Midwest Holding Inc. Reports First Quarter 2023 Results
First Quarter 2023 Highlights:
- GAAP net income for the quarter was
compared with$3.8 million recorded in the first quarter of 2022. GAAP earnings were$0.2 million per share (diluted) versus$1.01 per share (diluted) in Q1 2022.$0.05 - GAAP total revenue in Q1 2023 was
compared with revenue of$38.5 million in the first quarter of 2022, driven by an increase in investment income from growth in invested assets retained, higher policy administration fees, and growing amortization of deferred ceding commissions. The mark-to-market change in derivatives also generated a gain in the quarter compared to a loss in the same quarter in the prior year.$2.6 million - Annuity direct written premium under statutory accounting principles ("SAP"), a non-GAAP measure, was up
98.4% to in the first three months of the year from$194.6 million in Q1 2022, due to a focus on distribution and pricing. The mix of new business in the quarter was$98.1 million 69% Multi-Year Guaranteed Annuities (MYGA) and31% Fixed Indexed Annuities (FIA). - Ceded premiums (SAP), a non-GAAP measure, were
in Q1 2023 compared to$102.1 million in the first quarter of the prior year. The cession rate for the current period, or that portion of our written premium that we reinsured, was$40.1 million 52% compared to41% in the same period last year. - Total expenses for the quarter increased to
from$29.8 million in the first quarter of last year resulting from interest credited being treated as an expense (impacted by the change in value of the options embedded in our liabilities), compared to negative interest credited in the first quarter of the prior year, and from an expense related to the mark-to-market value of the options allowance included in other operating expenses, compared to a gain in the same period of the prior year. Total expenses have increased from variable costs associated with increased premiums written related to technology, distribution, product fees, and premium taxes along with expenses related to state expansion and capital initiatives. Salaries and benefits increased with the addition, repositioning, and retention of personnel to support growth and manage a tighter labor market.$(3.3) million - Invested assets grew to
at March 31, 2023 compared with$1,832.9 million at December 31, 2022. The retained portfolio was$1,615.0 million as of March 31, 2023, compared to$945.1 million at the end of last year. Third-party assets under management were$812.2 million at quarter-end compared to$828.6 million at December 31, 2022.$501.9 million - Effective February 28, 2023, reinsurer American Republic Insurance Company ("AEG") elected not to extend its commitment period for reinsuring liabilities under its Modified Coinsurance Agreement (the "AEG Agreement"). AEG had previously been taking a
20% quota share of certain liabilities with respect to Midwest's MYGA-5 business as well as a20% quota share of certain liabilities with respect to our FIA products and, as a result of the election, its quota share with respect to both MYGA and FIA policies is0% going forward. The AEG Agreement remains in place, and AEG remains responsible for previously ceded liabilities. - On April 30, 2023, Midwest Holding Inc. entered into an Agreement and Plan of Merger with affiliates of Antarctica Capital, LLC, whereby an affiliate of
Antarctica will acquire Midwest in an all-cash transaction valued at approximately .$100 million
Georgette Nicholas, CEO of Midwest noted, "We are excited about the execution and progress of the business. The results for the quarter reflect the continued focus on distribution, pricing, products, investment management, and reinsurance to position the Company for further growth. "
Q1 2023 versus Q1 2022 on a GAAP basis
Midwest reported net income of
Investment income rose in the first quarter of 2023 to
Amortization of deferred gain on reinsurance reached
Service fee revenue was at
Policy administration fee revenue for the quarter was
Our expenses were
Guidance
We continue to see a growing fixed annuity market with new competitors and various movements in pricing. Our focus is to maintain a competitive position on pricing and service to continue sales momentum in 2023. Given where we are in the second quarter of 2023, we anticipate growth in premiums for the quarter with the approval to write new business in both
State expansion efforts remain a key priority. We are excited to begin writing business in
Given our start for 2023, we estimate that premiums written for 2023 will be in the range of
The goal is to cede, on average, approximately 70
We continue to focus on expense management, making key investments to support growth of the business and bring efficiencies with technology. We anticipate general and administrative expenses on a management basis, a non-GAAP measure, to be approximately
Q1 2023 Key Performance Indicators and Non-GAAP Financial Measures
In addition to GAAP measures, Midwest's management utilizes a series of key performance indicators (KPI's) and non-GAAP measures 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;
- plan for and prepare future annual operating budgets and determine appropriate levels of operating investments; and
- facilitate comparison of results between periods and to better understand the underlying historical trends in our business and prospects.
These non-GAAP measures are not a substitute for GAAP measures; however, management believes that when used in conjunction with the GAAP measures, the non-GAAP measures can contribute to investors' understanding of the progress of our business. 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.
Annuity Premiums (a KPI)
For the first quarter of 2023, annuity direct written premiums were
Fees Received for Reinsurance (a KPI)
Fees received for reinsurance amounted to
General and Administrative ("G&A") Expenses (a non-GAAP measure)
We monitor this figure to track our overhead. It includes salary and benefits and other operating expenses; however, it excludes non-cash stock-based compensation and the non-cash mark-to-market-adjustment of our option budget allowance.
G&A expenses in Q1 2023 have risen to
Management Expenses (a non-GAAP measure)
We use this figure to monitor the expenses of our business on a cash basis. Importantly, we exclude from the calculation of management expenses the index interest credited related to our FIAs because this expense is fully hedged. Instead, we add back to Management Expenses the period's amortization of options previously purchased to provide this hedge. We view this amortized cost as our true cost of funds. Management Expenses also excludes the mark-to-market adjustment of our option budget allowance, as that is recorded as a component of other operating expense.
Management expenses for the first quarter of 2023 were
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this release constitute forward-looking statements. These statements are based on management's expectations, estimates, projections and assumptions. In some cases, you can identify forward-looking statements by terminology including "could," "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "intend," "target," "contemplate," "project," or "continue," the negative of these terms, or other comparable terminology used in connection with any discussion of future operating results or financial performance. These statements are only predictions and reflect our management's good faith present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
Factors that may cause our actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include among others, the following possibilities:
- our business plan, particularly including our reinsurance strategy, may not prove to be successful;
- our reliance on third-party insurance marketing organizations to market and sell our annuity insurance products through a network of independent agents;
- adverse changes in our ratings obtained from independent rating agencies;
- failure to maintain adequate reinsurance;
- our inability to expand our insurance operations outside the 24 states and
District of Columbia in which we are currently licensed;
- our annuity insurance products may not achieve significant market acceptance;
- we may continue to experience operating losses in the foreseeable future;
- the possible loss or retirement of one or more of our key executive personnel;
- intense competition, including the intensification of price competition, competitive pressures from established insurers with greater financial resources, the entry of new competitors, and the introduction of new products by new and existing competitors;
- adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products;
- fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest-rate sensitive investment;
- 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 advertising, marketing, administrative or management information systems expenditures;
- changes in our liquidity due to changes in asset and liability matching;
- possible claims relating to sales practices for insurance products; and
- lawsuits in the ordinary course of business.
In addition, this communication and any documents referred to in this communication contain certain forward-looking statements within the meaning of the federal securities laws with respect to the proposed acquisition of Midwest Holding Inc. (the "Company") by an affiliate of Antarctica Capital, LLC, including, but not limited to, statements regarding the anticipated timing of the closing of the proposed transaction. These forward-looking statements generally are identified by the words "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "intend," "target," "contemplate," "project," and similar expressions. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication, including but not limited to: (i) the risk that the proposed transaction may not be completed in a timely manner or at all, (ii) the failure to satisfy the conditions to the consummation of the proposed transaction, including approval of the proposed transaction by the stockholders of the Company and the receipt of necessary regulatory approvals, (iii) the occurrence of any event, change or other circumstance that could give rise to the termination of the proposed transaction, (iv) the effect of the announcement or pendency of the proposed transaction on the Company's business relationships, operating results, and business generally, including the termination of any business contracts, (v) risks that the proposed transaction disrupts current plans and operations of the Company and potential difficulties in hiring and retaining key personnel as a result of the proposed transaction, (vi) risks related to diverting management's attention from the Company's ongoing business operations, (vii) risks that any announcements related to the proposed transaction could have adverse effects on the Company's stock price, credit ratings, or operating results, (viii) the outcome of any legal proceedings that may be instituted related to the Merger Agreement or the proposed transaction and (ix) the significant transactions costs that the parties will incur in connection with the proposed transaction. The risks and uncertainties may be amplified by economic, market, business, or geopolitical conditions or competition, or changes in such conditions, negatively affecting the Company's business, operations, and financial performance. The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the Company's business as described in the "Risk Factors" section of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents filed from time to time with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and the Company assumes no obligation to, and does not intend to, update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.
Additional Information Regarding the Proposed Transaction and Where to Find It
In connection with the proposed transaction, the Company will be filing documents with the Securities and Exchange Commission ("SEC"), including preliminary and definitive proxy statements relating to the proposed transaction. A definitive proxy statement will be mailed or otherwise made available to the Company's stockholders in connection with the proposed transaction. This communication is not a substitute for the proxy statement or any other document that may be filed by the Company with the SEC. BEFORE MAKING ANY VOTING DECISION, INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT (INCLUDING ANY SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTION, OR DOCUMENTS INCORPORATED BY REFERENCE IN THE PROXY STATEMENT WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Any vote in respect of resolutions to be proposed at the Company's stockholder meeting to approve the proposed transaction or other responses in relation to the proposed transaction should be made only on the basis of the information contained in the Company's proxy statement. Investors and security holders may obtain free copies of these documents (when they are available) and other related documents filed with the SEC at the SEC's website at www.sec.gov or on the Company's website at www.ir.midwestholding.com.
Participants in the Solicitation Regarding the Proposed Transaction
The Company and certain of its directors, executive officers, and employees may be considered participants in the solicitation of proxies from the Company's stockholders in connection with the proposed transaction. Information regarding the persons who, under the rules of the SEC, may be considered participants in the solicitation of proxies in connection with the proposed transaction, including the interests of the Company directors and executive officers in the transaction, will be set forth in the preliminary and definitive proxy statements that will be filed with the SEC relating to the transaction. Additional information regarding the Company's directors and executive officers, including a description of their direct interests, by security holdings or otherwise, is contained in the Company's proxy statement for its 2023 annual meeting of stockholders, which was filed with the SEC on April 24, 2023. These documents are available free of charge at the SEC's website at www.sec.gov and on Company's website at www.ir.midwestholding.com.
About Midwest Holding Inc.
Midwest Holding Inc. is a growing, technology-enabled, services-oriented annuity platform. Midwest designs and develops annuity products that are distributed through independent distribution channels, to a large and growing demographic of
For more information, please visit www.midwestholding.com
Investor contact: ir@midwestholding.com
Media inquiries: press@midwestholding.com
Consolidated Balance Sheets | ||||||
March 31, 2023 | December 31, 2022 | |||||
(In thousands, except share information) | ||||||
Assets | ||||||
Fixed maturities, available for sale, at fair value | $ | 1,343,668 | $ | 1,214,635 | ||
Mortgage loans on real estate, held for investment (Allowance for credit losses of | 333,466 | 227,047 | ||||
Derivative instruments (See Note 3) | 23,814 | 15,934 | ||||
Equity securities, at fair value (cost: | 5,178 | 5,111 | ||||
Other invested assets (Allowance for credit losses of | 83,580 | 112,431 | ||||
Preferred stock | 32,714 | 31,415 | ||||
Deposits and notes receivable | 10,447 | 8,359 | ||||
Policy loans | 23 | 25 | ||||
Total investments | 1,832,890 | 1,614,957 | ||||
Cash and cash equivalents | 170,073 | 191,414 | ||||
Deferred acquisition costs, net | 48,150 | 43,433 | ||||
Premiums receivable | 368 | 362 | ||||
Accrued investment income | 31,590 | 25,165 | ||||
Reinsurance recoverables (See Note 7) | 55,202 | 20,190 | ||||
Property and equipment, net | 1,805 | 1,897 | ||||
Receivable for securities sold | - | 10,518 | ||||
Other assets | 4,397 | 12,495 | ||||
Total assets | $ | 2,144,475 | $ | 1,920,431 | ||
Liabilities and Stockholders' Equity | ||||||
Liabilities: | ||||||
Benefit reserves | $ | 12,739 | $ | 12,945 | ||
Deposit-type contracts (See Note 5) | 1,963,786 | 1,743,348 | ||||
Other policy-holder funds | 9,267 | 4,105 | ||||
Notes payable (See Note 6) | 25,000 | 25,000 | ||||
Deferred gain on coinsurance transactions | 39,952 | 38,063 | ||||
Payable for securities purchased | 22,677 | 8,872 | ||||
Other liabilities | 46,204 | 53,721 | ||||
Total liabilities | 2,119,625 | 1,886,054 | ||||
Stockholders' Equity: | ||||||
Preferred stock, | — | — | ||||
Voting common stock, | 4 | 4 | ||||
Additional paid-in capital | 138,789 | 138,482 | ||||
Treasury stock | (175) | (175) | ||||
Accumulated deficit | (63,863) | (63,019) | ||||
Accumulated other comprehensive (loss) | (61,928) | (51,386) | ||||
Total Midwest Holding Inc.'s stockholders' equity | 12,827 | 23,906 | ||||
Noncontrolling interests | 12,023 | 10,471 | ||||
Total stockholders' equity | 24,850 | 34,377 | ||||
Total liabilities and stockholders' equity | $ | 2,144,475 | $ | 1,920,431 |
Consolidated Statements of Comprehensive Loss | |||||||
Three months ended March 31, | |||||||
(In thousands, except per share data) | 2023 | 2022 | |||||
Revenues | |||||||
Investment income, net of expenses | $ | 19,193 | $ | 6,242 | |||
Net realized gain (loss) on investments (See Note 2) | 16,287 | (6,175) | |||||
Amortization of deferred gain on reinsurance transactions | 1,573 | 970 | |||||
Policy administration fees | 639 | 348 | |||||
Service fee revenue, net of expenses | 654 | 1,098 | |||||
Other revenue | 106 | 100 | |||||
Total revenue | 38,452 | 2,583 | |||||
Expenses | |||||||
Interest credited | 7,689 | (6,674) | |||||
Benefits | 958 | - | |||||
Amortization of deferred acquisition costs | 1,703 | 851 | |||||
Salaries and benefits | 5,503 | 4,318 | |||||
Other operating expenses | 13,912 | (1,822) | |||||
Total expenses | 29,765 | (3,327) | |||||
Net income before income tax expense | 8,687 | 5,910 | |||||
Income tax expense (See Note 8) | (2,907) | (4,722) | |||||
Net income after income tax expense | 5,780 | 1,188 | |||||
Less: Income attributable to noncontrolling interest | 1,951 | 1,001 | |||||
Net income attributable to Midwest Holding Inc. | 3,829 | 187 | |||||
Comprehensive loss: | |||||||
Unrealized losses on investments arising during the three months ended March 31, | (10,552) | (9,703) | |||||
Less: Reclassification adjustment for net realized losses on investments, net of | 10 | (512) | |||||
Other comprehensive loss | (10,542) | (10,215) | |||||
Comprehensive loss: | $ | (6,713) | $ | (10,028) | |||
Income per common share | |||||||
Basic | $ | 1.03 | $ | 0.05 | |||
Diluted | $ | 1.01 | $ | 0.05 |
Consolidated Statements of Cash Flows | ||||||
Three months ended March 31, | ||||||
(In thousands) | 2023 | 2022 | ||||
Cash Flows from Operating Activities: | ||||||
Income attributable to Midwest Holding Inc. | $ | 3,829 | $ | 187 | ||
Adjustments to arrive at cash provided by operating activities: | ||||||
Net premium and discount on investments | 9,253 | (639) | ||||
Depreciation and amortization | 95 | 11 | ||||
Stock options | 307 | 32 | ||||
Amortization of deferred acquisition costs | 4,788 | 851 | ||||
Deferred acquisition costs capitalized | (9,912) | (4,464) | ||||
Net realized (loss) gain on investments | (16,287) | 6,175 | ||||
Deferred gain on coinsurance transactions | 1,889 | 1,460 | ||||
Changes in operating assets and liabilities: | ||||||
Reinsurance recoverable | (27,809) | 5,316 | ||||
Interest and dividends due and accrued | (6,425) | 418 | ||||
Premiums receivable | (6) | (10) | ||||
Deposit-type liabilities | 56,963 | (16,151) | ||||
Policy liabilities | 4,955 | 897 | ||||
Receivable and payable for securities | 24,323 | 11,702 | ||||
Other assets and liabilities | 437 | 4,522 | ||||
Net cash provided by operating activities | 46,400 | 10,307 | ||||
Cash Flows from Investing Activities: | ||||||
Fixed maturities available for sale: | ||||||
Purchases | (193,329) | (226,416) | ||||
Proceeds from sale or maturity | 50,382 | 140,758 | ||||
Mortgage loans on real estate, held for investment | ||||||
Purchases | (131,820) | (19,699) | ||||
Proceeds from sale | 22,108 | 30,835 | ||||
Derivatives | ||||||
Purchases | (3,716) | (4,691) | ||||
Proceeds from sale | 4,197 | 1,388 | ||||
Equity securities | ||||||
Purchases | (68) | - | ||||
Proceeds from sale | - | 142 | ||||
Other invested assets | ||||||
Purchases | - | (23,768) | ||||
Proceeds from sale | 22,202 | 3,334 | ||||
Purchase of restricted common stock | (1,425) | - | ||||
Preferred stock | ||||||
Purchases | (1,299) | (1,549) | ||||
Net change in policy loans | 2 | (3) | ||||
Net purchases of property and equipment | - | (195) | ||||
Net cash used in investing activities | (232,766) | (99,864) | ||||
Cash Flows from Financing Activities: | ||||||
Net transfer to noncontrolling interest | 1,552 | 3,432 | ||||
Receipts on deposit-type contracts | 194,551 | 98,111 | ||||
Withdrawals on deposit-type contracts | (31,078) | (9,315) | ||||
Net cash provided by financing activities | 165,025 | 92,228 | ||||
Net (decrease) increase in cash and cash equivalents | (21,341) | 2,671 | ||||
Cash and cash equivalents: | ||||||
Beginning | 191,414 | 142,013 | ||||
Ending | $ | 170,073 | $ | 144,684 | ||
Supplementary information | ||||||
Cash paid for taxes | $ | - | $ | 250 |
Supplemental Information – Reconciliation – Management Expenses to GAAP Expenses | ||||||
Three months ended March 31, | ||||||
2023 | 2022 | |||||
Management Expenses | ||||||
G&A | $ | 11,519 | $ | 8,850 | ||
Management interest credited | 3,663 | 3,043 | ||||
Amortization of deferred acquisition costs | 1,703 | 851 | ||||
Expenses related to retained business | 5,366 | 3,894 | ||||
Management expenses - total | $ | 16,885 | $ | 12,744 | ||
Three months ended March 31, | ||||||
2023 | 2022 | |||||
G&A | ||||||
Salaries and benefits - GAAP | $ | 5,503 | $ | 4,318 | ||
Other operating expenses - GAAP | 13,912 | (1,822) | ||||
Subtotal | 19,415 | 2,496 | ||||
Adjustments: | ||||||
Less: Stock-based compensation | (307) | (32) | ||||
Less: Mark-to-market option allowance | (7,589) | 6,386 | ||||
G&A | $ | 11,519 | $ | 8,850 | ||
Three months ended March 31, | ||||||
2023 | 2022 | |||||
Management Interest Credited | ||||||
Interest credited - GAAP | $ | 7,689 | $ | (6,674) | ||
Adjustments: | ||||||
Less: FIA interest credited - GAAP | (6,328) | 7,764 | ||||
Add: FIA options cost - amortized - GAAP | 2,302 | 1,953 | ||||
Management interest credited | $ | 3,663 | $ | 3,043 | ||
Three months ended March 31, | ||||||
2023 | 2022 | |||||
Reconciliation - Management Expenses to GAAP Expenses | ||||||
Total expenses - GAAP | $ | 29,765 | $ | (3,327) | ||
Adjustments: | ||||||
Less: Benefits | (958) | — | ||||
Less: Stock-based compensation | (307) | (32) | ||||
Less: Mark-to-market option allowance | (7,589) | 6,386 | ||||
Less: FIA interest credited - GAAP | (6,328) | 7,764 | ||||
Add: FIA options cost - amortized - GAAP | 2,302 | 1,953 | ||||
Management expenses - total | $ | 16,885 | $ | 12,744 |
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SOURCE Midwest Holding Inc.