Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 20222023

or

    

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-39812

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, Street, Suite 400, Lincoln, NE

68506

(Address of principal executive offices)

(Zip           (Zip Code)

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

Title of each class:

Trading Symbol(s):Name of Each Exchange on Which Registered

Voting Common Stock, $0.001 par value

MDWTThe NASDAQ Stock Market, LLC

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 if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405232.405c 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company”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.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Act). Yes No

AsThe aggregate market value of August 15, 2022, there were 3,737,564the shares of the registrant’s Voting Common Stock,common stock held by non-affiliates as of July 31, 2023 was $99.7 million calculated by reference to the average of the bid and ask price of such voting common stock on July 31, 2023.

As of August 11, 2023, there were 3,744,645 shares of voting common stock, par value $0.001 per share, issued and outstanding.outstanding.

1

Table of Contents

MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item No.

    

Item Caption

    

Page

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Comprehensive Income (Loss)(Loss)

4

 

Consolidated Statements of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

4045

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

6164

 

Item 4.

Controls and Procedures

6164

PART II – OTHER INFORMATION

Item No.

    

Item Caption

    

Page

Item 1.

Legal Proceedings

6264

Item 1A.

Risk Factors

6264

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

6264

 

Item 3.

Defaults Upon Senior Securities

6264

 

Item 4.

Mine Safety Disclosures

6264

 

Item 5.

Other Information

6264

 

Item 6.

Exhibits

6364

 

Signatures

6468

2

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIDWEST HOLDING INC.

CONSOLIDATED BALANCE SHEETS

    

June 30, 2022

    

December 31, 2021

(In thousands, except share information)

(Unaudited)

Assets

 

  

 

  

Fixed maturities, available for sale, at fair value
(amortized cost: $923,063 and $679,921, respectively) (See Note 4)

$

894,471

$

683,296

Mortgage loans on real estate, held for investment

 

193,902

 

183,203

Derivative instruments (See Note 5)

7,190

23,022

Equity securities, at fair value (cost: $12,762 in 2022 and $22,158 in 2021)

11,925

21,869

Other invested assets

71,170

35,293

Investment escrow

1,491

3,611

Federal Home Loan Bank (FHLB) stock

500

500

Preferred stock

22,072

18,686

Notes receivable

6,111

5,960

Policy loans

 

22

 

87

Total investments

 

1,208,854

 

975,527

Cash and cash equivalents

 

128,964

 

142,013

Deferred acquisition costs, net

33,164

24,530

Premiums receivable

359

354

Accrued investment income

18,297

13,623

Reinsurance recoverables (See Note 9)

24,121

38,579

Intangible assets

 

700

 

700

Property and equipment, net

 

1,823

 

386

Operating lease right of use assets

2,239

2,360

Receivable for securities sold

0

19,732

Other assets

 

17,454

 

2,113

Total assets

$

1,435,975

$

1,219,917

Liabilities and Stockholders’ Equity

 

  

 

  

Liabilities:

 

  

 

  

Benefit reserves

$

12,879

$

12,941

Policy claims

 

3,232

 

237

Deposit-type contracts (See note 11)

 

1,283,660

 

1,075,439

Advance premiums

 

1

 

1

Deferred gain on coinsurance transactions

 

32,203

 

28,589

Lease liabilities (See Note 13):

Operating lease

2,249

2,364

Payable for securities purchased

2,770

5,546

Other liabilities

34,485

9,044

Total liabilities

 

1,371,479

 

1,134,161

Stockholders’ Equity:

 

 

Preferred stock, $0.001 par value; authorized 2,000,000 shares; 0 shares issued and outstanding as of June 30, 2022 or December 31, 2021

 

 

Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; 0 shares issued and outstanding June 30, 2022 and December 31, 2021, respectively

 

4

 

4

Additional paid-in capital

 

138,838

 

138,452

Treasury stock

(175)

(175)

Retained earnings

 

(60,707)

 

(70,159)

Accumulated other comprehensive income (loss)

 

(25,877)

 

2,634

Total Midwest Holding Inc.'s stockholders' equity

52,083

70,756

Noncontrolling interests

12,413

15,000

Total stockholders' equity

 

64,496

 

85,756

Total liabilities and stockholders' equity

$

1,435,975

$

1,219,917

See Notes to Consolidated Financial Statements.

3

Table of Contents

MIDWEST HOLDING INC.Midwest Holding Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSConsolidated Balance Sheets

(Unaudited)June 30, 2023 and December 31, 2022

Three months ended June 30, 

Six months ended June 30, 

(In thousands, except per share data)

    

2022

    

2021

    

2022

    

2021

Revenues

  

 

  

  

 

  

Investment income, net of expenses

$

10,541

 

3,220

$

16,783

6,107

Net realized gain (loss) on investments (See Note 4)

 

(12,636)

 

4,060

 

(18,810)

(589)

Amortization of deferred gain on reinsurance transactions

1,043

588

2,012

1,048

Service fee revenue, net of expenses

416

672

1,514

1,110

Other revenue

 

514

 

358

 

962

607

Total revenue

 

(122)

 

8,898

 

2,461

 

8,283

Expenses

 

  

 

  

 

  

 

  

Interest credited

 

(5,496)

 

3,931

 

(12,170)

1,585

Benefits

994

994

Amortization of deferred acquisition costs

 

1,052

 

524

 

1,902

1,027

Salaries and benefits

 

4,298

 

4,514

 

8,615

7,441

Other operating expenses

 

(2,240)

 

4,174

 

(4,060)

2,645

Total expenses

 

(1,392)

 

13,143

 

(4,719)

 

12,698

Net income (loss) before income tax expense

 

1,270

 

(4,245)

 

7,180

 

(4,415)

Income tax benefit (expense) (See Note 8)

 

2,125

 

(747)

 

(2,597)

(2,179)

Net income (loss) after income tax benefit (expense)

3,395

(4,992)

4,583

(6,594)

Less: Income attributable to noncontrolling interest

(5,871)

(4,869)

Net income (loss) attributable to Midwest Holding Inc.

9,266

(4,992)

9,452

(6,594)

Comprehensive income (loss):

 

  

 

  

 

  

 

  

Unrealized gains (losses) on investments arising during the three months ended June 2022 and 2021, net of offsets, net of tax ($2.0 million and $120,000, respectively); unrealized gains (losses) on investments arising during the six months ended June 2022 and 2021, net of offsets, net of tax ($4.7 million and $61,000, respectively)

 

(19,666)

 

373

 

(29,369)

1,336

Less: Reclassification adjustment for net realized losses on investments, net of offsets during the three months ended June 2022 and 2021 (net of tax ($2.4 million) and $209,000, respectively); reclassification adjustment for net realized losses on investments, net of offsets during the six months ended June 2022 and 2021 (net of tax ($5.0 million) and $294,000, respectively)

 

1,369

 

(785)

 

858

(1,106)

Other comprehensive income (loss)

 

(18,296)

 

(412)

 

(28,511)

 

230

Comprehensive loss

$

(9,030)

$

(5,404)

$

(19,059)

$

(6,364)

Impairment

Total other-than-temporary impairment

534

534

Net other-than-temporary impairment loss recognized in net income

$

534

534

Income (Loss) per common share

Basic

$

2.48

$

(1.34)

$

2.53

$

(1.76)

Diluted

$

2.47

$

(1.34)

$

2.52

$

(1.76)

    

June 30, 2023

    

December 31, 2022

(In thousands, except share information)

(Unaudited)

Assets

 

  

 

  

Fixed maturities, available for sale, at fair value
(amortized cost: $1,609,005 in 2023, and $1,269,735 in 2022.
Allowance for credit losses of $8,916 in 2023.) (See Note 3)

$

1,538,912

$

1,214,635

Mortgage loans on real estate, held for investment (Allowance for credit losses of $1,493 in 2023.)

 

352,908

 

227,047

Derivative instruments (See Note 4)

36,861

15,934

Equity securities, at fair value (cost: $5,592 in 2023 and $5,592 in 2022)

5,144

5,111

Other invested assets (Allowance for credit losses of $1,343 in 2023.)

107,902

112,431

Preferred stock

33,805

31,415

Deposits and notes receivable

11,012

8,359

Policy loans

 

55

 

25

Total investments

 

2,086,599

 

1,614,957

Cash and cash equivalents

 

194,275

 

191,414

Deferred acquisition costs, net

57,604

43,433

Premiums receivable

372

362

Accrued investment income

35,050

25,165

Reinsurance recoverables (See Note 8)

39,899

20,190

Property and equipment, net

 

1,811

 

1,897

Receivable for securities sold

441

10,518

Other assets

 

11,990

 

12,495

Total assets

$

2,428,041

$

1,920,431

Liabilities and Stockholders’ Equity

 

  

 

  

Liabilities:

 

  

 

  

Benefit reserves

$

12,646

$

12,945

Deposit-type contracts (See Note 6)

 

2,218,725

 

1,743,348

Other policy-holder funds

6,474

4,105

Notes payable (See Note 7)

25,000

25,000

Deferred gain on coinsurance transactions

 

43,214

 

38,063

Payable for securities purchased

44,656

8,872

Other liabilities

48,026

53,721

Total liabilities

 

2,398,741

 

1,886,054

Stockholders’ Equity:

 

 

Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of June 30, 2023 or December 31, 2022

 

 

Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,744,645 shares issued and outstanding as of June 30, 2023, and 3,727,976 as of December 31, 2022, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding June 30, 2023 and December 31, 2022, respectively

 

4

 

4

Additional paid-in capital

 

139,085

 

138,482

Treasury stock

(175)

(175)

Accumulated deficit

 

(67,746)

 

(63,019)

Accumulated other comprehensive loss

 

(57,433)

 

(51,386)

Total Midwest Holding Inc.'s stockholders' equity

13,735

23,906

Noncontrolling interests

15,565

10,471

Total stockholders' equity

 

29,300

 

34,377

Total liabilities and stockholders' equity

$

2,428,041

$

1,920,431

See Notes to Consolidated Financial Statements.

3

Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

June 30, 2023 and 2022

(Unaudited)

Three months ended June 30, 

Six months ended June 30, 

(In thousands, except per share data)

    

2023

    

2022

    

2023

    

2022

Revenues

  

 

  

  

 

  

Investment income, net of expenses

$

24,248

 

10,541

$

43,441

$

16,783

Net realized gain (loss) on investments

 

2,087

 

(12,636)

 

18,373

(18,810)

Amortization of deferred gain on reinsurance transactions

1,498

1,043

3,071

2,012

Policy administration fees

480

514

1,119

862

Service fee revenue, net of expenses

631

416

1,285

1,514

Other revenue

 

122

 

 

228

100

Total revenue

 

29,066

 

(122)

 

67,517

 

2,461

Expenses

 

  

 

  

 

  

 

  

Interest credited

 

12,590

 

(5,496)

 

20,279

(12,170)

Benefits

1,206

994

2,163

994

Amortization of deferred acquisition costs

 

1,914

 

1,052

 

3,617

1,902

Salaries and benefits

 

5,817

 

4,298

 

11,320

8,615

Other operating expenses

 

5,002

 

(2,240)

 

18,915

(4,060)

Total expenses

 

26,529

 

(1,392)

 

56,294

 

(4,719)

Net income before income tax expense

 

2,537

 

1,270

 

11,223

 

7,180

Income tax (expense) benefit (See Note 9)

 

(2,969)

 

2,125

 

(5,876)

(2,597)

Net (loss) income after income tax expense

(432)

3,395

5,347

4,583

Less: Income (loss) attributable to noncontrolling interest

3,451

(5,871)

5,400

(4,869)

Net (loss) income attributable to Midwest Holding Inc.

(3,883)

9,266

(53)

9,452

Comprehensive loss:

 

 

  

 

  

 

  

Unrealized gains (losses) on investments arising during the three months ended June 2023 and 2022, net of offsets, net of tax (($0.9) million and $2.0 million, respectively);
Unrealized gains (losses) on investments arising during the six months ended June 2023 and 2022, net of offsets, net of tax ($1.3 million and $4.7 million, respectively)

 

4,322

 

(19,666)

 

(6,230)

(29,369)

Less: Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the three months ended June 2023 and 2022 (net of tax less than $(0.1) million and $(2.4) million respectively);
Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the six months ended June 2023 and 2022 (net of tax less than $(0.1) million and $(5.0) million respectively)

 

173

 

1,369

 

183

858

Other comprehensive income (loss)

 

4,495

 

(18,296)

 

(6,047)

 

(28,511)

Comprehensive income (loss):

$

612

$

(9,030)

$

(6,100)

$

(19,059)

Impairment

Total other-than-temporary impairment

-

534

-

534

Net other-than-temporary impairment loss recognized in net income

$

-

534

$

-

534

Income per common share

Basic

$

(1.04)

$

2.48

$

(0.01)

$

2.53

Diluted

$

(1.04)

$

2.47

$

(0.01)

$

2.52

See Notes to Consolidated Financial Statements.

4

Table of Contents

MIDWEST HOLDING INC.Midwest Holding Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYConsolidated Statements of Stockholders’ Equity

June 30, 2023 and 2022

(Unaudited)

Three months ended June 30, 

Additional

Treasury

Common

Paid-In

Retained

Noncontrolling

Total

(In thousands)

    

Stock

    

Stock

    

Capital

    

Earnings

    

AOCI*

    

Interest

    

Equity

Balance at March 31, 2022

$

(175)

$

4

$

138,483

$

(69,973)

$

(7,581)

$

18,432

$

79,190

Net income (loss)

 

 

 

 

9,266

 

 

 

9,266

Employee stock options

355

355

Unrealized gains on investments, net of taxes

(18,296)

(18,296)

Noncontrolling interest

(6,019)

(6,019)

Balance, June 30, 2022

$

(175)

$

4

$

138,838

$

(60,707)

$

(25,877)

$

12,413

$

64,496

Balance at March 31, 2021

$

(175)

$

4

$

133,854

$

(55,124)

$

7,073

$

$

85,632

Net income (loss)

(4,992)

(4,992)

Additional capital raise related expenses

(129)

(129)

Employee stock options

1,507

1,507

Unrealized gains on investments, net of taxes

(412)

(412)

Balance, June 30, 2021

$

(175)

$

4

$

135,232

$

(60,116)

$

6,661

$

$

81,606

Three months ended June 30, 2023 and 2022

Additional

Treasury

Common

Paid-In

Accumulated

Noncontrolling

Total

(In thousands)

    

Stock

    

Stock

    

Capital

    

Deficit

    

AOCI*

    

Interest

    

Equity

Balance at March 31, 2022

$

(175)

$

4

$

138,483

$

(69,973)

$

(7,581)

$

18,432

$

79,190

Net income

 

-

-

-

9,266

-

-

 

9,266

Employee stock options

-

-

355

-

-

-

355

Unrealized losses on investments, net of taxes

-

-

-

-

(18,296)

-

(18,296)

Noncontrolling interest

-

-

-

-

-

(6,019)

(6,019)

Balance, June 30, 2022

$

(175)

$

4

$

138,838

$

(60,707)

$

(25,877)

$

12,413

$

64,496

Balance at March 31, 2023

$

(175)

$

4

$

138,789

$

(63,863)

$

(61,928)

$

12,023

$

24,850

Net loss

-

-

-

(3,883)

-

-

(3,883)

Employee stock options

-

-

296

-

-

-

296

Unrealized gains on investments, net of taxes

-

-

-

-

4,495

-

4,495

Cumulative effect of change in accounting estimate

-

-

-

-

-

-

-

Noncontrolling interest

-

-

-

-

-

3,542

3,542

Balance, June 30, 2023

$

(175)

$

4

$

139,085

$

(67,746)

$

(57,433)

$

15,565

$

29,300

Six months ended June 30, 

Additional

Treasury

Common

Paid-In

Retained

Noncontrolling

Total

(In thousands)

    

Stock

    

Stock

    

Capital

    

Earnings

    

AOCI*

    

Interest

    

Equity

Balance, December 31, 2021

$

(175)

$

4

$

138,452

$

(70,159)

$

2,634

$

15,000

$

85,756

Net income (loss)

9,452

9,452

Employee stock options

386

386

Unrealized gains on investments, net of taxes

(28,511)

(28,511)

Noncontrolling interest

(2,587)

(2,587)

Balance, June 30, 2022

$

(175)

$

4

$

138,838

$

(60,707)

$

(25,877)

$

12,413

$

64,496

Balance at December 31, 2020

$

(175)

$

4

$

133,591

$

(53,522)

$

6,431

$

$

86,329

Net income (loss)

 

 

 

 

(6,594)

 

 

 

(6,594)

Additional capital raise related expenses

(129)

(129)

Employee stock options

1,770

1,770

Unrealized losses on investments, net of taxes

230

230

Balance, June 30, 2021

$

(175)

$

4

$

135,232

$

(60,116)

$

6,661

$

$

81,606

Six months ended June 30, 2023 and 2022

Additional

Treasury

Common

Paid-In

Accumulated

Noncontrolling

Total

(In thousands)

    

Stock

    

Stock

    

Capital

    

Deficit

    

AOCI*

    

Interest

    

Equity

Balance at December 31, 2021

$

(175)

$

4

$

138,452

$

(70,159)

$

2,634

$

15,000

$

85,756

Net income

-

-

-

9,452

-

-

9,452

Employee stock options

-

-

386

-

-

-

386

Unrealized losses on investments, net of taxes

-

-

-

-

(28,511)

-

(28,511)

Noncontrolling interest

-

-

-

-

-

(2,587)

(2,587)

Balance, June 30, 2022

$

(175)

$

4

$

138,838

$

(60,707)

$

(25,877)

$

12,413

$

64,496

Balance at December 31, 2022

$

(175)

$

4

$

138,482

$

(63,019)

$

(51,386)

$

10,471

$

34,377

Net loss

 

-

 

-

 

-

 

(53)

 

-

 

-

 

(53)

Employee stock options

-

-

603

-

-

-

603

Unrealized losses on investments, net of taxes

-

-

-

-

(6,047)

-

(6,047)

Cumulative effect of change in accounting estimate

-

-

-

(4,674)

-

-

(4,674)

Noncontrolling interest

-

-

-

-

-

5,094

5,094

Balance, June 30, 2023

$

(175)

$

4

$

139,085

$

(67,746)

$

(57,433)

$

15,565

$

29,300

*Accumulated other comprehensive income (loss)

See Notes to Consolidated Financial Statements.

5

Table of Contents

MIDWEST HOLDING INC.Midwest Holding Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Cash Flows

June 30, 2023 and 2022

(Unaudited)

    

Six months ended June 30, 

(In thousands)

2022

    

2021

Cash Flows from Operating Activities:

 

  

 

  

Income (loss) attributable to Midwest Holding, Inc.

$

9,452

$

(6,594)

Adjustments to arrive at cash provided by operating activities:

 

  

 

  

Net premium and discount on investments

 

(3,834)

 

(438)

Depreciation and amortization

 

143

 

25

Stock options

 

386

 

1,770

Amortization of deferred acquisition costs

1,902

1,027

Deferred acquisition costs capitalized

(10,635)

(9,041)

Net realized loss on investments

 

18,810

 

589

Deferred gain on coinsurance transactions

 

3,614

 

6,674

Changes in operating assets and liabilities:

 

  

 

  

Reinsurance recoverable

18,383

(13,530)

Interest and dividends due and accrued

 

(4,674)

 

(3,642)

Premiums receivable

 

(6)

 

(20)

Deposit-type liabilities

(27,795)

(4,317)

Policy liabilities

 

2,933

 

11,651

Receivable and payable for securities

16,955

Other assets and liabilities

 

9,893

 

7,121

Net cash provided by (used in) operating activities

 

35,527

 

(8,725)

Cash Flows from Investing Activities:

 

  

 

  

Fixed maturities available for sale:

 

  

 

  

Purchases

 

(418,011)

 

(342,717)

Proceeds from sale or maturity

 

187,670

 

132,752

Mortgage loans on real estate, held for investment

 

 

Purchases

(55,431)

(51,979)

Proceeds from sale

46,853

16,597

Derivatives

Purchases

(11,421)

(9,850)

Proceeds from sale

3,232

3,063

Equity securities

Purchases

(46,924)

Proceeds from sale

11,009

Other invested assets

Purchases

(44,257)

(32,292)

Proceeds from sale

3,334

16,915

Purchase of restricted common stock in FHLB

(500)

Preferred stock

(3,474)

(779)

Net change in policy loans

 

65

 

(6)

Net purchases of property and equipment

 

(1,573)

 

(35)

Net cash provided by (used in) investing activities

 

(282,004)

 

(315,755)

Cash Flows from Financing Activities:

 

  

 

  

Net transfer to noncontrolling interest

(2,587)

Capital contribution

(129)

Receipts on deposit-type contracts

 

254,145

 

249,519

Withdrawals on deposit-type contracts

 

(18,130)

 

(6,310)

Net cash provided by (used in) financing activities

 

233,428

 

243,080

Net increase (decrease) in cash and cash equivalents

 

(13,049)

 

(81,400)

Cash and cash equivalents:

 

  

 

  

Beginning

 

142,013

 

151,679

Ending

$

128,964

$

70,279

Supplementary information

 

  

 

  

Cash paid for taxes

$

2,870

$

1,500

    

Six months ended June 30, 

(In thousands)

2023

    

2022

Cash flows from operating activities:

 

  

 

  

(Loss) income attributable to Midwest Holding Inc.

$

(53)

$

9,452

Adjustments to arrive at cash provided by operating activities:

 

  

 

  

Net premium and discount on investments

 

(12,468)

 

(3,834)

Depreciation and amortization

 

189

 

143

Stock options

 

603

 

386

Amortization of deferred acquisition costs

4,779

1,902

Deferred acquisition costs capitalized

(19,356)

(10,635)

Net realized (loss) gain on investments

 

(18,310)

 

18,810

Allowance for Credit Losses

4,751

-

Deferred gain on coinsurance transactions

 

5,151

 

3,614

Changes in operating assets and liabilities:

 

  

 

  

Reinsurance recoverable

(15,284)

18,383

Interest and dividends due and accrued

 

(9,886)

 

(4,674)

Premiums receivable

 

(10)

 

(6)

Deposit-type liabilities

79,646

(27,795)

Policy liabilities

 

2,069

 

2,933

Receivable and payable for securities

45,861

16,955

Other assets and liabilities

 

(5,317)

 

9,893

Net cash provided by operating activities

 

62,365

 

35,527

Cash flows from investing activities:

 

  

 

  

Fixed maturities available for sale:

 

  

 

  

Purchases

 

(378,752)

 

(418,011)

Proceeds from sale or maturity

 

58,471

 

187,670

Mortgage loans on real estate, held for investment

 

 

Purchases

(200,367)

(55,431)

Proceeds from sale

73,112

46,853

Derivatives

Purchases

(140,521)

(11,421)

Proceeds from sale

132,672

3,232

Equity securities

Purchases

(33)

-

Proceeds from sale

-

11,009

Other invested assets

Purchases

(727)

(44,257)

Proceeds from sale

-

3,334

Purchase of restricted common stock

(1,665)

-

Preferred stock

Purchases

(2,389)

(3,474)

Proceeds from sale

-

-

Net change in policy loans

 

(30)

 

65

Net purchases of property and equipment

 

(100)

 

(1,573)

Net cash (used in) investing activities

 

(460,329)

 

(282,004)

Cash flows from financing activities:

 

  

 

  

Net transfer to noncontrolling interest

5,094

(2,587)

Receipts on deposit-type contracts

 

457,782

 

254,145

Withdrawals on deposit-type contracts

 

(62,051)

 

(18,130)

Net cash provided by financing activities

 

400,825

 

233,428

Net increase (decrease) in cash and cash equivalents

 

2,861

 

(13,049)

Cash and cash equivalents:

 

  

 

  

Beginning

 

191,414

 

142,013

Ending

$

194,275

$

128,964

Supplementary information

 

  

 

  

Cash paid for taxes

$

8,200

$

2,870

See Notes to Consolidated Financial Statements.

6

Table of Contents

MIDWEST HOLDING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and BasisSummary of PresentationSignificant 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 State 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”) 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 currentlywas licensed to sell, underwrite, and market life insurance and annuity products in 2225 states and the District of Columbia.Columbia as of June 30, 2023.

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 CertificationCertificate of Authority to transact the business of a captive insurance company. On May 12, 2020, Midwest contributed $0.3 million to Seneca Re for a 100% ownership interest. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of June 30, 2022,2023, Seneca Re has twothree incorporated cells, including Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Re ProtectedIncorporated Cell 2021-03 (“SRC3”), which are consolidated in our financial statements. On May 12, 2020, Midwest contributed $0.3 million to Seneca Re for a 100% ownership interest. On June 29, 2022, Seneca Re incorporated a new cell,Additionally, Seneca Incorporated Cell LLC 2022-04 (SRC4). The Company will contribute capital to SRC4 upon non-disapproval from(“SRC4”) was established on September 30, 2022; however, management has determined that the Nebraska Department of Insurance.  entity does not qualify for consolidation into our financial statements.

Midwest initially owned a 100% interest in SRC1 by contributing a total of $21.4 million. OnSRC1; however, 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.

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 $0.5 million. 1505 Capital’s financial results have been consolidated with the Company’s since the date of its acquisition.

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”), an affiliate of Crestline Assurance Holdings LLC, a significant shareholder of Midwest via a Crestline subsidiary, Crestline Re SPC1.Midwest. 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, by and 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 indexed and multi-year guaranteed annuity 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.

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% forof the liabilities of American Life’sLife arising from its fixed indexed annuity (“FIA”) products. 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 Agreement, as well as the trust and related asset management agreements, were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1. The MasterReinsurance Agreement expires onwas most recently amended effective in April 24, 2023.

7

Table2023 to allow Crestline to provide reinsurance funding for a quota share percentage of Contents20% of the liabilities of American Life arising from its three-year multi-year guaranteed annuities (“MYGAs”), a quota share percentage of 10% of its five-year MYGAs, and a quota share percentage of 0% of the liabilities of American Life arising from its FIAs. The amended agreement limited the total amounts to be reinsured at $550 million.

In addition, pursuant to the Master Agreement, (as subsequently amended), the parties thereto have agreed to enter into aone or more separate agreementagreements 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 be compensated for providing

7

administrative services to certain advisory clients of Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline.

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 closedwas executed on June 30,29, 2021. Under the Modco AEG Agreement, American Life cedesinitially ceded to AEG (and subsequently renewed), on a modified coinsurance basis, a 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 AEG Agreement. Effective February 28, 2023, AEG elected not to extend its commitment period for reinsuring liabilities under its Modco AEG Agreement; as a result, AEG’s current quota share with respect to MYGA and FIA policies is 0%. The initial settlement included net premium of $37.5 millionModco AEG Agreement remains in place, and net reserves of $34.8 millionAEG remains responsible for the modified coinsurance account. The amount paid to the Modified Deposit Account from AEG was $2.4 million.previously ceded liabilities.

OnAs of November 10, 2021, Midwest purchased 100% ownershipof the common stock of an intermediary holding company for $5.7 million, which company thereupon contributed capital of $5.5 million to purchaseimmediately purchased 100% of SRC3 Class A and B capital stock.membership interests. Also ondated as of November 10, 2021 but effective as of July 1, 2021, American Life and SRC3 entered into a Funds Withheld and Modified Coinsurance Agreement, whereby, SRC3 agreed to provide reinsurance funding for an ongoing quota share percentage of 45% of the liabilities of American Life arising from its MYGA products and a quota share percentage of 45% of the liabilities of American Life arising from its MYGAFIA products. The agreement with SRC3 has been amended, most recently in the fourth quarter of 2022, to provide one-time reinsurance funding for a quota share of $10.0 million of the liabilities of American Life arising from its 10-year FIA products.

As of September 30, 2022, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2022-04 (“SRC4”)). SRC4 was capitalized by loans from Embrace Software, Inc. and Tillman Networks LLC. The Reinsurance Agreement was effective as of July 1, 2022, by and between American Life and SRC4. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and multi-year guaranteed annuity products. Under the Reinsurance Agreement, SRC4 initially agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life’s FIALife arising from its MYGA-5 products and a quota share percentage of 10% of the liabilities of American Life arising from its MYGA-3 products. American Life has established a Modco Deposit Account, a Funds Withheld custody account, and a Trust Account pursuant to the Reinsurance Agreement. The initial settlement included net premium of $21.4 million and net reserves of $21.5 million for the Modco Deposit Account. Also on September 30, 2022, American Life entered into an Investment Management Agreement (“IMA”) with CoVenture Management, LLC (“CoVenture”) naming CoVenture as the manager of certain assets held by American Life on behalf of SRC4.

Management evaluates the Company as 1one reporting segment in the life insurance industry. The Company is 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 policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product. American Life presently offers 6six annuity products: 2two MYGAs, 2two FIAs, and 2two bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products.

Basis of Presentation

These consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at June 30, 2022, and the results of our operations for the three and six months ended June 30, 2023 and 2022 and 2021 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”), the accompanying condensed consolidated financial statements do not include all disclosures normally required byhave been prepared in conformity with generally accepted accounting principles in the United States of AmericanAmerica (“GAAP”). These financial statements should be read in conjunction with thePreparation of our consolidated financial statements included in our Annual Report on Form 10-K forrequires us to make estimates and judgments that affect the year ended December 31, 2021 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentationreported amounts of the financial position, results of operations, changes in stockholders’ equityassets, liabilities, revenues and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.

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.

Credit Loss Impairments for Fixed Maturities and Other Invested Assets

The Company adopted new current expected credit loss guidance on January 1, 2023 impacting the Company’s investment portfolio. For fixed maturities, the difference between amortized cost, net of credit loss allowance, (amortized cost, net) and fair value is reported as a component of accumulated other comprehensive income (“AOCI”) on the consolidated balance sheet and is not reflected in the operating results of any period until reclassified to net income upon consummation of a transaction with an unrelated third party or when a credit loss allowance is recorded.  The Company has a comprehensive portfolio monitoring process to evaluate all our fixed maturities on a quarterly basis that may require a credit loss allowance.  These reviews, in conjunction with the Company’s investment managers’

8

reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer; (2) the Company’s intent to sell a fixed maturity or whether it is more likely than not that the Company will be required to sell a fixed maturity before the anticipated recovery in value; (3) the market leadership of the issuer; (4) the debt ratings of the issuer; and (5) the cash flows and liquidity of the issuer or the underlying cash flows, as required for our investment models, are all considered in the impairment assessment.

If the Company has not made the decision to sell and it is not more likely than not that the Company will be required to sell before the anticipated recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity. The Company estimates the anticipated recovery value based on the best estimate of future cash flows considering past events, current conditions and reasonable and supportable forecasts. The estimated future cash flows are discounted at the fixed maturity’s current effective rate and are compared to the amortized cost basis of the fixed maturity. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the fixed maturity. All reasonably available information relevant to the collectability of the fixed maturity are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the fixed maturity, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, origination vintage year, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third-party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the insurer, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate the anticipated recovery value if the Company determines that the fixed maturity is dependent on the liquidation of collateral for ultimate settlement.

If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis, a credit loss allowance is recorded as a net investment loss for the shortfall in expected cash flows; however, the amortized cost basis, net of the credit loss allowance, may not be lower than the fair value of the fixed maturity. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed maturity does not have sufficient cash flows or other information to estimate a recovery value for the fixed maturity, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recognized as a net investment loss.

When a fixed maturity is sold or otherwise disposed or the fixed maturity is deemed uncollectible and written-off, the Company reverses amounts previously recognized in the credit loss allowance through net investment gains (losses). Recoveries after write-offs are recognized when received. The Company does not measure a credit loss allowance on accrued interest receivable as accrued interest receivable is written off to net investment income in a timely manner when there are concerns regarding collectability.

Fixed 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, net of allowances for expected credit losses, as of the financial statement date. Premiums and discounts on fixed maturity debt instruments are amortized using the scientific-yield method over the term of the bonds.instruments. Realized gains and losses on securitiesfixed maturities 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).

8

Table of Contents

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, 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 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 impairment is bifurcated. The Company recognizes the credit loss portion as realized losses and the noncredit loss portion in accumulated other comprehensive loss. The credit component of 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. The Company had 0 impairments recognized as of June 30, 2022, 2021, or as of December 31, 2021. income.

Investment income consists of interest, dividends, gains and losses from equity method investments, and real estate income, which are recognized on an accrual basis along with the amortization of premiums and discounts.

Certain available-for-sale investments are maintained as collateral under funds withheldFunds Withheld (“FW”) and modified coinsuranceModified 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 withheldFW and modified coinsuranceModco 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 as either a realized gain or loss on the Consolidated Statements of Comprehensive Loss.

Mortgage loansLoans on real estate, held for investmentReal Estate

Mortgage loans on real estate, held for investment are carried at unpaid principal balances.balances, net of allowance for expected credit losses. Interest income 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 for impairments 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

9

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 newadded information becomes available. As of June 30, 2022,2023, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million, and one asset with an impairment for the full value of $0.5$0.6 million. NaN such impairments were recognized as ofAt December 31, 2021.2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

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, the Company must 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

9

Table of Contents

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 would be formally assessed at inception and periodically throughout the life of the designated hedging relationship.

During the last quarter of 2020, the Company began investing in foreign currency futures to hedge the fluctuations in the foreign currencies.various aspects of our business. The formal documentation and hedge effectiveness was not completed at the date we entered into those futures contracts; therefore, they do not qualify for hedge accounting. The futures change in fair market values were recorded on our consolidated statementConsolidated Statements of comprehensive lossComprehensive Loss as realized gains or (losses).

Additionally, reinsurance agreements written on a FW or Modco basis contain embedded derivatives on our annuity products. Gains or (losses) associated with the performance of assets maintained in the modified coinsurance deposit and funds withheld accounts are reflected as realized gains(losses) or (losses)gains in the consolidated statementConsolidated Statements of comprehensive loss.Comprehensive Loss.

Equity Securities

Equity securities at June 30, 2022,2023, consisted of exchange traded funds (“ETFs”). The ETFs are carried at fair value with the change in fair value recorded through realized gains and losses in the Consolidated Statements of Comprehensive Loss. As of June 30, 2022,2023, and December 31, 2021,2022 we held $11.9$5.1 million of ETFs.

Preferred Stock

The company holds investments in preferred stock of $33.8 million as of June 30, 2023 and $31.4 million as of December 31, 2022, of which $10.0 million was redeemable at both dates. Changes in the fair value of preferred stock are recorded through unrealized gains and losses in net investment income in the Consolidated Statements of Comprehensive Loss.

In 2020 American Life entered into a series of transactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”) acquiring preferred equity and warrants, and later 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 $12.2 million as of June 30, 2023 and $10.5 million of December 31, 2022. For the three months ended June 30, 2023, $0.5 million of investment income related to ACH was recognized, and $0.1 million was attributed to the noncontrolling interest held by Crestline Re SP1. For the three months ended June 30, 2022, $0.2 million of investment income was recognized, and less than $0.1 million was attributed to Crestline Re SP1.For the six months ended June 30, 2023 $2.8 million of investment income related to ACH was recognized, and $0.7 million was attributed to the noncontrolling interest held by Crestline Re SP1.For the six months ended June 30, 2022, $1.8 million of investment income was recognized, and $0.5 million was attributed to Crestline Re SP1.

10

Other Invested Assets

Other invested assets consists of approximately $107.9 million of various investments. Of this total, approximately $97.7 million are primarily collateral loans, and $10.2 million of private credit and equipment leases. The collateral loans, private credit and equipment leases are carried at fair market value, net of allowance for expected credit losses. Also, we had an initial investment of $19.0 million investment in a private fund between American Life and an unaffiliated entity, PF Collinwood Holdings, LLC (“PFC”), with American Life owning 100% of the entity effective January 2021. The fair value of the PFC investment as of June 30, 2023, was $11.2 million and $21.9as of December 31, 2022, $13.7 million, respectively, with any change in fair market value recorded in unrealized gains and losses in equity on the balance sheet.  On February 2, 2022, we established a special purpose vehicle, Python Asset Holding LLC, with American Life owning 100% of the entity with an initial investment of $7.4 million. As of June 30, 2023, our investment in Python was carried at the net asset value (“NAV”) plus approximately $0.7 million of ETFs,investment income.

Deposits and notes receivable

Investment escrow

The Company held in escrow $1.6 million and $0.8 million as of June 30, 2023 and December 31, 2022, respectively. The cash held at year end was used to purchased mortgages in July and January 2023, respectively.

Federal Home Loan Bank (FHLB) stock

American Life initially 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 June 30, 20222023, the Company had pledged assets with a market value of $187.2 million to FHLB to allow a borrowing capacity of $170.3 million and 2021 and$121.1 million pledged as of December 31, 2021, there were no such outstanding funding arrangements.

Other invested assets

Other invested assets of approximately $71.2 million primarily consist of approximately $29.3 million of collateral loans, and $21.7 million of private credit, and equipment leases. Also, we had an initial investment of $19.0 million investment in a private fund between American Life and an unaffiliated entity, PF Collinwood Holdings, LLC (“PFC”), with American Life owning 100% of the entity effective January 2021. NaN gain or loss was recognized from the repackaging of PFC. The statement value approximates the fair value of PFC as of June 30, 2022 and December 31, 2021 of $15.0 million and $14.5 million, respectively, with the change in fair market value recorded in unrealized gains and losses in equity on the balance sheet. On February 2, 2022, we established a special purpose vehicle, Python Asset Holding LLC, with American Life owning 100% of the entity with an initial investments of $7.4 million.2022. As of June 30, 2022 our investment in Python was carried at the initial investment minus approximately $0.32023 we had $66.0 million distribution from the fundof outstanding funding arrangements, and a partial repayment of debt of approximately $2.0 million.

Investment escrow

The Company held in escrow $1.5$29.0 million and $3.6 million as of June 30, 2022, and December 31, 2021, respectively. The cash was used to settle mortgage loan investments that closed in July 2022, and January 2022, respectively.

Preferred Stock

The Company held a perpetual preferred stock investment of $10.0 million as of June 30, 2022, and December 31, 2021, respectively. The change in fair market value is recorded in net investment income on the Statement of Comprehensive Loss.

In 2020 American Life entered into a series of transactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”). Through this transactions American Life acquired preferred equity in AGH in British Pound Sterling (“GBP”) of 3.6 million

10

Table of Contents

along 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 $9.7 million as of June 30, 2022, and $8.7 millionoutstanding as of December 31, 2021. The change in market value for the preferred stock and warrants of $1.8 million was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $1.8 million of investment income $0.5 million was attributable to the noncontrolling interest.2022.

Notes receivableReceivable

The Company held notes receivable carried at fair value of $6.1$6.4 million and $6.3 million as of June 30, 2022,2023 and December 31, 2021,2022, respectively, between American Life and a related party. The note receivable has an annual interest rate of 5% which is paid-in-kindpaid 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. See Note 1816 – Related Party – Chelsea for details regarding this note.

Policy loansLoans

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. NaNNo 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 equivalentsCash Equivalents

The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. As of June 30, 2022, and December 31, 2021, the Company held approximately less than GBP 0.1 million and GBP 2.2 million in several of our custody accounts, respectively. The USD equivalent held was approximately less than $0.1 million and $3.0 million, respectively. As of June 30, 2022, and December 31, 2021, the Company held approximately Euro (0.4) million and 9.3 million, respectively. The USD equivalent held was approximately ($0.4) million and $10.6 million, respectively. For the three months ended June 30, 2022 and 2021, we had realized losses of approximately $0.1 million and $0.1 million 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. For the six months ended June 30, 2022 and 2021, we had realized losses of less than $0.1 million approximately and $0.1 million 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 June 30, 2022, and December 31, 2021.

11

Deferred acquisition costsAcquisition 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.

The following table represents a roll forward of DAC, net of reinsurance:

(In thousands)

    

June 30, 2023

December 31, 2022

Beginning balance

$

43,433

$

24,530

Additions

19,356

23,857

Amortization

(3,938)

(3,905)

Interest

(841)

(883)

Impact of unrealized investment losses

(406)

(166)

Ending balance

$

57,604

$

43,433

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 in management’s judgment require an immediate review. The Company performed a recoverability analysis during the fourthsecond quarter of 20212023 and determined that all DAC balances were recoverable as of June 30, 2023 and December 31, 2021. The Company determined that no events occurred in the six months ended2022.

Premiums Receivable

Premiums receivable consists of premiums earned on our legacy insurance business which have been earned but have not yet been collected. Amounts are receivable from our legacy business partners and were less than $0.4 million and $0.4 million at June 30, 2023 and December 31, 2022 that suggest a review should be undertaken.

11

respectively.

Table of Contents

Property and equipmentEquipment

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 $0.1 million and $0.0$0.1 million for the three months ended June 30, 20222023 and 2021,2022, respectively. Depreciation expense totaled $0.1$0.2 million and $0.0$0.1 million for the six months ended June 30, 2023 and 2022, and 2021, respectively. AccumulatedThe accumulated depreciation, net of disposals, totaled $1.4$1.6 million and $1.4 million as of June 30, 2022,2023 and December 31, 2021,2022, 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 June 30, 2022, and December 31, 2021, the Company had capitalized approximately $1.4 million and $1.2 million of expenses incurred respectively. This software was implemented in the first quarter of 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 in the periods covered by the Consolidated Financial Statements 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 Consolidated Balance Sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance 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 0 allowances established as of June 30, 2022 and 2021 or December 31, 2021.

We seek to reinsure substantially alla significant portion of our new insuranceannuity 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 98 below for further discussion of our reinsurance activities.

12

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

12

Table of Contents

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 formed Seneca Re in early 2020, followed by Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Incorporated Cell, LLC 2021-03 (“SRC3”), which are consolidated in ourthese financial statements. Midwest sold 70% ownership of SRC1 to an ORIX Corporation USA subsidiary on December 30, 2021, and retained 30% ownership. Midwest maintains control over SRC1 and we continue to consolidate SRC1, in ourthese financial statementsstatements. Additionally, Seneca Re has established Seneca Incorporated Cell, LLC 2022-04; however, management has determined that Midwest does not control the entity and eliminatethus it is not consolidated into these financial statements. American Life entered into a novation agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”)  and Crestline Re SPC, for and on behalf of Crestline Re SP1, under which the noncontrolling interest.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.

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 and/or requires the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business American Lifeit 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 insurancereinsurance 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 lossLoss and Note 5 – Derivative Instruments4 below.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses of approximately $2.9 milliongains and (losses) as of June 30, 2022,2023 and unrealized gains of $0.2 million at December 31, 2021, respectively.2022. The terms of the contracts with the third-party reinsurers provide that the changes in the unrealized gains or lossesand (losses) on the portfolios accrue to the third-party reinsurers. Accordingly,To recognize changes in the change inthird-party unrealized gains and losses on the assets held by(losses), American Life were offset by gainsrecords the year-to-date change as an offsetting realized (loss) or gain in the embedded derivative of $3.1 million and a loss in the embedded derivative of $0.4 million as of June 30, 2022, and 2021, respectively. We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss)Net Realized (Loss) Gain on ourInvestments on the Consolidated Statements of Comprehensive Loss and in amounts payable to ourrecoverable from third-party reinsurers on the Consolidated Balance Sheets. For further discussion see Note 5. Derivative Instruments4 below.

Benefit reservesReserves

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 claimsClaims

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 contractsContracts

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

13

Deposit-type contracts also include balances outstanding under funding agreements with the Federal Home Loan Bank of Topeka (“FHLB”). The funding agreements are carried at cost. Amounts received and repaid under FHLB funding agreements are classified as financing activities in the Company's Consolidated Statements of Cash Flows.

In 2021, the Company became a member of FHLB, which provides access to collateralized borrowings and other FHLB products. Any borrowing from FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 4.5% of the borrowing. In 2022, the Board authorized a maximum amount equal to 5% of net aggregate admitted retained assets of American Life for FHLB advances and funding agreements combined. In 2023 and 2022, American Life received advances of $37.0 million and $29.0 million respectively, from FHLB under funding agreements and made no repayments on FHLB funding agreements. Outstanding advances under FHLB funding agreements are reported as part of deposit-type contracts in the Consolidated Balance Sheets and totaled $66.0 million as of June 30, 2023, and $29.0 million as of December 31, 2022. Interest on the funding agreements accrues at their effective interest rates.

As of June 30, 2023, scheduled maturity dates for outstanding FHLB funding agreements were as follows:

(Dollar amounts in thousands)

Interest

Maturity Date

Rate

    

Amount

March 1, 2024

5.10%

$

16,000

January 22, 2025

5.47%

13,000

January 22, 2025

5.17%

2,000

August 16, 2025

5.48%

8,000

September 1, 2027

5.40%

4,000

September 15, 2027

5.20%

8,000

October 1, 2027

5.41%

9,000

December 1, 2027

5.63%

6,000

$

66,000

Note Payable

On November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30.0 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is November 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of our assets. The balance of the revolving credit was $25.0 million at June 30, 2023, and December 31, 2022, with $5.0 million unutilized credit.

Deferred gainGain on coinsurance transactionsCoinsurance 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

13

Table of Contents

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.

Revenue Recognition and Related Expenses

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and are included in 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.

Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Liabilities for future policy benefits 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.

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

14

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.

Income taxesTaxes

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 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.DAC. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has 0no uncertain tax positions that it believes are more-likely-than not that the benefit will not to berealized. 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 are included in 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.

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.

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

Comprehensive lossLoss

Comprehensive lossLoss is comprised of net income (loss) and other comprehensive loss. Other comprehensive loss includes unrealized gains and losses from fixed maturities classified as available for sale, unrealized gains and losses from other invested assets, and unrealized gains and losses from foreign currency transactions,preferred stock, 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;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 58 below.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately $2.9 million as of June 30, 2022, and unrealized gains of $0.2 million as of 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 losses on the assets held by American Life were offset by

14

Table of Contents

gains in the embedded derivative of $3.1 million and losses of $0.4 million as of June 30, 2022, and 2021, respectively. We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets. For further discussion see Note 5. Derivative Instruments below.Earnings Per Share

Basic (loss) income (loss) per share for the three months ended June 30, 2023 and 2022 was $(1.04) and 2021, was $2.48 and ($1.34), respectively, which included the aforementioned gainsincludes a gain of $3.9 million and loss of $2.9 million and of loss of $0.4 million,from an embedded derivative, respectively. Basic (loss) income (loss) per share for the six months ended June 30, 2023 and 2022 was $(0.01) and 2021 was $2.53 and ($1.76), respectively, which included the aforementioned gainsincludes a gain of $3.9 million and $2.9 million from an embedded derivative, respectively.

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 3,744,645 voting common shares issued and outstanding as of lossJune 30, 2023 and 3,727,976 as of $0.4 million, respectively.December 31, 2022.

15

Three months ended June 30, 

Six months ended June 30, 

    

2023

    

2022

    

2023

    

2022

(In thousands, except per share amounts)

Numerator:

Net (loss) income attributable to Midwest Holding Inc.

$

(3,883)

$

9,266

$

(53)

$

9,452

Denominator:

Weighted average common shares outstanding

3,736,933

3,737,564

3,728,594

3,737,564

Effect of dilutive securities:

Stock options and deferred compensation agreements

126,868

12,000

126,868

12,000

Denominator for earnings (loss) per common share

3,863,801

3,749,564

3,855,462

3,749,564

(Loss) income per common share

$

(1.04)

$

2.48

$

(0.01)

$

2.53

(Loss) income per common share, diluted

$

(1.04)

$

2.47

$

(0.01)

$

2.52

Adoption of New Accounting Standards

In January 2020,December 2022, the FASB issued ASU No. 2020-1, Equity Securities (2022-06, Reference Rate Reform (Topic 846): Deferral of the Sunset Date of Topic 321)848. In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, Investments-Equity Method3-, 6-, and Joint Ventures (12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 323), and Derivatives and Hedging (848. Because the current relief in Topic 815)-Clarifying848 may not cover a period of time during which a significant number of modifications may take place, the Interactions betweenamendments in ASU 2022-06 defer the sunset date of Topic 321,848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 323, and848.

Measurement of Credit Losses on Financial Instruments

In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 815.326, Financial Instruments—Credit Losses. The amendments in this update clarify certain interactions betweeninclude items brought to the guidanceFASB’s attention by stakeholders to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, andclarify 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 orderASU 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, the incurred loss impairment methodology in current GAAP is replaced with a methodology that reflects expected credit losses that is referred 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.current expected credit loss (“CECL”) methodology. The amendments in this update aremeasurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures, not accounted for as insurance (loan commitments, standby letters of credit financial guarantees, and other instruments). In addition, ASU 2016-13 made changes to the accounting for available for sale debt fixed maturities. One such change is to require credit losses to be presented as an allowance rather than a write-down on available for sale debt fixed maturities management does not intend to sell or believes that it is not more likely than not they will be required to sell. The new standard became effective for public business entities for fiscal yearsreporting periods 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. As of June 30, 2022, and December 31, 2021,for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning accumulated deficit.

The Company’s implementation activities are complete, and the impacts relate to the Company’s investment portfolio. The Company adopted the new guidance on January 1, 2023 and recognized a cumulative effect adjustment that decreased retained earnings by $4.7 million, in conjunction with the $16.5 million allowance for credit losses and $11.8 million to Reinsurance Recoverables. Additionally, the Company had analyzedrecognized an incremental change in the allowance for expected credit losses of $0.2 million in the current period, to bring the retained allowance to approximately $4.5 million. The Company will apply the provisions of the guidance to investments that have

16

an other-than-temporary impairment on a prospective basis. Accordingly, the amortized cost basis will remain the same before and capitalized $1.4after adoption and $1.2 millionthe effective interest rate was not changed at the time of cloud-based software cost respectively.adoption.

Future adoptionAdoption of New Accounting Standards

Accounting for Long-Duration Insurance Contracts

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 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 duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new standard becomes effective for reporting periods 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 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 determineThe Company is evaluating the impact at this timeguidance will have on its results of ASU No. 2018-12 as we are still in the process of evaluating the standard.

In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial 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

15

Table of Contents

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 lossesoperations 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.financial position. 

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.

After the closing of the Reinsurance Agreement, Unified prepared and delivered certificates of assumption and other materials to policyholders of American Life in order to effect an assumption of the 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 policyholder would convert to assumptive, where American Life would no longer be responsible for the obligations to the policyholders, by the end of 2019.

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 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 Consolidated Statement of Comprehensive Loss.

An assessment of the assets and liabilities held for sale was performed as of December 31, 2021 and management believed that the remaining policyholder contracts will not be converted; therefore, those remaining policy contracts were reclassified to continuing operations and are no longer called out as discontinued operations.

Note 3.2. Non-controlling Interest

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, is the manager of the assets underlying SRC1’s reinsurance obligations, replacing Midwest’s asset management arm, 1505 Capital LLC. As of June 30, 2022, Midwest recognizedcarries the original purchase amount of $15.0 million plus $2.3 million of earnings as noncontrolling interest in the equity section of the Consolidated Balance Sheets.Sheets plus cumulative income of $3.7 million as of June 30, 2023, and a cumulative loss of $5.5 million as of December 31, 2022.

Purchase

In 2020 American Life entered into a series of transactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”). Through thisthese transactions American Life acquired preferred equity in AGH in British Pound Sterling (“GBP”) of 3.6 million along 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 at a market USD value of $9.7$12.2 million as of June 30, 2022,2023, and $8.7$10.5 million as of December 31, 2021.2022. The change in market value for the three months ended June 30, 2023 and 2022, of $0.5 million and $0.2 million for the preferred stock and warrants was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $0.5 million of investment income, $0.1 million was attributable to noncontrolling interest. The change in market value for the six months ended June 30, 2023 and 2022, of $2.8 million and $1.8 million for the preferred stock and warrants was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $1.8$2.8 million of investment income, $0.5$0.7 million was attributable to noncontrolling interest.

1617

Table of Contents

Note 4.3. Investments

The cost orfollowing table represents the amortized cost, allowance for credit losses, gross unrealized gains and losses, and estimated fair value of investments classified as available-for-sale as of June 30, 2022,2023 and December 31, 2021 were as follows:2022:

Gross

Gross

Allowance

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated

Amortized

for Credit

Unrealized

Unrealized

Estimated

(In thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Cost

Losses

    

Gains

    

Losses

    

Fair Value

June 30, 2022:

 

  

 

  

 

  

 

  

June 30, 2023:

 

  

 

  

 

  

 

  

Fixed maturities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Bonds:

U.S. government obligations

$

1,825

$

262

$

58

$

2,029

$

1,451

$

-

$

268

$

(68)

$

1,651

Mortgage-backed securities

 

151,686

 

205

 

9,869

 

142,022

 

458,248

 

(1,035)

 

1,478

 

(32,477)

 

426,214

Asset-backed securities

39,680

166

2,778

37,068

44,127

-

76

(3,985)

40,218

Collateralized loan obligations

230,551

256

12,481

218,326

358,240

(480)

1,591

(20,485)

338,866

States and political subdivisions-general obligations

 

222

 

 

19

 

203

 

128

 

-

 

-

 

(3)

 

125

States and political subdivisions-special revenue

 

130

 

1

 

 

131

 

-

 

-

 

-

 

-

 

-

Corporate

 

39,575

 

412

 

4,955

 

35,032

 

54,532

 

(1,297)

 

358

 

(4,670)

 

48,923

Term loans

445,164

3,310

347

448,127

692,279

(6,104)

1,687

(4,947)

682,915

Redeemable preferred stock

14,230

53

2,750

11,533

Total fixed maturities

$

923,063

$

4,665

$

33,257

$

894,471

$

1,609,005

$

(8,916)

$

5,458

$

(66,635)

$

1,538,912

Mortgage loans on real estate, held for investment

193,902

193,902

354,401

(1,493)

-

-

352,908

Derivatives

23,561

1,966

18,337

7,190

34,639

-

9,870

(7,648)

36,861

Federal Home Loan Bank (FHLB) stock

500

500

Equity securities

12,762

837

11,925

5,592

-

-

(448)

5,144

Other invested assets

67,806

3,373

9

71,170

107,149

(1,343)

2,285

(189)

107,902

Investment escrow

1,491

1,491

Preferred stock

18,919

3,153

22,072

38,026

-

1,357

(5,578)

33,805

Notes receivable

6,111

6,111

Deposits and notes receivable

11,012

-

-

-

11,012

Policy loans

22

22

55

-

-

-

55

Total investments

$

1,248,137

$

13,157

$

52,440

$

1,208,854

$

2,159,879

$

(11,752)

$

18,970

$

(80,498)

$

2,086,599

December 31, 2021:

 

  

 

  

 

  

 

  

December 31, 2022:

 

  

 

  

 

  

 

  

Fixed maturities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Bonds:

U.S. government obligations

$

1,855

$

32

$

5

$

1,882

$

1,343

$

-

$

-

$

(81)

$

1,262

Mortgage-backed securities

 

55,667

 

368

 

755

 

55,280

 

316,105

 

-

 

469

 

(22,508)

 

294,066

Asset-backed securities

24,675

443

167

24,951

34,728

-

17

(3,989)

30,756

Collateralized loan obligations

272,446

2,928

851

274,523

308,871

-

726

(21,924)

287,673

States and political subdivisions-general obligations

 

105

 

9

 

 

114

 

104

 

-

 

-

 

(3)

 

101

States and political subdivisions-special revenue

 

4,487

 

1,129

 

4

 

5,612

 

228

 

-

 

-

 

(23)

 

205

Corporate

 

35,392

 

1,846

 

99

 

37,139

 

46,700

 

-

 

415

 

(5,515)

 

41,600

Term loans

268,794

441

1,767

267,468

561,656

-

1,923

(4,607)

558,972

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

$

1,269,735

$

-

$

3,550

$

(58,650)

$

1,214,635

Mortgage loans on real estate, held for investment

183,203

183,203

227,047

-

-

-

227,047

Derivatives

18,654

6,391

2,023

23,022

30,239

-

2,694

(16,999)

15,934

Federal Home Loan Bank (FHLB) stock

500

500

Equity securities

22,158

289

21,869

5,592

-

-

(481)

5,111

Other invested assets

34,491

813

11

35,293

108,979

-

3,667

(215)

112,431

Investment escrow

3,611

3,611

Preferred stock

14,885

3,801

18,686

35,644

-

1,757

(5,986)

31,415

Notes receivable

5,960

5,960

Deposits and notes receivable

8,359

-

-

-

8,359

Policy loans

87

87

25

-

-

-

25

Total investments

$

963,470

$

18,273

$

6,216

$

975,527

$

1,685,620

$

-

$

11,668

$

(82,331)

$

1,614,957

1718

Table of Contents

The following table presents information related to allowance for credit losses as of June 30, 2023:

(In Thousands)

Balance
December 31, 2022

Additional Allowance Recognized Due to Adoption of Accounting Guidance

Credit Loss Expense for the Current Period

Balance
June 30, 2023

Fixed maturities

Bonds:

Mortgage-backed securities

$

-

$

3,564

$

(2,529)

$

1,035

Corporate

-

-

1,297

1,297

Asset-backed securities

-

273

(273)

-

Collateralized loan obligations

-

588

(108)

480

Term loans

-

8,518

(2,414)

6,104

Mortgage loans on real estate, held for investment

-

2,024

(531)

1,493

Other invested asset

-

1,703

(360)

1,343

Total allowance

$

-

$

16,670

$

(4,918)

$

11,752

(In Thousands)

Balance
March 31, 2023

Additional Allowance Recognized Due to Adoption of Accounting Guidance

Credit Loss Expense for the Current Period

Balance
June 30, 2023

Fixed maturities

Bonds:

Mortgage-backed securities

$

3,592

$

-

$

(2,557)

$

1,035

Corporate

-

-

1,297

1,297

Asset-backed securities

245

-

(245)

-

Collateralized loan obligations

610

-

(130)

480

Term loans

5,867

-

237

6,104

Mortgage loans on real estate, held for investment

2,709

-

(1,216)

1,493

Other invested asset

1,173

-

170

1,343

Total allowance

$

14,196

$

-

$

(2,444)

$

11,752

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2022,2023 and December 31, 2021.2022.

June 30, 2022

December 31, 2021

 

Carrying

Carrying

 

(In thousands)

    

Value

    

Percent

    

Value

    

Percent

 

AAA and U.S. Government

$

8,168

 

0.9

%  

$

2,674

 

0.4

%

AA

 

452

 

0.1

 

482

 

0.1

A

 

308,991

 

34.5

 

168,141

 

24.6

BBB

 

545,247

 

61.0

 

462,699

 

67.7

Total investment grade

 

862,858

 

96.5

 

633,996

 

92.8

BB and below

 

31,613

 

3.5

 

49,300

 

7.2

Total

$

894,471

 

100.0

%  

$

683,296

 

100.0

%

Reflecting the quality of securities maintained by us as of June 30, 2022, and December 31, 2021, 96.5% and 92.8%, respectively, of all fixed maturity securities were investment grade. The BB and below also includes maturities that have no rating.

The following table summarizes, for all fixed maturity securities in an unrealized loss position as of June 30, 2022, and December 31, 2021, the estimated fair value, pre-tax gross unrealized loss, and number of securities by consecutive months they have been in an unrealized loss position.

June 30, 2022

December 31, 2021

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

$

1,324

$

44

 

 

11

$

104

$

2

 

1

Mortgage-backed securities

 

129,114

 

9,869

 

 

59

 

35,403

 

755

 

35

Asset-backed securities

31,742

2,778

32

12,355

167

13

Collateralized loan obligations

195,384

11,683

25

90,731

851

115

States and political subdivisions-general obligations

136

10

7

 

 

States and political subdivisions-special revenue

 

 

 

 

217

 

4

 

1

Term loans

448,127

347

240

105,677

1,767

47

Redeemable preferred stock

11,532

2,750

9

10,837

245

6

Corporate

 

30,910

 

4,284

 

 

66

 

2,367

 

73

 

9

Greater than 12 months:

 

  

 

  

 

 

  

 

  

 

  

 

  

U.S. government obligations

 

152

 

14

 

 

4

 

66

 

3

 

3

Collateralized loan obligations

 

9,807

 

798

 

 

5

 

 

 

States and political subdivisions-special revenue

67

9

2

 

 

Corporate

 

1,538

671

 

 

7

 

324

26

 

2

Total fixed maturities

$

859,833

$

33,257

 

 

467

$

258,081

$

3,893

232

(1)We may reflect a security in more than one aging category based on various purchase dates.

June 30, 2023

December 31, 2022

 

Carrying

Carrying

 

(In thousands)

    

Value

    

Percent

    

Value

    

Percent

 

AAA and U.S. Government

$

200,014

 

13.0

%  

$

124,183

 

10.2

%

AA

 

29,185

 

1.9

 

815

 

0.1

A

 

420,690

 

27.3

 

371,371

 

30.6

BBB

 

752,652

 

48.9

 

619,516

 

51.0

Total investment grade

 

1,402,541

 

91.1

 

1,115,885

 

91.9

BB and below

 

136,371

 

8.9

 

98,750

 

8.1

Total

$

1,538,912

 

100.0

%  

$

1,214,635

 

100.0

%

18

Table of Contents

Our security positions resulted in a gross unrealized loss position as of June 30, 2022, that was greater than the gross unrealized loss position at December 31, 2021 due to increases in the Federal Reserve interest rates. We performed an analysis and determined that there were no additional indicators other than the increase in the interest rates that would indicate a cash flow testing analysis should be performed. NaN impairment was required as of June 30, 2022, or December 31, 2021.

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 in the associated embedded derivatives.

The Company purchases and sells equipment leases in its investment portfolio. As of June 30, 2022, the Company owned several leases, all which were performing. No impairment was required as of June 30, 2022, or December 31, 2021.

The amortized cost and estimated fair value of fixed maturities as of June 30, 2022, 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 due in the next year are in an unrealized loss position, therefore no impairments were recognized as of June 30, 2022.

Amortized

Estimated

(In thousands)

    

Cost

    

Fair Value

Due in one year or less

$

30,870

$

30,505

Due after one year through five years

 

443,417

 

440,196

Due after five years through ten years

 

348,824

 

333,739

Due after ten years through twenty years

55,342

51,367

Due after twenty years

39,610

34,586

No maturity

5,000

4,078

$

923,063

$

894,471

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. As of June 30, 2022, and December 31, 2021, these required deposits had a total amortized cost of $3.2 million and $3.0 million and fair values of $3.3 million and $3.0 million, respectively.

Mortgage Loans:

Mortgage loans consist of the following:

(In thousands)

June 30, 2022

December 31, 2021

1-4 Family

$

69,004

$

72,324

Hospitality

12,717

12,822

Land

32,522

15,904

Multifamily (5+)

27,497

31,583

Retail

17,909

17,655

Other

34,253

32,915

Total mortgage loans

$

193,902

$

183,203

Geographic Locations:

As of June 30, 2022, the commercial mortgages loans were secured by properties geographically dispersed throughout the United States with the largest concentrations in Delaware (40%), New York (27%), Arizona (5%), Maine (4%) and non-US  (10%). 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%).

19

Table of Contents

Reflecting the quality of fixed maturities maintained by us, as of June 30, 2023 and December 31, 2022, 91.1% and 91.9%, respectively, of all fixed maturity securities were investment grade. The BB and below also includes maturities that have no rating.

The following table summarizes, for all fixed maturity securities in an unrealized loss position as of June 30, 2023 and December 31, 2022 for which an allowance for credit losses has not been recorded and the estimated fair value, pre-tax gross unrealized loss, and number of fixed maturities by consecutive months they have been in an unrealized loss position.

June 30, 2023

December 31, 2022

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

$

-

$

-

 

 

-

$

1,135

$

(70)

 

 

13

Mortgage-backed securities

 

233,146

 

(12,202)

 

 

93

 

233,624

 

(18,464)

 

 

89

Asset-backed securities

14,234

(1,386)

10

24,552

(3,278)

23

Collateralized loan obligations

76,097

(2,786)

52

203,549

(16,730)

252

States and political subdivisions-general obligations

125

(3)

2

101

(3)

1

States and political subdivisions-special revenue

 

-

-

 

 

-

 

47

(2)

 

 

3

Corporate

 

17,722

 

(1,010)

 

 

16

 

37,286

 

(5,426)

 

 

64

Term loans

682,545

(4,947)

4

558,337

(4,607)

36

Greater than 12 months:

 

  

 

  

 

 

  

 

  

 

  

 

 

  

U.S. government obligations

 

1,146

 

(68)

 

 

9

 

126

 

(11)

 

 

5

Asset-backed securities

22,814

 

(2,599)

 

 

23

 

5,321

 

(711)

 

 

7

Collateralized loan obligations

 

162,126

 

(17,699)

 

 

240

 

37,814

 

(5,194)

 

 

47

States and political subdivisions-special revenue

-

-

-

158

(21)

7

Mortgage-backed securities

87,683

(20,275)

57

17,985

(4,044)

14

Corporate

 

14,888

(3,660)

 

 

45

 

376

(89)

 

 

7

Total fixed maturities

$

1,312,526

$

(66,635)

 

 

551

$

1,120,411

$

(58,650)

 

 

568

(1)We may reflect a fixed maturity in more than one aging category based on various purchase dates.

Our securities positions resulted in a gross unrealized loss position as of June 30, 2023 that was greater than the gross unrealized loss position at December 31, 2022. The Company views the decrease in fair value for all of the fixed maturity securities with unrealized losses as of June 30, 2023, which are driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility, as temporary. As of June 30, 2023, the Company has not made the decision to sell these securities and the Company does not believe it will be required to sell the fixed maturity securities with unrealized losses before an anticipated recovery in value. Therefore, it was determined that the unrealized losses on the fixed maturity securities were not indicative of any credit loss impairments as of June 30, 2023.

The Company reviews and analyzes all investments on an ongoing basis for changes in market interest rates and credit deterioration. The review process includes analyzing the recoverability of the amortized cost basis of each investment that has a fair value that is

20

materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for credit loss is a quantitative and qualitative process, which is subject to risks and uncertainties.

The process to identify securities that could potentially have credit loss involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:

•the determination of whether a mark-to-market loss on a fixed income security is due to a deterioration in the underlying credit quality of the security or to temporary market effects such as interest rates through a comprehensive understanding of both the specific security and the broader market context;

•the issuer’s payment history and adherence;

•the remaining payment terms and the financial condition and near-term prospects of the issuer;

•the lack of ability to refinance due to liquidity problems in the credit market;

•the fair value of any associated collateral;

•the availability of any credit protection;

•our intent to sell and  the likelihood of needing  to sell prior to recovery for debt securities;

•consideration of rating agency actions; and

•changes in estimated cash flows of mortgage and asset backed securities.

See the discussion in Note 8 Reinsurance regarding unrealized gains/(losses) on investments that are owned by our reinsurers and the corresponding offset carried as a (loss)/gain in the associated embedded derivatives.

The Company purchases and sells equipment leases in its investment portfolio. As of June 30, 2023, the Company owned several leases, all of which were performing. No impairment was required as of June 30, 2023.

The amortized cost and estimated fair value of fixed maturities as of June 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized

Estimated

(In thousands)

    

Cost

    

Fair Value

Due in one year or less

$

100,739

$

99,049

Due after one year through five years

 

859,855

 

840,065

Due after five years through ten years

 

440,299

 

403,551

Due after ten years through twenty years

175,126

170,768

Due after twenty years

32,986

25,479

$

1,609,005

$

1,538,912

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At June 30, 2023 and December 31, 2022, these required deposits had a total amortized cost of $2.8 million and $1.2 million, respectively, and fair values of $2.8 million and $1 million, respectively.

Mortgage loans consist of the following:

(In thousands)

June 30, 2023

December 31, 2022

1-4 Family

$

56,335

$

59,579

Hospitality

14,144

12,902

Land

77,961

62,119

Multifamily (5+)

58,711

34,072

Retail

45,681

22,119

Other

101,569

36,256

Allowance for credit loss

(1,493)

-

Total mortgage loans

$

352,908

$

227,047

Geographic Location:

As of June 30, 2023, the commercial mortgages loans were secured by properties geographically dispersed (with the largest concentrations in loans secured by properties in New York (19%), New Jersey (16%), New Zealand (9%), Florida (7%), and Texas

21

(7%)). As of December 31, 2022, the commercial mortgages loans were secured by properties geographically dispersed (with the largest concentrations in New York (24%), Florida (15%), Delaware (10%), California (6%), and Arizona (5%)).

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. As of June 30, 2022,2023, the Company held one asset valued at $7.7 million with an impairment of $0.5$1.4 million and one asset with an impairment for the full value of $0.6 million. NaN such valuations were established as ofAt December 31, 2021.2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

(In thousands)

June 30, 2022

December 31, 2021

Loan-to-Value Ratio:

0%-59.99%

$

110,995

$

91,104

60%-69.99%

34,050

42,819

70%-79.99%

37,323

44,106

80% or greater

11,534

5,174

Total mortgage loans

$

193,902

$

183,203

Commercial Mortgage Loans

(In thousands)

June 30, 2023

December 31, 2022

Loan-to-Value Ratio:

0%-59.99%

$

230,140

$

108,281

60%-69.99%

76,970

79,968

70%-79.99%

27,704

33,268

80% or greater

18,094

5,530

Total mortgage loans

$

352,908

$

227,047

The components of net investment income for the three and six months ended June 30, 2023 and 2022 and 2021wasare as follows:

Three months ended June 30, 

Six months ended June 30, 

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

    

2022

    

2021

    

2022

    

2021

    

2023

    

2022

    

2023

    

2022

Fixed maturities

$

15,347

$

4,088

$

20,393

$

7,068

$

33,841

$

14,173

$

67,902

$

26,837

Mortgage loans

2,963

367

3,246

540

6,298

2,963

12,973

5,383

Other invested assets

3,705

96

2,632

152

2,142

2,501

5,464

3,896

Other interest income

 

(9,220)

 

81

 

(6,902)

 

152

 

10,248

 

8,035

 

18,277

 

13,579

Gross investment income

 

12,795

 

4,632

 

19,369

 

7,912

 

52,529

 

27,672

 

104,616

 

49,695

Less: investment expenses

 

(2,254)

 

(1,412)

 

(2,586)

 

(1,805)

 

(5,367)

 

(2,515)

 

(11,564)

 

(4,726)

Less: amounts ceded to reinsurers

(22,914)

(14,616)

(49,611)

(28,186)

Investment income, net of expenses

$

10,541

$

3,220

$

16,783

$

6,107

$

24,248

$

10,541

$

43,441

$

16,783

Proceeds for the three months ended June 30, 2022,2023 and 20212022 from sales of investments classified as available-for-sale were $94.0$8.1 million, and $70.9$94 million, respectively. Gross gains of $0.3 million and $0.1 million and gross losses of less than $0.1 million and $1.3 million and gross losses of $1.2 million and $0.3 million were realized on thosesales and the realized losses on sales during the three months ended June 30, 2023 and 2022, and 2021, respectively.

Proceeds for the six months ended June 30, 20222023 and 20212022 from sales of investments classified as available-for-sale were $187.6$58.5 million, and $132.8$187.6 million, respectively. Gross gains of $1.5$0.3 million and $1.9$1.5 million and gross losses of $1.7less than $0.1 million and $0.5$1.7 million were realized on thosesales and the realized losses on sales during the six months ended June 30, 2022,2023 and 2021,2022, respectively.

The proceeds included those assets associated with the third-party reinsurers. The gains and losses relate only to the assets retained by American Life. Unrealized gain/(loss) included as part of net investment income were gains of $23.9 million and $10.5 million for the three months ended June 30, 2023 and 2022. Unrealized gain/loss included as part of net investment income were gains of $43.1 million and $16.8 million for the six months ended June 30, 2023 and 2022.

Note 5.4. Derivative Instruments

The Company enters into derivative instruments to manage risk, primarily equity, interest rate, credit, foreign currency and market volatility. TheSome of these derivative instruments are 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.

2022

Table of Contents

The following is a summary of the asset derivatives not designated as hedges and embedded derivatives in our FIA product as of June 30, 2022,2023 and December 31, 2021:  2022:  

    

June 30, 2023

December 31, 2022

(In thousands, except number of contracts)

Location in the

Derivatives Not Designated

Consolidated

Notional

Number of

Estimated

Notional

Number of

Estimated

as Hedging Instruments

Balance Sheets

Amount

Contracts

Fair Value

Amount

Contracts

Fair Value

Equity-indexed options

Derivatives

$

911,030

668

$

36,700

$

831,657

595

$

15,592

Equity-indexed
embedded derivatives

Deposit-type
contracts

866,847

7,095

142,800

782,997

6,131

111,618

    

June 30, 2022

December 31, 2021

Location in the

(In thousands, except number of contracts)

Consolidated

Derivatives Not Designated

Statement of

Notional

Number of

Estimated

Notional

Number of

Estimated

as Hedging Instruments

Balance Sheets

Amount

Contracts

Fair Value

Amount

Contracts

Fair Value

Equity-indexed options

Derivatives

$

648,853

521

$

5,376

$

526,096

482

$

23,766

Equity-indexed
embedded derivatives

Deposit-type
contracts

645,766

5,139

107,281

525,548

4,205

123,692

At June 30, 2022,2023, the value of the embedded derivative 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.

Due to Federal Reserve rate increases,price changes in the capital markets, our securities positions resulted in increased unrealized losses at June 30, 2022,  and2023, compared to December 31, 2021,2022, 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 gains.losses. The unrealized losses as of June 30, 2022,2023 were $2.9$14.4 million compared to unrealized gainslosses of $0.2$10.5 million as of December 31, 2021.2022.

The following table summarizes the impact of those embedded derivatives related to the funds withheld provision where the total return on the asset portfolio is passed through to the third-party-reinsurers:third-party reinsurers:

    

June 30, 2022

December 31, 2021

    

June 30, 2023

December 31, 2022

(In thousands)

Book Value

Market Value

Total Return

Book Value

Market Value

Total Return

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

Assets

Assets

Swap Value

American Republic Insurance Company

$

110,646

$

107,843

$

2,803

$

74,983

$

74,670

$

313

$

170,992

$

163,894

$

7,098

$

150,413

$

143,952

$

6,461

Crestline Re SP1

267,896

271,291

(3,395)

228,560

228,450

110

447,113

446,708

405

354,806

356,374

(1,568)

Ironbound

165,940

163,608

2,332

154,867

155,755

(888)

164,611

159,116

5,495

159,644

154,477

5,167

Ascendent Re

58,156

57,444

712

56,246

56,078

168

64,479

62,626

1,853

56,064

54,790

1,274

US Alliance

47,427

46,936

491

46,221

46,085

136

SRC4

152,401

152,828

(427)

61,646

62,516

(870)

Total

$

650,065

$

647,122

$

2,943

$

560,877

$

561,038

$

(161)

$

999,596

$

985,172

$

14,424

$

782,573

$

772,109

$

10,464

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses of approximately and $2.9$14.4 million as of June 30, 2022,2023, and cumulative unrealized gainslosses of $0.2$10.5 million as of December 31, 2021,2022, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains or losses on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized gainslosses on the assets held by American Life were offset by gains in the embedded derivative of $3.1$3.9 million and a lossgain in the embedded derivative of $0.4$2.9 million as offor the six months ended June 30, 2023 and 2022, and 2021, respectively.

We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.

Note 6.5. Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

21

Table of Contents

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.

23

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

There were no assets or liabilities classifiedCash and cash equivalents: Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents as levelLevel 1 at June 30, 2022, and December 31, 2021.measurements in the table below.

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 had escrow funds of as of June 30, 2022, and December 31, 2021, of $1.5 million and $3.6 million, respectively. These escrow funds were used to settle mortgage loans that did not close until July and January 2022. The money held in escrow at June 30, 2022, and December 31, 2021 was carried at cost.

Fixed maturity securities: Fixed maturity securities are recorded at fair value on a recurring basis utilizing aan independent third-party pricing source such as the Automated Valuation Service (“AVS”) Securities Valuation Office (“SVO”) pricing.source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services. For the six months ended June 30, 2022, and the year ended December 31, 2021, 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 indexessource such as the Standard & Poor’s (“S&P”) 500 index and the S&P Multi-Asset Risk Control (“MARC”) 5% index.

Equity securities: Equity securities at June 30, 2022, and December 31, 2021 consisted2023 consist of exchange traded funds (“ETFs”). The ETF’sETFs 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 statementConsolidated Statements of operations.Comprehensive Loss. As of December 31, 2022 we had purchased $5.1 million of ETFs.

Preferred stock: The Company’s preferred stock investments classified as Level 2 were valued at $10.0 million as of June 30, 2022,2023, and $9.5 million as of December 31, 2022. This investment is carried at fair market value with the change in fair market value is recorded in net investment income on the Consolidated Statements of Comprehensive Loss.

Deposits and notes receivable: The Company had escrow funds of as of June 30, 2023 and December 31, 2021 we held $11.92022, of $1.6 million and $21.9$0.8 million, respectively of ETFs.

Notes receivable:respectively. These escrow funds were used to settle mortgage loans that did not close until April and January 2023. The money held in escrow at June 30, 2023 and December 31, 2022 was carried at cost. The Company held in notes receivable as of June 30, 2022,2023 and December 31, 2021,2022, a note of $6.1$6.4 million and $6.0$6.3 million, respectively, that includes paid-in-kind (“PIK”) interest. The note receivable is between American Life and 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 cost plus PIK interest.

Level 3 measurements

Term loans:Loans The assets classified as term loans are carried at unpaid principal net of amortization of discount or accretion, which approximatesap-proximates 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.

Mortgage loans on real estate, held for investment:Loans 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

22

Table of Contents

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. As of June 30, 2022,2023, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million, and one asset with an impairment for the full value of $0.5$0.6 million. NaN such valuations were established as ofAt December 31, 2021.

2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

Other invested assets:Invested Assets 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 is carried at statement value with approximates fair value of the fund.based on market accepted valuation models. The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.

24

Federal Home Loan Bank (FHLB) stock:Deposits and notes receivable: American Life purchased Federal Home Loan Bank of Topeka (“FHLB”) common stock to solidify our membership with FHLB Topeka. The carrying value of FHLB stock approximates fair value based on market accepted valuation models, 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 securities.

Preferred stock:Stock The perpetualCompany’s preferred stock heldinvestment classified as Level 3 was valued at $23.9 million as of June 30, 2022,2023 and $21.9 million as of December 31, 2021, of $10.0 million was2022. This investment is carried at fair market utilizing a third-party pricing source such as AVS SVO pricing, along with other non-observable inputs.value. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services.

As of June 30, 2022, thechange in fair market value is recorded in net investment income on the Consolidated Statements of the Ascona preferred stock and warrants was $7.4 million and $2.4 million, respectively. As of December 31, 2021, the fair market value of the Ascona preferred stock and warrants was $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 prepared by a third-party.

Comprehensive Loss.

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 June 30, 2022,2023 and December 31, 2021.2022. 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.

2325

Table of Contents

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of June 30,, 2022, 2023 and December 31, 2021.2022.

Significant

Significant

Quoted

Other

Significant

Quoted

Other

Significant

In Active

Observable

Unobservable

Estimated

In Active

Observable

Unobservable

Estimated

Markets

Inputs

Inputs

Fair

Markets

Inputs

Inputs

Net Asset

Fair

(In thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Value

    

Value

June 30, 2022

 

  

 

  

 

  

 

  

June 30, 2023

 

  

 

  

 

  

 

  

Financial assets

Fixed maturity securities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Bonds

U.S. government obligations

$

$

2,029

$

$

2,029

$

-

$

1,651

$

-

$

-

$

1,651

Mortgage-backed securities

142,022

142,022

-

426,214

-

-

426,214

Asset-backed securities

37,068

37,068

-

40,218

-

-

40,218

Collateralized loan obligations

218,326

218,326

-

338,866

-

-

338,866

States and political subdivisions-general obligations

 

 

203

 

 

203

 

-

 

125

 

-

 

-

 

125

States and political subdivisions-special revenue

 

 

131

 

 

131

 

-

 

-

 

-

 

-

 

-

Corporate

 

 

35,032

 

 

35,032

 

-

 

48,923

 

-

 

-

 

48,923

Term loans

 

448,127

 

448,127

-

-

 

682,915

-

 

682,915

Redeemable preferred stock

11,533

11,533

Total fixed maturity securities

446,344

448,127

894,471

-

855,997

682,915

-

1,538,912

Mortgage loans on real estate, held for investment

193,902

193,902

-

-

352,908

-

352,908

Derivatives

7,190

7,190

-

36,861

-

-

36,861

Equity securities

11,925

11,925

-

5,144

-

-

5,144

Other invested assets

71,170

71,170

-

-

95,138

12,764

107,902

Investment escrow

1,491

1,491

Federal Home Loan Bank (FHLB) stock

500

500

Preferred stock

22,072

22,072

-

9,952

23,853

-

33,805

Notes receivable

6,111

6,111

Deposits and notes receivable

-

8,041

2,971

-

11,012

Policy loans

22

22

-

-

55

-

 

55

Total Investments

$

$

473,061

$

735,793

$

1,208,854

Total investments

$

-

$

915,995

$

1,157,840

$

12,764

$

2,086,599

Financial liabilities

Embedded derivative for equity-indexed contracts

$

$

$

107,281

107,281

$

$

$

142,800

$

142,800

December 31, 2021

 

  

 

  

 

  

 

December 31, 2022

 

  

 

  

 

  

 

Financial assets

 

  

 

  

 

  

 

  

 

  

 

  

 

  

  

Fixed maturity securities:

Bonds

U.S. government obligations

$

$

1,882

$

$

1,882

$

$

1,262

$

$

$

1,262

Mortgage-backed securities

55,280

55,280

294,066

294,066

Asset-backed securities

24,951

24,951

30,756

30,756

Corporate

274,523

274,523

Collateralized loan obligations

287,673

287,673

States and political subdivisions-general obligations

 

114

 

 

114

 

101

 

 

 

101

States and political subdivisions-special revenue

 

5,612

 

 

5,612

 

205

 

 

 

205

Corporate

 

37,139

 

 

37,139

 

41,600

 

 

 

41,600

Term loans

 

 

267,468

 

267,468

 

 

558,972

 

558,972

Trust preferred

 

2,237

2,237

Redeemable preferred stock

14,090

14,090

Total fixed maturity securities

415,828

267,468

683,296

655,663

558,972

1,214,635

Mortgage loans on real estate, held for investment

183,203

183,203

227,047

227,047

Derivatives

23,022

23,022

15,934

15,934

Equity securities

21,869

21,869

5,111

5,111

Other invested assets

35,293

35,293

99,997

12,434

112,431

Preferred stock

9,544

21,871

31,415

Investment escrow

3,611

3,611

784

784

Federal Home Loan Bank (FHLB) stock

500

500

Preferred stock

18,686

18,686

Federal Home Loan Bank stock

1,306

1,306

Notes receivable

5,960

5,960

6,269

6,269

Deposits and notes receivable

7,053

1,306

8,359

Policy loans

87

87

25

 

25

Total Investments

$

$

470,290

$

505,237

$

975,527

Total investments

$

$

693,305

$

909,218

$

12,434

$

1,614,957

Financial liabilities

Embedded derivative for equity-indexed contracts

$

123,692

$

123,692

$

$

$

111,618

$

111,618

There were no transfers of financial instruments between any levels during the six months ended June 30, 2023 or the year ended December 31, 2022.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed

2426

Table of Contents

There were 0 transfersabove. As of financial instruments between any levels during the three months ended June 30, 2022,2023 or for the year ended December 31, 2021.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. There2022, 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 June 30, 2022,2023 and as of December 31, 2021,2022, respectively:

June 30, 2022

June 30, 2023

Fair Value Measurements Using

Fair Value Measurements Using

Quoted Prices in

Quoted Prices in

Active Markets

Significant Other

Significant

Active Markets

Significant Other

Significant

for Identical Assets

Observable

Unobservable

for Identical Assets

Observable

Unobservable

Carrying

and Liabilities

Inputs

Inputs

Fair

Carrying

and Liabilities

Inputs

Inputs

Fair

(In thousands)

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Value

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Value

Assets:

Policy loans

$

22

$

$

$

22

$

22

$

55

$

$

$

55

$

55

Cash equivalents

 

128,964

 

 

128,964

 

 

128,964

Cash

 

194,275

 

194,275

 

 

 

194,275

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Policyholder deposits (deposit-type contracts)

 

1,283,660

 

 

 

1,283,660

 

1,283,660

 

2,218,725

 

 

 

2,218,725

 

2,218,725

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)

    

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, 2022

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)

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Value

Assets:

Policy loans

$

25

$

$

$

25

$

25

Cash

 

191,414

 

191,414

 

 

 

191,414

Liabilities:

 

  

 

  

 

  

 

  

 

  

Policyholder deposits (deposit-type contracts)

 

1,743,348

 

 

 

1,743,348

 

1,743,348

2527

Table of Contents

The following table presents a reconciliation of the beginning balance for all assets and liabilities measured at fair value on a recurring basis using level three inputs during the six months ended June 30, 2022:2023:

    

June 30, 2022

    

June 30, 2023

Total realized and unrealized gains (losses)

Total realized and unrealized gains (losses)

Beginning Balance

    

Included in
Income

Included in AOCI

Net Purchases,
Issuances, Sales,
and Settlements

Ending Balance

Beginning Balance

    

Included in
Income

Included in OCI

Net Purchases,
Issuances, Sales,
and Settlements

Ending Balance

(In thousands)

Assets

 

  

 

  

  

 

  

 

  

 

  

  

 

  

Term loans

$

267,468

$

$

1,963

$

178,696

448,127

$

558,972

$

-

$

(4,947)

$

129,377

$

683,402

Mortgage loans on real estate,

held for investment

183,203

10,699

193,902

227,047

-

-

125,861

352,908

Federal Home Loan Bank (FHLB) stock

500

500

Deposits and notes receivable

1,306

-

-

1,665

2,971

Other invested assets

35,293

(871)

(4,175)

40,923

71,170

99,997

-

2,096

(6,955)

95,138

Preferred stock

18,686

2,232

1,153

22,071

21,871

(4,220)

-

6,202

23,853

Policy loans

25

-

-

30

55

Total level 3 assets

$

505,150

$

1,361

$

(2,212)

$

231,471

$

735,770

$

909,218

$

(4,220)

$

(2,851)

$

256,180

$

1,158,327

Liabilities

Embedded derivative for equity-indexed contracts

(123,692)

(14,165)

30,576

(107,281)

(111,618)

30,115

-

(61,297)

(142,800)

Total level 3 liabilities

$

(123,692)

$

(14,165)

$

$

30,576

$

(107,281)

$

(111,618)

$

30,115

$

-

$

(61,297)

$

(142,800)

The following table presentstables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the year ended December 31, 2021:2022:

    

December 31, 2021

    

December 31, 2022

Total realized and unrealized gains (losses)

Total realized and unrealized gains (losses)

(In thousands)

    

Beginning Balance

    

Included in
Income

Included in AOCI

Net Purchases,
Issuances, Sales,
and Settlements

Ending Balance

    

Beginning Balance

    

Included in
Income

Included in OCI

Net Purchases,
Issuances, Sales,
and Settlements

Ending Balance

Assets

 

  

 

  

  

  

 

  

 

  

  

  

Term loans

$

107,254

$

(1,326)

$

225

$

161,315

$

267,468

$

267,468

$

-

$

(2,683)

$

294,187

$

558,972

Mortgage loans on real estate,

held for investment

94,990

88,213

183,203

183,203

-

-

43,844

227,047

Federal Home Loan Bank (FHLB) stock

500

500

Deposits and notes receivable

500

-

-

806

1,306

Other invested assets

21,897

810

(671)

13,257

35,293

35,293

-

3,452

61,252

99,997

Preferred stock

3,898

157

14,631

18,686

18,686

-

(4,229)

7,414

21,871

Policy loans

87

-

-

(62)

25

Total level 3 assets

$

228,039

$

(516)

$

(289)

$

277,916

$

505,150

$

505,237

$

-

$

(3,460)

$

407,441

$

909,218

Liabilities

Embedded derivative for equity-indexed contracts

(84,501)

(4,169)

(35,022)

(123,692)

(123,692)

(10,193)

-

22,267

(111,618)

Total level 3 liabilities

$

(84,501)

$

(4,169)

$

$

(35,022)

$

(123,692)

$

(123,692)

$

(10,193)

$

-

$

22,267

$

(111,618)

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.

26

Table of Contents

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.

28

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.

Preferred equity and warrants – Significant unobservable inputs we use in the preferred equity and warrants include surrender rate, discount rates, EBITDA Multiples, current performance data, proprietary pricing models, real-time quotes from contributing dealers, and earnings before interest, taxes, depreciation, and amortization (“other market dataEBITDA.”) Multiples.

EBITDA Multiple -The warrants valued using a market approach guideline public company method ("GCPM") using a multiplier of EBITDA.

Discount Rates - For the preferred equity, discounted cash flow models are used to assist with the calculation the fair value.

The following summarizesOther Invested Assets – Valuations are performed through a combination of EBITDA analysis, comparable transaction analysis, and discounted cash flow analysis. Unobservable inputs for these approaches include recent actual or pending transactions, yields of similar debt instruments, and subject company leverage and financial.

EBITDA Multiple -The other invested assets valued using a market approach guideline public company method ("GCPM") using a multiplier of EBITDA.
Discount Rates - For the other invested assets, discounted cash flow models are used to assist with the calculation the fair value.

Term Loans – Significant unobservable inputs for available for sale and trading securities and the embedded derivativesinclude yield analysis. Significant unobservable inputs we use include discount rates.

Mortgage Loans – Fair value of fixed indexed annuities:

June 30, 2022

(In millions, except for percentages and multiples)

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

$107.3

Option Budget Method

Nonperformance risk

0.8%

1.8%

1.3%

Decrease

Option budget

1.1%

4.1%

2.5%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

8.1%

Decrease

Preferred equity

$4.9

Yield analysis

Discount rates

17.5%

19.5%

18.5%

Increase

Detachable warrants

$3.8

Market Approach - GPCM

EBITDA Multiples

9.0x

10.0x

100.0%

Increase

* Weighted by account value

mortgage loan assets are valued at principal funded, plus any property related direct expenses that contractually can be added.

2729

Table of Contents

December 31, 2021

(In millions, except for percentages and multiples)

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

$123.7

Option Budget Method

Nonperformance risk

0.3%

1.1%

0.6%

Decrease

Option budget

1.1%

3.4%

2.4%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

7.7%

Decrease

Preferred equity

$4.9

Yield analysis

Discount rates

17.5%

19.5%

18.5%

Increase

Detachable warrants

$3.8

Market Approach - GPCM

EBITDA Multiples

9.0x

10.0x

100.0%

Increase

* Weighted by account value

Note 7. Earnings Per Share

The Company has 20 million voting common shares authorized, 2 million non-voting common shares authorized,following summarizes the unobservable inputs for available for sale and 2 milliontrading securities and the embedded derivatives of fixed indexed annuities and preferred shares authorized. There were 3,737,564 voting common shares issued and outstanding as of June 30, 2022, and June 30, 2021, and 0 nonvoting or preferred shares outstanding as of those dates.stock (with associated detachable warrants):

Three months ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands, except per share amounts)

Numerator:

Net income (loss) attributable to Midwest Holding, Inc.

$

9,266

$

(4,992)

$

9,452

$

(6,594)

Denominator:

Weighted average common shares outstanding

3,737,564

3,737,564

3,737,564

3,737,564

Effect of dilutive securities:

Stock options and deferred compensation agreements

12,000

12,000

Denominator for earnings (loss) per common share

3,749,564

3,737,564

3,749,564

3,737,564

Income (loss) per common share

$

2.48

$

(1.34)

$

2.53

$

(1.76)

Income (loss) per common share, diluted

$

2.47

$

(1.34)

$

2.52

$

(1.76)

June 30, 2023

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Term loans

$682.9

Yield Analysis

Discount rates

4.6%

17.3%

12.4%

Decrease

Mortgage loans on real estate

$352.9

Yield Analysis

Principal funded

NA

NA

NA

Decrease

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$142.8

Option Budget Method

Nonperformance risk

0.6%

1.5%

1.1%

Decrease

Option budget

1.1%

5.9%

2.9%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

12.5%

Decrease

Other invested assets

$95.1

Market Approach

EBITDA Multiples

2.6x

3.1x

2.8x

NA

Discount rates

8.0%

25.5%

14.5%

NA

Preferred stock

$9.7

Yield Analysis

Discount rates

24.0%

28.0%

26.0%

Increase

Detachable warrants

$2.4

Market Approach GPCM

EBITDA Multiples

10.0x

11.5x

100.0%

Decrease

Preferred stock

$11.8

Market Approach

EBITDA Multiples

2.55x

3.05x

2.8x

Decrease

* Weighted by account value

December 31, 2022

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Term loans

$559.0

Yield Analysis

Discount rates

4.6%

17.3%

12.4%

Decrease

Mortgage loans on real estate

$227.0

Yield Analysis

Principal funded

NA

NA

NA

Decrease

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$111.6

Option Budget Method

Nonperformance risk

0.6%

1.5%

1.1%

Decrease

Option budget

1.1%

5.7%

2.7%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

10.5%

Decrease

Other invested assets

$100.0

Market Approach

EBITDA Multiples

2.6x

3.1x

2.8x

NA

Discount rates

8.0%

25.5%

14.5%

NA

Preferred equity

$6.1

Yield Analysis

Discount rates

24.0%

28.0%

26.0%

Increase

Detachable warrants

$2.2

Market Approach GPCM

EBITDA Multiples

10.0x

11.5x

100.0%

Decrease

Preferred stock

$31.4

Market Approach

EBITDA Multiples

2.55x

3.05x

2.8x

Decrease

* Weighted by account value

30

Note 6. 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 six months ended June 30, 2023 and the year ended December 31, 2022:

    

(In thousands)

    

June 30, 2023

    

December 31, 2022

Beginning balance

$

1,743,348

$

1,075,439

US Alliance

 

(634)

 

(2,176)

Unified Life Insurance Company

-

(10)

Ironbound Reinsurance Company Limited

 

3,134

 

5,959

Ascendant Re

145

(3,185)

Crestline SP1

2,490

(11,623)

American Republic Insurance Company

2,735

(4,080)

SRC4

2,791

613

Deposits received

 

494,532

 

745,083

Investment earnings (includes embedded derivative)

 

30,115

 

(10,193)

Withdrawals

 

(59,931)

 

(51,659)

Policy charges

-

(820)

Ending balance

$

2,218,725

$

1,743,348

In addition, membership in FHLB provides the Company with access to additional short-term liquidity based on the level of investment in FHLB stock and pledged collateral. At June 30, 2023 and December 31, 2022 funding agreements of $66.0 million and $29.0 million were outstanding.

Note 7. Debt

On November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is November 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of the Company’s assets. The balance of the revolving credit was $25.0 million at June 30, 2023, and December 31, 2022, with $5.0 million unutilized credit.

Under the terms of the Credit Agreement, the Company has the option of selecting an applicable variable interest rate of (a) an adjusted term standard overnight financing rate (“SOFR”), plus an applicable margin or (b) a base rate, plus an applicable margin. Depending on our debt to capitalization ratio, the applicable margin can range from 2.50% to 3.25% for the base rate and from 3.50% to 4.25% for an adjusted term SOFR loan. Interest paid for the three months ended June 30, 2023 and 2022 was $0.5 million and $0.0 million respectively. Interest paid for the six months ended June 30, 2023 and 2022 was $1.1 million and $0.0 million respectively.

The terms of the Credit Agreement require the Company to maintain, among other things, certain financial measures including:

Consolidated debt to capitalization must not be greater than 35% on the last day of any fiscal quarter;
Risk-based capital of American Life & Security Corp. must not be less than 300% on the last day of any fiscal quarter;
Consolidated liquidity must not be less than $3.0 million at any time; and
The strength rating of American Life & Security Corp. from A.M. Best must not fall below “B++”.

31

28

Table of Contents

Note 8. Income Tax MattersReinsurance

Significant componentsA summary of significant reinsurance amounts affecting the Company’s deferred tax assets and liabilitiesaccompanying consolidated financial statements as of June 30, 2022,2023 and December 31, 2021 were2022 is as follows:

(in thousands)

    

June 30, 2022

    

December 31, 2021

Deferred tax assets:

 

  

 

  

Loss carryforwards

$

2,464

$

2,244

Capitalized costs

 

103

 

127

Stock option granted

1,142

1,060

Policy acquisition costs

4,813

3,640

General business credits

6

6

Derivative option allowance

510

Sec 163(j) limitation

172

171

Benefit reserves

 

9,889

 

6,720

Property and equipment

59

33

Unrealized losses on investments

5,654

Other

1,464

1,464

Total deferred tax assets

 

25,766

 

15,975

Less valuation allowance

 

(22,108)

 

(14,431)

Total deferred tax assets, net of valuation allowance

 

3,658

 

1,544

Deferred tax liabilities:

 

  

 

  

Unrealized losses on investments

 

 

1,084

Intangible assets

 

147

 

147

Derivative option allowance

 

2,906

 

Bond Discount

605

313

Total deferred tax liabilities

 

3,658

 

1,544

Net deferred tax assets

$

$

(In thousands)

    

June 30, 2023

    

December 31, 2022

Assets:

 

  

 

  

Reinsurance recoverables

$

39,899

$

20,190

Liabilities:

Deposit-type contracts

Direct

$

2,218,725

$

1,743,348

Reinsurance ceded

(1,123,475)

(912,982)

Retained deposit-type contracts

$

1,095,250

$

830,366

As

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by third-party reinsurers as of June 30, 2022, and December 31, 2021, the Company recorded a valuation allowance of $22.1 million and $14.4 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 carryforwards are expected to be available to reduce taxable income.

There was income tax benefit of $2.1 million and expense of $0.7 million for the three months ended June 30, 2022, and 2021, respectively. There was income tax expense of $2.6 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively. 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:2023:

Three months ended June 30, 

Six months ended June 30, 

(in thousands)

    

2022

    

2021

    

2022

    

2021

Computed expected income tax benefit (expense)

$

(409)

$

892

$

(1,508)

$

927

Reduction (increase) in income taxes resulting from:

 

 

  

 

 

  

IMR and reinsurance

61

(108)

(18)

(175)

Nondeductible expenses

(3)

(2)

(5)

(3)

Change in valuation allowance

 

2,480

 

(1,532)

 

(1,052)

(2,933)

Dividends received deduction

3

5

Deferred tax adjustment

(4)

(14)

Subtotal of increases

 

2,534

 

(1,639)

 

(1,089)

 

(3,106)

Tax benefit (expense)

$

2,125

$

(747)

$

(2,597)

$

(2,179)

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

$

-

$

-

$

5,338

$

-

$

5,338

Optimum Re Insurance Company

 

A

-

-

690

-

690

Sagicor Life Insurance Company

 

A-

 

-

 

238

 

10,626

 

(326)

 

10,538

Ascendant Re

NR

-

-

(3,906)

-

(3,906)

Crestline SP1

NR

-

-

(14,352)

-

(14,352)

American Republic Insurance Company

A

-

-

3,364

-

3,364

SRC4

NR

-

-

(12,749)

-

(12,749)

Unified Life Insurance Company

NR

-

25

991

(14)

1,002

US Alliance Life and Security Company

 

NR

 

-

 

-

 

49,997

 

(23)

 

49,974

$

-

$

263

$

39,999

$

(363)

$

39,899

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 June 30, 2022, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $8.7 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 $1.0 million prior to 2017 will expire through the year of 2032, and the NOLs generated June 28, 2018 and after, 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 $1.8 million on the deferred tax assets related to these federal NOL carryforwards.

2932

Table of Contents

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by third-party reinsurers as of December 31, 2022:

Recoverable on

Total Amount

Recoverable

Recoverable

Benefit

Ceded

Recoverable

(In thousands)

AM Best

on Paid

on Unpaid

Reserves/Deposit-

Due

from

Reinsurer

    

Rating

    

Losses

    

Losses

    

type Contracts

    

Premiums

    

Reinsurer

Ironbound Reinsurance Company Limited

NR

$

-

$

-

$

(344)

$

-

$

(344)

Optimum Re Insurance Company

 

A

-

-

601

-

601

Sagicor Life Insurance Company

 

A-

 

-

 

154

 

10,744

 

(303)

 

10,595

Ascendant Re

NR

-

-

(2,130)

-

(2,130)

Crestline SP1

NR

-

-

(3,357)

-

(3,357)

American Republic Insurance Company

A

-

-

5,879

-

5,879

SRC4

NR

-

-

(44,442)

-

(44,442)

Unified Life Insurance Company

 

NR

-

41

986

(17)

1,010

US Alliance Life and Security Company

NR

 

-

 

-

 

52,400

 

(22)

 

52,378

$

-

$

195

$

20,337

$

(342)

$

20,190

Our securities positions resulted in changes in the unrealized loss position as of June 30, 2023, compared to December 31, 2022, that is reported in accumulated other comprehensive (loss) income on the Consolidated Balance Sheets. As discussed in Note 1, 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 the assets and total gains 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 4.

On June 26, 2021, the NDOI issued its non-disapproval of the Modified Coinsurance Agreement (“Modco AEG Agreement”) with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement was executed on June 29, 2021. Under the Modco AEG Agreement, American Life initially ceded to AEG (and subsequently renewed), on a modified coinsurance basis, a 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 business. Effective February 28, 2023, AEG elected not to extend its commitment period for reinsuring liabilities under its Modco AEG Agreement; as a result, AEG’s current quota share with respect to MYGA and FIA policies is 0%. The Modco AEG Agreement remains in place, and AEG remains responsible for previously ceded liabilities.

On November 10, 2021, the NDOI issued its non-disapproval of the Funds Withheld and Modified Coinsurance Agreement with SRC3, whereby SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA products and a quota share percentage of 45% of the liabilities of American Life arising from its FIA products. In the fourth quarter of 2022, the agreement with SRC3 was again amended to provide one-time reinsurance funding for $10.0 million of the liabilities of American Life arising from its 10-year FIA products.

On September 21, 2022, the NDOI issued its approval of the conversion of American Life’s agreement with US Alliance to convert its block of business from a Funds Withheld agreement to a Funds Paid Coinsurance agreement. The conversion was effective as of October 1, 2022, and was triggered by US Alliance becoming a Qualified Institutional Buyer as specified in the original agreement. Upon conversion, American Life began transferring assets held on behalf of US Alliance to the reinsurer, with a corresponding entry made to Amounts Recoverable. The approximate value of assets transferred was $37.9 million.

On September 30, 2022, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2022-04 (“SRC4”)). SRC4 was capitalized by loans from Embrace Software, Inc. and Tillman Networks LLC. The Reinsurance Agreement was effective as of July 1, 2022, by and between American Life and SRC4. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and multi-year guaranteed annuity products. Under the Reinsurance Agreement, SRC4 initially agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA-5 products and a quota share percentage of 10% of the liabilities of American Life arising from its MYGA-3 products. American Life has established a Modco Deposit Account, a Funds Withheld custody account, and a Trust Account pursuant to the Reinsurance Agreement. The initial settlement included net premium of $21.4 million and net reserves of $21.5 million for the modified coinsurance account. Also on September 30, 2022, American Life entered into an Investment Management Agreement (“IMA”) with CoVenture Management, LLC (“CoVenture”) naming CoVenture as the manager of certain assets held by American Life on behalf of SRC4.

33

Note 9. Reinsurance

A summary of significant reinsurance, including our 100% legacy life business reinsured, amounts affectingThe tables below shows the accompanying consolidated financial statements as of June 30, 2022,ceding commissions from the reinsurers, excluding SRC1 and December 31, 2021, respectively, are as follows:

(in thousands)

    

June 30, 2022

    

December 31, 2021

Assets:

 

  

 

  

Reinsurance recoverables

$

24,121

$

38,579

Liabilities:

Deposit-type contracts

Direct

$

1,283,660

1,075,439

Reinsurance ceded

(720,030)

(647,632)

Retained deposit-type contracts

$

563,630

$

427,807

The table below isSRC3, and what was earned on a summary of our 100% legacy life business reinsuredGAAP basis for the three and six months ended June 30, 20222023 and 2021:2022:

Three months ended June 30, 

(In thousands)

2023

2022

Reinsurer

Gross Ceding Commission

Expense
Allowance(1)

Interest on Ceding Commission

Earned
Ceding
Commission

Gross Ceding Commission

Expense
Allowance

Interest on Ceding Commission

Earned
Ceding
Commission

Unified Life Insurance Company

$

$

$

$

9

$

-

$

-

$

-

$

6

Ironbound Reinsurance Company Limited

43

125

-

-

49

144

Ascendant Re

181

175

23

100

-

-

23

77

US Alliance Life and Security Company

11

73

-

-

14

76

Crestline Re SP 1

771

716

193

758

1,491

2,401

88

559

American Republic Insurance Company

1

48

84

257

1,026

1,774

30

197

SRC4

2,514

2,401

86

176

-

-

-

-

$

3,467

$

3,340

$

440

$

1,498

$

2,517

$

4,175

$

204

$

1,059

Three months ended June 30, 

Six months ended June 30, 

    

2022

    

2021

2022

    

2021

(in thousands)

 

  

 

  

  

 

  

Premiums

Direct

$

74

$

53

$

134

$

101

Reinsurance ceded

(74)

(53)

(134)

(101)

Total Premiums

$

$

$

$

Future policy and other policy benefits

Direct

$

46

$

15

$

99

$

21

Reinsurance ceded

 

(46)

 

(15)

 

(99)

 

(21)

Total future policy and other policy benefits

$

$

$

$

Six months ended June 30, 

(In thousands)

2023

2022

Reinsurer

Gross Ceding Commission

Expense
Allowance(1)

Interest on Ceding Commission

Earned
Ceding
Commission

Gross Ceding Commission

Expense
Allowance

Interest on Ceding Commission

Earned
Ceding
Commission

Unified Life Insurance Company

$

$

$

$

11

$

$

$

$

14

Ironbound Reinsurance Company Limited

93

253

98

258

Ascendant Re

181

175

46

185

47

163

US Alliance Life and Security Company

25

156

28

163

Crestline SP1

1,805

1,631

272

1,640

2,525

4,231

168

1,065

American Republic Insurance Company

560

753

106

562

1,827

3,227

52

349

SRC4

3,881

3,614

86

264

$

6,427

$

6,173

$

628

$

3,071

$

4,352

$

7,458

$

393

$

2,012

(1) Includes: acquisition and administrative expenses, commission expense allowance and product development fees.

The following table providesbelow shows the ceding commissions deferred on each reinsurance transaction on a summaryGAAP basis:

(In thousands)

June 30, 2023

December 31, 2022

Reinsurer

    

Deferred Gain on Reinsurance Transactions

Deferred Gain on Reinsurance Transactions

US Alliance Life and Security Company(1)

 

$

-

$

152

Unified Life Insurance Company(1)

 

352

217

Ironbound Reinsurance Company Limited(2)

4,811

4,876

Ascendant Re

 

3,104

2,947

US Alliance Life and Security Company(2)

2,025

2,069

American Republic Insurance Company(2)

7,684

7,502

Crestline SP1(2)

19,346

18,475

SRC4(2)

5,892

1,825

$

43,214

$

38,063

1)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 related to these businesses reduces the gross ceding commission with the remaining deferred and amortized over the lifetime of the blocks of business.
2)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 significantinsurance 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 balances recoverable on paid and unpaidagreement 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 by third-party reinsurers as of June 30, 2022:

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

$

$

$

(2,884)

$

$

(2,884)

Optimum Re Insurance Company

 

A

594

594

Sagicor Life Insurance Company

 

A-

 

 

188

 

10,749

 

(309)

 

10,628

Ascendant Re

NR

(780)

(780)

Crestline SP1

NR

3,865

3,865

American Republic Insurance Company

A

7,375

7,375

Unified Life Insurance Company

NR

40

999

(17)

1,022

US Alliance Life and Security Company

 

NR

 

 

 

4,325

 

(24)

 

4,301

$

$

228

$

24,243

$

(350)

$

24,121

(individually or in the aggregate) with respect to our ceded business.

3034

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer as of December 31, 2021:

Recoverable on

Total Amount

Recoverable

Recoverable

Benefit

Ceded

Recoverable

(in thousands)

AM Best

on Paid

on Unpaid

Reserves/Deposit-

Due

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

Our securities positions resulted in changes in the unrealized gains position as of June 30, 2022, compared to December 31, 2021, that is reported in accumulated other comprehensive income on the Consolidated Balance Sheets. As discussed in Note 1, 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 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. Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately $2.9 million as of June 30, 2022, and unrealized gains of $0.2 million as of December 31, 2021, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains or losses 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 $3.1 million and a loss in the embedded derivative of $0.4 million as of June 30, 2022, and 2021, respectively. We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.

On June 26, 2021, the NDOI issued its non-disapproval of the Modified 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 Modified coinsurance deposit account from AEG was $2.4 million.

On November 10, 2021, the NDOI issued its non-disapproval of the Funds Withheld and Modified Coinsurance Agreement with SRC3, whereby, SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising 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 FW and Modco Agreement. The initial settlement included net premium income of $37.5 million and net statutory reserves of $43.6 million.

31

Under GAAP, ceding commissions are deferred on the Consolidated Balance Sheets and are amortized over the period of the policyholder contracts. The tables below show the ceding commissions from the reinsurers excluding SRC1 and what was earned on a GAAP basis for the three and six months ended June 30, 2022 and 2021:

Three months ended June 30, 

(in thousands)

2022

2021

Reinsurer

Gross Ceding Commission

Expense
Allowance(1)

Interest on Ceding Commission

Earned
Ceding
Commission

Gross Ceding Commission

Expense
Allowance

Interest on Ceding Commission

Earned
Ceding
Commission

Unified Life Insurance Company

$

$

$

$

6

$

$

$

$

Ironbound Reinsurance Company Limited

49

144

14

54

123

Ascendant Re

23

77

21

22

45

US Alliance Life and Security Company

14

76

17

15

54

Crestline Re SP 1

1,491

2,401

88

559

2,032

4,097

60

282

American Republic Insurance Company

1,026

1,774

30

197

2,223

4,379

12

69

$

2,517

$

4,175

$

204

$

1,059

$

4,255

$

8,528

$

163

$

573

Six months ended June 30, 

(in thousands)

2022

2021

Reinsurer

Gross Ceding Commission

Expense
Allowance(1)

Interest on Ceding Commission

Earned
Ceding
Commission

Gross Ceding Commission

Expense
Allowance

Interest on Ceding Commission

Earned
Ceding
Commission

Unified Life Insurance Company

$

$

$

$

14

$

$

$

$

Ironbound Reinsurance Company Limited

98

258

30

108

245

Ascendant Re

47

163

45

44

91

US Alliance Life and Security Company

28

163

2

38

31

121

Crestline SP1

2,525

4,231

168

1,065

4,377

8,774

110

498

American Republic Insurance Company

1,827

3,227

52

349

2,223

4,379

12

68

$

4,352

$

7,458

$

393

$

2,012

$

6,602

$

13,266

$

305

$

1,023

(1) Includes acquisition and administrative expenses, commission expense allowance and product development fees.

The table below shows the ceding commissions deferred on each reinsurance transaction on a GAAP basis:

(in thousands)

June 30, 2022

December 31, 2021

Reinsurer

    

Deferred Gain on Reinsurance Transactions

Deferred Gain on Reinsurance Transactions

US Alliance Life and Security Company(1)

 

$

157

$

162

Unified Life Insurance Company(1)

 

229

242

Ironbound Reinsurance Company Limited(2)

5,015

5,137

Ascendant Re

 

3,029

3,101

US Alliance Life and Security Company(2)

2,190

2,286

American Republic Insurance Company(2)

5,967

4,146

Crestline SP1(2)

15,616

13,515

$

32,203

$

28,589

1)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 related to these businesses reduces the gross ceding commission with the remaining deferred and amortized over the lifetime of the blocks of business.

32

2)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. As of June 30, 2022, and2023 or December 31, 2022, 0no contingency reserves were established.

American Life seeksexpects to reinsure substantially alla significant portion 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.

Retained and Reinsured Balance Sheets

The tabletables below shows the retained and reinsurance condensedconsolidated balance sheets:

    

June 30, 2022

December 31, 2021

    

June 30, 2023

December 31, 2022

(in thousands)

Retained

Reinsured

Consolidated

Retained

Reinsured

Consolidated

(In thousands)

Retained

Reinsured

Consolidated

Retained

Reinsured

Consolidated

Assets

 

  

 

  

 

  

 

  

Total investments

$

561,709

$

647,145

$

1,208,854

$

414,418

$

561,109

$

975,527

$

1,104,198

$

982,401

$

2,086,599

$

812,177

$

802,780

$

1,614,957

Cash and cash equivalents

79,021

49,943

128,964

95,406

46,607

142,013

125,156

69,119

194,275

127,291

64,123

191,414

Deferred acquisition costs, net

57,604

-

57,604

43,433

-

43,433

Premiums receivable

-

372

372

-

-

-

Accrued investment income

6,632

11,665

18,297

3,853

9,770

13,623

14,648

20,402

35,050

11,307

13,858

25,165

Deferred acquisition costs, net

33,164

33,164

24,530

24,530

Reinsurance recoverables

13,230

10,891

24,121

38,579

38,579

(62,609)

102,508

39,899

(6,853)

27,405

20,552

Property and equipment, net

1,811

-

1,811

1,897

-

1,897

Receivable for securities sold

441

-

441

2,033

8,485

10,518

Other assets

20,883

1,692

22,575

27,834

(2,189)

25,645

9,255

2,735

11,990

12,259

236

12,495

Total assets

$

714,639

$

721,336

$

1,435,975

$

566,041

$

653,876

$

1,219,917

$

1,250,504

$

1,177,537

$

2,428,041

$

1,003,544

$

916,887

$

1,920,431

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder liabilities

$

567,007

$

732,765

$

1,299,772

$

427,807

$

660,811

$

1,088,618

Benefit reserves

$

944

$

11,702

$

12,646

$

1,332

$

11,613

$

12,945

Deposit-type contracts

1,103,844

1,114,881

2,218,725

841,980

901,368

1,743,348

Other policy-holder funds

6,069

405

6,474

4,105

-

4,105

Notes payable

25,000

-

25,000

25,000

-

25,000

Deferred gain on coinsurance transactions

32,203

32,203

28,589

28,589

231

42,983

43,214

38,063

-

38,063

Payable for securities sold

44,656

-

44,656

8,872

-

8,872

Other liabilities

50,933

(11,429)

39,504

23,889

(6,935)

16,954

40,460

7,566

48,026

49,815

3,906

53,721

Total liabilities

$

650,143

$

721,336

$

1,371,479

$

480,285

$

653,876

$

1,134,161

$

1,221,204

$

1,177,537

$

2,398,741

$

969,167

$

916,887

$

1,886,054

Stockholders’ Equity:

 

 

 

 

 

Preferred stock

$

-

$

-

$

-

$

-

$

-

$

-

Voting common stock

4

4

4

4

4

-

4

4

-

4

Additional paid-in capital

138,663

138,663

138,277

138,277

139,085

-

139,085

138,482

-

138,482

Treasury stock

(175)

-

(175)

(175)

-

(175)

Accumulated deficit

(60,707)

(60,707)

(70,159)

(70,159)

(67,746)

-

(67,746)

(63,019)

-

(63,019)

Accumulated other comprehensive income (loss)

(25,877)

(25,877)

2,634

2,634

Accumulated other comprehensive loss

(57,433)

-

(57,433)

(51,386)

-

(51,386)

Total Midwest Holding Inc.'s stockholders' equity

$

52,083

$

$

52,083

$

70,756

$

$

70,756

$

13,735

$

-

$

13,735

$

23,906

$

-

$

23,906

Noncontrolling interest

12,413

12,413

15,000

15,000

15,565

-

15,565

10,471

-

10,471

Total stockholders' equity

64,496

64,496

85,756

85,756

29,300

-

29,300

34,377

-

34,377

Total liabilities and stockholders' equity

$

714,639

$

721,336

$

1,435,975

$

566,041

$

653,876

$

1,219,917

$

1,250,504

$

1,177,537

$

2,428,041

$

1,003,544

$

916,887

$

1,920,431

35

Note 9. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of June 30, 2023 and December 31, 2022 are as follows:

(In thousands)

    

June 30, 2023

    

December 31, 2022

Deferred tax assets:

 

  

 

  

Loss carryforwards

$

4,519

$

2,672

Capitalized costs

 

55

 

79

Stock option granted

1,193

1,066

Policy acquisition costs

8,205

6,489

General business credits

6

6

Derivative option allowance

310

-

Sec 163(j) limitation

171

171

Benefit reserves

 

10,478

 

12,010

Impairments

535

403

Unrealized losses on investments

15,267

13,624

Other

1,928

1,928

Total deferred tax assets

 

42,667

 

38,448

Less valuation allowance

 

(40,729)

 

(35,305)

Total deferred tax assets, net of valuation allowance

 

1,938

 

3,143

Deferred tax liabilities:

 

  

 

  

Intangible assets

 

147

 

147

Derivative option allowance

 

-

 

2,150

Bond Discount

1,912

936

Property and equipment

 

(121)

 

(90)

Total deferred tax liabilities

 

1,938

 

3,143

Net deferred tax assets

$

-

$

-

At June 30, 2023 and December 31, 2022, the Company recorded a valuation allowance of $40.7 million and $35.3 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.

There was income tax expense of $3 million and $2.1 million for the three months ended June 30, 2023 and 2022. and $5.9 million and $2.6 million of tax expense for the six months ended June 30, 2023 and 2022. 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:

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

    

2023

    

2022

    

2023

    

2022

Computed expected income tax benefit (expense)

���

$

428

$

(409)

$

(2,357)

$

(1,508)

Reduction (increase) in income taxes resulting from:

 

 

  

 

 

  

Interest maintenance reserve and reinsurance

(18)

61

51

(18)

Nondeductible expenses

(3)

(3)

(6)

(5)

Change in valuation allowance

 

(3,593)

 

2,480

 

(3,781)

(1,052)

Deferred tax adjustment

-

(4)

-

(14)

AETR adjustment

76

-

76

-

Prior year true-up

141

-

141

-

Subtotal of (increases) decreases

 

(3,397)

 

2,534

 

(3,519)

 

(1,089)

Tax (benefit) expense

$

(2,969)

$

2,125

$

(5,876)

$

(2,597)

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 June 30, 2023, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $7.9 million. The federal NOLs generated by Midwest Holding and American Life prior to June 28, 2018 which are subject to the Section 382 limitation can be carried forward. If not utilized, the NOLs of $1.0 million prior to 2017 will expire through the year of 2032.

The NOLs generated by SRC1 prior to December 30, 2021 of less than $0.1 million are subject to Section 382 limitations due to the change in control. However, under the Tax Cuts and Jobs Act of 2017, they will not expire and can be carried forward indefinitely.  The NOLs not subject to Section 382 which were generated from June 28, 2018 to December 31, 2022 do not expire and will carry forward indefinitely, however 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 $1.7 million on the deferred tax assets related to these federal NOL carryforwards.

36

Note 10. Leases

Our operating lease activities consist of leases for office space and equipment and do not include variable lease payments. The right of use assets and lease liabilities generated by our lease agreements are included in on the Consolidated Balance Sheets in the Other Assets and Other Liabilities categories, respectively.

Supplemental balance sheet information for our leases as of June 30, 2023 and December 31, 2022 is as follows:

(In thousands)

    

Classification

    

June 30, 2023

    

December 31, 2022

Assets

 

  

 

  

 

  

Operating

 

Operating lease right-of-use assets

$

2,083

$

2,119

Liabilities

 

  

 

  

 

  

Operating lease

 

Operating lease liabilities

$

2,106

$

2,135

Our operating lease expense for the three and six months ended June 30, 2023 and 2022 is as follows:

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

    

Classification

    

2023

    

2022

    

2023

    

2022

Operating

 

General and administrative expense

$

3

$

3

$

7

$

7

Minimum contractual obligations for our leases as of June 30, 2023 are as follows:

(In thousands)

    

Operating Leases

2023

$

224

2024

 

378

2025

 

342

2026

345

2027

353

2028

362

2029 and after

1,041

Total remaining lease payments

$

3,045

The cash flows related to the operating lease were less than $0.1 million for both the six months ended June 30, 2023 and 2022.

The weighted average remaining lease terms of our operating leases were approximately eight-and-one-half years and ten years, respectively, as of June 30, 2023 and December 31, 2022. The weighted average discount rate used to determine the lease liabilities for operating leases was 8% as of June 30, 2023 and December 31, 2022, respectively. The discount rate used for operating leases was based on our incremental borrowing rate.

37

Note 11. Equity

Preferred stock

As of June 30, 2023 and December 31, 2022, the Company had two million shares of preferred stock authorized with none issued or outstanding.

Common Stock

Our voting common stock is traded on The Nasdaq Capital Market under the symbol “MDWT.” Midwest has authorized 20 million shares of voting common stock and two million shares of non-voting common stock. As of June 30, 2023 and December 31, 2022, Midwest had 3,744,645 and 3,727,976 shares of voting common stock issued and outstanding, respectively. As of those dates, there were no shares of Midwest’s non-voting common stock issued or outstanding.

Midwest holds approximately 4,500 shares of voting common stock in its treasury due to a reverse stock split.

Additional paid-in capital

Additional paid-in capital is primarily comprised of the cumulative cash that exceeds the par value received by the Company in conjunction with past issuances of its shares. It also is increased by the amortization expense of the consideration calculated at inception of the stock option grants as discussed in Note 12 – Long-Term Incentive Plans below.

Accumulated Other Comprehensive Income (AOCI)

AOCI represents the cumulative other comprehensive income (loss) items that are reported separate from net loss and detailed on the Consolidated Statements of Comprehensive Loss. AOCI includes the unrealized gains and losses on certain investments and DAC, net of offsets and taxes as follows:

(In thousands)

Unrealized
investment gains
(losses) on fixed maturities,
net of offsets

Balance at December 31, 2021

$

2,634

Other comprehensive (loss) before reclassifications, net of tax

 

(54,975)

Less: Reclassification adjustments for losses realized in net income

955

Balance, December 31, 2022

(51,386)

Other comprehensive (loss) before reclassifications, net of tax

(6,230)

Less: Reclassification adjustments for losses realized in net income, net of tax

183

Balance, June 30, 2023

$

(57,433)

Note 12. Long-Term Incentive Plans

On June 11,In 2019, ourthe Board of Directors approved the Midwest Holding Inc. (“MHI”) Long-Term Incentive Plan (the “2019 Plan”) that reserves up to 102,000 shares of ourMHI 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 approvalIn 2019, the shareholders of MHI approved the plan occurred on June 11, 2019.2019 Plan. All awards are required to be established, approved, and/or granted by the compensation committeeCompensation Committee of ourthe Board.

33

On November 16,In 2020, ourthe Board of Directors adopted a new equity incentive plan titled the 2020 Long-Term Incentive Plan (the "2020 Plan"“2020 Plan”) that reserves up to 350,000 shares of MHI voting common stock for award issuances. The terms of the 2020 Plan are essentially the same as the 2019 Plan. On June 29,In 2021, the shareholders of MHI approved the 2020 Plan was approved by the shareholders. On June 14,Plan. During 2022, the boardBoard approved the addition of 150,000 shares of voting common stock to be added to the 2020 Plan for future awards and these shares were approved by our stockholders.the shareholders of MHI.

Stock Options

In accordance with the stockholder-approved equity incentive plans above, we have grantedthe Company grants stock options to employees and directors for the purchase of common stock at exercise prices established at the date of the grants and restricted stock unit awards. We calculate the fairgrants. Fair value and compensation at grant date using the Black Scholes Model. Stock options become exercisable under various vesting schedules (typically two to four years) and generally expire in ten years after the date of grant. Using the Black Scholes Model, we calculate compensation expense for option share units on a straight-line basis over the requisite service periods, accounting for forfeitures as they occur.

Restricted Stock and Restricted Stock Units

On November 16, 2020, the Company awarded 18,597 shares of restricted stock, and on November 11, 2021, it awarded 5,089 restricted stock units (“RSUs”).

The restricted stock award of 18,597 shares had a grant date fair value of $41.25 per share and was subject to time-based vesting requirements of one-fourth increments sixty days after each of the first four anniversary dates of the grant date.  The recipient of the award resigned on March 31, 2022 and received a total of 5,812 vested shares in connection with his termination of employment, while the remaining 12,785 shares of restricted stock were forfeited.  

The 5,089 RSUs were granted to our non-employee directors and had a grant date fair value of $24.34 per share and vested on June 14, 2022, the date of the Company’s 2022 annual meeting of stockholders.  The RSU compensation expense was calculated using the grant date fair value and is amortizing on a straight-line basis over the requisite service periods.  Total compensation recognized in connection with the RSUs was approximately $0.4 million with $44,000 recognized in the second quarter of 2022.

On June 14, 2022, the Company granted 18,718 RSUs to our non-employee directors with a grant date fair value of $11.22 per share. The RSUs will vest  the earlier of the date of our 2023 annual meeting of stockholders or June 14, 2023. Compensation expense was calculated using the grant date fair value and will be amortized on a straight-line basis over the requisite service period.

The compensation expense relating to these awards was calculated using the grant date fair value and is amortized on a straight-line basis over the requisite service periods.

The table below identifies the assumptions used in the Black Scholes Model to calculate the compensation expense:

June 30, 

December 31, 

2022

2021

Expected volatility

4.16% - 4.26%

4.4% - 66.3%

Weighted-average volatility

4.1%

38.9%

Expected term (in years)

2 - 7

2 - 7

Risk-free rate

1.79% - 3.49%

.8% - 1.5%

For the three months ended June 30, 2022 and 2021, we amortized the compensation expense related to the 2019 and 2020 Plans over the vesting tranches which resulted in expenses and an increase in additional paid in capital of approximately $0.4 million and $1.5 million, respectively.

For the six months ended June 30, 2022 and 2021, we amortized the compensation expense related to the 2019 and 2020 Plans over the vesting tranches which resulted in expenses and an increase in additional paid in capital of approximately $0.4 million and $1.8 million, respectively.

3438

The tables below shows the remaining non-vested shares and options under the 2019 and 2020 Plans as of June 30, 2022, and December 31, 2021, respectively:

 

June 30, 2022

Stock Options/
Restricted Stock/Unit
Outstanding

Weighted Average Grant-Date Fair Value

Weighted Average Exercise Price(1)

Nonvested stock options and restricted stock unit awards at December 31, 2021

317,217

$

25.80

$

40.13

Options granted

49,517

3.37

16.60

Restricted stock units granted

18,718

11.21

Adjustment to prior year options granted

(20,325)

Vested

(31,882)

35.64

39.85

Forfeited

(60,623)

14.88

45.11

Ending Balance at June 30, 2022

 

272,622

$

16.87

$

38.92

 

December 31, 2021

Stock Options/
Restricted Stock/Unit
Outstanding

Weighted Average Grant-Date Fair Value

Weighted Average Exercise Price(1)

Nonvested stock options at December 31, 2020

100,972

$

22.91

$

34.70

Options granted

333,880

19.25

42.84

Restricted stock units

5,089

24.34

24.34

Vested

(85,957)

17.32

30.20

Forfeited

(36,767)

23.91

40.42

Ending Balance at December 31, 2021

 

317,217

$

25.80

$

40.13

(1)Restricted stock and restricted stock units do not have an exercise price.

The tables below show the outstanding vested and nonvested stock options and restricted stock units as of June 30, 2022, and December 31, 2021

Options(3)

Weighted Average
Exercise Price
Per Share

Weighted Average
Remaining
Contractual Life
(Years)

Outstanding at December 31, 2021

489,131

$

38.62

9.2

Granted(1)

49,517

16.60

10.0

Restricted stock units

18,718

10.0

Vested(2)

31,882

39.85

8.8

Forfeited or expired

(60,623)

45.11

8.6

Exercised

Outstanding at June 30, 2022

528,625

$

38.92

9.1

(1)Includes adjustment to prior year granted options
(2)Includes adjustment to prior year vested options
(3)Includes restricted stock units which do not have an exercise price

35

Options(1)

Weighted Average
Exercise Price
Per Share

Weighted Average
Remaining
Contractual Life
(Years)

Outstanding at December 31, 2020

100,972

$

38.51

9.8

Granted

333,880

43.91

10.0

Restricted stock units

5,089

10.0

Vested

85,957

39.78

9.0

Forfeited or expired

(36,767)

44.05

8.5

Exercised

Outstanding at December 31, 2021

489,131

$

38.62

9.2

(1)Includes restricted stock units which do not have an exercise price

Note 11. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of policyholders 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 as of June 30, 2022, and December 31, 2021:

(In thousands)

    

June 30, 2022

    

December 31, 2021

Beginning balance

$

1,075,439

$

597,868

US Alliance

 

(2,033)

 

1,873

Unified Life Insurance Company

(4)

468

Ironbound Reinsurance Company Limited

 

2,764

 

6,579

Ascendant Re

(2,813)

2,880

Crestline SP1

(10,287)

4,834

American Republic Insurance Company

(2,982)

1,567

Deposits received

 

254,145

 

471,646

Investment earnings (includes embedded derivative)

 

(12,170)

 

7,012

Withdrawals

 

(18,129)

 

(18,446)

Policy charges

(270)

(842)

Ending balance

$

1,283,660

$

1,075,439

36

Note 12. Contingencies and Commitments

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 $229.2 million as of June 30, 2022. Of the approximately $229.2 million in unfunded commitments at June 30, 2022, approximately $97.1 million related to American Life. The remaining $132.1 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.

(In thousands)

June 30, 2022

December 31, 2021

Due in one year or less

$

13,796

$

19,245

Due in two years

 

55,577

 

26,753

Due in three years

 

10,561

 

4,705

Due in four years

11,433

8,741

Due in five years and after

137,843

86,497

$

229,209

$

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 is licensed in 23 jurisdictions as of June 30, 2022. American Life has pending applications in additional states as of June 30, 2022.

Note 13. Leases

Our operating lease activities consist of leases for office space and equipment and do 0t include variable lease payments.

Supplemental balance sheet information as of June 30, 2022, and December 31, 2021, are as follows:

(In thousands)

    

Classification

    

June 30, 2022

    

December 31, 2021

Assets

 

  

 

  

 

  

Operating

 

Operating lease right-of-use assets

$

2,239

$

2,360

Liabilities

 

  

 

  

 

  

Operating lease

 

Operating lease liabilities

$

2,249

$

2,364

Our operating leases expenses for the three months ended June 30, 2022 and 2021, were approximately $3,300 and $400, respectively. Operating leases expenses for the six months ended June 30, 2022 and 2021, were approximately $6,600 and $1,600, respectively.

Minimum contractual obligations for our operating leases as of June 30, 2022, are as follows:

(in thousands)

    

Operating Leases

2022

$

171

2023

 

342

2024

 

342

2025

342

2026

345

2027 and after

1,758

Total remaining lease payments

$

3,300

37

The cash flows related to operating leases was approximately $6,600 and $5,000 as of June 30, 2022 and 2021, respectively.

The weighted average remaining lease terms of our operating leases were approximately nine years and one years as of June 30, 2022 and 2021, respectively. The weighted average discount rate used to determine the lease liabilities for operating leases was 8% as of June 30, 2022 and 2021, 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.

grant date are calculated using the Black Scholes Model. Compensation expense for option shares is expensed on a straight-line basis over the requisite service periods, accounting for forfeitures as they occur. Stock options become exercisable under various vesting schedules (typically two to four years) and generally expire in ten years after the date of grant. The exercise price of the option is equal to the average daily market price of MHI’s common stock on the date of grant resulting in a grant date intrinsic value of $0.00.

Changes in outstanding options were as follows:

Weighted Average Exercise Price Per Share

Range of Option Exercise Prices per Share

Total
Outstanding

Outstanding,
Non-vested

Vested and
Exercisable

December 31, 2022

$

32.19

$

11.20 - 55.02

319,121

271,517

47,604

Granted

17.12

17.20

5,750

5,750

-

Prior year adjustment

39.38

16.37 - 55.02

-

(7,390)

7,390

Vested

-

-

-

-

-

Exercised

-

-

-

-

-

Forfeited

36.73

25.00 - 55.02

(4,150)

(4,150)

-

Expired

-

-

-

-

-

June 30, 2023

$

31.85

$

11.20 - 55.02

320,721

265,727

54,994

Option information segregated by ranges of exercise prices were as follows:

June 30, 2023

Total Outstanding Options

Vested and Exercisable

Range of Option Exercise Prices per Share

Options

Weighted Average Exercise Price per Share

Weighted Average Remaining Term

Options

Weighted Average Exercise Price per Share

Weighted Average Remaining Term

> $50.00

49,353

$

55.02

7.71

7,390

$

55.02

7.59

$40.00 - $49.99

127,751

41.25

7.69

36,042

41.25

7.59

$30.00 - $39.99

-

-

-

-

-

-

$20.00 - $29.99

25,967

23.16

7.64

5,877

25.00

7.28

$10.00 - $19.99

115,000

13.43

9.00

4,285

16.37

7.59

< $10.00

-

$

-

-

-

$

-

-

The weighted average exercise prices of vested and exercisable options as of June 30, 2023, were $39.38.

As of June 30, 2023, based on a closing stock price of $26.32 per share, the aggregate intrinsic (in-the-money) values of vested options and all options outstanding were $0.6 million and $1.6 million, respectively.

Restricted Stock and Restricted Stock Units

In 2020, the Company awarded 18,597 shares of restricted stock, with a grant date fair value of $41.25 per share and subject to time-based vesting requirements of one-fourth increments sixty days after each of the first four anniversary dates of the grant date. The restricted stock compensation expense is calculated using the stock prices at grant date and amortizing on a straight-line basis over the requisite service periods. The recipient of the award resigned on March 31, 2022, and received a total of 5,812 vested shares in connection with his termination of employment, while the remaining 12,785 shares of restricted stock were forfeited.  

5,089 restricted stock units (“RSUs”) were granted to our non-employee directors in June 2021 with a grant date fair value of $24.34 per share and vested on June 14, 2022, the date of the Company’s 2022 annual meeting of stockholders.  The compensation expense relating to these awards was calculated using the grant date fair value and is amortizing on a straight-line basis over the requisite service periods.  

39

On June 14, 2022, the Company granted 18,718 RSUs to our non-employee directors with a grant date fair value of $11.22 per share, although 2,674 of those RSUs were forfeited by former MHI director Douglas Bratton when he left the Board in September 2022. The remaining 16,044 RSUs vested on June 6, 2023 in conjunction with our annual stockholders meeting. The compensation expense relating to these awards was calculated using the grant date fair value and was amortized on a straight-line basis over the requisite service periods.

On June 6, 2023, the Company granted 6,984 RSUs to our non-employee directors with a grant date fair value of $25.70 per share. By their terms, the RSUs will vest on the earlier of June 6, 2024 or the date of our 2024 annual stockholders meeting, although they are also subject to accelerated vesting in connection with the transaction described in Note 18. The compensation expense relating to these awards was calculated using the grant date fair value and will be amortized on a straight-line basis over the requisite service period.

Total Outstanding Units

Vested Units

Units

Weighted Average Grand Date Fair Value

Units

Weighted Average Grant Date Fair Value

December 31, 2022

17,207

$

13.84

1,163

$

50.00

Granted

6,984

25.76

-

-

Vested

-

-

-

-

Forfeited

-

-

-

-

Released

(16,044)

11.22

-

-

June 30, 2023

8,147

$

22.08

1,163

$

50.00

The table below identifies the assumptions used in the Black Scholes Model to calculate the compensation expense for options granted during the six months ended June 30, 2023 and the year ended December 31, 2022:

June 30, 

December 31, 

2023

2022

Volatility

287.3%

4.16% - 4.26%

Weighted-average volatility

287.3%

3.7%

Expected term (in years)

6.54 yrs

2 - 7

Risk-free rate

3.57%

0.02% - 2.15%

For the three months ended June 30, 2023 and 2022, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants above, over vesting tranches which resulted in expense and an increase in additional paid in capital of $0.3 million and $0.4 million, respectively.

For the six months ended June 30, 2023 and 2022, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants above, over vesting tranches which resulted in expense and an increase in additional paid in capital of $0.6 million and $0.4 million, respectively.

40

The tables below shows the remaining non-vested shares under the 2019 and 2020 Plans as of June 30, 2023 and December 31, 2022, respectively:

 

June 30, 2023

Awards
Outstanding

Weighted Average Grant-Date Fair Value

Weighted Average Exercise Price

Nonvested stock options and restricted

Stock unit awards at December 31, 2022

287,561

$

16.96

$

32.29

Options granted

5,750

16.56

17.12

Restricted stock units granted

6,984

16.56

-

Vested

(23,434)

15.76

55.02

Forfeited or expired

(5,400)

20.51

36.73

Ending Balance at June 30, 2023

271,461

$

16.92

$

31.85

 

 

December 31, 2022

Stock Options
Outstanding

Weighted Average Grant-Date Fair Value

Weighted Average Exercise Price

Nonvested stock options and restricted

stock unit awards at December 31, 2021

317,217

$

25.80

$

40.13

Options granted

117,367

9.57

14.92

Restricted stock units granted

18,718

Vested

(56,678)

21.12

36.53

Forfeited or expired

(109,063)

23.82

38.87

Ending Balance at December 31, 2022

 

287,561

$

16.96

$

32.29

Note 14.13. Statutory Net Income and Surplus

American Life isand Seneca Re are 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.

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 and the Vermont Department of Insurance for SRC1 and SRC3:

Three months ended June 30, 

Six months ended June 30, 

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

2022

    

2021

2022

    

2021

2023

    

2022

2023

    

2022

American Life

$

8,298

$

6,109

$

17,891

$

2,279

$

(18,528)

$

8,298

$

(35,116)

$

17,891

SRC1

$

(981)

$

(3,312)

$

(2,253)

$

(2,587)

$

1,583

$

(981)

$

4,797

$

(2,253)

SRC3

$

(564)

$

$

(95)

$

$

629

$

(564)

$

917

$

(95)

The following table represents the Capital and Surplus 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)

June 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

American Life

$

63,717

$

74,011

$

58,135

$

69,936

SRC1

$

6,162

$

8,415

$

16,979

$

9,615

SRC3

$

4,948

$

3,150

$

8,348

$

6,088

The following tables representtable represents the premiumpremiums sales 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:

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

2022

    

2021

2022

    

2021

American Life

$

72,498

$

28,291

$

130,616

$

68,246

SRC1

$

-

$

1,591

$

-

$

37,825

SRC3

$

23,905

$

$

23,757

$

41

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

2023

    

2022

2023

    

2022

American Life

$

138,920

$

72,498

$

231,207

$

130,616

SRC1

$

-

$

-

$

-

$

-

SRC3

$

(52)

$

23,905

$

123

$

23,757

State insurance laws require American Life to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaryAmerican Life 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 as of June 30, 2022,2023 and December 31, 2021,2022, exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC 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 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.

38

As of June 30, 2022,2023 and December 31, 2021,2022, American Life did not hold any participating policyholder contracts where dividends were required to be paid.

Note 15. Third-Party14. Third-party Administration

The Company, commencedthrough its investment advisory subsidiary 1505 Capital, offers investment and structuring services. Our reinsurance partners may choose to engage 1505 as the investment advisor for their portfolios. Services are also available to unaffiliated investors. As of June 30, 2023, and December 31, 2022, 1505 Capital had $531.6 million and $501.9 of third-party administrative (“TPA”) services in 2012assets under management, respectively.

Note 15. Policy Administration Fees

The company generates revenue through policy administration for our third-party reinsurers, as an additional revenue source. These services are offered to non-affiliated entities. These agreements, for various levelswell as fees received from early termination of administrative services on behalf of each customer, generate fee income for the Company. Services provided vary based on each customer’s needs and can include some or all aspects of back-office accounting and policy administration. TPA fee income earned for TPA administration duringpolicies. For the three months ended June 30, 2023 and 2022, we received $0.5 million and 2021 were approximately $0.0$0.5 million of fees and for both periods, respectively. TPA fee income earned for TPA administration during the six months ended June 30, 2023 and 2022 we received $1.1 million and 2021 were $0.1 and $0.3 million, respectively. As of June 30, 2022, 1505 Capital had $471.1$0.9 million of third-party assets under management.

Note 16. Equity

Preferred stock

As of June 30, 2022, and December 31, 2021, the Company had 2 million shares of preferred stock authorized but NaN were issued or outstanding.

Common Stock

The voting common stock is traded on The Nasdaq Capital Market under the symbol “MDWT.” Midwest has authorized 20 million shares of voting common stock and 2 million shares of non-voting common stock. As of June 30, 2022, and December 31, 2021, Midwest had 3,737,564 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 approximately 4,500 shares of voting common stock in its treasury.

Additional paid-in capital

Additional paid-in capital is primarily comprised of the cumulative cash that exceeds the par value received by the Company in conjunction with past issuances of its shares. It also is increased by the amortization expense of the consideration calculated at inception of the stock option grants as discussed in Note 10 – Long-Term Incentive Plans above.

Accumulated Other Comprehensive Income (AOCI)

AOCI represents the cumulative other comprehensive income (loss) (OCI) items that are reported separate from net income (loss) and detailed on the Consolidated Statements of Comprehensive Loss. AOCI includes the unrealized gains and losses on investments and DAC, net of offsets and taxes are as follows:

(In thousands)

Unrealized
investment gains
(losses) on fixed maturities,
net of offsets

Balance at December 31, 2020

$

6,431

Other comprehensive (loss) before reclassifications, net of tax

 

(1,422)

Less: Reclassification adjustments for losses realized in net income

(2,375)

Balance, December 31, 2021

2,634

Other comprehensive (loss) before reclassifications, net of tax

(29,369)

Less: Reclassification adjustments for losses realized in net income, net of tax

858

Balance, June 30, 2022

$

(25,877)

39

Note 17. Deferred Acquisition Costs

The following table represents a roll forward of DAC, net of reinsurance:

(In thousands)

    

June 30, 2022

December 31, 2021

Beginning balance

$

24,530

$

13,456

Additions

9,864

13,402

Amortization

(1,902)

(2,886)

Interest

565

632

Impact of unrealized investment losses

107

(74)

Ending Balance

$

33,164

$

24,530

fees.  

Note 18.16. 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 initially appointed as a director of both our board of directorsBoard and the American Life boardBoard of directors.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 a quota share percentage of 40% the liabilities of American Life’sLife arising from its FIA products. From inception throughThrough June 30, 2022,2023, American Life had ceded $334.0$515.3 million face amount of annuity premiumsannuities to Crestline Re SP1. American Life received total ceding commissions inception-to-date, of $15.5$0.8 million and expense reimbursements of $28.4$0.7 million in connection with these transactions as offor the three months ended June 30, 2023 and commissions of $1.6 million and expense reimbursements of $1.6 million for June 30, 2022.

The Reinsurance Agreement also contains the following agreements:

American Life and Crestline Re 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 Re SP1 entered into a trust agreement whereby SRC2Crestline maintains for American Life’s benefit a trust account that supports the reinsured business.

Currently,On September 16, 2022, Midwest Holding and Crestline executed a Letter of Understanding relating to the Stockholders Agreement. The Company and Crestline agreed that Crestline’s representative would resign from the Boards of Directors of the Company and American Life. Notwithstanding the foregoing, the parties agreed that the resignation and Crestline’s decision to no longer appoint a director does not constitute a permanent waiver of Crestline’s rights under the Stockholders Agreement to appoint a Crestline Designated

42

Director. The Company and Crestline agreed that the foregoing described agreement will remain in place until the earlier to occur of the date (i) the parties reach written agreement otherwise, (ii) that Crestline is no longer an affiliate of a life insurance entity it recently acquired and (iii) on which Crestline no longer has the right to elect or appoint a Designated Director (and Observer) to the Board.

As of June 30, 2023, and December 31, 2022, Crestline has approximately $311.9$477.2 million and $423.6 of the Company’s assets under management, respectively, and iswas a subadvisor on approximately $419.0$166.7 million and $134.3 million of additional investments.investments as of June 30, 2023 and December 31, 2022, respectively.

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”) and Class B preferred shares in Chelsea Holdings Midwest LLC. TheThis note is being carried at cost plus PIK of $6.1$6.4 million, and the preferred shares are carried at a fair market value of $2.3 million as of June 30, 2023 and $2.3 million as of December 31, 2022, based upon valuations received from an independent third-party.

Note 17. 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 $191.3 million as of June 30, 2022.2023. Of the approximately $191.3 million in unfunded commitments at June 30, 2023, approximately $55.8 million related to American Life. The remaining $135.5 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.

(In thousands)

June 30, 2023

December 31, 2022

Due in one year or less

$

73,566

$

52,951

Due in two years

 

28,892

 

43,604

Due in three years

 

21,847

 

7,731

Due in four years

11,737

13,277

Due in five years and after

55,245

61,432

$

191,287

$

178,995

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 was granted authorization to do business in Kentucky on June 23, 2023, and is currently licensed in 25 states and the District of Columbia as of June 30, 2023. American Life has pending applications in additional states as of June 30, 2023.

Note 18. Pending Merger

On April 30, 2023, Midwest Holding Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Midas Parent, LP, a Delaware limited partnership (“Parent”) and an affiliate of Antarctica Capital, LLC (“Antarctica”), and Midas Merger Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction (or waiver) of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company and whereupon Merger Sub will cease to exist and the Company will be the surviving corporation in the Merger and will continue as a wholly-owned subsidiary of Parent (the “Merger”).

The board of directors of the Company (the “Company Board”) unanimously approved and declared it advisable to enter into the Merger Agreement and resolved to recommend that the Company’s stockholders approve the adoption of the Merger Agreement and the transactions contemplated thereby (the “Transactions”), including the Merger on the terms and subject to the conditions set forth in the Merger Agreement.

As a result of the Merger, at the effective time of the Merger (the “Effective Time”), each outstanding share of common stock of the Company, par value $0.001 per share (the “Company Common Stock”) (other than (i) Company Common Stock held by Parent or the Company or any of their respective wholly owned subsidiaries, and (ii) any shares of Company Common Stock held by stockholders

43

who properly exercise appraisal rights under Delaware law), outstanding immediately prior to the Effective Time, will be converted into the right to receive $27.00 per share in cash, without interest.

Consummation of the Merger is subject to certain conditions, including, but not limited to, (i) the Company’s receipt of approval of the Company’s stockholders, (ii) the absence of any law or order prohibiting or making illegal the consummation of the Merger, (iii) the approval of the Merger by the Nebraska Department of Insurance and the Vermont Department of Financial Regulation (“DFR”) without the imposition of any Burdensome Condition (as defined in the Merger Agreement), and (iv) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement). On May 14, 2023, the DFR granted its approval of the Merger.

On July 26, 2023, the Company held a special meeting (the “Special Meeting”) of stockholders at which the Company’s stockholders voted to adopt the Merger Agreement and approve the Merger.  

44

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand thediscussion of our financial condition of the Company as of June 30, 2022, compared with December 31, 2021, and the results of operations for the three

40

and six months ended June 30, 2022, compared with corresponding periods in 2021 of Midwest Holding Inc. and its consolidated subsidiaries. The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statementsthe financial statements and the accompanying notes to the Consolidated Financial Statements (“Notes”) presentedthose statements included in “Part 1 – Item 1. Financial Statements” of this Annual Report and ouron Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”),and it includes many forward-looking statements which involve many risks and uncertainties including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysisthose referred to herein. Our actual results could differ materially from those indicated in such forward-looking statements as a result of Financial Condition and Results of Operations.”

certain factors, such as those set forth herein under “Special Cautionary Note Regarding Forward-Looking Statements,” “Summary of Risks Associated with our Business and Risk Factors

Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),Voting Common Stock” and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and such statements“Risk Factors.” We are subjectunder no duty to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning new products or services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlyingupdate any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “estimates,” “projects,” “should,” “intends,” “will,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, many of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors” of our 2021 Form 10-K and [below in Part III – Other Information – Item 1A Risk Factors.]

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;
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, pricing 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;

41

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;
variability of statutory capital required to be held by insurance or reinsurance entities; and
lawsuits in the ordinary course of business.

All such forward-looking statements speak only as ofafter the date of this report. You are cautioned notannual report to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertakingconform these statements to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statements are based.actual results.

Overview of Company and Business Model

Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated on October 31, 2003 for the purpose of operating a financial services company. We are in the annuity insurance business and operate through our wholly owned subsidiaries, American Life & Security Corp. (“American Life”), 1505 Capital LLC (“1505 Capital”), and our sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).

We are a 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 distribute our annuities through independent distributors who are primarily independent marketing organizations (“IMOs”). Our operations are comprised of three distinct, inter-connected businesses.businesses – insurance, reinsurance, and asset management. We seek to reinsure substantially alla significant portion of our annuity policies with third-party reinsurers and our captive reinsurance subsidiary, Seneca Re. Our third-party reinsurers include traditional reinsurers and capital markets reinsurers, who are third-party investors seeking exposure to reinsurance revenue and typically do not have their own reinsurance platforms or insurance-related operations. 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.

We believe that our operating capabilities and technology platform provide annuity distributors and reinsurers with flexible and cost-effective solutions. We seek to create value through our ability to provide the distributors and reinsurers with annuity product innovation, speed to market for new products, competitive rates and commissions, and streamlined customer and agent experiences. Our capital model allows us to support increasing annuity sales volumes with capital capacity provided by reinsurers although, in connection with plans for future growth, we continue to monitor ourany need (if any) for additional capital. By reinsuring a significant portion of the annuity policies issued, 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 reduce our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us.

We provide an end-to-end solution to manageAs of June 30, 2023, approximately 49% of the deposits received in 2023 for our annuity products that includes a broad set of product development, distribution support, policy administration, and asset/liability management services. Our technology platform enables uswere ceded to efficiently develop, sell and administer a wide range of products. Our asset management services are also provided to third-party insurers and reinsurers.

We currently offer annuity products, consisting of multi-year guaranteed annuity (“MYGA”) and fixed indexed annuity (“FIA”) policies, through IMOs thatreinsurance vehicles capitalized by third party reinsurers or held in turn distribute our products and services to independent insurance agents in 22 states and the

42

District of Columbia. We further provide IMOs with our product development expertise, administrative capabilities and technology platform.protected cells within Seneca Re for future reinsurance transactions.

We operate our core business through threefour subsidiaries under one reportable segment. American Life & Security Corp. (“American Life”) is a Nebraska-domiciled life insurance company, that is currently licensed to sell, underwrite, and market life insurance and annuity products in 2225 states and the District of Columbia. In late 2018, 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, thatin December 2018. That rating was affirmed in December 2020 and February 2022.March 2023. A.M. Best also upgradedrecently revised its outlook for American Life’s long-term issuer credit ratingLife from Stable to bbb+ from bbb in December 2020 which was  affirmed in February 2022.Under Review. All of our annuities are written by American Life.

American Life was granted authorization to do business in Kentucky on June 23, 2023, and has pending applications in additional states as of June 30, 2023.

Our other insurance subsidiary, Seneca Re, is a Vermont-domiciled sponsored captive reinsurance company established in early 2020 to reinsure various types of risks on behalf of American Life and third-party capital providers through special purpose reinsurance entities known as “protected cells.” Through Seneca Re, we assist capital market investors in establishing and licensing new protected cells. We also own

Midwest Capital Corp was established as a holding company and is the immediate parent of Seneca Incorporated Cell, LLC 2021-03 (“SRC3”), both of which are consolidated into our financial statements.

45

Our fourth subsidiary, 1505 Capital, which is an SEC registered investment adviser that providesproviding financial, investment advisory, and management services. Our asset management services are available to third-party insurers and reinsurers. At June 30, 2022,2023, 1505 Capital had approximately $471.1$531.6 million total third-party assets under management.

We seek to deliver long-term value by growing our annuity volumes and generating profitable fee-based revenue. We generate fees and other revenue based on the gross deposits received on the annuity policies we issue, reinsure, and administer.

We seekprovide an end-to-end solution 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 a majority of our reinsurers. 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 liabilities.

By reinsuring a significant portion of the annuity 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.

As of June 30, 2022, approximately 61% of the deposits received in 2022 for ourmanage annuity products were ceded to reinsurance vehicles capitalized by third party reinsurers or held in protected cells within Seneca Re for future reinsurance transactions.

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 three months ended June 30, 2022 and 2021, we generated $2.5 million and $4.3 million, respectively, in upfront ceding commissions. For the six months ended June 30, 2022 and 2021, we generated $4.4 million and $6.6 million, respectively, in upfront ceding commissions. On our balance sheet is an item “deferred gains on reinsurance” equaling $32.2 million and $28.6 million asthat includes a broad set of June 30, 2022, and December 31, 2021, respectively which will be earned as revenue over the relevant reinsured annuity contract periods. Amortization of the deferred gain on reinsurance was $1.0 million and $0.6 million for the three months ended June 30, 2022 and 2021, respectively, and was recognized as revenue under GAAP. Amortization of the deferred gain on reinsurance was $2.0 million and $1.1 million for the six months ended June 30, 2022 and 2021, respectively, and was recognized as revenue under GAAP.

For the three months ended June 30, 2022 and 2021, we generated negative $0.1 million and positive $8.9 million of revenue from investment income, realized gains on investments, ceding commissions earned,product development, distribution support, policy administration, and assetasset/liability management fees. For the six months ended June 30, 2022 and 2021, we generated $2.5 million and $8.3 million of revenue from investment income, realized gains on investments, ceding commissions earned, policy administration, and asset management fees.

43

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.

Our Products

Through American Life we presently issue several MYGA and FIA products. American Life presently offers fixed annuity products, consisting of two MYGAs, two FIAs, 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 (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 with fully protected principal. American Life began selling its MYGA and FIA products in 2019.

In 2021, we introduced two new indexes into the selections on FIA products. The S&P 500 ESG index for fixed annuities is comprised of a subset of 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 S&P Dow Jones Indices (S&P DJI).

Our second index introduced in 2021, the Goldman Sachs Xenith Index is a multi-asset strategy that uses an 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 methodology.

We expect to expand American Life’s product line in the future. Depending on market demand, we expect to consider having American Life write a variety of insurance products, including fixed deferred, fixed indexed and other annuities. Any new insurance products we create must be filed with and approved by appropriate state insurance regulatory authorities before being offered to the public. American Life’s MYGA and FIA products were developed using an independent consulting actuary, and we expect that any new products will utilize similar services. Our long-term plan isplatform enables us to broaden our products to lifeefficiently develop, sell and Medicare supplements under attractive market conditions.

44

The table below sets forth American Life’s MYGA and FIA deposits received during the three and six months ended June 30, 2022 and 2021:

Three months ended June 30, 

Six months ended June 30, 

2022

2021

2022

2021

(In thousands)

Deposits Received(1)

Deposits Received(1)

Deposits Received(1)

Deposits Received(1)

Annuity Premium

MYGA

$

70,230

$

26,191

$

95,694

$

35,560

FIA

85,804

99,674

158,452

213,959

Total issued

$

156,034

$

125,865

$

254,146

$

249,519

1) Under generally accepted accounting principles in the United States of America (“GAAP”), these products are defined as deposit-type contracts; therefore, the deposits received are accounted for under GAAP as deposit-type liabilities on our balance sheet and premiums received are not recognized as revenue in our consolidated statement of comprehensive loss. Under Statutory Accounting Principles (“SAP”), the MYGA and FIA premiums received are treated as premiums written and as revenue when earned.

Industry Trends and Market Conditions

Market

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 importanta key role in retirement planning by providing individuals with stable, tax-efficient sources of income. In 20202022, annuity premium,premiums accounted for $295$313 billion of annual premiums, or approximately 31%48% of the $963$652 billion of total annual life annuity, and accident and healthannuity premiums according to the 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 MYGAs and FIAs written on an individual basis.

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 forecastforecasted to grow from 56 million in 2020 to an estimated 81 million in the next 20 years,by 2040, according to the U.S. Census Bureau, Population Estimates and Projections. This study also forecasted that U.S. population aged over 65 years old is expected to grow by 44% from 2020 to 2040, while the total U.S. population is expected to grow by only 12%.  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 2020,the fourth quarter of  2022, approximately 77%63% of U.S. individual annuity sales occurred through independent distributors, including independent agents, broker-dealers, and banks, representing an increase from approximately 70% in 2016 according to U.S. Individual Annuities, 2020 Year in Review,the Life Insurance Marketing and Research Association (“LIMRA”), 2021. 2022 Q4 U.S. Individual Annuities Glimpse. Independent agents are the second largest distribution channel, behind independent broker-dealers,banks, accounting for approximately 19%18% of U.S. individual annuity sales in 2020.the fourth quarter of 2022. IMOs provide independent agents with access to annuity products along with operational support services and functionality to support the distribution 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.

We believe that capital markets investors have been actively seeking investing in and acquiring insurance and reinsurance 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. However, there are significant regulatory and operational hurdles for capital providers looking to enter the insurance 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 annuities through a variety of reinsurance entities that we can form quickly and operate efficiently with lower upfront and ongoing regulatory and operating costs.

45

State expansion efforts have taken more time than anticipated, as statesstate insurance regulators would like to see a more meaningfulfully developed historical financial footprint. We are working diligently to file in more states, responding and providing increased information to regulators and discussing how theour business model ensures policyholders are protected, given the capital held and supported by the use of reinsurance.

Our most recently authorized states, Florida, Georgia, and Kentucky, granted certificates of authority as of December 22, 2022, February 24, and June 23, 2023, respectively, and we have commenced operations in these new jurisdictions.

We currently distribute annuity products through eight27 third-party IMOs. We believe our product development, prompt policy processing, operating flexibility and speed to market make us a desirable partner for insurance distributors. We are seeking to grow by increasing volumes with our current IMOs and by establishing new IMO relationships.

Competition

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.

46

Our experience indicates that the market for annuities is dynamic. The combination of the treasury market experiencing the unprecedented rate increases and the volatility in the market resulting from the war in Ukraine and related economic uncertainties due to inflation has opened up investment opportunities that allow us, and our reinsurance partners, to support more competitive rates for annuities. Based on our experience with COVID, we expect this investment environment to be conducive to our business model. We have been reviewing policy pricing along with reinsurer appetite to ensure we continue to grow our business while managing risk.We have recently taken pricing action on both our FIA and MYGA products and continue to monitor our competitiveness in the market. We have also increased our focus on marketing, reestablishing, and expanding our relationships on the distribution side through various channels and are reallocating or adding resources relating to this initiative. As a result, we experienced encouraging sales in the second quarter of 2022.as 2022 unfolded. However, we expect competition in our market to remain intense particularly from other well established entities providing annuity products.

Given potential premium growth, we have capacity to cover the capital needs of writing new business through existing reinsurers although, in connection with plans for future growth, we continue to monitor our need (if any) for additional capital. Additionally, we have a number of potential reinsurance transactions in the pipeline that may close later in the year.

Interest Rate Environment

The Federal Reserve repeatedly increased the federal funds rate throughout 2022, moving from 0.25% to 4.50%, and continued that trend increasing short-term interest ratesthe rate to 5.00% in the second quarter of 2022, compared to the historically low levels in the same period in 2021 and the expectation communicated from U.S. federal banking officials is for rate increases to continue during the remainder of 2022.June 2023. We seek to address our interest rate risk through managing the duration of the liabilities and purchasing and holding quality, long-term assets mirroring that duration.

If interest rates were to rise, we believe the yield on our floating rate investments and the yield on new investment purchases would rise. We also believe our products would therefore be more attractive to consumers and our annuities sales would increase.

Discontinuation of LIBOR

The Financial Conduct Authority (“FCA”), the United Kingdom regulator of the London Interbank Offered Rate ("LIBOR"), previously indicated that it intends to stop 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 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 LIBOR Instruments, the terms 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, federal legislation governing securities under New York law has been enacted to provide a safe harbor for transition to the recommended

46

alternative reference rate. In addition, federal legislation has been introduced to provide the same protection for securities not governed by New York law.

Notwithstanding the availability of statutory guidance on fallback procedures, 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 instruments.

As a result, the transition of our LIBOR Instruments to alternative reference rates, including the Secured Overnight Financing Rate (“SOFR”), may result in adverse changes to the net investment income, fair market value and return on those investments. We intend to continue evaluating and monitormonitoring 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 the effect of adopting or transitioning to alternative rates such as SOFR, we are unable to predict the overall impact of this change at this time, although we have experienced no adverse effecttime.

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with 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 investment portfoliosignificant accounting policies and estimates. These accounting policies inherently require significant judgment and assumptions, and actual operating results could differ significantly from this transition to date.

COVID-19

management’s estimates determined using these policies. We continue to closely monitor developments relatedbelieve the following accounting policies, judgments, and estimates are the most critical to the COVID-19 pandemic to assess any potential adverse impact on our business. It is currently not possible to provide a longer-term estimateunderstanding of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations and financial condition or liquidity. We continue to monitor the Center for Disease Controlposition. Our accounting policies, judgments, and Prevention and State of Nebraska guidelines regarding employee safety. Our management continues to monitorestimates have not changed significantly over our investments and cash flows to evaluate any impact.

Critical Accounting Policies and Estimates

Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K contains a detaileddisclosed accounting periods. For further discussion of our critical accounting policies and estimates. This reportestimates see “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” to our Consolidated financial statements.

47

Valuation of Investments

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. Premiums 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 income.

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be readrecorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, 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 conjunctionthe statement of comprehensive income as an 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 impairment is bifurcated. The Company recognizes the credit loss portion as realized losses and the noncredit loss portion in accumulated other comprehensive loss. The credit component of other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the “Critical Accounting Policiesamortized 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” discussedestimates regarding timing and amount of recoveries associated with a default. As of June 30, 2023 and December 31, 2022, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million and $1.4 million, respectively.Additionally, during the first quarter of 2023 the company recognized an impairment for the full value of an asset valued at $0.6 million.

Investment income consists of interest, dividends, gains and losses, 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 June 30, 2023, the sum of the fair value of those licenses exceeded the carrying value of the indefinite-lived intangible assets. These amounts are carried on our balance sheet in Other Assets.

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.

48

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 FW 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. When our investment advisor subsidiary, 1505 Capital, is appointed to manage these assets, we receive additional ongoing asset management 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 products.

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 these 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 deposit-type contract liabilities. Annuity premiums are shown as a financing activity in the Consolidated Statements 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 Statements of Cash Flows. Revenues from asset management services are recognized as earned.

Derivative Instruments

Derivatives are used to hedge the risks experienced in our 2021 Form 10-K MD&A.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 Consolidated 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 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 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 Consolidated Statements of Comprehensive Loss as a realized gain or (loss).

Additionally, reinsurance agreements written on a FW 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 Statements of Comprehensive Loss.

Derivatives

The Company has entered into certain derivative instruments to hedge FIA products that guarantee the return of principal to our 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

49

the FIA index credits and the related embedded derivative liability fluctuate 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 in seeking tothat align with the terms of our FIA products which are between seven and ten years. We have analyzed our hedging strategy on our FIA products and, while the correlation of the hedges to the FIA products is not matched dollar for dollar, we believe the hedges are effective  as of June 30, 2022.2023.

American Life also has agreements with several third-party reinsurers that have funds withheld (“FW”)FW and modified coinsurance (“Modco”)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 —4 Derivative Instruments” to our Consolidated Financial Statements.financial statements. Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses of approximately $2.9 million as of June 30, 2022,2023 and unrealized gains of $0.2 million as of December 31, 2021,2022, of approximately $14.4 million and $10.5 million, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains and losses on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized gainslosses on the assets held by American Life on behalf of the third-party reinsurers were offset by gains in the embedded derivative of $3.1$3.3 million and a loss in$1.1 million for the embedded derivative of $0.4 million as ofthree months ended June 30, 2023 and 2022, respectively, and 2021, respectively.realized gains of $3.9 million and $2.9 million for the six months ended June 30, 2023 and 2022. We account for this unrealized gain (loss)loss pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets. 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.

47

Consolidated Results of Operations – the three months ended June 30, 2022 and 2021

Comprehensive Net Income (Loss)

In this section, unless otherwise noted the discussion below first compares the threesix months ended June 30, 2022,2023 to the threesix months ended June 30, 2021.2022.

We incurredhad a comprehensive loss of $9.0$6.1 million including unrealized loss of $6.0 million, mainly from the fixed maturity portfolio, resulting in a net loss to Midwest of $0.1 million for the six months ended June 30, 2023. This compares to a comprehensive loss of $19.1 million including unrealized loss of $28.5 million, resulting in a net income of $9.5 million to Midwest in the prior year.

Revenues were up year over year, being impacted by realized gains of $18.4 million for the six months ended June 30, 2023 versus a loss of $18.8 million in 2022 compared to $5.4 million. Our revenues decreased to ($0.1) million from positive $8.9 million driven by unrealized losses from derivatives used to hedge FIA exposure of $23.6 millionthe prior year. Investment income increased due to changes inthe growth in the Federal Reserveretained portfolio and from higher interest rate, offset by increases in fee revenuerates. Policy administration fees were up year over year, from early surrender activity, and investment income. Our expenses decreased to negative $1.4 million from $13.1 million due primarily to the interest rate increases resulting in losses in the embedded derivative creating negative interest credited on our FIA products and a gain from passing the losses of the mark-to-market on the reinsurance option allowances. These decreases in expense were offset by increases in consulting related to new software implementation.

Other reasons fordespite the increase in Consolidated Statementsliabilities through annuity premiums ceded in the prior year. Amortization of Comprehensive Loss included:deferred ceded premium grew as we added new reinsurers and the portfolio continues to age. Service fee revenue was up relatively consistent at $1.3 million in 2023 compared to $1.5 million from the prior year.

1)Taxes. Our GAAP effective tax rates were unusually high in comparison to 2021. The increase was primarily due to our change in valuation allowances.  We expect our effective rates to decrease throughout the remainder of 2022. Note 8 to our Financial Statements provides further information relating to this tax rate increase.
2)Change in Realized Investment Losses (Gains). This $16.7 million change moved to a loss of $12.6 million in 2022 from a gain of $4.1 million in 2021. The increase in interest rates in 2022 decreased the value of our fixed-income investments to a much greater extent than occurred in 2021.

Expenses were up, driven by interest credited and the option allowance (see point 3 below). Salaries and benefits increased with additional personnel, repositioning, and retaining of personnel to support growth and given tight labor market. Increase in other expenses was driven by consulting, legal and accounting fees to support distribution, state expansion, capital initiatives, and technology initiatives.

The effective tax rate was 52.4% compared to 36.2% for the six months ended June 30, 2023 and 2022, respectively. Our primary insurance entities, American Life, SRC1, and SRC3, are taxed on a statutory basis. GAAP defers the recognition of income related to premiums received until they are earned across the life of the contract. Statutory principles though recognize premiums as income in the period they are received, creating the difference between the two statements of income.  See Note 9 to our financial statements for further information related to the income tax expense.

Our FIA products have three components influencing our Consolidated Statements of Comprehensive Loss:

The derivatives we purchase to hedge interest rate risk we would otherwise face from our FIA. We carry these derivatives at fair value on our Consolidated Balance Sheets, recording the change in fair value in our Consolidated Statements of Comprehensive Loss as either a realized gain or realized loss. In 2022, the decrease in the market value of the derivative option assets was $14.3 million compared to a decrease of $3.7 million in 2021.

1)The embedded derivative in our FIAs. We carry this derivative at fair value, as of the balance sheet date, with the change in fair value recorded in the interest credited line of our Consolidated Statements of Comprehensive Loss. InterestAcross our FIA products, interest credited for all of our products was a negative $5.5$14.9 million in 20222023 compared to $3.9with $7.8 million in 2021. The decrease in the value of the embedded derivative related to our FIAs was included in overall interest credited.2022. Reflecting our risk management, strategy, the change in the value of the embedded derivative equaledcorresponds to the change in the value of option contracts we use to hedge this exposure.
2)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 Statements of Comprehensive Loss as either a realized gain or realized loss. As of June 30, 2023, the market value of the derivative assets was $36.7 million compared to $15.6 million as of December 31, 2022 the change is reflected in our net unrealized gain or loss.
3)The option budget reinsurers pay us to purchase derivative assets. We mark these assets to market at each balance sheet date.period. Separately, we record a payable to the reinsurers that is owed to a reinsurer when a policy is surrendered, an annuitant dies, or a policy

50

lapses. We compare what the reinsurer paid for the original option budget to the market value at the end of the period. The change in the market value is added to or subtracted from the payable to the reinsurer to cover the reinsurer’s obligations to the policyholder. This change in market value that resulted in negative $5.3$(5.6) million expense and was included in our other operating expense in 20222023 compared to a positive $1.3negative $(5.5) million expense in 2021.the prior year.

48American Life has treaties with several third-party reinsurers that have funds withheld and modified coinsurance provisions. Assets held on behalf of the third-party reinsurers had unrealized losses at June 30, 2023 and December 31, 2022, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolio accrue to the reinsurers. We account for the change in these unrealized gains or losses by recording equivalent realized losses or gains on our Consolidated Statements of Comprehensive Loss. We recorded the increase in the unrealized losses on the asset portfolio as a realized gain of $3.9 million and $2.9 million for the six months ended June 30, 2023 and 2022.

TableConsolidated Results of ContentsOperations –Three Months Ended June 30, 2023

Revenues

The following summarizes the sources of our revenue sources for the periods indicated:revenue:

Three months ended June 30, 

(In thousands)

2022

    

2021

Investment income, net of expenses

$

10,541

$

3,220

Net realized gains (loss) on investments

 

(12,636)

 

4,060

Amortization of deferred gain on reinsurance

 

1,043

 

588

Service fee revenue, net of expenses

416

672

Other revenue

 

514

 

358

$

(122)

$

8,898

Three months ended June 30, 

(In thousands)

2023

    

2022

Investment income, net of expenses

$

24,248

$

10,541

Net realized losses on investments

 

2,087

 

(12,636)

Amortization of deferred gain on reinsurance

 

1,498

 

1,043

Policy administration fees

480

514

Service fee revenue, net of expenses

631

416

Other revenue

 

122

 

-

$

29,066

$

(122)

Premium revenue: OurSales of our MYGA and FIA products generated significant cash flowsa large volume of new business in 20222023 and 2021;2022; however, as indicated above, these products are defined as investment contracts under U.S. GAAP. Accordingly, the funds we received from our customers under these contracts were recorded on our balance sheet as a deposit-type liability – and not as premium revenue.

Investment income, net of expensesexpenses: : The components of our net investment income are as follows:

Three months ended June 30, 

(In thousands)

2022

    

2021

Fixed maturities income

$

15,347

$

4,088

Mortgage loans

 

2,963

 

367

Other invested assets

3,705

96

Other interest income

 

(9)

 

81

Gross investment income

 

12,795

 

4,632

Less investment expenses

 

(2,254)

 

(1,412)

Investment income, net of expenses

$

10,541

$

3,220

Investment income, net of expenses consisted, of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to the investment income earned on our bonds and mortgage loans purchased with net proceeds from sales of our MYGA and FIA products that were not ceded to reinsurers during the period, as well as deployment of excess cash towards credit investments. As of June 30, 2022, and December 31, 2021, on a gross consolidated basis, our investment portfolio (excluding cash) was $1.2 billion and $975.5 million, respectively.

Net realized losses on investments: Net realized losses on investments were $12.6 million in 2022 compared to net realized gain of $4.1 million in 2021. The figure included  a gain of $1.1 million and a loss of $0.8 million from a total return swap embedded derivative in 2022 and 2021, respectively. In 2022, there were net realized losses of $14.3 million related to derivative options we own to hedge the obligations to FIA policyholders; such losses were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

American Life 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 potential credit risk. Under this provision 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 to our Consolidated Financial Statements.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately $2.9 million and gains of $0.2 million as of June 30, 2022, 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-

49

party reinsurers. Accordingly, the unrealized losses on the assets held by American Life were offset by gains in the embedded derivative of $0.4 million and $2.7 million as of June 30, 2022, and December 31, 2021, respectively.

Amortization of deferred gain on reinsurance:  The increase in 2022 to $1.0 million from $0.6 million in 2021 was due to higher deferred gain on reinsurance, driven in part by higher reinsured premiums during 2022.

Service fee revenue, net of expenses: 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 reinsurers. The decrease in this revenue, to $0.4 million in 2022 from $0.7 million in 2021, was due primarily to assets managed by 1505 Capital.

Other revenue: Other revenue consists of revenue generated by us for providing ancillary services such as third-party administration (“TPA”) to clients and policy surrender charges. The increase in 2022 was primarily due to increased policy surrender charges.

Expenses

Our expenses for the periods indicated are summarized below:

Three months ended June 30, 

(In thousands)

2022

    

2021

Interest credited

$

(5,496)

$

3,931

Benefits

1

0

Amortization of deferred acquisition costs

 

1,052

 

524

Salaries and benefits

 

4,298

 

4,514

Other operating expenses

 

(2,240)

 

4,174

$

(1,392)

$

13,143

Interest credited: The increase was primarily due to the interest credited in 2022 relating to the MYGA products of approximately $0.9 million and $0.5 million for 2022 and 2021, respectively, offset by interest credited related on our retained FIA policies of approximately negative $6.4 million and $3.4 million for 2022 and 2021, respectively. The FIA interest credited is related to the fair market value of the embedded derivative which is owed to policyholders and which experienced a sharp decline due to increases in the Federal Reserve interest rates, partially offset by the realized gain on our total return swap that is included in the net realized gain on investments above.

Amortization of deferred acquisition costs: The increase was due to the acquisition costs relating to the sale of MYGA and FIA products where we retained approximately 62% of the business in 2022 compared to the 32% retained in 2021. These figures include the deferred acquisition cost (“DAC”) of the Seneca Re protected cells, SRC1 and SRC3.

Salaries and benefits: The decrease to $4.3 million compared with $4.5 million was due to slightly lower costs.

Other operating expenses: Other operating expenses were approximately $6.0 million lower due primarily to:

Our FIA products have embedded derivatives included in the account value that are market driven. The FIA reinsurers pay an option allowance to American Life to purchase derivatives. As of June 30, 2022 and 2021, the mark-to-market on those allowances were in a negative position so American Life incurred $5.3 million and $2.0 million, respectively, of income and receivable from the reinsurers for that market value true-up. As the market fluctuates going forward, the mark-up of the option allowance will go up or down.
Offset due to increases in other operating expenses of approximately $1.1 million was due to fees to consultants to assist in implementing our business plan and new accounting software, increased audit and actuarial costs, and overhead office expenses to support the planned growth of our business.

50

Taxes

Income tax expense decreased by $2.9 million to negative $2.1 million in 2022 from $0.7 million in 2021. This change was primarily driven by the change in the reinsurance modified coinsurance tax reserves discussed.

Consolidated Results of Operations - Six Months Ended June 30, 2022 and 2021

Comprehensive Net Income (Loss)

In this section, unless otherwise noted the discussion below first compares the sixthree months ended June 30, 2023 and 2022 to the six months ended June 30, 2021.

We incurred a comprehensive loss of $19.1 million in 2022 compared to a comprehensive loss of $6.4 million in 2021. Our revenues decreased to $2.5 million from $8.2 million reflecting an overall increase in investment income and fee revenue; offset by realized losses due to the increases in the Federal Reserve interest rate. Our expenses decreased to a negative $4.7 million from $12.7 million, primarily due to the Federal Reserve interest rate increases resulting in losses in the embedded derivative creating negative interest credited on our FIA product and a gain from passing the losses of the mark-to-market on the reinsurance option allowances. These decreases in expense were offset by increases in consulting fees.

Other reasons for the increase in Consolidated Statements of Comprehensive Loss:

1)Taxes. Our GAAP effective tax rates were unusually high in 2022 compared to 2021. The increase was primarily due to our change in valuation allowances.  We expect the effective rates will decrease throughout the remainder of 2022. Note 8 to our Financial Statements provides further information related to this increase in tax rate.
2)Change in Realized Investment Losses (Gains). This change was a loss of $18.8 million in 2022 compared with a loss of $0.6 million. The increase in interest rates in 2022 decreased the value of our fixed-income investments to a much greater extent than occurred in 2021.

Our FIA products have three components influencing our Consolidated Statements of Comprehensive Loss:

The derivatives we purchase to hedge interest rate risk we would otherwise face from our FIA. We carry these derivatives at fair value on our Consolidated Balance Sheets, recording the change in fair value in our Consolidated Statements of Comprehensive Loss as either a realized gain or realized loss. In 2022, the decrease in the market value of the derivative option assets was $27.1 million compared to the decrease in market value of the derivative option assets of $1.7 million in 2021 in our net realized gain on investments.

1)The embedded derivative in our FIAs. We carry this derivative at fair value as of the balance sheet date, with the change in fair value recorded in the interest credited line of our Consolidated Statements of Comprehensive Loss. Interest credited for all of our products was a negative $12.2 million in 2022 compared with $1.6 million in 2021. The decrease in the value of the embedded derivative related to our FIAs was included to the overall interest credited. Reflecting our risk management strategy, the change in the value of the embedded derivative equaled the change in the value of option contracts we use to hedge this exposure.
2)The option budget reinsurers pay us to purchase derivative assets. We mark these assets to market at each balance sheet date. Separately, we record a payable to the reinsurers that is owed to 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 change in the market value is added to or subtracted from the payable to the reinsurer to cover the reinsurer’s obligations to the policyholder. This change in market value that resulted in negative $6.4 million was included in our other operating expense in 2022 compared to a negative $4.1 million expense in 2021.

51

Revenues

The following summarizes our revenue sources for the periods indicated:

Six months ended June 30, 

(In thousands)

2022

    

2021

Investment income, net of expenses

$

16,783

$

6,107

Net realized losses on investments

 

(18,810)

 

(589)

Amortization of deferred gain on reinsurance

 

2,012

 

1,048

Service fee revenue, net of expenses

1,514

1,110

Other revenue

 

962

 

607

$

2,461

$

8,283

Premium revenue: Our MYGA and FIA products generated significant cash flows in 2022 and 2021; however, as indicated above, these products are defined as investment contracts under U.S. GAAP. Accordingly the funds we received from our customers under these contracts were recorded on our balance sheet as a deposit-type liability – and not as premium revenue.

Investment income, net of expenses: Our net investment income components are as follows:

Six months ended June 30, 

Three months ended June 30, 

(In thousands)

2022

    

2021

2023

    

2022

Fixed maturities

$

20,393

$

7,068

$

33,841

$

14,173

Mortgage loans

 

3,246

 

540

 

6,298

 

2,963

Other invested assets

2,632

152

2,142

2,501

Other interest income

 

(6,902)

 

152

Other interest (expense) income

 

10,248

 

8,035

Gross investment income

 

19,369

 

7,912

 

52,529

 

27,672

Less: investment expenses

 

(2,586)

 

(1,805)

 

(5,367)

 

(2,515)

Investment income, net of expenses

$

16,783

$

6,107

Less: amounts ceded to reinsurers

(22,914)

(14,616)

Retained investment income, net of expenses

$

24,248

$

10,541

Investment income, net of expenses consisted of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to the investment income earned on our bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period, as well as deployment of excess cash towards credit investments.investments with attractive yields and risk-return profiles. As of June 30, 2022,2023 and December 31, 2021,2022, on a gross consolidated basis, our investment portfolio (excluding cash) was $1.2 billion$2,086.6 million and $975.5$1,615.0 million, respectively.respectively, as a result of proceeds from our MYGA and FIA product sales, reflecting both retained premium proceeds as well as assets held on behalf of our reinsurers.

Net realized losses(losses) on investments: Net realized lossesgain on investments were $18.8negative $2.1 million in 20222023 compared towith losses of $(12.6) million in 2022. The figures include a loss of $0.6 million in 2021. The figure included a gain of $3.1$(3.3) million and a loss of $0.4gain $1.1 million from a total return swap embedded derivative in 20222023 and 2021,2022, respectively. In 2022,2023, there were net realized lossesgain of $27.1$3.4 million related to derivative optionsderivatives we own to hedge the obligations to FIA policyholders; such gains were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

51

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 4 Derivative Instruments to our Consolidated financial statements and above.

Amortization of deferred gain on reinsurance:  The increase in 2023 to $1.5 million from $1.0 million in 2022 was due to higher deferred gain on reinsurance, driven in part by higher reinsured premiums during 2023.

Policy administration fees: Policy administration fees includes fees received for the servicing and initiation of policies ceded to our reinsurers. Also included are fees surrendered by policy holders for early termination of their contracts. The revenue of $0.5 million in the three months ended June 30, 2023 and $0.5 million in 2022 comes from policies written and ceded, as well as additional policy holder early termination.  

Service fee revenue, net of expenses: 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 reinsurers. The decrease in this revenue, to $0.6 million in the three months ended June 30, 2023 from $0.4 million in 2022, was due primarily to the level of asset management services provided by 1505 Capital to third-party clients.

Expenses

Our expenses for the periods indicated are summarized in the table below:

Three months ended June 30, 

(In thousands)

2023

    

2022

Interest credited

$

12,590

$

(5,496)

Benefits

1,206

994

Amortization of deferred acquisition costs

 

1,914

 

1,052

Salaries and benefits

 

5,817

 

4,298

Other operating expenses

 

5,002

 

(2,240)

$

26,529

$

(1,392)

Interest credited: The increase was primarily due to the interest credited across all our products in the second quarter of 2023 Interest credited for our retained MYGA products was positive $4 million while interest credited related to our retained FIA policies was $14.9 million in 2023. MYGA and FIA interest credited were $12.6 million and negative $7.8 million in the three months ended June 30, 2023 and 2022, respectively. The FIA interest credited is related to the fair market value of the 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 benefits on our policies, which were $1.2 million and less than $0.1 million in the three months ended June 30, 2023 and 2022 respectively.

Amortization of deferred acquisition costs: The increase was due to the acquisition costs relating to the sale of American Life’s MYGA and FIA products where we retained approximately 51% of the business in the first quarter of 2023 compared to the 60% retained in 2022. These figures include the Seneca Re protected cells, SRC1 and SRC3, and DAC amortization.

Salaries and benefits: The increase to $5.8 million compared with $4.3 million for the second quarter was due to continued costs incurred to attract and add personnel to service our business growth. We are hiring more in-house expertise to service our growth initiatives and reduce the reliance on third-party providers.

Other operating expenses: Other operating expenses were approximately $7.2 million higher 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 June 30, 2023, the mark-to-market adjustment on those allowances was in a positive position so American  Life incurred a negative $(5.6) million expense payable to the reinsurers for that mark-up. As the market fluctuates going forward, the mark up of the option allowance could go up or down.
Increases of other expenses related to legal and consulting fees of $5.8 million related primarily to efforts to secure new additional capital sources and the expansion of our business into new jurisdictions.

52

Taxes: Income tax expense increased by $5.6 million to $3 million in 2023 from a tax benefit of $2.6 million in 2022. This change was primarily driven by a change in the reinsurance modified coinsurance tax reserves.

Consolidated Results of Operations -Six Months Ended June 30, 2023

Revenues

The following summarizes the sources of our revenue:

Six months ended June 30, 

(In thousands)

2023

    

2022

Investment income, net of expenses

$

43,441

$

16,783

Net realized gains (losses) on investments

 

18,373

 

(18,810)

Amortization of deferred gain on reinsurance

 

3,071

 

2,012

Policy administration fees

1,119

 

862

Service fee revenue, net of expenses

1,285

1,514

Other revenue

 

228

 

100

$

67,517

$

2,461

Premium revenue: Sales of our MYGA and FIA products generated a large volume of new business in 2023 and 2022; however, these products are defined as investment contracts under GAAP. Accordingly, the funds we received from our customers under these contracts were recorded on our balance sheet as a deposit-type liability – and not as premium revenue.

Investment income, net of expenses: The components of net investment income for the six months ended June 30, 2023 and 2022 were as follows:

Six months ended June 30, 

(In thousands)

2023

    

2022

Fixed maturities

$

67,902

$

26,837

Mortgage loans

 

12,973

 

5,383

Other invested assets

5,464

3,896

Other interest (expense) income

 

18,277

 

13,579

Gross investment income

 

104,616

 

49,695

Less: investment expenses

 

(11,564)

 

(4,726)

Less: amounts ceded to reinsurers

(49,611)

(28,186)

Retained investment income, net of expenses

$

43,441

$

16,783

Investment income, net of expenses consisted of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to the investment income earned on our bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period, as well as deployment of excess cash towards credit investments with attractive yields and risk-return profiles. As of June 30, 2023 and December 31, 2022, on a gross consolidated basis, our investment portfolio (excluding cash) was $2,086.6 million and $1,615.0 million, respectively, as a result of proceeds from our MYGA and FIA product sales, reflecting both retained premium proceeds as well as assets held on behalf of our reinsurers.

Net realized gains (losses) on investments: Net realized gain on investments were $18.4 million for the six months ended June 30, 2022 compared with losses of $18.8 million in 2022. The figures include a gain of $3.9 million and $2.9 million from a total return swap embedded derivative in 2023 and 2022, respectively. In 2023, there were net realized gain of $8.5 million related to derivatives we own to hedge the obligations to FIA policyholders; such gains were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

American Life 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 modifiedthat have funds withheld 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 potential credit risk. Under these provisions, with third-party reinsurers,under which the assets backing the treaties are maintained by American Life as investmentscollateral but the assets and total returns or lossesreturn on the investments are owned byasset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Comprehensive LossNote 4 Derivative Instruments to our Consolidated Financial Statements.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately $2.9 million as of June 30, 2022, and unrealized gains of $0.2 million as of 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 and losses on the assets held by American Life were

52

offset by gains in the embedded derivative of $3.1 million and a loss in the embedded derivative of $0.4 million as of June 30, 2022, and 2021, respectively. We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.above.

Amortization of deferred gain on reinsurance:  The increase in 20222023 to $3.1 million from $2.0 million from $1.0 million in 20212022 was due to higher deferred gain on reinsurance, driven in part by higher reinsured premiums during 2022.2023.

53

Policy administration fees: Policy administration fees includes fees received for the servicing and initiation of policies ceded to our reinsurers. Also included are fees surrendered by policy holders for early termination of their contracts. The revenue of $1.1 million in the six months ended June 30, 2023 and $0.9 million in 2022 comes from policies written and ceded, as well as additional policy holder early termination.  

Service fee revenue, net of expenses: 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 reinsurers. The increasedecrease in this revenue, to $1.3 million in the six months ended June 30, 2023 from $1.5 million in 2022, from $1.1 million in 2021, was due primarily to an increase in the assets managedlevel of asset management services provided by 1505 Capital.

Other revenue: Other revenue consists of revenue generated by providing ancillary services such asCapital to third-party administration (“TPA”) to clients and policy surrender charges. The increase in 2022 was primarily due to increased policy surrender charges.

clients.

Expenses

Our expenses for the periods indicated are summarized in the table below:

Six months ended June 30, 

(In thousands)

2022

    

2021

Interest credited

$

(12,170)

$

1,585

Benefits

994

Increase in benefit reserves

 

 

0

Amortization of deferred acquisition costs

 

1,902

 

1,027

Salaries and benefits

 

8,615

 

7,441

Other operating expenses

 

(4,060)

 

2,645

$

(4,719)

$

12,698

Six months ended June 30, 

(In thousands)

2023

    

2022

Interest credited

$

20,279

$

(12,170)

Benefits

2,163

994

Amortization of deferred acquisition costs

 

3,617

 

1,902

Salaries and benefits

 

11,320

 

8,615

Other operating expenses

 

18,915

 

(4,060)

$

56,294

$

(4,719)

Interest credited: The decreaseincrease was primarily due to the interest credited across all our products in 2022 relating to the first two quarters of 2023. Interest credited for our retained MYGA products of approximatelywas positive $7.4 million while interest credited related to our retained FIA policies was $14.9 million for the six months ended June 30, 2023. MYGA and FIA interest credited were negative $2.0 million and $0.8 million for 2022 and 2021, respectively, offset by interest credited related on our retained FIA policies of approximately negative $14.2 million and negative $0.6 million forin the six months ended June 30, 2022, and 2021, respectively. The FIA interest credited is related to the fair market value of the embedded derivative which is owed to policyholders which experienced a sharp decline due to the increases in the Federal Reserve interest rates,policyholders. This was partially offset by the realized gain on our total return swap that is included in the net realized gain on investmentsinvestment above.

Benefits: This refers to death benefits on our policies, which were $2.2 million and $1.0 million in the six months ended June 30, 2023 and 2022 respectively.

Amortization of deferred acquisition costs: The increase was due to the acquisition costs relating to the sale of American Life’s MYGA and FIA products where we retained approximately 61%51% of the business in 2022the first two quarters of 2023 compared to the 46%61% retained in 2021.2022. These figures include the DAC of Seneca Re protected cells, SRC1 and SRC3.SRC3, and DAC amortization.

Salaries and benefitsbenefits: The increase to $11.3 million for the six months ended June 30, 2023 compared with $8.6 million compared with $7.4 millionin 2022 was due to continued costs incurred to attract and add personnel to service our business growth and the cost related to non-cash stock consideration.growth. We have hiredare hiring more in-house expertise to service our growth initiatives and reduce the reliance on third-party providers.

Other operating expenses: Other operating expenses were approximately $6.7$23.0 million lowerhigher due primarily to:

Our FIA products haveproduct has embedded derivatives included in the account value thatvalue. Those derivatives are market driven. The reinsurers that reinsure the FIA reinsurersproducts pay an option allowance to American Life to purchase derivatives. As of June 30, 2022 and 2021,2023, the mark-to-market adjustment on those allowances werewas in a negativepositive position so American  Life incurred $11.7a negative $ (7.6) million and $2.8 million, respectively, of income and receivable fromexpense payable to the reinsurers for that market value true-up.mark-up. As the market fluctuates going forward, the mark-upmark up of the option allowance willcould go up or down.
Offset dueIncreases of other expenses related to increases in other operating expenseslegal and consulting fees of approximately $2.4$5.8 million was duerelated primarily to feesefforts to consultants to assist in implementingsecure new additional capital sources and the expansion of our business plan andinto new accounting software, increased audit and actuarial costs, and overhead office expenses to support our plan growth of our business.jurisdictions.

53

Taxes

Taxes

: Income tax expense increased by $0.4$3.3 million to $5.9 million for the six months ended June 30, 2023 from $2.6 million in 2022 from $2.2 million in 2021.2022. This change was primarily driven by thea change in the reinsurance modified coinsurance tax reserves discussed above.

Investmentsreserves.

54

Investments

Most investments on our Consolidated Balance Sheetsbalance 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 haveown the investment risk on these assets, we typically restrict their investment allocations via control over the selection of the asset managersmanager as well as asset restrictions set forth in investment guidelines and control over the investment managers.manager. In many of our reinsurance agreements, 1505 Capital acts as the asset manager for the invested assets for a fee.

Our investment guidelines relate primarily to collateralized loan obligations,typically include U.S. government bonds, corporate bonds, commercial mortgages, on real estate, mortgage-backedasset backed securities, municipal bonds, and termcollateral 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 June 30, 2022,2023 and December 31, 2021.2022. Increases in fixed maturity securities primarily resulted from the proceedssale of our new MYGA and FIA products during 2022. Most of the investments as of June 30, 2022, and December 31, 2021 are held as collateral for our reinsurers.2023.

June 30, 2022

December 31, 2021

 

June 30, 2023

December 31, 2022

 

Carrying

Percent

Carrying

Percent

 

Carrying

Percent

Carrying

Percent

 

(In thousands)

    

Value

    

of Total

    

Value

    

of Total

 

    

Value

    

of Total

    

Value

    

of Total

 

Fixed maturity securities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Bonds:

U.S. government obligations

$

2,029

 

0.2

%  

$

1,882

 

0.2

%

$

1,651

 

0.1

%  

$

1,262

 

0.1

%

Mortgage-backed securities

 

142,022

 

10.6

 

55,280

 

4.9

 

426,214

 

18.7

 

294,066

 

16.3

Asset-backed securities

37,068

2.8

24,951

2.2

40,218

1.8

30,756

1.7

Collateralized loan obligations

218,326

16.3

274,523

24.6

338,866

14.9

287,673

15.9

States and political subdivisions-general obligations

 

203

 

 

114

 

 

125

 

 

101

 

States and political subdivisions-special revenue

 

131

 

 

5,612

 

0.5

 

 

 

205

 

Corporate

 

35,032

 

2.6

 

37,139

 

3.3

 

48,923

 

2.1

 

41,600

 

2.3

Term loans

448,127

33.5

267,468

24

682,915

29.8

558,972

30.9

Trust preferred

0

2,237

0.2

Redeemable preferred stock

11,533

0.9

14,090

1.3

Total fixed maturity securities

 

894,471

 

66.9

 

683,296

 

61.1

 

1,538,912

 

67.4

 

1,214,635

 

67.2

Mortgage loans on real estate, held for investment

193,902

14.5

183,203

16.4

352,908

15.5

227,047

12.6

Derivatives

7,190

0.5

23,022

2.1

36,861

1.6

15,934

0.9

Equity securities

11,925

0.9

21,869

2

5,144

0.2

5,111

0.3

Other invested assets

71,170

5.3

35,293

3.2

107,902

4.7

112,431

6.2

Investment escrow

1,491

0.1

3,611

0.3

1,647

784

Federal Home Loan Bank (FHLB) stock

500

500

Federal Home Loan Bank stock

2,971

0.3

1,306

0.2

Preferred stock

22,072

1.7

18,686

1.7

33,805

1.5

31,415

1.7

Notes receivable

6,111

0.5

5,960

0.5

6,394

0.3

6,269

0.3

Policy Loans

 

22

 

 

87

 

Policy loans

 

55

 

 

25

 

Cash and cash equivalents

128,964

9.6

142,013

12.7

194,275

8.5

191,414

10.6

Total investments, including cash and cash equivalents

$

1,337,818

 

100.0

%  

$

1,117,540

 

100.0

%

$

2,280,874

 

100.0

%  

$

1,806,371

 

100.0

%

54

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2022,2023 and December 31, 2021.2022.

June 30, 2022

December 31, 2021

 

June 30, 2023

December 31, 2022

 

Carrying

Carrying

 

Carrying

Carrying

 

(In thousands)

    

Value

    

Percent

    

Value

    

Percent

 

    

Value

    

Percent

    

Value

    

Percent

 

AAA and U.S. Government

$

8,168

 

0.9

%  

$

2,674

 

0.4

%

$

200,014

 

13.0

%  

$

124,183

 

10.2

%

AA

 

452

 

0.1

 

482

 

0.1

 

29,185

 

1.9

 

815

 

0.1

A

 

308,991

 

34.5

 

168,141

 

24.6

 

420,690

 

27.3

 

371,371

 

30.6

BBB

 

545,247

 

61.0

 

462,699

 

67.7

 

752,652

 

48.9

 

619,516

 

51.0

Total investment grade

 

862,858

 

96.5

 

633,996

 

92.8

 

1,402,541

 

91.1

 

1,115,885

 

91.9

BB and below

 

31,613

 

3.5

 

49,300

 

7.2

 

136,371

 

8.9

 

98,750

 

8.1

Total

$

894,471

 

100.0

%  

$

683,296

 

100.0

%

$

1,538,912

 

100.0

%  

$

1,214,635

 

100.0

%

Approximately 96.5%Reflecting the quality of securities maintained by us, 91.1% and 92.8%91.9% of all fixed maturity securities were investment grade as of June 30, 2022,2023 and December 31, 2021,2022, respectively.

We expect that the net proceeds from our MYGA and FIA products sales will continue to result in an increase in investable assets in future periods.

55

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 Consolidated Balance Sheetsbalance sheet as collateral, our reinsurers bear the market risks related to these investments, andwhile 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 althoughthough 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 amongamongst 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

55

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 14 – Statutory Net Income and Surplus13 to our Consolidated Financial Statements.consolidated financial statements. As of June 30, 2022,2023, American Life maintained sufficient capital and surplus to comply with regulatory 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. 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 that have a readily obtainable valuation at fair value. Investments without a valuation are carried at amortized cost.
allows bonds to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”),NAIC, while they are recorded at fair value for GAAP.

56

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 deposit-type contract liabilities.
Requires thatrequires 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.
treats all leases, except leveraged leases, as operating leases, while GAAP differentiates between operating and finance leases.
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.

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 regarding 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, in addition to capital contributions from us.

5657

The table below sets forth our SAP net income (loss) for each of the three and six months ended June 30, 20222023 and 20212022 for each of our insurance subsidiaries and then reconciled to GAAP.

Three months ended June 30, 

Six months ended June 30, 

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Consolidated GAAP net income (loss)

$

9,266

$

(4,992)

$

9,452

$

(6,594)

Consolidated GAAP net (loss) income

$

(3,883)

$

9,266

$

(53)

$

9,452

Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re)

5,413

(776)

3,856

(2,383)

(3,694)

5,413

(4,188)

3,856

GAAP net gain (loss) of statutory insurance entities

$

3,853

$

(4,216)

$

5,596

$

(4,211)

GAAP net (loss) gain of statutory insurance entities

$

(189)

$

3,853

$

4,135

$

5,596

GAAP net income (loss) by statutory insurance entity:

GAAP net (loss) income by statutory insurance entity:

American Life

$

10,660

$

(1,302)

$

11,551

$

(3,282)

$

(3,968)

$

10,660

$

(1,871)

$

11,551

Seneca Re Protected Cell 01

(7,595)

(1,872)

(7,535)

(929)

Seneca Re Protected Cell 03

788

1,580

SAP net gain (loss)

$

3,853

$

(3,174)

$

5,596

$

(4,211)

Seneca Re Incorporated Cell 01

4,506

(7,595)

6,415

(7,535)

Seneca Re Incorporated Cell 03

(726)

788

(409)

1,580

GAAP net (loss) income

$

(188)

$

3,853

$

4,135

$

5,596

Reconciliation of GAAP and SAP

GAAP net income (loss) of American Life

10,660

(1,302)

11,551

(3,282)

GAAP net (loss) income of American Life

(3,968)

10,660

(1,871)

11,551

Increase (decrease) due to:

Deferred acquisition costs

(9,052)

(9,967)

(15,846)

(20,676)

3,468

(9,052)

2,380

(15,846)

Coinsurance transactions

88,083

46,535

157,744

102,989

-

88,083

-

157,744

Carrying value of reserves

(80,747)

(32,106)

(143,935)

(74,671)

(144,552)

(80,747)

(252,272)

(143,935)

Foreign exchange and derivatives

5,767

(6,215)

20,366

(14,334)

5,767

(28,606)

20,366

Gain (loss) on sale of investments, net of asset valuation reserve

(6,130)

163

(12,181)

(2,072)

(11,922)

(6,130)

(31,742)

(12,181)

Other

(282)

(938)

192

(9)

152,780

(282)

276,995

192

SAP net income (loss) of American Life

$

8,299

$

(3,830)

$

17,891

$

2,279

SAP net (loss) income of American Life

$

(18,528)

$

8,299

$

(35,116)

$

17,891

.

GAAP net income (loss) of Seneca Re Protected Cell 01

(7,595)

(1,872)

(7,535)

(929)

GAAP net income (loss) of Seneca Re Incorporated Cell 01

4,506

(7,595)

6,415

(7,535)

Increase (decrease) due to:

Deferred acquisition costs

586

146

1,110

(4,722)

636

586

1,291

1,110

Coinsurance transactions

71

1,591

148

37,825

(213)

71

-

148

Carrying value of reserves

(2,307)

(707)

(5,551)

(35,783)

(10,298)

(1,857)

(10,654)

(5,551)

Gain on sale of investments, net of asset valuation reserve

7,974

9,789

1,795

565

7,974

1,899

9,789

Other gain (loss)

(160)

1,265

(214)

(773)

SAP net income (loss) of Seneca Re Protected Cell

$

(1,431)

$

423

$

(2,253)

$

(2,587)

Other loss

6,387

(160)

5,846

(214)

SAP net income (loss) of Seneca Re Incorporated Cell

$

1,583

$

(981)

$

4,797

$

(2,253)

GAAP net income (loss) of Seneca Re Protected Cell 03

788

1,580

GAAP net income of Seneca Re Incorporated Cell 03

(726)

788

(409)

1,580

Increase (decrease) due to:

Deferred acquisition costs

280

521

602

280

974

521

Coinsurance transactions

23,905

23,756

(81)

23,905

-

23,756

Carrying value of reserves

(26,694)

(27,689)

(1,209)

(26,694)

(1,296)

(27,689)

Gain on sale of investments, net of asset valuation reserve

1,199

1,785

2,043

1,199

1,648

1,785

Other

(42)

(48)

-

(42)

-

(48)

SAP net income (loss) of Seneca Re Protected Cell 03

$

(564)

$

$

(95)

$

SAP net income (loss) of Seneca Re Incorporated Cell 03

$

629

$

(564)

$

917

$

(95)

SAP net gain (loss) of statutory insurance entities

$

7,735

$

(3,830)

$

15,543

$

(308)

SAP net (loss) gain of statutory insurance entities

$

(16,316)

$

6,754

$

(29,402)

$

15,543

Key Operating and Non-GAAP Measures

In addition to our GAAP results,We discuss below we provide 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.

57

Table• facilitate internal comparisons of Contentsthe 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.

Management believes the use of these non-GAAP measures, together with the relevant GAAP measures provides information that may enhance understanding of our results by investors. 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.

58

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 SAP, our annuity premiums received are treated as premium revenue. Our premium metrics include all sums paid byinto an individual annuitantannuity 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.transactions involving portfolios of annuity premiums.

The following tables settable 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 Sheetsbalance sheets and is not recognized in our Consolidated Statements of Comprehensive LossLoss.

Six months ended June 30, 

Six months ended June 30, 

(In thousands)

2022

2021

2023

2022

Annuity Premiums (SAP)

Annuity direct written premiums

$

254,145

$

249,519

$

457,782

$

254,145

Ceded premiums

(100,023)

(133,570)

(218,429)

(100,023)

Net premiums retained

$

154,122

$

115,949

$

239,353

$

154,122

StartingThe increase in the fourth quarter of 2021,annuity direct written premiums reflect strong sales of ouras 2023 begins, even in a challenging sales environment, in which competitors were pricing rates on annuity products decreased compared to like prior periods, and the competitive decrease continued through the first quarter of 2022.aggressively. We took pricing action on both our FIA and MYGA products that were a key factor in sales rebounding in the second quarter of 2022 and we monitor our competitiveness in the market on an ongoing basis. We are seeking to growsell annuities through the IMO channelchannel. We aim to grow 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 number of states in which we are licensed to sell our annuity products. We are also seekingaim 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 the increase in annuity direct written premiums.

Operating Metric – Fees Received for Reinsurance

Three months ended June 30, 

Six months ended June 30, 

Three months ended June 30, 

Six months ended June 30, 

(In thousands)

2022

    

2021

    

2022

    

2021

2022

    

2021

    

2023

    

2022

Fees received for reinsurance(1)

Fees received for reinsurance - total

$

3,197

$

4,864

$

5,626

$

7,722

$

4,760

$

3,197

$

8,222

$

5,626

(1) Consists of: 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.

Fees received for reinsurance are the net fees received for reinsurance transactions completed during the period and includes ceding commission.

For the three months ended June 30, 2022,2023, fees received for reinsurance decreased 36%increased by $1.6 million compared to the like period in the prior year period due to lower reinsurance volumes.higher ceded premiums. For the three months ended June 30, 2022, and 2021,2023, the components of fees received for reinsurance included $1.0$1.5 million of amortization of deferred gain on reinsurance from our GAAP Consolidated Statements of Comprehensive Loss and $2.2$3.3 million of deferred coinsurance ceding commission from our GAAP Consolidated Statements of Cash Flows.

58

For the six months ended June 30, 2022,2023, fees received for reinsurance decreased 27%increased by $2.6 million compared to the like period in the prior year period due to lower reinsurance volumes.higher ceded premiums. For the six months ended June 30, 2022 and 2021,2023, the components of fees received for reinsurance included $2.0$3.1 million of amortization of deferred gain on reinsurance from our GAAP Consolidated Statements of Comprehensive Loss and $3.6$5.2 million of deferred coinsurance ceding commission from our GAAP Consolidated Statements of Cash Flows.

59

Reconciliation – Management Expenses to GAAP Expenses

Three months ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Management Expenses

  

 

  

  

 

  

G&A

$

6,999

$

5,893

$

15,850

$

11,144

Management interest credited

2,895

1,740

5,937

2,882

Amortization of deferred acquisition costs

1,052

524

1,902

1,027

Expenses related to retained business

3,947

2,264

7,839

3,909

Management expenses - total

$

10,946

$

8,157

$

23,689

$

15,053

Three months ended June 30, 

Six months ended June 30, 

2022

    

2021

    

2022

    

2021

G&A

Salaries and benefits - GAAP

$

4,298

$

4,514

$

8,615

$

7,441

Other operating expenses - GAAP

(2,240)

4,174

(4,060)

2,645

Subtotal

2,058

8,688

4,555

10,086

Adjustments:

Less: Stock-based compensation

(354)

(1,508)

(386)

(1,770)

Less: Mark-to-market option allowance

5,295

(1,287)

11,681

2,828

G&A

$

6,999

$

5,893

$

15,850

$

11,144

Three months ended June 30, 

Six months ended June 30, 

2022

    

2021

    

2022

    

2021

Management Interest Credited

Interest credited - GAAP

$

(5,496)

$

3,931

$

(12,170)

$

1,585

Adjustments:

Less: FIA interest credited - GAAP

6,401

(3,404)

14,165

(586)

Add: FIA options cost - amortized - GAAP

1,990

1,213

3,942

1,883

Management interest credited

$

2,895

$

1,740

$

5,937

$

2,882

Three months ended June 30, 

Six months ended June 30, 

2022

    

2021

    

2022

    

2021

Reconciliation - Management Expenses to GAAP Expenses

Total expenses - GAAP

$

(1,392)

$

13,143

$

(4,719)

$

12,698

Adjustments:

Less: Benefits

(994)

(994)

Less: Stock-based compensation

(354)

(1,508)

(386)

(1,770)

Less: Mark-to-market option allowance

5,295

(1,287)

11,681

2,828

Less: FIA interest credited - GAAP

6,401

(3,404)

14,165

(586)

Add: FIA options cost - amortized - GAAP

1,990

1,213

3,942

1,883

Management expenses - total

$

10,946

$

8,157

$

23,689

$

15,053

Three months ended June 30, 

Six months ended June 30, 

    

2023

    

2022

    

2023

    

2022

Management Expenses

  

 

  

  

 

  

G&A

$

12,521

$

6,999

$

24,034

$

15,850

Management interest credited

3,977

2,895

7,640

5,937

Amortization of deferred acquisition costs

1,914

1,052

3,617

1,902

Expenses related to retained business

5,891

3,947

11,257

7,839

Management expenses - total

$

18,412

$

10,946

$

35,291

$

23,689

Three months ended June 30, 

Six months ended June 30, 

2023

    

2022

    

2023

    

2022

G&A

Salaries and benefits - GAAP

$

5,817

$

4,298

$

11,320

$

8,615

Other operating expenses - GAAP

5,002

(2,240)

18,915

(4,060)

Subtotal

10,819

2,058

30,235

4,555

Adjustments:

Less: Stock-based compensation

(289)

(354)

(603)

(386)

Less: Mark-to-market option allowance

1,991

5,295

(5,598)

11,681

G&A

$

12,521

$

6,999

$

24,034

$

15,850

Three months ended June 30, 

Six months ended June 30, 

2023

    

2022

    

2023

    

2022

Management Interest Credited

Interest credited - GAAP

$

12,590

$

(5,496)

$

20,279

$

(12,170)

Adjustments:

Less: FIA interest credited - GAAP

(8,613)

6,401

(14,941)

14,165

Add: FIA options cost - amortized - GAAP

-

1,990

2,302

3,942

Management interest credited

$

3,977

$

2,895

$

7,640

$

5,937

Three months ended June 30, 

Six months ended June 30, 

2023

    

2022

    

2023

    

2022

Reconciliation - Management Expenses to GAAP Expenses

Total expenses - GAAP

$

26,529

$

(1,392)

$

56,294

$

(4,719)

Adjustments:

Less: Benefits

(1,206)

(994)

(2,163)

(994)

Less: Stock-based compensation

(289)

(354)

(603)

(386)

Less: Mark-to-market option allowance

1,991

5,295

(5,598)

11,681

Less: FIA interest credited - GAAP

(8,613)

6,401

(14,941)

14,165

Add: FIA options cost - amortized - GAAP

-

1,990

2,302

3,942

Management expenses - total

$

18,412

$

10,946

$

35,291

$

23,689

Operating Metric – Management and G&A Expenses

In addition to total expenses, 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 use of management interest credited (as discussed below), the exclusion of stock-based compensation and the exclusion of the mark-to-market option allowance expense (included in other operating expenses) payable to reinsurers 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 expenses provides information that can enhance an investor’s understanding of our underlying operating results.

59

For the three months ended June 30, 2022, the sum of salaries2023, GAAP general and benefits and other operatingadministrative expenses totaled $2.1$24.0 million compared to $8.7$15.9 million for the three months ended June 30, 2021.prior year. For the three months ended June 30, 2022,2023, as disclosed above, included in these expenses is mainly salaries, benefits and other operating expenses, along with $5.3$0.3 million of non-cash stock-based compensation and $ (5.6) million of non-cash mark-to-market option allowanceexpense of our derivative option allowance, which we exclude in our management G&A.

For the six months ended June 30, 2022, the sum of salaries2023, GAAP general and benefits and other operatingadministrative expenses totaled $4.6$24.0 million compared to $10.1$15.9 million for the six months ended June 30, 2022.prior year. For the six months ended June 30, 2022,2023, as disclosed above, included in these expenses is mainly salaries, benefits

60

and other operating expenses, along with $11.7$0.6 million of non-cash stock-based compensation and $ (5.6) million of non-cash mark-to-market option allowanceexpense of our derivative option allowance, which we exclude in our management G&A.

Operating 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 three months ended June 30, 2023, GAAP interest credited totaled $12.6 million compared to $(5.5) million for the prior year. For the three months ended June 30, 2023, as disclosed above, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately $8.6 million.

For the six months ended June 30, 2023, GAAP interest credited totaled $20.3 million compared to $(12.2) million for the prior year. For the six months ended June 30, 2023, as disclosed above, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately $14.9 million.

Liquidity and Capital Resources

Investments

Information regarding our investment portfolio, which is comprised primarily of investment grade, fixed maturity  securities, is presented in Part I, Note 3 and the Consolidated Financial Statements in this report.

Comparative Cash Flows

At June 30, 2022,2023 and December 31, 2021,2022, we had cash and cash equivalents totaling $129.0 compared to $142.0$194.3 and $191.4 million, respectively. Our short-term liquidity requirements, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity benefits.

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. In the event we are successful in furtheringAs our state expansion continues, we expect an increase in our sales of our MYGA and FIA products. However, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of cash flows generated from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, we may be required to raise additional funds, including through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. If such funds are not available in the future, we may be required to delay or significantly modify our operations, each of which could have a material adverse impact on our results of operations or financial condition.

Cash flow is a vital 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.

61

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 statements for more detailed information.

Six months ended June 30, 

2023

    

2022

(In thousands)

Net cash (used in) provided by operating activities

$

(17,886)

$

35,527

Net cash (used in) investing activities

(380,078)

(282,004)

Net cash provided by financing activities

400,825

233,428

Net (decrease) increase in cash and cash equivalents

2,861

(13,049)

Cash and cash equivalents:

Beginning of period

191,414

142,013

End of period

$

194,275

$

128,964

Cash Provided by Operating Activities

Net cash provided by operating activities was $62.4 million for the six months ended June 30, 2023, which was comprised primarily of an increase in deposit type liabilities of $107.4 million and an increase in receivable and payable for securities of $28.9 million, offset by decreases in realized gains on investments of $37.1 million, reinsurance recoverables of $33.7 million, and net premium and discount of investments of $8.6 million.

Cash Used in Investing Activities

Net cash used for investing activities for the six months ended June 30, 2023 was $460.3 million. The primary source of cash used was from our purchase of investments from sales of the MYGA and FIA products of $722.2 million. Offsetting this use of cash was our sale of investments of $264.2 million.

Cash Provided by Financing Activities

Net cash provided by financing activities in the six months ended June 30, 2023 was $400.8 million. The primary source of cash was net receipts on the MYGA and FIA products of $457.8 million.

As of June 30, 2023, we held $201.2 million of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated. Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to noninvestment grade status or a downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.

Capital Resources

We have determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the NAIC. Historically, our insurance subsidiary has generated capital in excess of such needed levels. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations. Our regulated insurance subsidiary is subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2023 from our insurance subsidiary without prior regulatory approval is approximately $7.4 million. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth and debt interest payments.

Total capital was $2,280.9 million at June 30, 2023, including $25.0 million of short-term and long-term debt. Total debt represented 1.10% of total capital including net unrealized investment gains on fixed maturity securities (1.11% of total capital excluding net unrealized investment gains on fixed maturity securities) at June 30, 2023.

Stockholders’ equity was $29.3 million at June 30, 2023, including net unrealized investment gains on fixed maturity securities of negative $57.4 million after taxes and the related impact of DAC associated with annuity contracts with account values. The market value of our common stock and the market value per share were $47.0 million and $26.32, respectively, at June 30, 2023.

The Company did not pay dividends in the six months ended June 30, 2023.

62

The NAIC has established minimum capital requirements in the form of risk based capital (“RBC”)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. The RBC calculation is performed annually and asAs of December 31, 2022, and 2021, the RBC ratio of American Life was 558% and 764%., respectively.

Comparative Cash Flows

Cash flowOn November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is an important componentNovember 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of our business model because we receive annuity premiums and invest them upon receipt forassets. The balance of the revolving credit was $25.0 million at June 30, 2023, with $5.0 million unutilized credit.

Under the terms of the Credit Agreement, the Company has the option of selecting an applicable variable interest rate of (a) an adjusted term standard overnight financing rate (“SOFR”), plus an applicable margin or (b) a base rate, plus an applicable margin. Depending on our reinsurers and us anddebt to capitalization ratio, the applicable margin can range from 2.50% to 3.25% for the benefitbase rate and from 3.50% to 4.25% for an adjusted term SOFR loan.

At its November 2022 meeting, the Company’s Board of our policyholders.

Directors approved the “FHLB Program Recommendations and Strategy Document” that allowed for FHLB funding to be used for spread lending business, beginning in the fourth quarter of 2022. The following table summarizes our cash flows from operational, investing and financing activities for the periods indicated.

Six months ended June 30, 

2022

    

2021

(In thousands)

Net cash provided by (used in) operating activities

$

35,527

$

(8,725)

Net cash provided by (used in) investing activities

(282,004)

(315,755)

Net cash provided by (used in) financing activities

233,428

243,080

Net increase (decrease) in cash and cash equivalents

(13,049)

(81,400)

Cash and cash equivalents:

Beginning of period

142,013

151,679

End of period

$

128,964

$

70,279

Cash Provided by Operating Activities

Net cash provided by operating activities was $35.5 million for the six months endedstrategy initially utilizes FHLB advances of up to 5% of American Life’s balance sheet. As of June 30, 2022, which was comprised primarily2023, we had $66.0 million of an increase in realized losses on investments of $18.8 million, an increase in recoverable from reinsurers of $18.4 million, a receivable for securities of $17.0 million, and an increase in other assets and liabilities of $9.3 million. These were offset by a decrease in deposit type liabilities of $27.8 million, and an increase in amortization of DAC of $10.5 million.

60

Cash Used in Investing Activities

Net cash used for investing activities forborrowings outstanding with the six months ended June 30, 2022, was $282.0 million. The primary use of cash resulted from our purchase of investments from sales of the MYGA and FIA products of $522.4 million. Offsetting this use of cash was our sale of investments in available-for-sale securities for proceeds of $250.6 million.

Cash Flow Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022, was $233.4 million. The primary source of cash was net receipts on the MYGA and FIA products of $254.1 million. The primary use of cash was withdrawals on those products of $18.1 million and $2.0 million transferred to noncontrolling interest.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, and the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on our investment portfolio with a corresponding effect on investment income.Federal Home Loan Bank (“FHLB”).

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements disclosed in Note 12. Contingencies and Commitments below, 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.resources that is material to investors.

Contractual Obligations

As a “smaller reporting company,” the Company is not required to provide a table of contractual obligations required pursuant to this Item.

63

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK

As a “smaller reporting company,” the Company is not required to provide disclosure pursuant to this Item.

ITEM 4. CONTROLS AND PROCEDURES.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 our Board of Directors.the Board.

Management,As required by Rule 13a-15(b) under the Exchange Act, management (with the participation of our principalchief executive officer 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)13a 15(e) and 15d-15(e)15d 15(e) under the Exchange Act as of June 30,December 31, 2022. Based on this evaluation, our principal executive 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 principal executive officersofficer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no significant changes Management, (with the participation of our chief executive officer 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, 2022. Based on this evaluation, our principal executive and financial officers concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with respect to the Company’srelated internal controlcontrols over financial reporting were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or any other factors that materially affect, or are reasonably likelysubmit 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 materially affect, internal control overour management, including our principal executive officer and principal financial reporting during the quarter ended June 30, 2022.

61

officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II – OTHER INFORMATION

ITEM 1. 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.

ITEM 1A. RISK FACTORS.

There have not been any changes to our risk factors previously disclosed in our 20212022 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

6264

63

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: August 15, 2022

MIDWEST HOLDING INC.

By: 

/s / Georgette Nicholas

Name:

Georgette Nicholas

Title:

Chief Executive Officer

11, 2023

MIDWEST HOLDING INC.

 

By: 

/s/ Daniel S. MaloneyGeorgette Nicholas

Name:

Daniel S. MaloneyGeorgette Nicholas

Title:

Principal AccountingChief Executive Officer and

By:

/s/ Daniel Maloney

Name:

Daniel Maloney

Title:

Executive Vice President of Accounting and Finance

6465