ITEM 1. FINANCIAL
STATEMENTS.
Midwest Holding Inc. and
Subsidiaries
Consolidated Balance Sheets
|
|
June 30, 2017
|
|
December 31,
2016
|
Assets
|
|
(unaudited)
|
|
|
|
|
Investments, available for sale, at fair
value
|
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost:
$27,568,865 and $29,024,083, respectively)
|
|
$
|
26,815,486
|
|
|
$
|
27,738,939
|
|
Real estate, held for investment
|
|
|
511,709
|
|
|
|
517,729
|
|
Policy Loans
|
|
|
422,731
|
|
|
|
412,583
|
|
Total investments
|
|
|
27,749,926
|
|
|
|
28,669,251
|
|
Cash and cash equivalents
|
|
|
2,282,502
|
|
|
|
661,545
|
|
Amounts recoverable from
reinsurers
|
|
|
11,453,050
|
|
|
|
11,704,055
|
|
Interest due and accrued
|
|
|
307,167
|
|
|
|
312,054
|
|
Due premiums
|
|
|
649,280
|
|
|
|
670,989
|
|
Deferred acquisition costs, net
|
|
|
2,485,195
|
|
|
|
2,568,799
|
|
Value of business acquired, net
|
|
|
1,595,797
|
|
|
|
1,726,192
|
|
Intangible assets
|
|
|
700,000
|
|
|
|
700,000
|
|
Property and equipment, net
|
|
|
166,411
|
|
|
|
158,471
|
|
Other assets
|
|
|
127,008
|
|
|
|
95,773
|
|
Total assets
|
|
$
|
47,516,336
|
|
|
$
|
47,267,129
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Benefit reserves
|
|
$
|
24,755,191
|
|
|
$
|
24,606,543
|
|
Policy claims
|
|
|
430,856
|
|
|
|
565,148
|
|
Deposit-type contracts
|
|
|
17,271,789
|
|
|
|
16,012,567
|
|
Advance premiums
|
|
|
49,610
|
|
|
|
52,074
|
|
Total policy liabilities
|
|
|
42,507,446
|
|
|
|
41,236,332
|
|
Accounts payable and accrued
expenses
|
|
|
1,534,234
|
|
|
|
1,211,875
|
|
Surplus notes
|
|
|
550,000
|
|
|
|
550,000
|
|
Total liabilities
|
|
|
44,591,680
|
|
|
|
42,998,207
|
|
Commitments and Contingencies (See Note
8)
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, $0.001 par value.
Liquidation preference $6.00 per share. Authorized 2,000,000 shares;
issued and outstanding 74,159 shares as of June 30, 2017 and December 31,
2016.
|
|
|
74
|
|
|
|
74
|
|
Preferred stock, Series B, $0.001 par value. Liquidation preference
$6.00 per share. Authorized 1,000,000 shares; converted to common stock as
of June 15, 2017 and issued and outstanding 102,669 shares as of December
31, 2016.
|
|
|
-
|
|
|
|
103
|
|
Common stock, $0.001
par value. Authorized 120,000,000 shares; issued and outstanding
22,764,294 shares as of June 30, 2017 and 22,558,956 as of December 31,
2016.
|
|
|
22,764
|
|
|
|
22,559
|
|
Additional paid-in capital
|
|
|
33,006,279
|
|
|
|
33,036,924
|
|
Accumulated
deficit
|
|
|
(29,367,826
|
)
|
|
|
(27,533,447
|
)
|
Accumulated other comprehensive
loss
|
|
|
(736,635
|
)
|
|
|
(1,257,291
|
)
|
Total stockholders'
equity
|
|
|
2,924,656
|
|
|
|
4,268,922
|
|
Total liabilities and stockholders'
equity
|
|
$
|
47,516,336
|
|
|
$
|
47,267,129
|
|
See Notes to Consolidated
Financial Statements.
3
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Comprehensive
Income
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
871,535
|
|
|
$
|
932,042
|
|
|
$
|
1,704,382
|
|
|
$
|
1,859,475
|
|
Investment
income, net of expenses
|
|
|
250,153
|
|
|
|
201,778
|
|
|
|
504,833
|
|
|
|
414,906
|
|
Net realized
gains (losses) on investments
|
|
|
54,513
|
|
|
|
(56,629
|
)
|
|
|
19,009
|
|
|
|
(53,744
|
)
|
Miscellaneous income
|
|
|
19,055
|
|
|
|
13,250
|
|
|
|
37,855
|
|
|
|
63,557
|
|
|
|
|
1,195,256
|
|
|
|
1,090,441
|
|
|
|
2,266,079
|
|
|
|
2,284,194
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and
other benefits
|
|
|
270,337
|
|
|
|
179,096
|
|
|
|
565,594
|
|
|
|
408,118
|
|
Interest
credited
|
|
|
234,149
|
|
|
|
182,395
|
|
|
|
453,381
|
|
|
|
352,989
|
|
Increase in
benefit reserves
|
|
|
162,620
|
|
|
|
224,644
|
|
|
|
307,746
|
|
|
|
391,669
|
|
Amortization
of deferred acquisition costs
|
|
|
134,149
|
|
|
|
25,233
|
|
|
|
292,854
|
|
|
|
147,727
|
|
Salaries and
benefits
|
|
|
528,042
|
|
|
|
549,343
|
|
|
|
1,103,608
|
|
|
|
1,025,823
|
|
Other
operating expenses
|
|
|
656,434
|
|
|
|
849,805
|
|
|
|
1,377,275
|
|
|
|
1,646,863
|
|
|
|
|
1,985,731
|
|
|
|
2,010,516
|
|
|
|
4,100,458
|
|
|
|
3,973,189
|
|
Loss before
income taxes
|
|
|
(790,475
|
)
|
|
|
(920,075
|
)
|
|
|
(1,834,379
|
)
|
|
|
(1,688,995
|
)
|
Income tax
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(790,475
|
)
|
|
|
(920,075
|
)
|
|
|
(1,834,379
|
)
|
|
|
(1,688,995
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on investments arising during period
|
|
|
356,652
|
|
|
|
478,024
|
|
|
|
539,665
|
|
|
|
929,918
|
|
Less: reclassification adjustment
for net realized (gains) losses on investments
|
|
|
(54,513
|
)
|
|
|
56,629
|
|
|
|
(19,009
|
)
|
|
|
53,744
|
|
Other
comprehensive income
|
|
|
302,139
|
|
|
|
534,653
|
|
|
|
520,656
|
|
|
|
983,662
|
|
Comprehensive loss
|
|
$
|
(488,336
|
)
|
|
$
|
(385,422
|
)
|
|
$
|
(1,313,723
|
)
|
|
$
|
(705,333
|
)
|
Net loss per common share,
basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
See Notes to Consolidated
Financial Statements.
4
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Cash
Flows
(Unaudited)
|
|
Six Months ended June 30,
|
|
|
2017
|
|
2016
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,834,379
|
)
|
|
$
|
(1,688,995
|
)
|
Adjustments
to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Net premium and discount on
investments
|
|
|
102,300
|
|
|
|
105,673
|
|
Depreciation
and amortization
|
|
|
170,063
|
|
|
|
208,235
|
|
Deferred acquisition costs
capitalized
|
|
|
(220,360
|
)
|
|
|
(66,951
|
)
|
Amortization
of deferred acquisition costs
|
|
|
292,854
|
|
|
|
147,727
|
|
Net realized (gains) losses on
investments
|
|
|
(19,009
|
)
|
|
|
53,744
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Amounts recoverable from
reinsurers
|
|
|
251,005
|
|
|
|
353,377
|
|
Interest and
dividends due and accrued
|
|
|
4,887
|
|
|
|
3,585
|
|
Due premiums
|
|
|
21,709
|
|
|
|
3,339
|
|
Policy
liabilities
|
|
|
460,412
|
|
|
|
275,049
|
|
Other assets and liabilities
|
|
|
291,124
|
|
|
|
(569,165
|
)
|
Other assets
and liabilities held for sale
|
|
|
-
|
|
|
|
1,877
|
|
Net cash used for operating
activities
|
|
|
(479,394
|
)
|
|
|
(1,172,505
|
)
|
Cash Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(14,009,798
|
)
|
|
|
(7,878,585
|
)
|
Proceeds from sale or maturity
|
|
|
15,381,725
|
|
|
|
7,671,898
|
|
Securities
held for sale:
|
|
|
|
|
|
|
|
|
Proceeds from sale or maturity
|
|
|
-
|
|
|
|
52,703
|
|
Net change
in equity securities carried at cost:
|
|
|
|
|
|
|
|
|
Proceeds from sale
|
|
|
-
|
|
|
|
26,434
|
|
Net change
in policy loans
|
|
|
(10,148
|
)
|
|
|
27,283
|
|
Acquisition of Northstar Financial
Corporation
|
|
|
-
|
|
|
|
2,427,394
|
|
Net
purchases of property and equipment
|
|
|
(41,588
|
)
|
|
|
(29,515
|
)
|
Net cash provided by
investing activities
|
|
|
1,320,191
|
|
|
|
2,297,612
|
|
Cash Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
(30,543
|
)
|
|
|
(21,560
|
)
|
Receipts on
deposit-type contracts
|
|
|
1,405,247
|
|
|
|
1,339,406
|
|
Withdrawals on deposit-type
contracts
|
|
|
(594,544
|
)
|
|
|
(421,203
|
)
|
Net cash provided by financing activities
|
|
|
780,160
|
|
|
|
896,643
|
|
Net increase in cash and cash
equivalents
|
|
|
1,620,957
|
|
|
|
2,021,750
|
|
Cash and
cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
661,545
|
|
|
|
1,192,336
|
|
Ending
|
|
$
|
2,282,502
|
|
|
$
|
3,214,086
|
|
Supplemental Cash Flow
Information
(Unaudited)
|
|
June 30, 2017
|
|
June 30, 2016
|
Supplemental
Disclosure of Non-Cash Information
|
|
|
|
|
|
|
|
Converted Series B Preferred
Stock
|
|
$
|
(103
|
)
|
|
$
|
-
|
Common Stock
issues from Converted B Preferred Stock
|
|
|
103
|
|
|
|
-
|
Common stock issued on Northstar
Acquisition
|
|
|
-
|
|
|
|
2,405,874
|
|
|
$
|
-
|
|
|
$
|
2,405,874
|
See Notes to Consolidated
Financial Statements.
5
Midwest Holding Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of
Operations and Summary of Significant Accounting Policies
Nature of operations:
Midwest Holding Inc. (Midwest
or the Company) was incorporated in Nebraska on October 31, 2003 for the
primary purpose of operating a financial services company. The Company is in the
life insurance business and operates through its wholly owned subsidiary,
American Life & Security Corp. (American Life). The Company has made
several acquisitions of life insurance companies and related entities since
2008, all of which have been merged into the Company or into American Life.
Basis of presentation:
The accompanying unaudited
consolidated financial statements have been prepared in accordance with United
States of America generally accepted accounting principles (GAAP) for interim
financial information and with the instructions from the Securities and Exchange
Commission (SEC) Quarterly Report on Form 10-Q, including Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. Therefore, the
information contained in the Notes to Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2016
(2016 Form 10-K), should be read in connection with the reading of these
interim unaudited consolidated financial statements.
In the opinion of
management, these statements include all normal recurring adjustments necessary for a fair presentation of the
Companys results. Operating results for the six month period ended June 30, 2017, are not necessarily indicative of
the results that may be expected for the full year ending December 31, 2017.
Most of the Companys liquid assets are held
in an insurance subsidiary and under existing insurance law, the subsidiary
cannot make significant payments up to the parent company, which is the Company.
Accordingly, unless the Company is able to raise substantial additional capital
in the near term, its ability to continue as a going concern will be in
jeopardy.
Management has been seeking to raise additional
capital in order to help fund the liquidity issues that the Company addresses, but cannot assure that such additional capital
will be raised during the remainder of 2017
.
The National Association of Insurance Commissioners (NAIC) has established minimum capital requirements in the form of
Risk-Based
Capital (RBC). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance companys business to develop a minimum level of capital called authorized control level risk-based capital and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. Our life insurance subsidiary is currently above the RBC minimums as of June 30, 2017 but could fall below that level by the end of 2017 should American Life continue with operating losses as
experienced
in the first half of 2017.
We are currently discussing co-insuring a block or blocks of business which would provide statutory capital and surplus relief that would ensure that our RBC ratio does not fall below 200% for the next twelve months.
Investments:
All fixed maturities and a portion of the equity
securities owned by the Company are considered available-for-sale and are
included in the consolidated financial statements at their fair value as of the
financial statement date. Bond premiums and discounts are amortized using the
scientific-yield method over the term of the bonds. Realized gains and losses on
securities sold during the year are determined using the specific identification
method. Unrealized holding gains and losses, net of applicable income taxes, are
included in comprehensive loss.
Declines in the fair value
of available for sale securities below their amortized cost are evaluated to
assess whether any other-than-temporary impairment loss should be recorded. In
determining if these losses are expected to be
other-than-temporary
, the
Company considers severity of impairment, duration of impairment, forecasted
recovery period, industry outlook, financial condition of the issuer, issuer
credit ratings, and the intent and ability of the Company to hold the investment
until the recovery of the cost.
The recognition of
other-than-temporary impairment losses on debt securities is dependent on the
facts and circumstances related to the specific security. If the Company intends
to sell a security or it is more likely than not that the Company would be
required to sell a security prior to recovery of the amortized cost, the
difference between amortized cost and fair value is recognized in the statement
of comprehensive income as an other-than-temporary impairment. If the Company
does not expect to recover the amortized basis, does not plan to sell the
security and if it is not more likely than not that the Company would be
required to sell a security before the recovery of its amortized cost, the
recognition of the other-than-temporary impairment is bifurcated. The Company
recognizes the credit loss portion in the income statement and the noncredit
loss portion in accumulated other comprehensive loss. The credit component of an
other-than-temporary impairment is determined by comparing the net present value
of projected cash flows with the amortized cost basis of the debt security. The
net present value is calculated by discounting the Companys best estimate of
projected future cash flows at the effective interest rate implicit in the fixed
income security at the date of acquisition. Cash flow estimates are driven by
assumptions regarding probability of default, including changes in credit
ratings, and estimates regarding timing and amount of recoveries associated with
a default. No other-than-temporary impairments were recognized during the six
months ended June 30, 2017 or 2016.
Investment income consists
of interest, dividends, and real estate income, which are recognized on an
accrual basis and amortization of premiums and discounts.
Policy
loans:
Policy loans are carried
at unpaid principal balances. Interest income on policy loans is recognized in
net investment income at the contract interest rate when earned. No valuation
allowance is established for these policy loans as the amount of the loan is
fully secured by the death benefit of the policy and cash surrender
value.
6
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Short-term
investments
:
Short-term investments are stated at cost and
consist of certificates of deposit. At June 30, 2017 and December 31, 2016 the
Company did not have any short-term investments.
Real estate, held for
investment:
Real estate, held for
investment is comprised of ten condominiums in Hawaii. Real estate is carried at
depreciated cost. Depreciation on residential real estate is computed on a
straight-line basis over 50 years.
Cash:
The Company considers all liquid investments with
original maturities of three months or less when purchased to be cash
equivalents. At June 30, 2017 and December 31, 2016, the Company had no cash
equivalents.
Deferred acquisition
costs:
Deferred acquisition costs
(DAC) consist of incremental direct costs, net of amounts ceded to reinsurers,
that result directly from and are essential to the contract acquisition
transaction and would not have been incurred by the Company had the contract
acquisition not occurred. These costs are capitalized, to the extent
recoverable, and amortized over the life of the premiums produced. The Company
evaluates the types of acquisition costs it capitalizes. The Company capitalizes
agent compensation and benefits and other expenses that are directly related to
the successful acquisition of contracts. The Company also capitalizes expenses
directly related to activities performed by the Company, such as underwriting,
policy issuance, and processing fees incurred in connection with successful
contract acquisitions.
Recoverability of deferred
acquisition costs is evaluated periodically by comparing the current estimate of
the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the
difference is charged to expense. The Company performs a recoverability analysis
annually in the fourth quarter unless events occur which require an immediate
review. The Company determined that no events occurred in the six months ended
June 30, 2017 that suggest a review should be undertaken.
The following table
provides information about deferred acquisition costs for the periods ended June
30, 2017 and December 31, 2016, respectively.
|
|
Six Months Ended
|
|
Year Ended
|
|
|
June 30,
|
|
December 31
|
|
|
2017
|
|
2016
|
Balance at
beginning of period
|
|
$
|
2,568,799
|
|
|
$
|
2,765,063
|
|
Capitalization of commissions, sales and issue
expenses
|
|
|
220,360
|
|
|
|
178,419
|
|
Change in
DAC due to unrealized investment losses
|
|
|
(11,110
|
)
|
|
|
(7,448
|
)
|
Gross amortization
|
|
|
(292,854
|
)
|
|
|
(367,235
|
)
|
Balance at
end of period
|
|
$
|
2,485,195
|
|
|
$
|
2,568,799
|
|
V
alue of business acquired:
Value of business acquired (VOBA) represents the
estimated value assigned to purchased companies or insurance in force of the
assumed policy obligations at the date of acquisition of a block of
policies.
Recoverability of value of
business acquired is evaluated periodically by comparing the current estimate of
the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the
difference is charged to expense. The Company performs a recoverability analysis
annually in the fourth quarter unless events occur which require an immediate
review. The Company determined that no events occurred in the six months ended
June 30, 2017 that suggest a review should be undertaken.
Property and equipment:
Property and equipment are stated
at cost net of accumulated depreciation. Annual depreciation is primarily
computed using straight-line methods for financial reporting and straight-line
and accelerated methods for tax purposes. Furniture and equipment is depreciated
over 3 to 7 years and computer software and equipment is generally depreciated
over 3 years. Depreciation expense totaled $17,258 and $25,601 for the three
months ended June 30, 2017 and 2016, respectively. Depreciation expense totaled
$33,647 and $61,091 for the six months ended June 30, 2017 and 2016,
respectively. Accumulated depreciation net of disposals totaled $982,830 and
$961,864 as of June 30, 2017 and December 31, 2016, respectively.
7
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Maintenance and repairs are
expensed as incurred. Replacements and improvements which extend the useful life
of the asset are capitalized. The net book value of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
earnings.
Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognized if the carrying amount of an asset may not be recoverable and exceeds
estimated future undiscounted cash flows of the asset. A recognized impairment
loss reduces the carrying amount of the asset to its fair value. Management has
determined that no such events occurred in the six months ended June 30, 2017
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
premiums are generally reflected in income in a manner consistent with the
recognition of premiums on the reinsured contracts. Reinsurance does not
extinguish the Companys primary liability under the policies written.
Therefore, the Company regularly evaluates the financial condition of its
reinsurers including their activities with respect to claim settlement practices
and commutations, and establishes allowances for uncollectible reinsurance
recoverable as appropriate. There were no allowances as of June 30, 2017 or
December 31, 2016.
Benefit reserves:
The Company establishes
liabilities for amounts payable under insurance policies, including traditional
life insurance and annuities. Generally, amounts are payable over an extended
period of time. Liabilities for future policy benefits of traditional life
insurance have been computed by a net level premium method based upon estimates
at the time of issue for investment yields, mortality and withdrawals. These
estimates include provisions for experience less favorable than initially
expected. Mortality assumptions are based on industry experience expressed as a
percentage of standard mortality tables.
Policy claims:
Policy claims are based on
reported claims plus estimated incurred but not reported claims developed from
trends of historical data applied to current exposure.
Deposit-type contracts:
Deposit-type contracts consist of
amounts on deposit associated with deferred annuity riders, premium deposit
funds and supplemental contracts without life contingencies.
Income taxes:
The Company is subject to income
taxes in the U.S. federal and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of the related tax
laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state or local tax
examinations by tax authorities for the years before 2013. The provision for
income taxes is based on income as reported in the financial statements. The
income tax provision is calculated under the asset and liability method.
Deferred tax assets are recorded based on the differences between the financial
statement and tax basis of assets and liabilities at the enacted tax rates. The
principal assets and liabilities giving rise to such differences are
investments, insurance reserves, and deferred acquisition costs. A deferred tax
asset valuation allowance is established when there is uncertainty that such
assets would be realized. The Company has no uncertain tax positions that it
believes are more-likely-than not that the benefit will not to be realized. When
applicable, the Company recognizes interest accrued related to unrecognized tax
benefits and penalties in income tax expense. The Company had no accruals for
payments of interest and penalties at June 30, 2017 and December 31,
2016.
Revenue recognition and
related expenses:
Revenues on
traditional life insurance products consist of direct and assumed premiums
reported as earned when due.
Amounts received as payment
for annuities and/or non-traditional contracts such as interest sensitive whole
life contracts, single payment endowment contracts, single payment juvenile
contracts and other contracts without life contingencies are recognized as
deposits to policyholder account balances and included in future insurance
policy benefits. Revenues from these contracts are comprised of fees earned for
administrative and contract-holder services and cost of insurance, which are
recognized over the period of the contracts, and included in revenue. Deposits
are shown as a financing activity in the consolidated statements of cash flows.
8
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Amounts received under our
multi-benefit policy form are allocated to the life insurance portion of the
multi-benefit life insurance arrangement and the annuity portion based upon the
signed policy.
Liabilities for future
policy benefits are provided and acquisition costs are amortized by associating
benefits and expenses with earned premiums to recognize related profits over the
life of the contracts. Acquisition costs are amortized over the premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts, which generally remain in force for the
lifetime of the insured.
Comprehensive loss:
Comprehensive loss is comprised
of net loss and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses from marketable securities
classified as available for sale, net of applicable taxes.
Common and preferred
stock and earnings (loss) per share:
The par value per common share is $0.001 with 120,000,000 voting common
shares authorized, 20,000,000 non-voting common shares authorized, and
10,000,000 preferred shares authorized. At June 30, 2017 and December 31, 2016,
the Company had 22,764,294 and 22,558,956 voting common shares issued and
outstanding, respectively.
At December 31, 2016, the
Company had 1,179 warrants outstanding. The warrants were exercisable through
December 31, 2016 for 10 shares of voting common stock per warrant at an
exercise price of $6.50 per share. No warrants were exercised during 2016 and
are now expired.
The Class A preferred
shares are non-cumulative, non-voting and convertible by the holder to voting
common shares at a rate of 1.3 common shares for each preferred share (subject
to customary anti-dilution adjustments). There is no stated dividend rate on the
Class A shares, but the holders of Class A shares will receive a dividend on
each outstanding share of Class A preferred stock in an amount equal to the
amount of the dividend payable on each share of common stock. The par value per
preferred Class A share is $0.001 with 2,000,000 shares authorized. At June 30,
2017 and December 31, 2016, the Company had 74,159 Class A preferred shares
issued and outstanding.
The Class B preferred
shares were non-cumulative, non-voting and convertible by the holder or the
Company to voting common shares after May 1, 2017 at a rate of 2.0 common shares
for each preferred share. The par value per preferred share was $0.001 with
1,000,000 shares authorized. The stated annual dividend rate on the Class B
preferred shares was 7%. Dividends totaling $30,543 and $43,120 were paid as of
June 30, 2017 and December 31, 2016, respectively. At December 31, 2016, the
Company had 102,669 Class B preferred shares issued and outstanding. On June 15,
2017, the outstanding Class B preferred shares were converted to 205,338 voting
common shares by the
Company.
Loss per share attributable
to the Companys common stockholders were computed based on the weighted average
number of shares outstanding during each period. The weighted average number of
shares outstanding during the three months ended June 30, 2017 and 2016 were
22,764,294 and 22,558,956 shares, respectively. The weighted average number of
shares outstanding during the six months ended June 30, 2017 and 2016 were
22,763,160
and 20,682,546 shares, respectively.
Reclassification of
certain prior period information:
Reclassifications have been made on the Consolidated Statement of
Comprehensive Income for the three and six months ended June 30, 2016. These
reclassifications do not impact the overall Net loss or Net loss per common
share lines of the Consolidated Statement of Comprehensive Income for the three
and six months ended June 30, 2016.
New accounting
standards:
In June 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2016-13,
Financial
Instruments Credit Losses
(Topic 326). Under the new guidance, this replaces the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and
supportable information to perform credit loss estimates. This update changes
the methodology from an incurred loss to an expected credit loss. An allowance
for the expected credit loss will be set up and the net income will be impacted.
The credit losses will be evaluated in the current period and an adjustment to
the allowance can be made. The new standard becomes effective after December 15,
2019. We are currently evaluating the impact of our pending adoption of the new
standard on our consolidated financial statements.
9
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
In February 2016, the FASB
issued ASU 2016-02,
Leases
(Topic 842). The
guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under
the new guidance, lessees are required to recognize lease assets and lease
liabilities on the balance sheet for all leases with terms longer than 12
months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A
modified retrospective transition approach is required for lessees for capital
and operating leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, with certain
practical expedients available. We are currently evaluating the impact of our
pending adoption of the new standard on our consolidated financial statements.
In January 2016, the FASB
issued ASU 2016-1,
Financial
InstrumentsOverall
(Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities. This guidance changes how entities account for equity investments
that do not result in consolidation and are not accounted for under the equity
method of accounting. Entities will be required to measure these investments at
fair value at the end of each reporting period and recognize changes in fair
value in net income. A practicability exception will be available for equity
investments that do not have readily determinable fair values; however; the
exception requires the Company to adjust the carrying amount for impairment and
observable price changes in orderly transactions for the identical or a similar
investment of the same issuer. This guidance also changes certain disclosure
requirements and other aspects of current GAAP. This guidance is effective for
fiscal years beginning after December 15, 2017, and is applicable to the Company
in fiscal 2018. The Company is currently evaluating the impact of the adoption
of ASU 2016-01 on its consolidated financial statements.
Note 2. Acquisitions and
Divestitures
On March 15, 2016, Midwest
acquired Northstar Financial Corporation (Northstar), an inactive Minnesota
corporation, pursuant to an Agreement and Plan of Merger dated December 18,
2015. Pursuant to this merger, Midwest exchanged 1.27 shares of its voting
common stock for each share of Northstar common stock, or approximately
4,553,000 shares. The merger of Northstar was recorded as an asset acquisition.
The assets (primarily cash) and liabilities of Northstar were recorded in the
Companys consolidated financial statements at their estimated fair values as of
the acquisition date.
Effective as of August 29,
2016, American Life sold its interest in its dormant subsidiary, Capital Reserve
Life Insurance Company (Capital Reserve) to an unrelated third party for cash
which approximated the statutory surplus of Capital Reserve, resulting in a net
gain of approximately $26,000 including $50,000 cash above book value and
unrealized gains on the fair market value of bonds becoming realized at the date
of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain was
included in the net realized gain (loss) on investments on the consolidated
statement of comprehensive income.
10
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 3.
Investments
The cost or amortized cost
and estimated fair value of investments classified as available-for-sale as of
June 30, 2017 and December 31, 2016 are as follows:
|
|
Cost or
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
June 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
2,506,577
|
|
$
|
-
|
|
$
|
102,755
|
|
$
|
2,403,822
|
Agency
securities
|
|
|
929,845
|
|
|
4,093
|
|
|
13,946
|
|
|
919,992
|
States and political
subdivisions -- general obligations
|
|
|
380,812
|
|
|
1,044
|
|
|
600
|
|
|
381,256
|
States and political
subdivisions -- special revenue
|
|
|
125,781
|
|
|
6,933
|
|
|
27
|
|
|
132,687
|
Corporate
|
|
|
23,625,850
|
|
|
47,965
|
|
|
696,086
|
|
|
22,977,729
|
Total fixed
maturities
|
|
$
|
27,568,865
|
|
$
|
60,035
|
|
$
|
813,414
|
|
$
|
26,815,486
|
December 31,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
3,390,545
|
|
$
|
-
|
|
$
|
166,326
|
|
$
|
3,224,219
|
States and political
subdivisions -- general obligations
|
|
|
383,730
|
|
|
732
|
|
|
3,067
|
|
|
381,395
|
States and political
subdivisions -- special revenue
|
|
|
275,262
|
|
|
5,633
|
|
|
3,160
|
|
|
277,735
|
Corporate
|
|
|
24,974,546
|
|
|
16,232
|
|
|
1,135,188
|
|
|
23,855,590
|
Total fixed
maturities
|
|
$
|
29,024,083
|
|
$
|
22,597
|
|
$
|
1,307,741
|
|
$
|
27,738,939
|
The Company has four
securities that individually exceed 10% of the total of the state and political
subdivisions categories as of June 30, 2017. The amortized cost, fair value,
credit ratings, and description of each security is as follows:
|
|
Amortized
|
|
Estimated
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Credit Rating
|
June 30, 2017:
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
States and political
subdivisions -- general obligations
|
|
|
|
|
|
|
|
|
Bellingham Wash
|
|
$
|
110,471
|
|
$
|
110,528
|
|
AA+
|
Longview Washington
Refunding
|
|
|
161,581
|
|
|
160,981
|
|
Aa3
|
Memphis Tenn
|
|
|
108,760
|
|
|
109,747
|
|
AA
|
States and political
subdivisions -- special revenue
|
|
|
|
|
|
|
|
|
Riviera Beach FLA Pub Impt
Rev
|
|
|
100,376
|
|
|
107,309
|
|
AA
|
Total
|
|
$
|
481,188
|
|
$
|
488,565
|
|
|
11
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
summarizes, for all securities in an unrealized loss position at June 30, 2017
and December 31, 2016, the estimated fair value, pre-tax gross unrealized loss
and number of securities by length of time that those securities have been
continuously in an unrealized loss position.
|
|
June 30, 2017
|
|
December 31,
2016
|
|
|
|
|
|
Gross
|
|
Number
|
|
|
|
|
Gross
|
|
Number
|
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
|
Fair Value
|
|
Loss
|
|
Securities
(1)
|
|
Fair Value
|
|
Loss
|
|
Securities
(1)
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12
months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
2,403,822
|
|
$
|
102,755
|
|
14
|
|
$
|
3,224,219
|
|
$
|
166,326
|
|
17
|
Agency
securities
|
|
|
727,596
|
|
|
13,946
|
|
8
|
|
|
-
|
|
|
-
|
|
-
|
States and political
subdivisions -- general obligations
|
|
|
160,982
|
|
|
600
|
|
1
|
|
|
271,093
|
|
|
3,067
|
|
2
|
States and political
subdivisions -- special revenue
|
|
|
25,377
|
|
|
27
|
|
1
|
|
|
171,711
|
|
|
3,160
|
|
2
|
Corporate
|
|
|
17,833,350
|
|
|
529,874
|
|
93
|
|
|
19,737,965
|
|
|
935,545
|
|
112
|
Greater than 12
months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
2,119,567
|
|
|
166,212
|
|
15
|
|
|
2,558,275
|
|
|
199,643
|
|
12
|
Total fixed
maturities
|
|
$
|
23,270,694
|
|
$
|
813,414
|
|
132
|
|
$
|
25,963,263
|
|
$
|
1,307,741
|
|
145
|
(1)
|
|
We may reflect a
security in more than one aging category based on various purchase
dates.
|
Based on our review of the
securities in an unrealized loss position at June 30, 2017 and December 31,
2016, no other-than-temporary impairments were deemed necessary. Management
believes that the Company will fully recover its cost basis in the securities
held at June 30, 2017, and management does not have the intent to sell nor is it
more likely than not that the Company will be required to sell such securities
until they recover or mature. The temporary impairments shown herein are
primarily the result of the current interest rate environment rather than credit
factors that would imply other-than-temporary impairment.
The amortized cost and
estimated fair value of fixed maturities at June 30, 2017, 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
|
|
|
Cost
|
|
Fair Value
|
Due in one year or
less
|
|
$
|
-
|
|
$
|
-
|
Due after one year through
five years
|
|
|
1,253,971
|
|
|
1,234,392
|
Due after five years
through ten years
|
|
|
10,281,957
|
|
|
10,030,372
|
Due after ten
years
|
|
|
16,032,937
|
|
|
15,550,722
|
|
|
$
|
27,568,865
|
|
$
|
26,815,486
|
The Company is required to
hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At June 30, 2017 and December 31, 2016, these
required deposits had a total amortized cost of $3,242,743 and $2,747,571 and
fair values of $3,167,297 and $2,635,225, respectively.
12
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The components of net
investment income for the
three and
six months ended June 30, 2017 and 2016 are as
follows:
|
|
Three months ended June
30,
|
|
Six months ended June
30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fixed maturities
|
|
$
|
244,867
|
|
|
$
|
207,495
|
|
|
$
|
509,448
|
|
|
$
|
417,151
|
|
Other
|
|
|
16,611
|
|
|
|
15,628
|
|
|
|
32,618
|
|
|
|
32,537
|
|
|
|
|
261,478
|
|
|
|
223,123
|
|
|
|
542,066
|
|
|
|
449,688
|
|
Less investment
expenses
|
|
|
(11,325
|
)
|
|
|
(21,345
|
)
|
|
|
(37,233
|
)
|
|
|
(34,782
|
)
|
Investment income, net of
expenses
|
|
$
|
250,153
|
|
|
$
|
201,778
|
|
|
$
|
504,833
|
|
|
$
|
414,906
|
|
Proceeds for the three
months ended June 30, 2017 and 2016 from sales of investments classified as
available-for-sale were
$10,669,580
and $3,897,138, respectively. Gross gains of
$77,394 and $45,897 and gross losses of $22,881 and $35,026 were realized on
those sales during the
three
months ended June 30, 2017 and 2016, respectively.
Proceeds for the six months ended June 30, 2017 and 2016 from sales of
investments classified as available-for-sale were $15,381,725 and $7,516,601,
respectively. Gross gains of $87,535 and $69,653 and gross losses of $68,526 and
$55,897 were realized on those sales during the six months ended June 30, 2017
and 2016, respectively.
Note 4. 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 entitys own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, accounting standards
establish a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
●
|
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
|
●
|
Level 2: Significant other observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market
data.
|
●
|
Level 3: Significant unobservable inputs that
reflect a reporting entitys 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.
Fixed
maturities:
Fixed maturities are
recorded at fair value on a recurring basis utilizing a third-party pricing
source. The valuations are reviewed and validated quarterly through random
testing by comparisons to separate pricing models or other third party pricing
services. For the period ended June 30, 2017, there were no material changes to
the valuation methods or assumptions used to determine fair values, and no
broker or third party prices were changed from the values received. Securities
with prices based on validated quotes from pricing services are reflected within
Level 2.
13
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Cash:
The carrying value of cash and cash equivalents
and short-term investments approximate the fair value because of the short
maturity of the instruments.
Policy loans:
Policy loans are stated at unpaid
principal balances. As these loans are fully collateralized by the cash
surrender value of the underlying insurance policies, the carrying value of the
policy loans approximates their fair value. Policy loans are categorized as
Level 3 in the fair value hierarchy.
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. These liabilities are categorized as Level 3 in the fair value
hierarchy.
Surplus notes:
The fair value for surplus notes
is calculated using a discounted cash flow approach. Cash flows are projected
utilizing scheduled repayments and discounted to the valuation date using market
rates currently available for debt with similar remaining maturities. These
notes are structured such that all interest is paid at maturity. In the
following fair value tables, the Company has included accrued interest expense,
which is recorded in the accounts payable and accrued expenses, of approximately
$278,077 and $261,971 in carrying value of the surplus notes as of June 30, 2017
and December 31, 2016, respectively. These liabilities are categorized as Level
3 in the fair value hierarchy. The following table presents the Companys fair
value hierarchy for those financial instruments measured at fair value on a
recurring basis as of June 30, 2017 and December 31, 2016.
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted
|
|
Other
|
|
Significant
|
|
|
|
|
|
In Active
|
|
Observable
|
|
Unobservable
|
|
Estimated
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
-
|
|
$
|
2,403,822
|
|
$
|
-
|
|
$
|
2,403,822
|
Agency
securities
|
|
|
-
|
|
|
919,992
|
|
|
-
|
|
|
919,992
|
States and political
subdivisions general obligations
|
|
|
-
|
|
|
381,256
|
|
|
-
|
|
|
381,256
|
States and political
subdivisions special revenue
|
|
|
-
|
|
|
132,687
|
|
|
-
|
|
|
132,687
|
Corporate
|
|
|
-
|
|
|
22,977,729
|
|
|
-
|
|
|
22,977,729
|
Total fixed
maturities
|
|
$
|
-
|
|
$
|
26,815,486
|
|
$
|
-
|
|
$
|
26,815,486
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
-
|
|
$
|
3,224,219
|
|
$
|
-
|
|
$
|
3,224,219
|
States and political
subdivisions general obligations
|
|
|
-
|
|
|
381,395
|
|
|
-
|
|
|
381,395
|
States and political
subdivisions special revenue
|
|
|
-
|
|
|
277,735
|
|
|
-
|
|
|
277,735
|
Corporate
|
|
|
-
|
|
|
23,855,590
|
|
|
-
|
|
|
23,855,590
|
Total fixed
maturities
|
|
$
|
-
|
|
$
|
27,738,939
|
|
$
|
-
|
|
$
|
27,738,939
|
There were no transfers of
financial instruments between any levels during the six months ended June 30,
2017 or during the year ended December 31, 2016.
Accounting standards
require disclosure of the fair value of financial assets and financial
liabilities, including those financial assets and financial liabilities that are
not measured and reported at fair value on a recurring basis or non-recurring
basis. The methodologies for estimating the fair value of financial assets and
financial liabilities that are measured at fair value on a recurring basis are
discussed above. There were no financial assets or financial liabilities
measured at fair value on a non-recurring basis.
14
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following disclosure
contains the carrying values, estimated fair values and their corresponding
placement in the fair value hierarchy, for financial assets and financial
liabilities as of June 30, 2017 and December 31, 2016, respectively:
|
|
June 30, 2017
|
|
|
|
|
|
Fair Value
Measurements Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
for Identical
Assets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
and
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
422,731
|
|
$
|
-
|
|
$
|
-
|
|
$
|
422,731
|
|
$
|
422,731
|
Cash
|
|
|
2,282,502
|
|
|
2,282,502
|
|
|
-
|
|
|
-
|
|
|
2,282,502
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder deposits
(Deposit-type contracts)
|
|
|
17,271,789
|
|
|
-
|
|
|
-
|
|
|
17,271,789
|
|
|
17,271,789
|
Surplus notes and accrued
interest payable
|
|
|
828,077
|
|
|
-
|
|
|
-
|
|
|
828,077
|
|
|
828,077
|
|
|
December 31,
2016
|
|
|
|
|
|
Fair Value
Measurements Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
for Identical
Assets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
and
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
412,583
|
|
$
|
-
|
|
$
|
-
|
|
$
|
412,583
|
|
$
|
412,583
|
Cash
|
|
|
661,545
|
|
|
661,545
|
|
|
-
|
|
|
-
|
|
|
661,545
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder deposits
(Investment-type contracts)
|
|
|
16,012,567
|
|
|
-
|
|
|
-
|
|
|
16,012,567
|
|
|
16,012,567
|
Surplus notes and accrued
interest payable
|
|
|
811,971
|
|
|
-
|
|
|
-
|
|
|
808,602
|
|
|
808,602
|
Note 5. Income Tax
Matters
Significant components of
the Companys deferred tax assets and liabilities as of June 30, 2017 and
December 31, 2016 are as follows:
|
|
June 30, 2017
|
|
December 31,
2016
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
Loss
carryforwards
|
|
$
|
11,573,419
|
|
|
$
|
9,705,974
|
|
Capitalized
costs
|
|
|
628,768
|
|
|
|
667,264
|
|
Unrealized losses on
investments
|
|
|
280,647
|
|
|
|
436,949
|
|
Benefit
reserves
|
|
|
951,034
|
|
|
|
984,640
|
|
Total deferred tax
assets
|
|
|
13,433,868
|
|
|
|
11,794,827
|
|
Less valuation
allowance
|
|
|
(11,813,518
|
)
|
|
|
(10,170,638
|
)
|
Total deferred tax assets,
net of valuation allowance
|
|
|
1,620,350
|
|
|
|
1,624,189
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Policy acquisition
costs
|
|
|
611,755
|
|
|
|
571,148
|
|
Due premiums
|
|
|
220,755
|
|
|
|
228,136
|
|
Value of business
acquired
|
|
|
542,571
|
|
|
|
586,905
|
|
Intangible
assets
|
|
|
238,000
|
|
|
|
238,000
|
|
Property and
equipment
|
|
|
7,269
|
|
|
|
-
|
|
Total deferred tax
liabilities
|
|
|
1,620,350
|
|
|
|
1,624,189
|
|
Net deferred tax
assets
|
|
$
|
-
|
|
|
$
|
-
|
|
15
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
At June 30, 2017 and
December 31, 2016, the Company recorded a valuation allowance of $11,813,518 and
$10,170,638, 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.
Loss carryforwards for tax purposes as
of June 30, 2017, have expiration dates that range from 2024 through
2036.
There was no income tax
expense for the
three and
six months ended June 30, 2017 and 2016. This differed from the
amounts computed by applying the statutory U.S. federal income tax rate of 34%
to pretax income, as a result of the following:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Computed
expected income tax benefit
|
|
$
|
(268,762
|
)
|
|
$
|
(312,825
|
)
|
|
$
|
(623,689
|
)
|
|
$
|
(574,258
|
)
|
Increase
(reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meals,
entertainment and political contributions
|
|
|
3,388
|
|
|
|
9,598
|
|
|
|
6,265
|
|
|
|
18,755
|
|
Adjustment
to Prior Year NOL
|
|
|
(1,172,196
|
)
|
|
|
-
|
|
|
|
(1,172,196
|
)
|
|
|
-
|
|
Other
|
|
|
(9,798
|
)
|
|
|
56,760
|
|
|
|
(9,562
|
)
|
|
|
25,066
|
|
|
|
|
(1,178,606
|
)
|
|
|
66,358
|
|
|
|
(1,175,493
|
)
|
|
|
43,821
|
|
Tax benefit
before valuation allowance
|
|
|
(1,447,368
|
)
|
|
|
(246,467
|
)
|
|
|
(1,799,182
|
)
|
|
|
(530,437
|
)
|
Change in
valuation allowance
|
|
|
1,447,368
|
|
|
|
246,467
|
|
|
|
1,799,182
|
|
|
|
530,437
|
|
Net income
tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 6.
Reinsurance
A summary of significant
reinsurance amounts affecting the accompanying consolidated financial statements
as of June 30, 2017 and December 31, 2016 and for the three and six months ended
June 30, 2017 and 2016 is as follows:
|
|
June 30, 2017
|
|
December 31, 2016
|
Balance
sheets:
|
|
|
|
|
|
|
Benefit and
claim reserves assumed
|
|
$
|
2,626,861
|
|
$
|
2,470,063
|
Benefit and
claim reserves ceded
|
|
|
11,453,050
|
|
|
11,704,055
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Statements
of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
assumed
|
|
$
|
5,076
|
|
$
|
5,466
|
|
$
|
11,590
|
|
$
|
12,231
|
Premiums
ceded
|
|
|
57,581
|
|
|
84,117
|
|
|
107,597
|
|
|
150,274
|
Benefits
assumed
|
|
|
13,364
|
|
|
25,135
|
|
|
29,130
|
|
|
30,158
|
Benefits
ceded
|
|
|
97,109
|
|
|
216,531
|
|
|
212,955
|
|
|
571,656
|
Commissions
assumed
|
|
|
4
|
|
|
9
|
|
|
14
|
|
|
17
|
Commissions
ceded
|
|
|
-
|
|
|
650
|
|
|
-
|
|
|
1,288
|
The following table
provides a summary of the significant reinsurance balances recoverable on paid
and unpaid policy claims by reinsurer along with the A.M. Best credit rating as
of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
Recoverable
on
|
|
|
|
|
Total
Amount
|
|
|
|
|
Recoverable
|
|
Recoverable
|
|
Benefit
|
|
Ceded
|
|
Recoverable
|
|
|
AM
Best
|
|
on
Paid
|
|
on
Unpaid
|
|
Reserves/Deposit-
|
|
Due
|
|
from
|
Reinsurer
|
|
Rating
|
|
Losses
|
|
Losses
|
|
type Contracts
|
|
Premiums
|
|
Reinsurer
|
Optimum Re
Insurance Company
|
|
A-
|
|
$
|
-
|
|
$
|
16,837
|
|
$
|
175,460
|
|
$
|
-
|
|
$
|
192,297
|
Sagicor Life
Insurance Company
|
|
A-
|
|
|
-
|
|
|
250,575
|
|
|
11,250,031
|
|
|
239,853
|
|
|
11,260,753
|
|
|
|
|
$
|
-
|
|
$
|
267,412
|
|
$
|
11,425,491
|
|
$
|
239,853
|
|
$
|
11,453,050
|
At June 30, 2017 and
December 31, 2016, total benefit reserves, policy claims, deposit-type
contracts, and due premiums ceded by American Life to Sagicor were $11,260,753
and $11,446,342, respectively. American Life remains contingently liable on this
ceded reinsurance should Sagicor be unable to meet their obligations.
16
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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. 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, a separate contingency reserve may be established. At June
30, 2017 and December 31, 2016, no contingency reserve was
established.
Note 7. Deposit-Type
Contracts
The Companys 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 quarter ended June 30, 2017 and the year
ended December 31, 2016:
|
|
Six Months
Ended
|
|
Year
Ended
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Beginning
balance
|
|
$
|
16,012,567
|
|
|
$
|
13,897,421
|
|
Deposits
received
|
|
|
1,405,247
|
|
|
|
2,433,781
|
|
Investment
earnings
|
|
|
453,374
|
|
|
|
776,541
|
|
Withdrawals
|
|
|
(594,544
|
)
|
|
|
(1,086,661
|
)
|
Contract
Charges
|
|
|
(4,855
|
)
|
|
|
(8,515
|
)
|
Ending
balance
|
|
$
|
17,271,789
|
|
|
$
|
16,012,567
|
|
Under the terms of American
Lifes coinsurance agreement with SNL, American Life assumes certain
deposit-type contract obligations, as shown in the table above. The remaining
deposits, withdrawals and interest credited represent those for American Lifes
direct business.
Note 8. Commitments and
Contingencies
Legal Proceedings:
We are involved in litigation
incidental to our operations from time to time. We are not presently a party to
any legal proceedings other than litigation arising in the ordinary course of
our business, and we are not aware of any claims that could materially affect
our financial position or results of operations.
Regulatory
Matters
: State regulatory bodies
and other regulatory bodies regularly make inquiries and conduct examinations or
investigations concerning the Companys compliance with laws in relation to, but
not limited to, insurance and securities. The issues involved in information
requests and regulatory matters vary widely. The Company cooperates in these
inquiries. Agencies from the state of Nebraska are currently conducting a
routine insurance regulatory examination for the period 2013 through 2016 as
required by state statutes.
17
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Office
Lease:
The Company leases office
space in Lincoln, Nebraska under an agreement executed October 17, 2013 that
expires on January 31, 2024. The Company executed an amendment to its lease for
an additional 2,876 square feet of office space on October 23, 2015, which
expired on May 31, 2017. Great Plains entered into a lease on October 4, 2013
for office space in Mitchell, South Dakota, which expired on November 30, 2016.
First Wyoming leased space in Cheyenne, Wyoming, which expired on August 31,
2016. Rent expense for the three months ended June 30, 2017 and 2016 was $60,914
and $99,833, respectively. Rent expense for the six months ended June 30, 2017
and 2016 was $117,134 and $173,043, respectively. Future minimum lease payments
for the remainder of 2017 and the subsequent years are as follows:
2017
|
|
$
|
74,800
|
2018
|
|
|
136,557
|
2019
|
|
|
141,412
|
2020
|
|
|
146,477
|
2021
|
|
|
151,543
|
Later
years
|
|
|
331,790
|
Total
|
|
$
|
982,579
|
Note 9. Statutory Net
Income and Surplus
American Life is required
to prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the Nebraska Department of
Insurance. 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. First
Wyoming Life and Great Plains Life merged into American Life as of September 1,
2016 and December 31, 2016, respectively. Capital Reserve was sold effective
August 29, 2016. The June 30, 2016 numbers in the table below have been restated
to include the First Wyoming Life and Great Plains Life balances into American
Life to be consistent with the June 30, 2017 statutory statement filing. The
following table summarizes the statutory net loss and statutory capital and
surplus of American Life as of June 30, 2017 and December 31, 2016 and for the
six months ended June 30, 2017 and 2016.
|
|
Statutory Net Loss for the
six months ended June 30,
|
|
|
2017
|
|
2016
|
American Life
|
|
$
|
1,477,855
|
|
$
|
692,364
|
Capital Reserve
|
|
|
N/A
|
|
$
|
80,322
|
|
|
|
Statutory Capital and
Surplus as of
|
|
|
June 30, 2017
|
|
December 31,
2016
|
American Life
|
|
$
|
2,327,225
|
|
$
|
3,817,844
|
Capital Reserve
|
|
|
N/A
|
|
|
N/A
|
Note 10. Surplus
Notes
The following provides a
summary of the Companys surplus notes along with issue dates, maturity dates,
face amounts, and interest rates as of June 30, 2017:
Creditor
|
|
Issue Date
|
|
Maturity Date
|
|
Face Amount
|
|
Interest Rate
|
David G. Elmore
|
|
September 1, 2006
|
|
September 1, 2016
|
|
$ 250,000
|
|
7%
|
David G.
Elmore
|
|
August 4,
2011
|
|
August 1,
2016
|
|
300,000
|
|
5%
|
18
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Any payments and/or
repayments must be approved by the Nebraska Department of Insurance. As of June
30, 2017, the Company has accrued $278,077 of interest expense under accounts
payable and accrued expenses on the consolidated balance sheet. No payments were
made in the six months ended June 30, 2017, or during the year ended December
31, 2016. The surplus notes for $300,000 and $250,000 matured on August 1, 2016
and September 1, 2016, respectively. Due to the nature of surplus notes, a
repayment cannot be made without the prior approval of the Nebraska insurance
regulators.
Note 11. Related Party
Transactions
The Company commenced its
third party administrative (TPA) services in 2012 as an additional revenue
source. These services were offered to American Life through February 28, 2017,
and to non-consolidated entities. These agreements, for various levels of
administrative services on behalf of each company, generate fee income for the
Company. Services provided vary based on their needs and can include some or all
aspects of back-office accounting and policy administration. We have been able
to perform our TPA services using our existing in-house resources. Fees earned
during the three months ended June 30, 2017 and 2016 were $16,500 and $13,500,
respectively. Fees earned during the six months ended June 30, 2017 and 2016
were $33,000 and $28,000, respectively.
Note 12. Subsequent
Events
All of the effects of
subsequent events that provide additional evidence about conditions that existed
at June 30, 2017, including the estimates inherent in the process of preparing
consolidated financial statements, are recognized in the consolidated financial
statements. The Company does not recognize subsequent events that provide
evidence about conditions that did not exist at the date of the consolidated
financial statements but arose after, but before the consolidated financial
statements were available to be issued. In some cases, non-recognized subsequent
events are disclosed to keep the consolidated financial statements from being
misleading.
The Company has evaluated
subsequent events through the date that the consolidated financial statements
were issued and found no events to report.
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following Managements
Discussion and Analysis (MD&A) is intended to help the reader understand
the financial condition as of June 30, 2017, compared with December 31, 2016,
and the results of operations for the three and six months ended June 30, 2017,
compared with the corresponding periods in 2016 of Midwest Holding Inc. and its
consolidated subsidiary. The MD&A is provided as a supplement to, and should
be read in conjunction with our consolidated financial statements and the
accompanying notes to the consolidated financial statements (Notes) presented
in Part 1 Item 1. Financial Statements; our Form 10-K for the year ended
December 31, 2016 (2016 Form 10-K), including the sections entitled Part I
Item 1A. Risk Factors, and Part II Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Cautionary Note
Regarding Forward-Looking Statements
Except for certain
historical information contained herein, this report contains certain statements
that may be considered forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act), and Section 27A of the Securities Act of 1933, as amended, and such
statements are subject to the safe harbor created by those sections. All
statements, other than statements of historical fact, are statements that could
be deemed forward-looking statements, including without limitation: any
projections of revenues, earnings, cash flows, capital expenditures, or other
financial items; any statement of plans, strategies, and objectives of
management for future operations; any statements concerning proposed acquisition
plans, new services, or developments; any statements regarding future economic
conditions or performance; and any statements of belief and any statement of
assumptions underlying any of the foregoing. Words such as believe, may,
could, expects, hopes, estimates, projects, intends, anticipates,
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, some of which cannot be predicted or quantified, which could
cause future events and actual results to differ materially from those set forth
in, contemplated by, or underlying the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the section entitled "Item 1A. Risk Factors," set forth in
our 2016 Form 10-K.
19
All such forward-looking
statements speak only as of the date of this Form 10-Q. You are cautioned not to
place undue reliance on such forward-looking statements. We expressly
disclaim
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the our
expectations with regard thereto or any change in the events, conditions, or
circumstances on which any such statement is based.
Overview
We were formed on October
31, 2003 for the primary purpose of becoming a financial services company. We
presently conduct our business through our sole life insurance subsidiary,
American Life & Security Corp. (American Life). In 2009, American Life was
issued a certificate of authority to conduct life insurance business in
Nebraska.
We have incurred losses
since inception that resulted primarily from costs incurred while raising
capital and establishing and operating American Life and other entities. We
expect to continue to incur operating losses until American Life achieves a
volume of in-force life insurance policies that provides premiums that are
sufficient to cover our operating expenses.
Critical Accounting
Policies and Estimates
The Managements Discussion
and Analysis section included in our 2016 Form 10-K contains a detailed
discussion of our critical accounting policies and estimates. This report should
be read in conjunction with the Critical Accounting Policies and Estimates
discussed in our 2016 Form 10-K.
Consolidated Results of
Operations Three Months Ended June 30, 2017
The following discussion
compares the results of the three months ended June 30, 2017 with the three
months ended June 30, 2016. Unless the context indicates otherwise, the 2017
results are stated first followed by 2016 results.
Net Loss
: The increase in net loss was primarily due to
the decline in premium revenue, the increase in death benefits and surrenders,
interest credited, and the amortization of deferred acquisition costs. These
were offset by lower reserves and the decrease in other operating expenses.
Revenues are primarily
generated from premium revenues and investment income. Insurance revenues are
summarized in the table below.
|
|
Three months ended June 30,
|
|
|
2017
|
|
2016
|
Premiums
|
|
$
|
871,535
|
|
$
|
932,042
|
|
Investment
income, net of expenses
|
|
|
250,153
|
|
|
201,778
|
|
Net realized
gains (losses) on investments
|
|
|
54,513
|
|
|
(56,629
|
)
|
Miscellaneous income
|
|
|
19,055
|
|
|
13,250
|
|
|
|
$
|
1,195,256
|
|
$
|
1,090,441
|
|
Premium
revenue:
Premium revenue
decreased primarily due to our decision to reduce new life insurance policy
sales to near zero in 2015 and 2016 in order to preserve the regulatory capital
and surplus of American Life. The net effect is evident in the second quarter of
2017 and we expect it will be evident throughout the remainder of 2017. We
expect to have limited production of new insurance business in 2017 with new
sales resulting in $50,000 of new annual premium issued in the second quarter of
2017.
20
Investment income, net
of expenses
: The components of
net our investment income are as follows:
|
|
Three months ended June 30,
|
|
|
2017
|
|
2016
|
Fixed
maturities
|
|
$
|
244,867
|
|
|
$
|
207,495
|
|
Other
|
|
|
16,611
|
|
|
|
15,628
|
|
|
|
|
261,478
|
|
|
|
223,123
|
|
Less
investment expenses
|
|
|
(11,325
|
)
|
|
|
(21,345
|
)
|
Investment
income, net of expenses
|
|
$
|
250,153
|
|
|
$
|
201,778
|
|
The increase in investment
income was due primarily to the increased size of our bond portfolio. Management
was more aggressive in investing excess cash during late 2016, resulting in
larger invested assets and interest income in 2017. Policy loan interest and
miscellaneous investment income is included in the Other line item
above.
Net realized gains on
investments:
The increase is
primarily due to the gains from the sale of investments due to improved market
conditions and the one-time loss on an equity investment which was incurred in
the same period of 2016.
Miscellaneous
income:
Miscellaneous income
increased slightly due to the sale of Capital Reserve Life and the new TPA fee
agreement
for that company. Management expects revenues for such agreement to be $38,000 in 2017
. Fees earned during the three months ended June 30, 2017 and 2016 were
$16,500 and $13,500, respectively.
Expenses are summarized in
the table below.
|
|
Three months ended June 30,
|
|
|
2017
|
|
2016
|
Death and
other benefits
|
|
$
|
270,337
|
|
$
|
179,096
|
Interest
credited
|
|
|
234,149
|
|
|
182,395
|
Increase in
benefit reserves
|
|
|
162,620
|
|
|
224,644
|
Amortization
of deferred acquisition costs
|
|
|
134,149
|
|
|
25,233
|
Salaries and
benefits
|
|
|
528,042
|
|
|
549,343
|
Other
operating expenses
|
|
|
656,434
|
|
|
849,805
|
|
|
$
|
1,985,731
|
|
$
|
2,010,516
|
Death and other
benefits
: Death benefits
increased due to an increase in our paid claims. We expect death benefits to
continue at current levels due to the age of a block of business we acquired
several years ago. Claims experience on our current underwritten block has been
minimal. We had two claims on American Lifes new business during the period,
which net to us was only $70,000. We maintain policy reserves to offset the
effect of all claims. Claim expenses on our acquired block of business are
largely offset by a release in policy reserves.
Interest credited:
The increase was due to the
increase in the annuity deposits.
Management made the decision to decrease the credit rate on most in-force annuity deposits effective July 1, 2017. This action is expected to reduce expense by approximately $275,000 per year.
Increase in benefit
reserves
: The decrease in benefit
reserves reflects the surrenders primarily from acquired blocks of business.
American Lifes overall persistency is 94% which is above industry average and
better than the pricing model for the block. The decrease was offset by the new
business written in late 2016 and the first half of 2017 and the maturity of our
in-force block of business.
Amortization of deferred
acquisition costs
: The increase
was a result of more surrenders related to an acquired block of business. The
unamortized DAC that related to those policies surrendered was expensed upon
surrender. We also began writing new business in late 2016 and the first half of
2017 which increased the DAC amortization.
Salaries and
benefits
: The decrease was due to
the personnel reduction gained from the synergies of merging the three life
companies in the second half of 2016.
Other operating
expenses
: Other operating
expenses decreased primarily due to the one-time expenses incurred in 2016
related to the Northstar and First Wyoming acquisitions and the redomestication
of and merger of our former life subsidiaries of $100,000 and decrease in travel
of $30,000 related to capital raising. These were offset by the Nebraska
Department of Insurance regulatory examination fees of $60,000.
Management continues to look for opportunities to aggressively reduce operating expenses.
21
Consolidated Results of
Operations Six Months Ended June 30, 2017
The following discussion
compares the results of the six months ended June 30, 2017 with the six months
ended June 30, 2016. Unless the context indicates otherwise, the 2017 results
are stated first followed by 2016 results.
Net Loss
: The increase in net loss was primarily due to
the decline in premium revenue, the increase in death benefits and surrenders,
interest credited, amortization of deferred acquisition costs and salaries.
These were offset by lower reserves and the decrease in other operating
expenses.
Revenues are primarily
generated from premium revenues and investment income. Insurance revenues are
summarized in the table below.
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
Premiums
|
|
$
|
1,704,382
|
|
$
|
1,859,475
|
|
Investment
income, net of expenses
|
|
|
504,833
|
|
|
414,906
|
|
Net realized
gain (loss) on investments
|
|
|
19,009
|
|
|
(53,744
|
)
|
Miscellaneous income
|
|
|
37,855
|
|
|
63,557
|
|
|
|
$
|
2,266,079
|
|
$
|
2,284,194
|
|
Premium
revenue:
Premium revenue
decreased primarily due to our decision to reduce new life insurance policy
sales to near zero in 2015 and 2016 in order to preserve the regulatory capital
and surplus of American Life. The net effect is evident in the first half of
2017 and we expect it will be evident throughout the remainder of 2017. We
expect to have limited production of new insurance business in 2017 with new
sales resulting in $50,000 of new annual premium issued in the first half of
2017.
Investment income, net
of expenses
: The components of
net our investment income are as follows:
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
Fixed
maturities
|
|
$
|
509,448
|
|
|
$
|
417,151
|
|
Other
|
|
|
32,618
|
|
|
|
32,537
|
|
|
|
|
542,066
|
|
|
|
449,688
|
|
|
|
|
(37,233
|
)
|
|
|
(34,782
|
)
|
|
|
$
|
504,833
|
|
|
$
|
414,906
|
|
The increase in investment
income was due primarily to the increased size of our bond portfolio. Management
was more aggressive in investing excess cash during late 2016, resulting in
larger invested assets and interest income in 2017. Policy loan interest and
miscellaneous investment income is included in the Other line item above. The
increase in investment expenses was due to the transfer of bonds to American
Lifes custodial account from the custodial accounts that were held for First
Wyoming Life and Great Plains Life prior to our acquisition of those companies
during the first quarter of 2017.
Net realized gains on
investments:
The increase is
primarily due to the gains from the sale of investments due to improved market
conditions and the one-time loss on an equity investment which was incurred in
the same period of 2016.
Miscellaneous
income:
Miscellaneous income
decreased due to repayment of one of our investments in 2016 for a gain of
$32,000 offset by a slight increase in our TPA fees. We have two customers for
whom we performed these services. We do not expect such services to be a
significant source of future revenue. Fees earned during the six months ended
June 30, 2017 and 2016 were $33,000 and $28,000, respectively.
22
Expenses are summarized in
the table below.
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
Death and
other benefits
|
|
$
|
565,594
|
|
$
|
408,118
|
Interest
credited
|
|
|
453,381
|
|
|
352,989
|
Increase in
benefit reserves
|
|
|
307,746
|
|
|
391,669
|
Amortization
of deferred acquisition costs
|
|
|
292,854
|
|
|
147,727
|
Salaries and
benefits
|
|
|
1,103,608
|
|
|
1,025,823
|
Other
operating expenses
|
|
|
1,377,275
|
|
|
1,646,863
|
|
|
$
|
4,100,458
|
|
$
|
3,973,189
|
Death and other
benefits
: Death benefits
increased due to an increase in our paid claims. We expect death benefits to
continue at current levels due to the age of a block of business we acquired
several years ago. Claims experience on our current underwritten block has been
minimal. We had only three large claims on American Lifes new business during
the period, which net to us was $140,000. We maintain policy reserves to offset
the effect of all claims. Claim expenses on our acquired block of business are
largely offset by a release in policy reserves.
Interest credited:
The increase was due to the
increase in the annuity deposits.
Management made the decision to decrease the credit rate on most in-force annuity deposits effective July 1, 2017. This action is expected to reduce expense by approximately $275,000 per year.
Increase in benefit
reserves
: The decrease in benefit
reserves reflects the surrenders and claims primarily from acquired blocks of
business. American Lifes overall persistency is 94% which is above industry
average and better than the pricing model for the block. The decrease was offset
by the new business written in late 2016 and the first half of 2017 and the
maturity of our in-force block of business.
Amortization of deferred
acquisition costs
: The increase
was a result of more surrenders related to an acquired block of business. The
unamortized DAC that related to those policies surrendered was expensed upon
surrender. We also began writing new business in late 2016 and the first half of
2017 which increased the DAC amortization.
Salaries and
benefits
: The increase was due to
recruitment fees and the increase in the vacation accrual.
Other operating
expenses
: Other operating
expenses decreased primarily due to the one-time expenses incurred in 2016
related to the Northstar and First Wyoming acquisitions and the redomestication
of and merger of our former life subsidiaries of $220,000 and decrease in travel
of $43,000 related to capital raising. These were offset by the Nebraska
Department of Insurance regulatory examination fees of $140,000.
Management continues to look for opportunities to aggressively reduce operating expenses.
Investments
The Companys overall
investment philosophy is reflected in the allocation of its investments. The
Company emphasizes investment grade debt securities, real estate held for
investment, and policy loans. 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, 2017 and December 31,
2016.
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Carrying
|
|
Percent
|
|
Carrying
|
|
Percent
|
|
|
Value
|
|
of Total
|
|
Value
|
|
of Total
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
2,403,822
|
|
8.0
|
%
|
|
$
|
3,224,219
|
|
11.0
|
%
|
Agency
securities
|
|
|
919,992
|
|
3.1
|
|
|
|
-
|
|
-
|
|
States and political subdivisions - general
obligation
|
|
|
381,256
|
|
1.3
|
|
|
|
381,395
|
|
1.3
|
|
States and
political subdivisions - special revenue
|
|
|
132,687
|
|
0.4
|
|
|
|
277,735
|
|
0.9
|
|
Corporate
|
|
|
22,977,729
|
|
76.5
|
|
|
|
23,855,590
|
|
81.2
|
|
Total fixed
maturity securities
|
|
|
26,815,486
|
|
89.3
|
|
|
|
27,738,939
|
|
94.4
|
|
Cash and cash equivalents
|
|
|
2,282,502
|
|
7.6
|
|
|
|
661,545
|
|
2.4
|
|
Other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, held for investment
|
|
|
511,709
|
|
1.7
|
|
|
|
517,729
|
|
1.8
|
|
Policy
loans
|
|
|
422,731
|
|
1.4
|
|
|
|
412,583
|
|
1.4
|
|
Total
|
|
$
|
30,032,428
|
|
100.0
|
%
|
|
$
|
29,330,796
|
|
100.0
|
%
|
23
The following table shows
the distribution of the credit ratings of our portfolio of fixed maturity
securities by carrying value as of June 30, 2017 and December 31,
2016.
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
Percent
|
|
Value
|
|
Percent
|
AAA
and U.S. Government
|
|
$
|
3,511,005
|
|
13.1
|
%
|
|
$
|
4,301,163
|
|
15.5
|
%
|
AA
|
|
|
3,338,018
|
|
12.4
|
|
|
|
1,612,897
|
|
5.8
|
|
A
|
|
|
9,781,741
|
|
36.5
|
|
|
|
8,319,121
|
|
30.1
|
|
BBB
|
|
|
9,501,741
|
|
35.5
|
|
|
|
12,827,754
|
|
46.2
|
|
Total investment grade
|
|
|
26,132,505
|
|
97.5
|
|
|
|
27,060,935
|
|
97.6
|
|
BB
and other
|
|
|
682,981
|
|
2.5
|
|
|
|
678,004
|
|
2.4
|
|
Total
|
|
$
|
26,815,486
|
|
100.0
|
%
|
|
$
|
27,738,939
|
|
100.0
|
%
|
Reflecting the quality of
securities maintained by the Company, 97.5% and 97.6% of all fixed maturity
securities were investment grade as of June 30, 2017 and December 31, 2016,
respectively. Due to the low interest rate environment, the Company has invested
in bonds with A or BBB ratings.
Market Risks of
Financial Instruments
The Company holds a
portfolio of investments that primarily includes cash, bonds, and real estate,
held for investment. Each of these investments is subject to market risks that
can affect their return and their fair value. A majority of the investments are
fixed maturity securities including debt issues of corporations, U.S. Treasury
securities, or securities issued by government agencies. The primary market
risks affecting the investment portfolio are interest rate risk, credit risk,
and equity risk.
Interest Rate
Risk
Interest rate risk arises
from the price sensitivity of investments to changes in interest rates. Interest
and dividend income represent the greatest portion of an investments 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. We attempt to mitigate our
exposure to adverse interest rate movements through staggering the maturities of
the fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet
our
obligations and to
address reinvestment risk considerations. Due to the composition of our book of
insurance business, we believe it is unlikely that we would encounter large
surrender activity due to an interest rate increase that would force the
disposal of fixed maturities at a loss.
Credit
Risk
We are exposed to credit
risk through counterparties and within the investment portfolio. Credit risk
relates to the uncertainty associated with an obligors ability to make timely
payments of principal and interest in accordance with the contractual terms of
an instrument or contract. We manage our credit risk through diversification of
investments amongst many corporations and numerous industries. Additionally
,
our
investment policy limits the size of holding in any particular issuer.
Liquidity and Capital
Resources
At June 30, 2017, the
Company had cash and cash equivalents totaling $2,282,502. We believe that our
existing cash and cash equivalents will be sufficient to fund the anticipated
operating expenses and capital expenditures for at least twelve months when
combined with the level of maturing securities and the liquidity associated with
our investment portfolio. However, most of the Companys liquid assets are held
in an insurance subsidiary and under existing insurance law, the subsidiary
cannot make significant payments up to the parent company, which is the Company.
Accordingly, unless the Company is able to raise substantial additional capital
in the near term, its ability to continue as a going concern will be in
jeopardy. Management has been seeking to raise additional capital in order to
help fund the liquidity issues that the Company addresses, but cannot assure
that such additional capital will be raised during the remainder of 2017. The
Company has based this estimate upon assumptions that may prove to be wrong and
we could use our capital resources sooner than we currently
expect.
The National Association of Insurance Commissioners (NAIC) has established minimum capital requirements in the form of
Risk-Based
Capital (RBC). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance companys business to develop a minimum level of capital called authorized control level risk-based capital and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. Our life insurance subsidiary is currently above the RBC minimums as of June 30, 2017 but could fall below that level by the end of 2017 should American Life continue with operating losses as
experienced
in the first half of 2017.
We are currently discussing co-insuring a block or blocks of business which would provide statutory capital and surplus relief that would ensure that our RBC ratio does not fall below the 200% for the next twelve months.
Our surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes a repayment cannot be made
without the prior approval of the Nebraska regulators and they have not approved any repayment to date.
24
Since inception, our
operations have been financed primarily through the sale of voting common stock
and preferred stock. Our operations have generated significant operating losses
since we were incorporated in 2003. We expect to continue to incur losses for at
least the foreseeable future.
Aside from raising capital,
which has funded the vast majority of our operations, premium income, deposits
to policyholder account balances, and investment income are the primary sources
of funds while withdrawals of policyholder account balances, investment
purchases, policy benefits in the form of claims, and operating expenses are the
primary uses of funds. To ensure we will be able to meet future commitments, the
funds received as premium payments and deposits are invested in primarily fixed
income securities. Funds are invested with the intent that the income from
investments, plus proceeds from maturities, will in the future meet our ongoing
cash flow needs. The approach of matching asset and liability durations and
yields requires an appropriate mix of investments. Our investments consist
primarily of marketable debt securities that could be readily converted to cash
for liquidity needs. Cash flow projections and cash flow tests under various
market interest scenarios are also performed annually to assist in evaluating
liquidity needs and adequacy. We currently anticipate that available liquidity
sources and future cash flows will be adequate to meet our needs for funds for
at least the next twelve months.
Net cash used by operating
activities was $479,395 for the six months ended June 30, 2017, which was
comprised primarily of the net loss of $1,834,379 partially offset by an
increase in policy liabilities of $460,411. Net cash provided by investing
activities was $1,320,191. The primary source of cash was from sales of
available for sale securities. Offsetting this source of cash was our purchases
of investments in available-for-sale securities and the purchase of property and
equipment. Net cash provided by financing activities was $780,161. The primary
source of cash was net receipts on deposit-type contracts, offset by dividends
paid to Class B Preferred Stock shareholders.
Managements focus is on
raising additional capital from outside investors. We cannot assure that
additional capital will be raised, or if raised, on terms that will be
economical to us. Such capital will further strengthen the Company and American
Life and allow us to expand our writing of new business.
Impact of
Inflation
Insurance premiums are
established before the amount of losses and loss adjustment expenses, or the
extent to which inflation may affect such losses and expenses, are known. The
Company attempts, in establishing premiums, to anticipate the potential impact
of inflation. If, for competitive reasons, premiums cannot be increased to
anticipate inflation, this cost would be absorbed by us. Inflation also affects
the rate of investment return on the investment portfolio with a corresponding
effect on investment income.
Off-Balance Sheet
Arrangements
We have no off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Contractual
Obligations
As a smaller reporting
company the Company is not required to provide the table of contractual
obligations required pursuant to this Item.