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spk04: Ladies and gentlemen, welcome to the Midwest Holdings Incorporated Q1 2021. My name is Katie and I'll be coordinating your call today. If you'd like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I'll now hand you over to your host, Tom Bombalo, to begin. Tom, please go ahead.
spk00: Good afternoon and welcome to Midwest Holdings first quarter 2021 earnings call. This is Tom Bumbelow, head of business development here at Midwest. Joining me for today's presentation will be our co-CEOs and founders, Michael Salem and Mike Minnick, as well as our chief financial officer, Deborah Havronik. Yesterday evening, Midwest issued our Q1 2021 earnings release, announcing our financial results. During today's call, we will reference this letter, a copy of which can be found on the Investor Relations page of our website at ir.midwestholding.com. While this call will reflect items discussed within that document, for more comprehensive information about our financial performance, we also encourage you to read through our Form 10-Q, which has been filed with the Securities and Exchange Commission. Before we begin, I want to remind you that matters discussed on today's call will include forward-looking statements related to our operating performance, financial goals, business outlook, which are based on management's current beliefs and assumptions. These forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our Form 10-K, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures in discussing Midwest's performance. You can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release in 10Q. Lastly, we are pleased to announce that Mike and Michael have been selected as speakers for Piper Sandler's virtual Midwest Life Insurance Tour on Thursday, May 20th. Their discussion will begin at 9.30 a.m. Central Time, led by Senior Research Analyst John Barnage. Please reach out to John Barnage or a member of the Piper Sandler team if you are interested in attending. With that, I'll turn the call over to Michael Salem. Michael?
spk01: Thanks, Tom, and good afternoon, everyone. I'm pleased to join you today to report on the solid progress we are making at Midwest. We continue to execute on our business plan and remain uniquely positioned to capitalize on the life and annuity supply chain. The opportunity in our space is significant. Our business model has been validated by the industry. But while incumbents and large financial institutions struggle to adapt due to their size and complexity, we are executing. Midwest was in fact built for this opportunity. built from scratch to manufacture and distribute individual life and annuity products on behalf of third-party asset managers and investors. The difficulty and complexity of our industry creates a natural moat around our success. We have an extremely unique and talented team that is dedicated to our vision. And it is our ability to execute that will ultimately separate us from the pack. Our goal is to build a platform capable of generating significant long-term earnings power. We are not here to build a very good small company. Our opportunity is to build a transformational company. And in order to do that, we must build an incredible infrastructure, including investment in technology, distribution, asset management, and operations. And we must manage our capital and our growth. We are pleased with our progress in the quarter in pursuit of this long-term mission. First of all, our premium volumes remain strong with $123.7 million in written annuity premium, representing 159% growth from $47.8 million in the first quarter of last year, with management revenues growing 126% during the quarter to $6.4 million from $2.8 million in the first quarter of 2020. We are also making strong progress in building a leading technology and operations platform, not only allowing us to efficiently scale, but also providing us incredible third-party revenue opportunity. In our reinsurance program, we have significantly expanded our distribution capabilities for our products, positioning us for scalable access to capital for years to come. but our transition to larger, more strategic sources of reinsurance capital takes time. We have an extremely valuable product, and we will be deliberate in our relationships. We are confident in our ability to execute on our long-term reinsurance strategy. We have also built the beginnings of a solid asset management platform, attracting top talent to lead our efforts, including 1505 CEO Eric Delmonico, head trader Elliot Sperber, and head of credit Brad Schneider. Admittedly, our investment income was below our target for the quarter as we have been slow to invest the proceeds from our December public offering. As we continue to develop reinsurance and asset management relationships, we expect this to correct. Finally, managing our investor relations and financial presentation as a new public company has been a work in progress. We still have more work to do, but we are moving in the right direction. The last thing I'll say before I hand this over to Mike is that we have an extremely talented and committed management team. We are well aligned, we are focused, and we are poised to deliver results for our stakeholders. And as we continue to execute as we have, we truly have an opportunity to become a leading life and annuity platform. Mike? Thanks, Michael.
spk02: We're building an incredible company. Our long-term approach has given us sustainable advantages, allowing us to invest in our growth. As such, we will continue to capitalize on our unique opportunities in distribution, product development, asset management, and reinsurance services. Beginning with distribution, we see value in our limited distribution model across additional distribution channels where our current partners are not strongly represented. such as independent banks, broker-dealers, and RIAs. In the product area, we continue to differentiate through simplification. Our ability to manufacture new products that are simple, competitive, and easy to integrate onto our distribution partners' infrastructure is a key competitive advantage of our technology platform. As Michael mentioned, we have made strategic hires in asset management. Combining access to insurance liabilities and asset management capabilities has been a common theme over the past many years. We believe our asset-light twist on this theme is a long-term winner, and we expect to see more firms following our lead to the extent that they can. In addition to these new hires, we are investing in our infrastructure to support the long-term scalability in asset management. These investments in turn will benefit our reinsurance business as well. Regarding reinsurance, our expanding reinsurance product suite allows institutional investors multiple ways to access insurance company liabilities. Our partners receive all the benefits of the insurance liabilities without tackling distribution and policy administration, among other competitive modes in the insurance industry. We have turned our insurance company into an intermediary that provides insurance as a service to our institutional clients. This innovation is symbiotic for us and our partners. We gain the capacity to originate more annuities without being burdened with the capital strain and investment risk, while our partners gain access to in-demand policy liabilities. Regarding our reinsurance pipeline, we have a number of letters of intent signed and hope to announce the details of these reinsurance partnerships in the future. The breadth of these partnerships is in part due to the platform's flexibility to offer an entire suite of reinsurance solutions, ranging from sidecar investments, joint ventures, IMAs, all the way to secure funding-backed agreements. Last week, we announced that American Life became a member of the Federal Home Loan Bank. Through this membership, American Life can access competitive liquidity lines as well as an attractive funding source for qualifying mortgage loans. In addition to the senior members of our asset management team, we are excited to announce the nomination of two exceptionally talented individuals to our board of directors, Nancy Callahan and Diane Davis. Nancy has over 25 years of experience in technology, financial services, and insurance. She is currently the Global Vice President for Strategy and Growth of SAP Services, having held previous leadership positions at AIG and Reuters. Diane has over three years of experience in life insurance as an actuary, business head, and CEO at multiple insurance companies, including Kemper, Zurich, and Farmers Insurance. We look forward to the invaluable insights both will provide and welcome them to Midwest if elected to serve as directors of the upcoming meeting of stockholders. So with that, I'll turn it over to Deb, our CFO.
spk03: Thanks, Mike, and good afternoon, everyone. I am pleased with the continued progress made during the quarter and the financial position of our company. In the first quarter of 2021, management revenue was $6.4 million, up 126% from the first quarter of 2020. And on a management earnings power basis, our revenue for the quarter was $10 million, up 274% from the first quarter of 2020. Management operating income loss available to common shareholders in the quarter decreased to a loss of $0.4 million, or $3.1 million income on a management earnings power basis, compared to income of 0.5 million or 0.6 million income on a management earnings power basis in the first quarter of 2020. Going forward, we will be sharing our management earnings power, P&L, which we use to measure the true earnings power of the business, taking into account the timing of reinsurance transactions, as well as G&A, that we attribute to investment in future growth of the business. In this quarter, due to our excess cash balances, we're also adjusting our investment income based on our target ROA. As Mike and Michael mentioned, we continue to see an opportunity to invest in growth across the entire platform. For the first quarter of 2021, G&A expenses, excluding stock-based compensation and the mark-to-market of the derivative option allowances, totaled 5.3 million compared to 2.1 million in the first quarter of 2020. We approximate 15% of G&A this quarter to be directly related to activities connected to investment in the future growth of the business. As we continue to settle into our new role as a publicly listed company, we're focused on increasing our exposure in the market and strengthening our communication and presentation of our business to investors. An example of the level of detail we are committed to providing can be found in our GAAP interest credited line. This line contains a lot of technical accounting noise and does little to help investors understand our financial performance. So we're now backing that number out along with the derivative we use to hedge and adding a management interest credited line to our expenses. We will continue to improve our financial presentation and explanation as we move forward. With that, we will now open the line for questions.
spk04: Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Matt Coletti from JMP. Matt, your line is now open.
spk02: Hey, thanks. Good morning. i was hoping um we could maybe start with just the top line production and and talk a little about um kind of the mix in the quarter um obviously you know my guys go down a bit and then fias grew nicely um can you talk a little bit about kind of the competitive environment and what might have driven you know the decisions you made there sure thanks matt um Yeah, the mica market certainly has been a bit more competitive in the quarter. So I think that you're seeing a little bit of a reduction as we're not really chasing that market at the moment. And, you know, theas have generally been more attractive to us because we can differentiate ourselves in terms of the product design as well as, you know, the service that we're able to provide. In terms of the general overall production, there is a bit of seasonality in the first quarter, just way over from the holiday season in December, that we would expect to kind of see a slight slowdown. But with respect to the general mix, it's really just kind of in response to what we're seeing our competitors doing.
spk01: Okay.
spk02: Oh, go ahead. Yeah, sorry.
spk01: Yeah, I just wanted to add something quickly, Matt. This is Michael. We are seeing an opportunity in expanding our distribution in the MIGA product, and so that's something I think that we can, because of our position, our ability to enter new channels quickly and easily, I think there's an opportunity for us to do that. I would also add that the MIGA product, uh you know really is something that when there's an opportunity and we have you know good reinsurance capacity that's something that we can grow in pretty easily um and so we don't expect that to be as a kind of consistent producer necessarily quarter quarter and a little bit more sensitive to the competitive environment okay perfect that is a perfect lead-in to kind of my next question just in terms of
spk02: you know if you can give it a feel for overall volume i mean um you know mike i appreciate your comments on on you know kind of a good pipeline of reinsurance partners building um but how much i guess of the the volume that was produced in the quarter was did you did you hold back maybe based on a market environment versus like the fact that you're warehousing a lot now and kind of waiting for kind of to get those partnerships finalized and before producing a lot more
spk01: yeah sure i think i think that's fair as as we build reinsurance capacity and that's part of the unique uh nature of our of our business uh and finalize some of the you know really quite scalable relationships that we're working on that allows us then to you know strengthen the pricing and uh be more competitive and that's the virtuous circle and value proposition of our business so i do think there's some attribution to that And, you know, when we speak to the reinsurance market and our reinsurance partners, you know, they're really focused on how much bigger we can get. And so I think that should, you know, play out nicely as we move forward and continue to execute the business plan.
spk02: Yeah, I mean, on that point, maybe concern is the wrong word, but when we think about kind of top line production, is it almost on the other side in terms of We should be thinking more about how quickly you can ramp to kind of feed their desires when these partnerships are signed. And does that or do you expect that to have kind of any impact on kind of either the pace of state expansion or your partnerships on the front end? How should we think about that? you know, kind of the appetite from those reinsurance partners for, you know, the liabilities and your ability to kind of fulfill that, you know, to their expectations.
spk01: Yeah, I think that's really... you know, that's the circle, you know, that we're playing. And as we build capacity, they have confidence that we've demonstrated that we can, you know, grow the business. And, you know, I think, you know, it's very, you know, very well positioned. Mike, is there anything you wanted to add?
spk02: Yeah, no, I think really what I wanted to add is that we are making those efforts now to expand, you know, state expansion, you know, distribution, et cetera, so that it's going to be really set up when that capacity is ready to be taken up. So we're making all the efforts kind of in the background for the future growth. Great. And then one more question, if I could. You know, Michael, you commented a little bit in your big comments about kind of the build of talent at 1505. Can you give us just a little more color on kind of the – what is your long-term vision for the asset management piece of your business? What are you trying to build?
spk01: Right. Yeah. So – To start with, the synergies, obviously, I think have been demonstrated between insurance and asset management. And so we have extremely high synergies with our business, with the alternative asset management community, and that is an extremely large marketplace. But what we see our value where we're kind of building infrastructure is really to partner with asset management. And so what we've done is to bring in you know, very senior asset management, risk management, credit, you know, trading professionals to help us manage those relationships and bring those relationships to the business, but it is not to build, you know, true asset management infrastructure because when we look at the value chain, those partnerships and what's out there right now is just, you know, extremely valuable and we can access it on a partnership basis, which is very attractive to us.
spk02: Great. Thank you very much for the color. Best of luck. Thank you, Matt.
spk04: Our next question comes from John Varnish from Piper Sandler. John, please go ahead.
spk02: Thank you very much. You may be sticking with 1505 in the question Matt had. Do you anticipate it will grow beyond just premiums retained, or how should we be thinking about the growth of that AUM? Yeah, so it is going to grow beyond premiums retained. So with respect to our reinsurance products, there's really two types of products that we offer. One is out to asset managers who will be bringing their own assets and or asset management. And the second is really with respect to third-party capital that is not going to be bringing their asset management. So it's really with respect to that second group, will be driving the growth of the 1505 capital AUM. As I think you're aware, about three quarters of our reinsurance partners to date are using the 1505 asset management. And we have a number of those reinsurance agreements in the pipeline where 1505 will be the asset manager.
spk01: Over the long term, John, we expect about 50-50 kind of split is I think what our expectation would be if we were to say it today in terms of retaining the asset management with passive third-party capital versus our asset management products.
spk02: Okay. That's very helpful. Thanks. Clearly there was a bit of a cash drag in the quarter. Can you talk about your outlook or timeline on maybe exiting that cash drag? And maybe within that, how the FHLB of Topeka can help with that and help on funding and product construction? Right. Yes. So with respect to the cash drag, we do expect to – put that cash to work, if not here in the second quarter, winding that up in the third quarter. Regarding the home loan bank, it is going to be a source of liquidity for us and will actually enable us to run at almost zero cash balances because we will be able to have securities pledged to the home loan bank and draw down on liquidity as needed. Um, this is a new program for us so that we, we have not had, uh, you know, gotten all that, you know, mechanics locked down, but that is certainly in the works. Um, additionally, um, I think, I think you, you, you kind of alluding to, you know, is there a product mix that can be offered out to our reinsurers, uh, based on the home loan bank, um, you know, access. That is something that we are exploring, and we do believe that we should be able to offer that financing to be financed by third-party capital providers.
spk01: Yeah, and, John, the other thing I just wanted to kind of add on top of Mike's The reinsurance relationships that we're building with third-party asset managers are also providing us, you know, really unique and opportunistic flows of assets. And so the synergies that we have on the asset management side of our business that we've discussed and the ways that we can partner with, you know, really, you know, who we believe are the best asset managers out there, you know, both grow our ability to invest for our own balance sheet, our third-party investing reinsurance clients, and then also our reinsurance pipeline funnel. So we're really kind of finding the different ways we can interact and partner with asset managers to be a very strong component of the opportunity.
spk02: Okay. That's, that's real helpful. Maybe dovetailing on that. I mean, it seems like with the, and maybe it's just timing, but with the FHLB admission for Topeka that, you know, competitive liquidity lines that you feel some comfort level with new distribution on MIGA. So can you talk about, is that like IMOs, new states, something possibly bigger? Yeah. So, I would say it's really some of the other distribution lines outside of the IMOs. So as you're aware, the limited distribution strategy has been very successful for us in the IMO channel. We are looking to take that same strategy into some of the other channels, such as the broker-dealers, the banks, and the RIAs. We are making significant headway in breaking into some of those channels, and we do feel specifically for the MIGA product, which is a very simple product. I think it sells well through those types of channels, that our future MIGA growth will probably be there. Okay. That's helpful. And then maybe on the reinsurance self-structuring, it was a little lower in the first quarter. Is it reasonable to think that as we look through the year that there'll be somewhat of a hockey stick as these new reinsurance asset management relationships are opening up such that it still probably does hit that 90% target that you guys have? Yes, the 90% target is still our expectation for 2021. and um it's exactly as you described uh you know we would expect that these reinsurance agreements uh would be taking our q1 and q2 um you know production and or you know even anything that was left over from um you know 2020 uh potentially such that uh we may have reinsurance in a particular quarter that is higher than our production um and that's that's one of the reasons why um we're giving some a little bit more guidance or thought process on what our quarterly earnings power is so that you can see, like, it's kind of based on our production of premium, but, you know, depending on the timing of the reinsurance, you know, that profitability is going to show up in our, you know, earnings differently. Okay. So 90% seems... what you're thinking for reinsurance, does $600 million in sales also seem about what you're also still thinking about as well? Yes, no change in that projection. Okay. That's fantastic. And maybe my last question I'll let others ask, but can you talk about your total addressable market today that you think you're hitting and where you see that being over, say, the next three years?
spk01: Sure. A couple different addressable markets that we look at as a company. Obviously, there's kind of individual agents. We also have just the individual annuity market and then the life and health market. So that's on the liability side. And we're kind of really running at very, very low market shares of those markets. I think maybe we're at 17 basis points of the individual annuity market. And so because of that, we don't focus as much around the overall growth of the market. But that being said, the tailwind, demographic tailwind, some of the things that could come through around tax, products that we're writing really, really are very strong products. products for financial planning and individual investors. And so we really like the overall market as well, even though what really is going to kind of drive our growth is our increase from the 17 basis points. total market share you know and then beyond that you know we also look at you know our reinsurance products and that's the form of an alternative asset you know product and in that market you know is even bigger and that that markets you know kind of in the trillions and so you know and we also think that alternative investments is an area that really should grow in the individual investor and financial planning market. When we look at individual investors and retail investors, we see that they're very underweight alternatives, and there's an opportunity there. So overall, the markets that we're in are massive, and our opportunity is really to build the best business plan that combines both insurance and alternative asset management which we think we're doing. Thanks for the answers. Thank you, John.
spk04: As a reminder, to ask any further questions, please press star followed by one on a telephone keypad now. Okay. So we have another question again from John Barnage from Piper Sandler. John, please go ahead.
spk02: Thanks. Maybe one more on the pricing dynamics that you're seeing on seeding commissions, directionality of where you see it. It's actually held up well. And then maybe does that differ between fixed index and MYGIS at all? Thank you.
spk01: Yeah, I can take that, John. So we see Yeah, we see our margins, you know, kind of being very stable on our reinsurance products. The MIGA is a bit shorter duration, and we also have a three-year MIGA now. So you could, you know, in the shorter duration product, we get paid a little bit less relative to the fee. So, you know, there is some movement around there. But generally, when we look at our margins, as well as, you know, other companies, who have replicated some of our reinsurance structures, they're all kind of right on top of each other, and it seems very, very stable. So I think that's what we're seeing there. Mike, is there anything you wanted to add?
spk02: No, nothing to add.
spk04: Okay, we have no further questions, so I will hand it back to our speaker team.
spk01: Thank you. Well, we appreciate the questions and the investor support and look forward to connecting with anybody that would like to have a one-on-one conversation with us. Thank you very much.
spk04: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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