Note 1. Nature of Operations and SummaryBasis of Significant Accounting PoliciesPresentation

Nature of operations:Operations

Midwest Holding Inc. (“Midwest”Midwest,” “the Company,” “we,” “our,” or “the Company”“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 State of Delaware on August 27, 2020. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiary,subsidiaries, American Life & Security Corp. (“American Life”), and 1505 Capital LLC (“1505 Capital”) as well as through its sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).

American Life is a Nebraska-domiciled life insurance company that is currently licensed to sell, underwrite, and market life insurance and annuity products in 22 states and the District of Columbia.

Effective March 12, 2020, Seneca 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 March 31, 2022, 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.

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 SRC1 to a subsidiary of ORIX Corporation USA “ORIX USA”) for $15.0 million. Under the terms of the agreement, Midwest now holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, is the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital.

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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.

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On July 27, 2020, American Life 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, 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 production by providing reinsurance capacity for American Life to write certain kinds of fixed and multi-year guaranteed annuity products. Concurrently with the Reinsurance Agreement:

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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 its multi-year guaranteed annuities (“MYGA”) and a quota share percentage of 40% for American Life’s fixed indexed annuity (“FIA”) products. The 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 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.

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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 of $37.5 million and net reserves of $34.8 million for the modified coinsurance account. The amount paid to the Modified Deposit Account from AEG was $2.4 million.

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On November 10, 2021, Midwest purchased 100% ownership of an intermediary holding company for $5.7 million, which company there of 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.

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Management evaluates the Company as 1 reporting segment in the life insurance industry. The Company has made several acquisitionsis 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. American Life’s legacy product offerings consisted of a multi-benefit life insurance companiespolicy that combined cash value life insurance with a tax deferred annuity and related entities since 2008, all of which have been merged intoa single premium term life product. American Life presently offers 6 annuity products: 2 MYGAs, 2 FIAs, and 2 bonus plans associated with the Company or into American Life.FIA product. It is not presently offering any traditional life insurance products.

Basis of presentation:The accompanying unaudited consolidatedPresentation

These financial statements have been prepared in accordance with United Statesinclude all adjustments, consisting of America generally accepted accounting principles (“GAAP”)only normal recurring adjustments, which are necessary to make our financial position at March 31, 2022 and the results of our operations for interim financial informationthe three months ended March 31, 2022 and with2021 not misleading. As permitted by the instructions fromrules and regulations of the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they, the accompanying condensed consolidated financial statements do not include all of the information and notesdisclosures normally required by GAAP for complete financial statements. Therefore, the information containedgenerally accepted accounting principles in the Notes to Consolidated Financial StatementsUnited States of American (“GAAP”). These financial statements should be read in conjunction with the consolidated financial statements included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), should be read in connection2021 on file with the reading of these interim unauditedSEC. In our opinion, the condensed consolidated financial statements.

In the opinion of management, these statements include all normal recurring adjustments necessary forare a fair presentation of the Company’s results. Operatingfinancial position, results of operations, changes in stockholders’ equity and cash flows for the nine month periodperiods presented. The results of operations for three months ended September 30, 2017,March 31, 2022 are not necessarily indicative of the results that mayof operations to be expected for the full fiscal year ending December 31, 2017. Most2022.

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 Company’s liquid assetsfollowing accounting policies, judgments and estimates are held in an insurance subsidiary and under existing law, the subsidiary cannot make significant payments upmost critical to the parent company, which is the Company. Accordingly, unless the Company is able to raise substantial additional capitalunderstanding of our results of operations and financial position. All intercompany accounts and transactions have been eliminated in the near term, its ability to continue as a going concern will be in jeopardy. Management hasconsolidation and certain immaterial reclassifications have been seeking to raise additional capital in order to help fund the liquidity issues that the Company addresses, but cannot assure that such additional capital will be raised during the remainder of 2017.

The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, 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.

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance to transfer 100% of the risk relatedmade to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction wasprior period results to provide statutory capital and surplus for American Life and has minimal effect on GAAP financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. American Life had more than one offer to assume this business. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liabilityconform to the policyholders; the liabilities and obligations associatedcurrent period’s presentation with the reinsured blocksno impact on results of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $9,003,663 as of September 30, 2017. We transferred $9,705,063 of GAAP net adjusted reserves to US Alliance for cash of $7,153,663 which was net of a ceding allowance of $1,850,000 which is treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life will cede $658,600 of annual GAAP revenues and $1,317,300 of statutory revenues. US Alliance assumes all responsibilities for incurred claims, surrenders and commission from the effective date. See Note 6.operations or total stockholders’ equity.

Investments:Fixed Maturities

All fixed maturities and a portion of the equity securities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value as of the financial statement date. Bond premiumsPremiums and discounts on fixed maturity debt instruments are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in accumulated other comprehensive loss.(loss) income.

Declines in the fair value of available for saleavailable-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, 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.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security, and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income 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 the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. No other-than-temporary impairments wereThe Company had 0 impairment recognized during the nine months ended September 30, 2017 or 2016.as of March 31, 2022 and as of December 31, 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-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 funds withheld and modified coinsurance provisions. In Modco, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In 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 Statements of 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 and disposition of collateral. These evaluations are revised as conditions change and new information becomes available. NaN such valuation allowance was established for the as of March 31, 2022 and as of December 31, 2021.

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

with warrants bearing no initial assigned value. American Life subsequently created a special purpose vehicle, 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 ACH. American Life is carrying the preferred equity and warrants at a market value in USD of $10.1 million as of March 31, 2022 and $8.7 million as of December 31, 2021. The change in market value of $1.7 million for the preferred stock and warrants of $1.7 million was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $1.7 million of investment income $438,631 was attributable to the noncontrolling interest.

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Notes receivable

The Company held notes receivable carried at fair value of $6.0 million as of March 31, 2022, and December 31, 2021, between American Life and a related party. 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. This note matures on June 18, 2050.

Policy loans: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. NoNaN 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.

Short-term investments:Short-term investments are stated at costCash and consist of certificates of deposit. At September 30, 2017 and December 31, 2016 the Company did not have any short-term investments.cash equivalents

Real estate, held for investment:Real estate, held for investment is comprised of ten condominiums in Hawaii. Real estate is carried at depreciated cost. Depreciation on residential real estate is computed on a straight-line basis over 50 years.

Cash:The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At September 30, 2017As of March 31, 2022 and December 31, 2016,2021, the Company held approximately GBP 131,078 and GBP 2.2 million in several of our custody accounts, respectively. The USD equivalent held was approximately $172,581 and $3.0 million, respectively. As of March 31, 2022 and December 31, 2021, the Company held approximately Euro 1.7 and 9.3 million, respectively. The USD equivalent held was approximately $1.9 million and $10.6 million, respectively. For the three months ended March 31, 2022 and 2021, we had no cash equivalents.realized losses of approximately $108,000 and $75,000 respectively, related to the change in the foreign currency exchange rate of the GBP and Euro that were recorded in realized (losses) gains on investments in the Consolidated Statements of Comprehensive Loss. The Company had 0 money market investments as of March 31, 2022 and December 31, 2021.

Deferred acquisition costs: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 expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminatedperformed a recoverability analysis during the $437,620fourth quarter of 2021 and determined that all DAC that was associated with the Great Plains Life blockbalances were recoverable as of business that was included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. TheDecember 31, 2021.The Company determined that no other events occurred in the ninethree months ended September 30, 2017 that suggest a review should be undertaken.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The following table provides information about deferred acquisition costs for the periods ended September 30, 2017 and DecemberMarch 31, 2016, respectively.

Value of business acquired:Value of business acquired (“VOBA”) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies.

Recoverability of value of business acquired is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminated $1,085,811 of the unamortized VOBA associated with the Great Plains Life and First Wyoming Life blocks of business that were included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. The Company determined that no other events occurred in the nine months ended September 30, 20172022 that suggest a review should be undertaken.

Property and equipment:equipment

Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years.

Depreciation expense totaled $16,740$9,964 and $20,275$12,334 for the three months ended September 30, 2017March 31, 2022 and 2016, respectively. Depreciation expense totaled $50,387 and $81,366 for the nine months ended September 30, 2017 and 2016,2021, respectively. Accumulated depreciation net of disposals totaled $882,778$1.1 million and $961,864$1.1 million as of September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively.

During the first quarter of 2021, the Company began the implementation of a new cloud-based enterprise resource planning and enterprise performance management system. The Company is capitalizing related consultation and support expenses relating to this system and began amortizing these fees over a period of five years starting in 2022. 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). At March 31, 2022 and December 31, 2021, the Company had capitalized approximately $1.4 million of expenses incurred. This software was implemented in the first quarter of 2022 with amortization expense of approximately $58,000 recognized for the three months ended March 31, 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. Management hasThe Company determined that no such events occurred that in the nine months ended September 30, 2017 thatperiods covered by the Consolidated Financial Statements would indicate the carrying amounts may not be recoverable.

Reinsurance: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 consolidated balance sheetsConsolidated Balance Sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no0 allowances established as of September 30, 2017March 31, 2022 and 2021 or December 31, 2016.2021,.

We seek 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 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 9 below for further discussion of our reinsurance activities.

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 (such as posting substantial 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.

Midwest Holding Inc.formed Seneca Re in early 2020. Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Subsidiaries
NotesSeneca Incorporated Cell, LLC 2021-03 (“SRC3”), which are consolidated in our financial statements. Midwest sold 70% ownership of SRC1 to a ORIX USA on December 30, 2021 and retained 30% ownership. Midwest maintains control over SRC1 so we are still consolidating SRC1 in our financial statements.

Some reinsurers are not and may not be “accredited” or qualified as reinsurers under Nebraska 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 American Life 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 Nebraska insurance investment statutes and applicable insurance regulations.

American Life currently has treaties with several third-party reinsurers and one related party reinsurer. 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. 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.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately $923,000,  and gains of $2.5 million, and $161,000 as of March 31, 2022 and 2021, and December 31, 2021, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized gains on the assets held by American Life were offset by gains in the embedded derivative of $1.1 million, $400,000 and $2.7 million as of March 31, 2022 and 2021, and December 31, 2021, respectively. We account for this unrealized gain (loss) pass-through by recording equivalent realized gain or (loss) on our Consolidated Financial Statements – Continuedof Comprehensive Loss and in amount payable to our third-party reinsurers on the Consolidated balance sheets. For further discussion see Note 5. Derivative Instruments below.

Benefit reserves:reserves

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.

Policy claims: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:contracts

Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders,annuities, premium deposit funds and supplemental contracts without life contingencies.

Deferred gain on coinsurance transactions

American Life has entered into several reinsurance contracts where it has earned or 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 and administrative expenses from reinsurance transactions that represent recovery of acquisition costs. These remittances first reduce the DAC associated with the reinsured blocks of business with the remainder being included in the deferred gain on coinsurance transactions that is also being amortized.

Income taxes: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 2014.2019. The Company is not currently under examination for any open years for income taxes. 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 no0 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. The Company had no accruals for payments of interest and penalties at September 30, 2017 and December 31, 2016.

Revenue recognition and related expenses:Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.expenses

Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and are included in future insurance policy benefits.deposit-type liabilities. 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.

Amounts received under our multi-benefit policy form are allocated to theRevenues on traditional life insurance portionproducts consist of the multi-benefit life insurance arrangementdirect and the annuity portion based upon the signed policy.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 premium paying period using the net level premium method. Traditionalexpected life insurance products are treated as long duration contracts, which generally remain in force for the lifetime of the insured.annuity contracts.

Service fee revenue is comprised of third-party administration (“TPA”) fees and investment management fees:

Comprehensive loss:loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss).loss. Other comprehensive income (loss)loss 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 FW and Modco 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.

CommonAssets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately $923,000, $2.5 million and preferred stock$161,000 as of March 31, 2022 and earnings (loss) per share:The par value per common share is $0.001 with 120,000,000 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. At September 30, 20172021, and December 31, 2016,2021, respectively. The terms of the Company had 22,764,294 and 22,558,956 voting common shares issued and outstanding, respectively.

At December 31, 2016,contracts with the Company had 1,179 warrants outstanding. The warrants were exercisable through December 31, 2016 for 10 shares of voting common stock per warrant at an exercise price of $6.50 per share. No warrants were exercised during 2016 and are now expired.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The Class A preferred shares are non-cumulative, non-voting and convertible bythird-party reinsurers provide that the holder to voting common shares at a rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). There is no stated dividend ratechanges in unrealized gains on the Class A shares, but the holders of Class A shares will receive a dividend on each outstanding share of Class A preferred stock in an amount equalportfolios accrue to the amountthird-party reinsurers. Accordingly, the change in unrealized gains on the assets held by American Life were offset by gains in the embedded derivative of the dividend payable on each share$1.1 million, $400,000, and $2.7 million as of common stock. The par value per preferred Class A share is $0.001 with 2,000,000 shares authorized. At September 30, 2017March 31, 2022 and 2021, and December 31, 2016, the Company had 74,159 Class A preferred shares issued2021, respectively. We account for this unrealized gain (loss) pass-through by recording equivalent realized gains or (losses) on our Consolidated Statements of Comprehensive Loss and outstanding.

The Class B preferred shares were non-cumulative, non-voting and convertible by the holder or the Companyin amount payable to voting common shares after May 1, 2017 at a rate of 2.0 common shares for each preferred share. The par value per preferred share was $0.001 with 1,000,000 shares authorized. The stated annual dividend rateour third-party reinsurers on the Class B preferred shares was 7%. Dividends totaling $30,543 and $43,120 were paid asConsolidated Balance Sheets. For further discussion see Note 5. Derivative Instruments below

LossBasic income (loss) per share attributable to the Company’s common stockholders were computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding duringfor the three months ended September 30, 2017March 31, 2022 and 2016 were 22,764,2942021 was $0.05 and 22,558,956 shares,($0.43), respectively, which included the aforementioned gains of $1.1 million and of $400,000, respectively.

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 weighted average numberamendments 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 shares outstandingaccounting 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. This amendment was adopted effective January 1, 2021 with no impact to our financial 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 nine months ended September 30, 2017preliminary project and 2016 were 22,763,542the post-implementation stage are expensed as the activities are performed. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and 21,312,581 shares, respectively.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. As of March 31, 2022 and December 31, 2021, the Company had analyzed and capitalized $1.4 million of cloud-based software cost.

ReclassificationFuture adoption of New Accounting Standards

In August 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (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 prior period information:Reclassifications have been made onseparate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the Consolidated Statementamortization of Comprehensive IncomeDAC for the threevirtually all long duration contracts, and nine months ended September 30, 2016. These reclassifications do not impact the overall Net loss or Net loss per common share lines(iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new standard becomes effective after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024 for companies eligible as smaller reporting companies. Early application of the Consolidated Statementamendments in Update 2018-12 is permitted. We anticipate that the adoption of Comprehensive Income forASU 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 three and nine months ended September 30, 2016.impact at this time of ASU No. 2018-12 as we are still in the process of evaluating the standard.

New accounting standards:​

In June 2016,November 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 326, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)Instruments—Credit Losses. The amendments in this update include items brought to the FASB’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 the new guidance,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, 2019. We are currently evaluating the impact2022. 

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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 new standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02,Leases(Topic 842)liabilities and obligations under substantially all of American Life’s life, annuity and health policies (“Policies”). The guidance in this ASU supersedesAgreement closed on December 10, 2018.

After 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 new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginningclosing of the earliest comparative period presentedReinsurance Agreement, Unified prepared and delivered certificates of assumption and other materials to policyholders of American Life in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoptionorder to effect an assumption of the new standard on our consolidated financial statements.

In January 2016,Policies by 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. Unified estimated that 80% to 90% of the FASB issued ASU 2016-1,Financial Instruments—Overall(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes how entities accountpolicyholder would convert to assumptive, where American Life would no longer be responsible for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be requiredobligations to measure these investments at fair value atthe policyholders, by the end of each reporting period2019.

The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was $3.5 million (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the Statutory Reserves and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.