Midwest Holding Inc. Reports Fourth Quarter and Full-Year 2022 Results
Midwest Holding Inc. (NASDAQ: MDWT) reported financial results for 2022, achieving a net income of $7.1 million compared to a $16.6 million net loss in 2021. Earnings per share improved to $1.88, up from a loss of $4.45. Total revenue was $30 million, slightly down from $30.1 million in 2021. Annuity direct written premiums surged by 51.8% to $715.8 million, driven by strong growth. However, Q4 2022 saw a GAAP net loss of $9.7 million, worsened by lower investment income and rising legal expenses. The company expands into Florida and Georgia, anticipating 33% growth in premiums. Overall, 2023 projections suggest premiums between $800-$850 million.
- Net income rose significantly to $7.1 million from a loss of $16.6 million in 2021.
- Earnings per share improved to $1.88 from a loss of $4.45.
- Annuity direct written premiums increased by 51.8% to $715.8 million.
- Invested assets grew to $1.615 billion from $975.5 million year-over-year.
- Expansion into Florida and Georgia could add approximately 33% growth to existing premiums written.
- Q4 2022 GAAP net loss of $9.7 million compared to $7.0 million loss in Q4 2021.
- Lower investment income in Q4 2022 contributed to losses.
- Increased legal and other costs impacted financial results.
Fourth Quarter and Full Year 2022 Highlights:
- GAAP net income for the year was
compared with a$7.1 million net loss recorded in 2021. GAAP earnings were$(16.6) million per share (diluted) versus a ($1.88 ) per share (diluted) loss in the prior year. For the fourth quarter 2022, a GAAP net loss of$4.45 was incurred compared to a loss of$(9.7) million in the prior year fourth quarter driven by lower investment income from other invested assets and an increase in other expenses related to legal and other fees paid related to the establishment of the line of credit and reinsurance in the quarter.$(7.0) million - GAAP total revenue for the year was
compared with revenue of$30.0 million in 2021, driven by an increase in investment income from growth in invested assets retained, higher policy administration fees and growing amortization of deferred ceding commissions, offset by unrealized losses on derivatives compared to gains in the prior year.$30.1 million - Annuity direct written premium under statutory accounting principles ("SAP"), a non-GAAP measure, was up
51.8% to for 2022 from$715.8 million in 2021 reflecting strong growth throughout 2022, from a focus on distribution and pricing. The mix of new business was$471.6 million 56% Multi-Year Guaranteed Annuities (MYGA) and45% Fixed Indexed Annuities (FIA). - Authority to write business was obtained in
Florida andGeorgia along with product approvals inFlorida , North andSouth Dakota . - Ceded premiums (SAP), a non-GAAP measure, were
for 2022 compared to$311.3 million in the prior year. The rate for the year, or that portion of our written premium that we reinsured, was$237.4 million 43.5% compared to50.3% in the prior year. - Total expenses for 2022 decreased to
from$21.7 million in the prior year benefiting from negative interest credited due to the value of the options embedded in our liabilities and from a gain on the mark to market value of the options allowance included in other operating expenses. On a non-GAAP basis, 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.$41.9 million - Invested assets grew to
at year-end 2022 compared with$1,615.0 million at year- end 2021. The retained portfolio was$975.5 million at the end of$812 million December 31, 2022 compared to at the end of prior year. Third-party assets under management were$414 million at year-end compared to$502 million in prior year.$405.0 million - Effective
February 28, 2023 , reinsurerAmerican 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 a20% 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, andAEG remains responsible for previously ceded liabilities.
Full-Year 2022 versus Full-Year 2021 on a GAAP basis
Midwest reported net income of
Investment income rose in 2022 to
Amortization of deferred gain on reinsurance reached
Service fee revenue was consistent at
Policy administration fee revenue for the year was
Our expenses were
Q4 2022 versus Q4 2021 on a GAAP basis
Midwest reported GAAP net loss of
Investment income in 2022's fourth quarter was
Amortization of deferred gain on reinsurance reached
Service fee revenue from assets under management was
Policy charges revenue for the fourth quarter was
Our total expenses on a GAAP basis were
Guidance
We continue to see a growing fixed annuity market with new competitors and various movement 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 first quarter of 2023, we anticipate premiums for the quarter will be consistent with the fourth quarter of 2022.
State expansion efforts remain a key priority. We are excited to begin writing business in
Given our start for 2023, we estimate premiums written for 2023 to 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
Q4 2021 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 fourth quarter of 2022, annuity direct written premiums were
For the full year 2022, annuity direct written premiums were
Fees Received for Reinsurance (a KPI)
We use this non-GAAP figure to measure the progress of our effort to secure third-party capital to back our reinsurance programs. Fees Received for Reinsurance sums two components: Amortization of deferred gain on reinsurance, which is a line item in our Consolidated Statements of Comprehensive Loss, and deferred coinsurance ceding commission, which is a line item in our GAAP consolidated Statement of Cash Flows.
For the fourth quarter of 2022, fees received for reinsurance totaled
General and Administrative 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 expense in 2022 rose 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 Fixed Indexed Annuities 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 2022 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," 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.
Earnings Teleconference information and Details
To register for this conference call, please go to this link. Registrants will receive confirmation with dial-in details.
The call may also be accessed via webcast, using this link.
A replay of the webcast will be made available after the call on the Investor Relations page of the Company's website at https://ir.midwestholding.com
About
For more information, please visit www.midwestholding.com
Investor contact: ir@midwestholding.com
Media inquiries: press@midwestholding.com
Consolidated Balance Sheets | |||||||
(In thousands, except share information) | |||||||
Assets | |||||||
Fixed maturities, available for sale, at fair value | $ | 1,214,635 | $ | 683,296 | |||
Mortgage loans on real estate, held for investment | 227,047 | 183,203 | |||||
Derivative instruments (See Note 4) | 15,934 | 23,022 | |||||
Equity securities, at fair value (cost: | 5,111 | 21,869 | |||||
Other invested assets | 112,431 | 35,293 | |||||
Preferred stock | 31,415 | 18,686 | |||||
Deposits and notes receivable | 8,359 | 10,071 | |||||
Policy loans | 25 | 87 | |||||
Total investments | 1,614,957 | 975,527 | |||||
Cash and cash equivalents | 191,414 | 142,013 | |||||
Deferred acquisition costs, net | 43,433 | 24,530 | |||||
Premiums receivable | 362 | 354 | |||||
Accrued investment income | 25,165 | 13,623 | |||||
Reinsurance recoverables (See Note 8) | 20,190 | 38,579 | |||||
Property and equipment, net | 1,897 | 386 | |||||
Receivable for securities sold | 10,518 | 19,732 | |||||
Other assets | 12,495 | 5,173 | |||||
Total assets | $ | 1,920,431 | $ | 1,219,917 | |||
Liabilities and Stockholders' Equity | |||||||
Liabilities: | |||||||
Benefit reserves | $ | 12,945 | $ | 12,941 | |||
Deposit-type contracts (See Note 6) | 1,743,348 | 1,075,439 | |||||
Other policy-holder funds | 4,105 | 238 | |||||
Notes payable (See Note 7) | 25,000 | — | |||||
Deferred gain on coinsurance transactions | 38,063 | 28,589 | |||||
Payable for securities purchased | 8,872 | 5,546 | |||||
Other liabilities | 53,721 | 11,408 | |||||
Total liabilities | 1,886,054 | 1,134,161 | |||||
Stockholders' Equity: | |||||||
Preferred stock, | — | — | |||||
Voting common stock, no shares issued and outstanding | 4 | 4 | |||||
Additional paid-in capital | 138,482 | 138,452 | |||||
(175) | (175) | ||||||
Accumulated deficit | (63,019) | (70,159) | |||||
Accumulated other comprehensive (loss) income | (51,386) | 2,634 | |||||
23,906 | 70,756 | ||||||
Noncontrolling interests | 10,471 | 15,000 | |||||
Total stockholders' equity | 34,377 | 85,756 | |||||
Total liabilities and stockholders' equity | $ | 1,920,431 | $ | 1,219,917 |
Consolidated Statements of Comprehensive Loss | ||||||||||||||||
Three months ended | Year ended | |||||||||||||||
(In thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Revenues | ||||||||||||||||
Investment income, net of expenses | $ | 5,395 | 3,434 | $ | 35,115 | $ | 15,737 | |||||||||
Net realized (loss) gain on investments (See Note 3) | (203) | 10,456 | (14,878) | 7,752 | ||||||||||||
Amortization of deferred gain on reinsurance transactions | 1,565 | 1,312 | 4,816 | 3,022 | ||||||||||||
Policy administration fees | 732 | 1 | 2,130 | 842 | ||||||||||||
Service fee revenue, net of expenses | 734 | 605 | 2,366 | 2,343 | ||||||||||||
Other revenue | 367 | 202 | 500 | 367 | ||||||||||||
Total revenue | 8,590 | 16,009 | 30,049 | 30,063 | ||||||||||||
Expenses | ||||||||||||||||
Interest credited | (3,704) | 5,143 | (10,193) | 7,012 | ||||||||||||
Benefits | 861 | 5 | 3,206 | 6 | ||||||||||||
Amortization of deferred acquisition costs | 1,693 | 1,106 | 4,788 | 2,886 | ||||||||||||
Salaries and benefits | 3,830 | 5,460 | 16,196 | 16,926 | ||||||||||||
Other operating expenses | 9,401 | 8,335 | 7,661 | 15,104 | ||||||||||||
Total expenses | 12,081 | 20,050 | 21,658 | 41,934 | ||||||||||||
Net income (loss) before income tax expense | (3,491) | (4,041) | 8,391 | (11,871) | ||||||||||||
Income tax expense (See Note 9) | (3,753) | (2,934) | (7,600) | (4,766) | ||||||||||||
Net income (loss) after income tax benefit (expense) | (7,244) | (6,975) | 791 | (16,637) | ||||||||||||
Less: Income attributable to noncontrolling interest | 2,496 | — | (6,349) | — | ||||||||||||
Net income (loss) attributable to | (9,740) | (6,975) | 7,140 | (16,637) | ||||||||||||
Comprehensive income (loss): | ||||||||||||||||
Unrealized (losses) on investments arising during the year ended | 508 | (3,843) | (54,975) | (1,422) | ||||||||||||
Less: Reclassification adjustment for net realized losses on investments, net of offsets | 1,049 | (764) | 955 | (2,375) | ||||||||||||
Other comprehensive loss | 1,557 | (4,607) | (54,020) | (3,797) | ||||||||||||
Comprehensive loss | $ | (8,183) | $ | (11,582) | $ | (46,880) | $ | (20,434) | ||||||||
Impairment | ||||||||||||||||
Total other-than-temporary impairment | 881 | — | 1,415 | — | ||||||||||||
Net other-than-temporary impairment loss recognized in net income | $ | 881 | — | 1,415 | — | |||||||||||
Income (Loss) per common share | ||||||||||||||||
Basic | $ | (2.62) | $ | (0.82) | $ | 1.91 | $ | (4.45) | ||||||||
Diluted | $ | (2.57) | $ | (0.82) | $ | 1.88 | $ | (4.45) |
Consolidated Statements of Cash Flows | |||||||||||
Year ended | |||||||||||
(In thousands) | 2022 | 2021 | |||||||||
Cash Flows from Operating Activities: | |||||||||||
Income (loss) attributable to | $ | 7,140 | $ | (16,637) | |||||||
Adjustments to arrive at cash provided by operating activities: | |||||||||||
Net premium and discount on investments | (11,548) | (1,244) | |||||||||
Depreciation and amortization | 338 | 50 | |||||||||
Stock options | 29 | 4,981 | |||||||||
Amortization of deferred acquisition costs | 4,788 | 2,886 | |||||||||
Deferred acquisition costs capitalized | (23,857) | (14,018) | |||||||||
Net realized loss on investments | 14,878 | (7,752) | |||||||||
Deferred gain on coinsurance transactions | 9,474 | 10,390 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Reinsurance recoverable | 29,015 | (6,434) | |||||||||
Interest and dividends due and accrued | (11,542) | (6,816) | |||||||||
Premiums receivable | (8) | (40) | |||||||||
Deposit-type liabilities | 3,431 | 24,371 | |||||||||
Policy liabilities | 3,872 | 239 | |||||||||
Receivable and payable for securities | 12,540 | (14,185) | |||||||||
Other assets and liabilities | 34,612 | (1,129) | |||||||||
Net cash provided by (used in) operating activities | 73,162 | (25,338) | |||||||||
Cash Flows from Investing Activities: | |||||||||||
Fixed maturities available for sale: | |||||||||||
Purchases | (1,060,013) | (660,059) | |||||||||
Proceeds from sale or maturity | 456,615 | 356,820 | |||||||||
Mortgage loans on real estate, held for investment | |||||||||||
Purchases | (110,381) | (160,714) | |||||||||
Proceeds from sale | 69,365 | 72,064 | |||||||||
Derivatives | |||||||||||
Purchases | (24,112) | (23,944) | |||||||||
Proceeds from sale | 3,232 | 14,578 | |||||||||
Equity securities | |||||||||||
Purchases | — | (22,097) | |||||||||
Proceeds from sale | 16,986 | — | |||||||||
Other invested assets | |||||||||||
Purchases | (84,734) | (95,529) | |||||||||
Proceeds from sale | 3,334 | 82,272 | |||||||||
Purchase of restricted common stock | (806) | (500) | |||||||||
Preferred stock | |||||||||||
Purchases | — | (14,926) | |||||||||
Proceeds from sale | 23,579 | — | |||||||||
Net change in policy loans | 62 | (41) | |||||||||
Net purchases of property and equipment | (1,835) | (331) | |||||||||
Net cash used in investing activities | (708,708) | (452,407) | |||||||||
Cash Flows from Financing Activities: | |||||||||||
Net transfer to noncontrolling interest | (4,529) | 15,000 | |||||||||
Proceeds from term debt | 25,000 | — | |||||||||
Capital contribution | — | (121) | |||||||||
Receipts on deposit-type contracts | 716,083 | 471,646 | |||||||||
Withdrawals on deposit-type contracts | (51,607) | (18,446) | |||||||||
Net cash provided by financing activities | 684,947 | 468,079 | |||||||||
Net increase (decrease) in cash and cash equivalents | 49,401 | (9,666) | |||||||||
Cash and cash equivalents: | |||||||||||
Beginning | 142,013 | 151,679 | |||||||||
Ending | $ | 191,414 | $ | 142,013 | |||||||
Supplementary information | |||||||||||
Cash paid for taxes | $ | 2,870 | $ | 6,450 |
Supplemental Information – Reconciliation – Management Expenses to GAAP Expenses | ||||||||||||
Three months ended | Year ended | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Management Expenses | ||||||||||||
G&A | $ | 10,197 | $ | 7,274 | $ | 35,015 | $ | 24,632 | ||||
Management interest credited | 5,217 | 2,645 | 15,811 | 8,757 | ||||||||
Amortization of deferred acquisition costs | 1,693 | 1,106 | 4,788 | 2,886 | ||||||||
Expenses related to retained business | 6,910 | 3,751 | 20,599 | 11,643 | ||||||||
Management expenses - total | $ | 17,107 | $ | 11,025 | $ | 55,614 | $ | 36,275 | ||||
Three months ended | Year ended | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
G&A | ||||||||||||
Salaries and benefits - GAAP | $ | 3,830 | $ | 5,460 | $ | 16,196 | $ | 16,926 | ||||
Other operating expenses - GAAP | 9,401 | 8,335 | 7,661 | 15,104 | ||||||||
Subtotal | 13,231 | 13,795 | 23,857 | 32,030 | ||||||||
Adjustments: | ||||||||||||
Less: Stock-based compensation | (316) | (2,216) | (29) | (4,981) | ||||||||
Less: Mark-to-market option allowance | (2,718) | (4,305) | 11,187 | (2,417) | ||||||||
G&A | $ | 10,197 | $ | 7,274 | $ | 35,015 | $ | 24,632 | ||||
Three months ended | Year ended | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Management Interest Credited | ||||||||||||
Interest credited - GAAP | $ | (3,704) | $ | 5,143 | $ | (10,193) | $ | 7,012 | ||||
Adjustments: | ||||||||||||
Less: FIA interest credited - GAAP | 6,047 | (4,132) | 17,171 | (4,169) | ||||||||
Add: FIA options cost - amortized - GAAP | 2,874 | 1,634 | 8,833 | 5,914 | ||||||||
Management interest credited | $ | 5,217 | $ | 2,645 | $ | 15,811 | $ | 8,757 | ||||
Three months ended | Year ended | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Reconciliation - Management Expenses to GAAP Expenses | ||||||||||||
Total expenses - GAAP | $ | 12,081 | $ | 20,050 | $ | 21,658 | $ | 41,934 | ||||
Adjustments: | ||||||||||||
Less: Benefits | (861) | (6) | (3,206) | (6) | ||||||||
Less: Stock-based compensation | (316) | (2,216) | (29) | (4,981) | ||||||||
Less: Mark-to-market option allowance | (2,718) | (4,305) | 11,187 | (2,417) | ||||||||
Less: FIA interest credited - GAAP | 6,047 | (4,132) | 17,171 | (4,169) | ||||||||
Add: FIA options cost - amortized - GAAP | 2,874 | 1,634 | 8,833 | 5,914 | ||||||||
Management expenses - total | $ | 17,107 | $ | 11,025 | $ | 55,614 | $ | 36,275 |
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