDOI granted American Life approvalnon-disapproval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Ironbound prior to closing of the agreement in July 2019. The NDOI granted American Life approvalnon-disapproval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with SDA prior to closing F-45 of the agreement in December 2019. The NDOI granted American Life approvalnon-disapproval to enter into the Funds Withheld and Funds Paid Coinsurance Agreement with US Alliance prior to closing of the agreement on April 15, 2020. The NDOI granted American Life approvalnon-disapproval to enter into the Funds Withheld and Modified Coinsurance Agreement with Seneca Re through SRC1 prior to closing of the agreement on May 13, 2020. The NDOI granted American Life approvalnon-disapproval to enter into the FW and Modco Agreement with Seneca Re SRC2 prior to closing of the agreement on July 23,27, 2020. The NDOI granted American Life non-disapproval to enter into the Modco Agreement with AEG prior to closing of the agreement on June 30, 2021. The NDOI granted American Life non-disapproval to enter into the FW and Modco Agreement with SRC3 prior to closing of the agreement on November 10, 2021.
Note 13. Leases
Our operating lease activities consist of leases for office space and equipment. Our finance lease activities consist of leases for hardware which we will own at the end of the lease agreement. NoneNaN of our lease agreements include variable lease payments. SeeAs of December 31, 2021, we have 1 remaining lease related to our office space. An amendment to the discussion of our January 1, 2019 implementation of a new accounting standardoffice space lease for leases and its impactadditional space was effective October 16, 2021 extending the term on our Consolidated Financial Statements at Note 1. New Accounting Standards.the lease another ten years.
F-34
Supplemental balance sheet information for our leases for the years ended December 31, 20202021 and 2019,2020, are as follows:
| | | | | | | | |
(In thousands) | | | | As of | | As of | ||
Leases |
| Classification |
| December 31, 2021 |
| December 31, 2020 | ||
Assets |
|
|
| |
|
| |
|
Operating |
| Operating lease right-of-use assets | | $ | 2,360 | | $ | 348 |
| | | | | | | | |
Liabilities |
|
| |
|
| |
|
|
Operating lease |
| Operating lease liabilities | | $ | 2,364 | | $ | 397 |
| | | | | | | | |
| | | | As of | | As of | ||
Leases |
| Classification |
| December 31, 2020 |
| December 31, 2019 | ||
Assets |
|
|
| |
|
| |
|
Noncurrent: |
|
|
| |
|
| |
|
Finance |
| Office and other equipment, net of accumulated depreciation and amortization | | $ | — | | $ | 2,913 |
Operating |
| Operating lease right-of-use assets | |
| 348,198 | |
| 470,132 |
Total leased assets |
|
| | $ | 348,198 | | $ | 473,045 |
| | | | | | | | |
Liabilities |
|
| |
|
| |
|
|
Current: |
|
| |
|
| |
|
|
Finance lease |
| Finance lease liabilities | | $ | — | | $ | 1,860 |
Noncurrent: |
|
| |
|
| |
|
|
Operating lease |
| Operating lease liabilities | |
| 396,911 | |
| 524,248 |
Total leased liabilities |
|
| | $ | 396,911 | | $ | 526,108 |
F-37
The difference between assets and liabilities includes a $5,266 adjustment to the finance lease and a $54,454 adjustment to an operating lease, both on January 1, 2019 as partTable of the ASC 842 implementation adjustment discussed in Note 2. New Accounting Standards.Contents
Our operating and finance leases expenses for the years ended December 31, 20202021 and 2019,2020, are as follows:
| | | | | | | | |
| | | | Year ended December 31, | ||||
Leases |
| Classification |
| 2020 |
| 2019 | ||
Operating |
| General and administrative expense | | $ | 8,731 | | $ | 13,797 |
| | | | | | | | |
Finance lease cost: |
|
| |
|
| |
|
|
|
| Amortization expense | |
| 2,913 | |
| 11,651 |
|
| Interest expense | |
| 111 | |
| 444 |
| | | | | | | | |
(In thousands) | | | | Year ended December 31, | ||||
Leases |
| Classification |
| 2021 |
| 2020 | ||
Operating |
| General and administrative expense | | $ | 8 | | $ | 9 |
| | | | | | | | |
Finance lease cost: |
|
| |
|
| |
|
|
|
| Amortization expense | |
| — | |
| 3 |
Minimum contractual obligations for our leases as of December 31, 20202021 are as follows:
| | | | | | |
|
| Operating Leases | ||||
2021 | | $ | 164,081 | |||
(in thousands) |
| Operating Leases | ||||
2022 | |
| 156,608 | | $ | 342 |
2023 | |
| 161,674 | |
| 342 |
2024 | |
| 13,508 | |
| 342 |
2025 | | | 342 | |||
2026 | | | 345 | |||
2027 | | | 353 | |||
2028 | | | 362 | |||
2029 | | | 371 | |||
2030 | | | 380 | |||
2031 | | | 292 | |||
Total remaining lease payments | | $ | 495,871 | | $ | 3,471 |
F-35
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||
Cash payments |
| |
|
| |
|
| |
|
| |
|
Operating cash flows from operating leases | | $ | (5,404) | | $ | (337) | | $ | (12) | | $ | (5) |
Operating cash flows from finance leases | |
| 1,164 | |
| 4,657 | |
| — | |
| 1 |
Financing cash flows from finance leases | |
| (111) | |
| (444) |
The weighted average remaining lease terms of our operating leases were approximately ten years and one and a half years, respectively as of December 31, 2021 and 2020. The weighted average discount rate used to determine the lease liabilities for finance leases was 6% and operating leases was 8% as of December 31, 20202021 and 2019,2020, respectively. The discount rate used for finance leases was based on the rates implicit in the leases. The discount rate used for operating leases was based on our incremental borrowing rate.
Note 14. 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 Nebraska Department of Insurance and the Vermont Department of Insurance. 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. As
The following table represents the net gains or (losses) as filed in the statutory-basis annual statement with the Nebraska Department of Insurance for American Life’s statutory net gainsLife and the Vermont Department of Insurance for the year ended December 31, 2020SRC1 and 2019 were $3,893,041 and $1,317,885, respectively.SRC3:
| | | | | | | |
(In thousands) | | | Statutory Net Income/(Loss) as of December 31, | ||||
| | | 2021 | | 2020 | ||
American Life | | | $ | (6,355) | | $ | 3,893 |
SRC1 | | | $ | (1,004) | | $ | (9,482) |
SRC3 | | | $ | (6,851) | | $ | — |
F-38
The following table represents the Capital and surplusSurplus as filed in the statutory-basis annual statement with the Nebraska Department of Insurance for American Life and the Vermont Department of Insurance for SRC1 and SRC3:
| | | | | | | |
(In thousands) | | | Statutory Capital and Surplus as of December 31, | ||||
American Life | | | $ | 74,011 | | $ | 77,447 |
SRC1 | | | $ | 8,415 | | $ | 5,518 |
SRC3 | | | $ | 3,150 | | $ | - |
The following table represents the premiums sales as filed in the statutory-basis annual statement with the Nebraska Department of December 31, 2020 and 2019 was $77,446,537 and $19,507,325, respectively. The increase in capital and surplus ofInsurance for American Life was due to capital contributions from Midwest to American Lifeand the Vermont Department of $55.0 million during 2020. The net gain was primarily due to the ceding commission and reserve adjustments earned on the Ironbound, SDA, US Alliance,Insurance for SRC1 and Crestline Re SP 1 reinsurance transactions; offset by continuing expenses incurred to provide services on the new software and related technology to distribute products through national marketing organizations. The MYGA sales began late in January 2019 with $145,747,737 of face amount of MYGA policies and $15,616,831 of face amount of FIA policies issued during 2019. MYGA and FIA sales were $114,661,090 and $300,900,211, respectively with an additional $2,632,158 of MYGA and $39,930,262 of FIA sales were pending as of December 31, 2020.SRC3:
| | | | | | | |
| | | Premiums Sales as of December 31, | ||||
(In thousands) | | | 2021 | | 2020 | ||
American Life | | | $ | 107,767 | | $ | 39,934 |
SRC1 | | | $ | 37,764 | | $ | 147,502 |
SRC3 | | | $ | 88,704 | | $ | — |
State insurance laws require American Life to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiary is subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from its domiciliary insurance regulatory authorities. American Life is also subject to risk-based capital (“RBC”) requirements that may further affect its ability to pay dividends. American Life’s statutory capital and surplus atas of December 31, 20202021 and 2019,2020, exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements.requirements as of those dates.
As of December 31, 2020, American Life had an invested asset that was impaired as a result of the fair market of the underlying collateral being valued less that the book value. This was a non-admitted asset for statutory accounting.accounting purposes. This asset was held in our modified coinsurance account for Ironbound so it was passed through to the third-party reinsurer through as a reduction of the investment income earned by the third-party reinsurer. As of March 31, 2021, this invested asset was sold for a loss of $2.4 million that was passed through to the third-party reinsurer as a reduction of its investment income earned.
As of December 31, 20202021 and 2019,2020, American Life did not hold any participating policyholder contracts where dividends were required to be paid.
Note 15. Third-party Administration
The Company commenced its third-party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to non-affiliated 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. TPA fee income earned for TPA administration duringservices for the year ended December 31, 2021 and 2020 were $523,000 and 2019 were $142,222 and $43,300,$142,000, respectively.
Note 16. Reverse Stock Split
On August 10, 2020, Midwest filed Articles of Amendment of Amended and Restated Articles of Incorporation (“Amendment”) that changed the total number of shares that the Company is authorized to issue to 22,000,00022 million shares of common stock, of which
F-36
20,000,000 20 million were designated as voting common stock with a par value of $0.001 per share and 2,000,0002 million designated as non-voting common stock with a par value of $0.001 per share. The Amendment also provides for 2,000,0002 million shares of preferred stock with a par value of $0.001 per share. The Amendment provided that upon effectiveness, each 500 shares of voting common stock either issued or outstanding would be converted into one1 share of voting common stock through a reverse stock split. Fractional shares were not issued in connection with the reverse stock split but were paid out in cash. The Company paid approximately $175,000 for those fractional shares and is now holding treasury stock represented by that amount. Outstanding shares as of December 31, 2020 and 2019, were 3,737,564 and 2,042,670, respectively. The effective date, August 27, 2020, for the reverse stock split was retrospectively applied to these financial statements. Outstanding shares of voting common stock as of December 31, 2021 and 2020, were 3,737,564.
F-39
Note 17. Capital Raise
On December 17,21, 2020, Midwest announced that it pricedcompleted a public offering of 1,000,0001 million shares of its voting common stock offered by the Company at a price to the public of $70.00 per share. The Midwest voting common stock was concurrently approved for listing on the Nasdaq Capital Market under the ticker symbol “MDWT.” The offering closed on December 21, 2020.
A registration statement relating to this offering was declared effective by the Securities and Exchange Commission (the “SEC”) on December 16, 2020. The offering was made only by means of a prospectus.
Midwest raised $70,000,000$70.0 million of gross proceeds from the capital raisepublic offering and incurred dealcommissions and expenses of approximately $4,636,102$6.0 million that waswere offset against those proceeds.
Note 18. Equity
Preferred stock
As of December 31, 20202021 and 2019,2020, the Company had 2,000,0002 million shares of preferred stock authorized but noneNaN were issued or outstanding.
Common Stock
The voting common stock is traded on the National Association of Securities Dealers (“NASDAQ”)The Nasdaq Capital Market under the symbol “MDWT”.“MDWT.” Midwest has authorized 20 million shares of voting common stocks par value is $0.001stock and has authorized 20,000,000 shares.2 million shares of non-voting common stock. As of December 31, 20202021 and 2019,2020, Midwest had 3,737,564 and 2,042,670, respectively, shares of voting common stock issued and outstanding. As of those dates, there were 0 shares of Midwest’s non-voting common stock issued or outstanding.
Midwest holds treasuryapproximately 4,500 shares of voting common stock of approximately $175,000in its treasury due to the reverse stock split discussed in Note 16 above.
Additional paid-in capital
Additional paid-in capital is primarily comprised of the cumulative excess cash that exceeds the par value received by the Company in conjunction with past issuances of Common Stockits shares. It also is increased by the amortization expense of the consideration calculated at inception of the stock option grantgrants as discussed in Note.Note 10 – Long-Term Incentive PlanPlans above.
Accumulated Other Comprehensive Income (Loss)(AOCI)
AOCI represents the cumulative OCIOther Comprehensive Income (OCI) items that are reported separate from net incomeloss and detailed on the Consolidated Statements of Comprehensive Income.Loss. AOCI includes the unrealized gains and losses on investments and DAC, net of offsets and taxes and a note receivable paid-in-kind (“PIK”) interest accrued, net of taxes.
F-37
The balance of and changes in each component of AOCI as of and for the years ended December 31, are as follows:
| | | | | | | | | | | | | | | | |
| Unrealized |
| Unrealized |
| Accumulated other | |||||||||||
Balance at December 31, 2018 | $ | (1,818,014) | | $ | — | | $ | (1,818,014) | ||||||||
Other comprehensive income before reclassificaitons |
| 2,645,015 | |
| — | |
| 2,645,015 | ||||||||
(In thousands) | Unrealized |
| Unrealized |
| Accumulated other | |||||||||||
Balance at December 31, 2019 | $ | 474 | | $ | 146 | | $ | 620 | ||||||||
Other comprehensive income before Reclassifications |
| 7,398 | | | — | |
| 7,398 | ||||||||
Unrealized gains on foreign currency | | — | | | 146,185 | | | 146,185 | | — | | | (146) | | | (146) |
Less: Reclassification adjustments for losses realized in net income | | (353,602) | | | — | | | (353,602) | | (1,441) | | | — | | | (1,441) |
Balance at December 31, 2019 | | 473,399 | | | 146,185 | | | 619,584 | ||||||||
Other comprehensive income (loss) before reclassificaitons, net of tax | | 7,398,432 | | | — | | | 7,398,432 | ||||||||
Unrealized gains on foreign currency | | — | | | (146,185) | | | (146,185) | ||||||||
Balance at December 31, 2020 | | 6,431 | | | — | | | 6,431 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax | | (1,422) | | | — | | | (1,422) | ||||||||
Less: Reclassification adjustments for losses realized in net income, net of tax | | (1,441,264) | | | — | | | (1,441,264) | | (2,375) | | | — | | | (2,375) |
Balance at December 31, 2020 | $ | 6,430,567 | | $ | — | | $ | 6,430,567 | ||||||||
Balance, December 31, 2021 | $ | 2,634 | | $ | — | | $ | 2,634 |
F-40
Note 19. Deferred Acquisition Costs
The following table represents a rollforwardroll forward of DAC, net of reinsurance:
| | |
| DAC | |
Balance at December 31, 2019 | | — |
Additions | | 13,919,206 |
Amortization | | (670,233) |
Interest | | 138,295 |
Impact of unrealized investment losses | | 69,035 |
Balance at December 31, 2020 | $ | 13,456,303 |
| | | | | | |
(In thousands) |
| December 31, 2021 | | December 31, 2020 | ||
Beginning balance | | $ | 13,456 | | $ | 0 |
Additions | | | 13,402 | | | 13,919 |
Amortization | | | (2,886) | | | (670) |
Interest | | | 632 | | | 138 |
Impact of unrealized investment losses | | | (74) | | | 69 |
Ending Balance | | $ | 24,530 | | $ | 13,456 |
Note 20. Related Party
Crestline
On April 24, 2020, we entered into a Securities Purchase Agreement with Crestline Assurance Holdings LLC (“Crestline”) an institutional alternative investment management firm under which we issued 444,444 shares of our voting common stock to Crestline. We contributed $5.0 million of the net proceeds to American Life and used $3.3 million of the proceeds to capitalize Seneca Re and its first protected cell. We also entered into a Stockholders Agreement along with Xenith and Vespoint that grants Crestline certain rights. Also, Douglas K. Bratton, a principal of Crestline, was appointed as a director of both our board of directors and the American Life board of directors.
In addition, on April 24, 2020, American Life entered into a three-year master letter agreement and related reinsurance, trust and asset management agreement with Seneca Re and a Crestline affiliate regarding the flow of annuity reinsurance and related asset management, whereby Crestline agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its MYGA and quota share percentage of 40% of American Life’s FIA products. The Crestline affiliate contributed $40.0 million of assets to capitalize SRC2 now known as Crestline Re SP1 (“Crestline SP1”). Through December 31, 2021, American Life had ceded $227.2 million face amount of annuities to Crestline SP1. American Life received total ceding commissions of $12.9 million and expense reimbursements of $24.1 million in connection with these transactions for the year ended December 31, 2021. Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline SP1, a segregated portfolio company of Crestline Re SPC, under which the above described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1.
The Reinsurance Agreement also contains the following agreements:
● | American Life and Crestline SP1 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and |
● | American Life and Crestline SP1 entered into a trust agreement whereby SRC2 maintains for American Life’s benefit a trust account that supports the reinsured business. |
Currently, Crestline has approximately $228 million assets under management and is a subadvisor on approximately $351 million of additional investments.
Chelsea
On June 29, 2020, Midwest’s subsidiary, American Life, purchased a 17% interest in Financial Guaranty UK Limited through an economic interest in Chelsea Holdings Midwest LLC. American Life has a note receivable from Chelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a nationally recognized statistical rating organization (“NRSRO”). This note is being carried at fair market value of $5.9 million as of December 31, 2021.
F-38F-41
MIDWEST HOLDING INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
I — Summary of Investments — Other Than Investments in Related Parties |
| FS-2 |
FS-3 | ||
FS-6 | ||
FS-7 | ||
FS-8 |
FS-1
Schedule I
Midwest Holding Inc. and Subsidiaries
Summary of Investments — Other Than Investments in Related Parties
December 31, 20202021
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Amount | | | | | | | | Amount | ||
| | | | | | | | Recognized in | | | | | | | | Recognized in | ||
| | Amortized | | | | | Consolidated | | Amortized | | | | | Consolidated | ||||
|
| Cost |
| Fair Value |
| Balance Sheets | ||||||||||||
(In thousands) |
| Cost |
| Fair Value |
| Balance Sheets | ||||||||||||
Type of Investment |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Fixed maturities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. government obligations | | $ | 5,744,221 | | $ | 6,164,983 | | $ | 6,164,983 | | $ | 1,855 | | $ | 1,882 | | $ | 1,882 |
Mortgage-backed securities | |
| 14,638,299 | |
| 14,757,414 | |
| 14,757,414 | |
| 55,667 | |
| 55,280 | |
| 55,280 |
Asset-backed securities | | | 216,500,672 | | | 221,773,609 | | | 221,773,609 | | | 24,675 | | | 24,951 | | | 24,951 |
Collateralized loan obligation | | | 272,446 | | | 274,523 | | | 274,523 | |||||||||
States and political subdivisions -- general obligations | |
| 106,528 | |
| 117,330 | |
| 117,330 | |
| 105 | |
| 114 | |
| 114 |
States and political subdivisions -- special revenue | |
| 5,293,365 | |
| 6,202,204 | |
| 6,202,204 | |
| 4,487 | |
| 5,612 | |
| 5,612 |
Corporate | |
| 35,392 | |
| 37,139 | |
| 37,139 | |||||||||
Term Loans | | | 268,794 | | | 267,468 | | | 267,468 | |||||||||
Trust preferred | | | 2,218,142 | | | 2,284,816 | | | 2,284,816 | | | 2,218 | | | 2,237 | | | 2,237 |
Corporate | |
| 124,654,841 | |
| 125,863,002 | |
| 125,863,002 | |||||||||
Total fixed maturities | | $ | 369,156,068 | | $ | 377,163,358 | | $ | 377,163,358 | |||||||||
Redeemable preferred stock | | | 14,282 | | | 14,090 | | | 14,090 | |||||||||
Total fixed maturity securities | | $ | 679,921 | | $ | 683,296 | | $ | 683,296 | |||||||||
Mortgage loans on real estate, held for investment | | | 94,989,970 | | | — | | | 94,989,970 | | | 183,203 | | | 183,203 | | | 183,203 |
Derivatives | | | 8,532,252 | | | 11,361,034 | | | 11,361,034 | | | 18,654 | | | 23,022 | | | 23,022 |
Federal Home Loan Bank (FHLB) stock | | | 500 | | | 500 | | | 500 | |||||||||
Equity securities | | | 22,158 | | | 21,869 | | | 21,869 | |||||||||
Other invested assets | | | 21,897,130 | | | 21,897,130 | | | 21,897,130 | | | 34,491 | | | 35,293 | | | 35,293 |
Investment escrow | | | 3,174,047 | | | 3,174,047 | | | 3,174,047 | | | 3,611 | | | 3,611 | | | 3,611 |
Preferred stock | | | 3,897,980 | | | 3,897,980 | | | 3,897,980 | | | 14,885 | | | 18,686 | | | 18,686 |
Notes receivable | | | 5,665,487 | | | 5,665,487 | | | 5,665,487 | | | 5,960 | | | 5,960 | | | 5,960 |
Policy loans | |
| 45,573 | | | — | | | 45,573 | |
| 87 | | | 87 | | | 87 |
Total Investments | | $ | 507,358,507 | | | 423,159,036 | | $ | 518,194,579 | | $ | 963,470 | | | 975,527 | | $ | 975,527 |
FS-2
Schedule II
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Parent
Balance Sheets
| | | | | | |
| | As of December 31, | ||||
(In thousands) |
| 2021 |
| 2020 | ||
Assets: | | | | | | |
Investment in subsidiaries (1) | | $ | 79,532 | | $ | 78,736 |
Cash and cash equivalents | |
| 7,540 | |
| 7,682 |
Notes receivable | | | 31 | | | 29 |
Property and equipment, net | |
| 334 | |
| 39 |
Right of use assets | | | 2,360 | | | 337 |
Other assets | |
| 3,257 | |
| 1,590 |
Total assets | | $ | 93,054 | | $ | 88,413 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Notes payable | |
| 500 | |
| 500 |
Lease liability | | | 2,364 | | | 386 |
Accounts payable and accrued expenses | |
| 4,434 | |
| 1,197 |
Total liabilities | |
| 7,298 | |
| 2,083 |
Stockholders’ Equity: | |
|
| |
|
|
Preferred stock, $0.001 par value; authorized 2,000,000 shares; 0 shares issued and outstanding as of December 31, 2021 or December 31, 2020 | |
| — | |
| — |
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 shares issued and outstanding as of December 31, 2021 and 2020, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; 0 shares issued and outstanding December 31, 2021 and 2020, respectively | |
| 4 | |
| 4 |
Additional paid-in capital | |
| 138,452 | |
| 133,592 |
Treasury stock | | | (175) | | | (175) |
Accumulated deficit | |
| (70,159) | |
| (53,522) |
Accumulated other comprehensive loss | |
| 2,634 | |
| 6,431 |
Total Midwest Holding Inc.'s stockholders' equity | | | 70,756 | | | 86,330 |
Noncontrolling interest | |
| 15,000 | |
| — |
Total stockholders' equity | | $ | 85,756 | | $ | 86,330 |
Total liabilities and stockholders' equity | | | 93,054 | | | 88,413 |
| | | | | | |
| | As of December 31, | ||||
|
| 2020 |
| 2019 | ||
Assets: | | | | | | |
Investment in subsidiaries (1) | | $ | 78,735,693 | | $ | 14,417,498 |
Preferred stock | | | — | | | 500,000 |
Cash and cash equivalents | |
| 7,681,529 | |
| 4,446 |
Notes receivable | | | 28,750 | | | — |
Property and equipment, net | |
| 38,651 | |
| 30,717 |
Right of use assets | | | 337,406 | | | 446,835 |
Other assets | |
| 1,590,292 | |
| 51,245 |
Total assets | | $ | 88,412,321 | | $ | 15,450,741 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Notes payable | |
| 500,000 | |
| 500,000 |
Lease 1iability | | | 386,119 | | | 500,952 |
Accounts payable and accrued expenses | |
| 1,196,703 | |
| 291,041 |
Total liabilities | |
| 2,082,822 | |
| 1,291,993 |
Stockholders’ Equity: | |
|
| |
|
|
Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of December 31, 2020 or December 31, 2019 | |
| — | |
| — |
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 and 2,042,670 shares issued and outstanding as of December 31, 2020 and 2019, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding at December 31, 2020 or 2019 | |
| 3,738 | |
| 2,042 |
Additional paid-in capital | |
| 133,592,605 | |
| 54,494,355 |
Treasury stock | | | (175,333) | | | — |
Accumulated deficit | |
| (53,522,078) | |
| (41,081,710) |
Accumulated other comprehensive loss | |
| 6,430,567 | |
| 619,584 |
Total Midwest Holding Inc.'s stockholders' equity | | | 86,329,499 | | | 14,034,271 |
Noncontrolling interest | |
| — | |
| 124,477 |
Total stockholders' equity | | $ | 86,329,499 | | $ | 14,158,748 |
Total liabilities and stockholders' equity | | | 88,412,321 | | | 15,450,741 |
FS-3
Schedule II (Continued)
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Parent
Statements of Comprehensive Loss
| | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Income: |
| |
|
| |
|
| |
|
| |
|
Investment loss, net of expenses | | $ | (168) | | $ | (270) | | $ | — | | $ | — |
Miscellaneous income | |
| 31,798 | |
| 48,368 | |
| 23 | |
| 32 |
| |
| 31,630 | |
| 48,098 | |
| 23 | |
| 32 |
Expenses: | |
|
| |
|
| |
|
| |
|
|
General | |
| 968,789 | |
| 1,261,131 | |
| 7,193 | |
| 969 |
| | | | | | | | | | | | |
Loss from continuing operations before taxes | |
| (937,159) | |
| (1,213,033) | |
| (7,170) | |
| (937) |
Income tax expense (See Note 7) | |
| 37,444 | |
| — | ||||||
Income tax expense (See Note 8) | |
| (4,766) | |
| 37 | ||||||
Loss before equity in loss of consolidated subsidiaries | |
| (899,715) | |
| (1,213,033) | |
| (11,936) | |
| (900) |
Equity in loss of consolidated subsidiaries | |
| (11,540,653) | |
| (4,396,148) | |
| (4,701) | |
| (11,540) |
Net loss | | | (12,440,368) | | | (5,609,181) | | | (16,637) | | | (12,440) |
Less: Gain attributable to noncontrolling interest | | | — | | | (124,477) | | | — | | | — |
Net loss | | | (12,440,368) | | | (5,733,658) | | | (16,637) | | | (12,440) |
Comprehensive Income: | |
|
| |
|
| |
|
| |
|
|
Unrealized gains on investments arising during period, net of tax | |
| 7,398,432 | |
| 2,645,015 | |
| (1,422) | |
| 7,398 |
Unrealized gains on foreign currency, net of tax | | | (146,185) | | | 146,185 | | | — | | | (146) |
Less: reclassification adjustment for net realized gains on investments | |
| (1,441,264) | |
| (353,602) | |
| (2,375) | |
| (1,441) |
Other comprehensive income, net of tax | |
| 5,810,983 | |
| 2,437,598 | |
| (3,797) | |
| 5,811 |
Comprehensive loss | | $ | (6,629,385) | | $ | (3,296,060) | | $ | (20,434) | | $ | (6,629) |
FS-4
Schedule II (Continued)
Midwest Holding Inc. (Parent Company)
Condensed Financial Information of Parent
Statements of Cash Flows
| | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Cash Flows from Operating Activities: |
| |
|
| |
|
| |
|
| |
|
Net loss | | $ | (12,440,368) | | $ | (5,733,658) | | $ | (16,637) | | $ | (12,440) |
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | |
|
| |
|
| |
|
| |
|
|
Equity in net loss of consolidated subsidiaries | |
| 11,540,653 | |
| 4,396,148 | |
| 9,506 | |
| 11,541 |
Depreciation | |
| (7,934) | |
| (3,500) | |
| (295) | |
| (8) |
Preferred stock dividend | | | — | | | 845,536 | ||||||
Stock options | | | 163,664 | | | 21,745 | | | 4,982 | | | 164 |
Net transfers to noncontrolling interest | | | — | | | 124,477 | | | — | | | — |
Other assets and liabilities | |
| 84,596 | |
| 274,451 | |
| 1,525 | |
| 84 |
Net cash used by operating activities | |
| (659,389) | |
| (74,801) | |
| (919) | |
| (659) |
Cash Flows from Investing Activities: | |
|
| |
|
| |
|
| |
|
|
Purchase of preferred stock | |
| — | |
| (500,000) | |
| — | |
| — |
Net (purchases) disposals of property and equipment | |
| — | |
| — | |
| — | |
| — |
Net cash used by investing activities | |
| — | |
| (500,000) | |
| — | |
| — |
Cash Flows from Financing Activities: | |
|
| |
|
| |
|
| |
|
|
Capital contribution | |
| 79,311,805 | |
| — | |
| (14,102) | |
| 79,312 |
Repurchase of common stock | | | (70,300,000) | | | — | | | — | | | (70,300) |
Treasury stock | | | (175,333) | | | — | | | — | | | (175) |
Acquisition of noncontrolling interest | | | (500,000) | | | — | ||||||
Noncontrolling interest | | | | | | | ||||||
Note payable to American Life | |
| — | |
| 500,000 | ||||||
Capital contribution to American Life | |
| — | |
| — | ||||||
Additional capital raise related expenses | | | (121) | | | — | ||||||
Net transfers to noncontrolling interest | | | 15,000 | | | (500) | ||||||
Net cash provided by financing activities | |
| 8,336,472 | |
| 500,000 | |
| 777 | |
| 8,337 |
Net (decrease) increase in cash and cash equivalents | |
| 7,677,083 | |
| (74,801) | |
| (142) | |
| 7,678 |
Cash and cash equivalents: | |
|
| |
|
| |
|
| |
|
|
Beginning | |
| 4,446 | |
| 79,247 | |
| 7,682 | |
| 4 |
Ending | | $ | 7,681,529 | | $ | 4,446 | | $ | 7,540 | | $ | 7,682 |
| | | | | | | | | | | | |
Supplementary information | |
|
| |
|
| |
|
| |
|
|
Cash paid for taxes | | $ | 350,400 | | $ | — | | $ | — | | $ | — |
Conversion of notes payable and preferred stock | | | | | | | ||||||
Book value of note payable | | | — | | | (19,100,000) | ||||||
Book value of preferred stock | | | | | | (1,500,000) | ||||||
Common stock, note payable ($927,680) and preferred stock ($72,855) | | | — | | | 1,000,535 | ||||||
Additional paid in capital, note payable ($18,172,320) and preferred stock ($1,427,145) | | | — | | | 19,599,465 |
FS-5
Schedule III
Midwest Holding Inc. and Subsidiaries
Supplementary Insurance Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | For the Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
(In thousands) | | As of December 31, 2021 | | For the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| | Future Policy | | | | | | | | | | | | | | Death and | | | | | Future Policy | | | | | | | | | | | | | | Death and | | | | ||||
| | Benefits, | | | | | Deferred | | | | | | | Other Benefits | | | | | Benefits, | | | | | Deferred | | | | | | | Other Benefits | | | | ||||||||
| | Claims and | | | | | Gain on | | | | | Net | | and Increase | | Other | | Claims and | | | | | Gain on | | | | | Net | | and Increase | | Other | ||||||||||
| | Deposit-type | | Advance | | Coinsurance | | Premium | | Investment | | in Benefit | | Operating | | Deposit-type | | Advance | | Coinsurance | | Premium | | Investment | | in Benefit | | Operating | ||||||||||||||
|
| Contracts |
| Premiums |
| Transaction |
| Revenue |
| Income |
| Reserves |
| Expenses |
| Contracts |
| Premiums |
| Transaction |
| Revenue |
| Income |
| Reserves |
| Expenses | ||||||||||||||
Life Insurance | | $ | 610,805,948 | | $ | 2,541 | | $ | 18,198,757 | | $ | 24 | | $ | 2,362,087 | | $ | 4,890,108 | | $ | 16,547,380 | | $ | 1,088,617 | | $ | 1 | | $ | 28,589 | | $ | — | | $ | 15,737 | | $ | 9,904 | | $ | 32,030 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | For the Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
(In thousands) | | As of December 31, 2020 | | For the Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| | Future Policy | | | | | | | | | | | | | | Death and | | | | | Future Policy | | | | | | | | | | | | | | Death and | | | | ||||
| | Benefits, | | | | | Deferred | | | | | | | Other Benefits | | | | | Benefits, | | | | | Deferred | | | | | | | Other Benefits | | | | ||||||||
| | Claims and | | | | | Gain on | | | | | Net | | and Increase | | Other | | Claims and | | | | | Gain on | | | | | Net | | and Increase | | Other | ||||||||||
| | Deposit-type | | Advance | | Coinsurance | | Premium | | Investment | | in Benefit | | Operating | | Deposit-type | | Advance | | Coinsurance | | Premium | | Investment | | in Benefit | | Operating | ||||||||||||||
|
| Contracts |
| Premiums |
| Transaction |
| Revenue |
| Income |
| Reserves |
| Expenses |
| Contracts |
| Premiums |
| Transaction |
| Revenue |
| Income |
| Reserves |
| Expenses | ||||||||||||||
Life Insurance | | $ | 187,713,925 | | $ | 261 | | $ | 7,578,195 | | $ | (152) | | $ | 120,581 | | $ | 75,520 | | $ | 8,699,269 | | $ | 610,806 | | $ | 3 | | $ | 18,199 | | $ | — | | $ | 2,362 | | $ | 4,890 | | $ | 16,547 |
FS-6
Schedule IV
Midwest Holding Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Percentage |
| | | | | | | | | |
| | | | | | | | | | | | | | of Amount |
| | | | | | | | | |
| | | | | | | | Assumed | | | | | Assumed |
| | | | | | | | | | |
| | | | | Ceded to Other | | from Other | | | | | to |
| | | | | Ceded to Other | | | | |||
(In thousands) |
| Gross Amount |
| Companies |
| Net Amount | ||||||||||||||||||
Year ended December 31, 2021 |
| |
|
| |
|
| |
| |||||||||||||||
Life insurance in force | | $ | 45,930 | | $ | 44,090 | | $ | 1,840 | |||||||||||||||
| | | | | | | | | | |||||||||||||||
Life insurance premiums | | $ | 1,055 | | $ | 1,055 | | $ | — | |||||||||||||||
|
| Gross Amount |
| Companies |
| Companies |
| Net Amount |
| Net |
| | | | | | | | | | ||||
Year ended December 31, 2020 |
| |
|
| |
|
| |
|
| |
|
|
| | |
|
| |
|
| |
|
|
Life insurance in force | | $ | 92,403,000 | | $ | 90,565,000 | | $ | — | | $ | 1,838,000 |
| 0.00 | % | | $ | 92,403 | | $ | 90,565 | | $ | 1,838 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Life insurance premiums | | $ | 1,851,067 | | | 1,851,043 | | $ | — | | $ | 24 |
| 0.00 | % | | $ | 1,851 | | | 1,851 | | $ | — |
| | | | | | | | | | | | | | | | |||||||||
Year ended December 31, 2019 | |
|
| |
|
| |
|
| |
|
|
|
| | |||||||||
Life insurance in force | | $ | 103,575,000 | | $ | 101,737,000 | | $ | — | | $ | 1,838,000 |
| 0.00 | % | |||||||||
| | | | | | | | | | | | | | | | |||||||||
Life insurance premiums | | $ | 2,881,909 | | | 2,882,061 | | $ | — | | $ | (152) |
| 0.00 | % |
FS-7
Schedule V
Midwest Holding Inc. and Subsidiaries
Valuation and Qualifying Accounts
| | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(In thousands) |
| 2021 |
| 2020 | ||||||||
Accumulated Depreciation: |
| |
|
| |
|
| |
|
| |
|
Beginning of the year |
| | 975,481 |
| | 943,323 |
| | 1,023 |
| | 975 |
Depreciation expense |
| | 47,853 |
| | 40,000 |
| | 49 |
| | 48 |
Disposals |
| | — |
| | (7,842) |
| | — |
| | — |
End of the year | | $ | 1,023,334 | | $ | 975,481 | | $ | 1,072 | | $ | 1,023 |
FS-8