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spk01: Ladies and gentlemen, welcome to the Midwest Holding Incorporated Q2 2021 earnings call. My name is Lydia 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 our host today, Tom Bumbalo. Please go ahead, Tom.
spk03: Good afternoon and welcome to Midwest Holding's second quarter 2021 earnings call. This is Tom Bumbelow, Head of Business Development at Midwest. Joining me for today's presentation will be our co-CEO and founder, Michael Salem, as well as our Chief Financial Officer, Deborah Havronik, and Director of Corporate Finance, Nojun Chu. Yesterday evening, Midwest issued our Q2 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 10Q, which has been filed with the Securities and Exchange Commission. Before we begin, I want to remind you that matters from today's call will include forward-looking statements related to our operating performance, financial goals, and 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 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 the 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'll discuss some non-GAAP measures in discussing Midwest performance. you could find the reconciliation of those historical measures to the nearest comparable gap measures in our earnings release. We have several exciting developments to report for the second quarter, and I'll turn the call over to Michael Phelan to tell you more. Michael?
spk02: Thank you, Tom, and good afternoon, everyone. It's a pleasure to be with you today to report on Midwest Holdings' second quarter results. It was a solid quarter, and we continue to execute on our plan. On a macro level, our opportunity remains as strong as ever, the wealth management and insurance value chain continues to be under tremendous flux. Asset managers are becoming insurance companies. Traditional insurers are divesting of assets. Private equity is aggregating. Technology is circling. We expect this industry realignment to continue for some time, with the true winners to be determined in decades, not years. Midwest was, in fact, built for this environment from the ground up as a technology-enabled life and annuity company. At the forefront of our vision is our commitment to driving value to our customers and partners. We do this as an open architecture product manufacturer. Our platform allows us to aggregate and curate alternative asset management that we repackage and distribute to individuals seeking to fund their retirement and institutions seeking unique uncorrelated returns. Our business is positioned to be aligned with these key stakeholders by connecting them to attractive products with top customer service, all powered by information and technology. We believe we have the people, the platform, and the vision to be a long-term winner in this market. In the past quarter, we solidly executed in pursuit of our opportunity. Importantly, We advanced our reinsurance pipeline, including closing a key transaction that helped drive our strong financial results. As we said before, these pipes take time to build, but we are building them to support long-term sustainable growth. Additionally, we have advanced our technology and operating infrastructure, crucially positioning us for long-term scalability. And we also expanded our distribution efforts. notably adding Nate Thompson with over two decades of experience to spearhead this important area of our growth. We are moving quickly. We are driven by an incredible energy, and we are attracting incredible people. We believe that our team and our speed will be key drivers in our success, and our admittedly higher-than-forecasted expenses reflect our opportunity to move more quickly than we expected. From the top line perspective, we are satisfied with where we are. Our FIA production is in line with our expectations, and our MIGA products, like we've said before, are more price sensitive. But we currently see an opportunity in the market, so our production should be more balanced in the second half. While we know investors and analysts are going to be focused on our short-term growth, our focus is equally on investing in our platform and our capabilities to support long-term sustainable growth. These investments will take time to materialize into tangible results. But if you simply look at the scale of the market and our relative size, it's just 2% market share in fixed annuities alone, we would be at over $2 billion of production. And the opportunity is much bigger than that. So hopefully that provides some context on our approach. In summary, we feel exceptionally well-positioned for our long-term success. At this moment in our company's trajectory, there is incredible excitement, so much promising activity, and a continued and unwavering commitment to the hard work on the road ahead. And with that, I'll now turn it over to our CFO, Debra.
spk00: Thank you, Michael, and thank you, everyone, for joining us today. I'm pleased to be able to report on Midwest financial highlights during the quarter and our company's overall financial position. Our premium volume remains strong. We wrote $125.9 million in annuity direct premiums in the second quarter of 2021, representing 26% growth from $99.7 million in the second quarter of last year. In the second quarter of 2021, management revenue was $9.1 million, up 184% from the second quarter of 2020. Management operating income loss available to common shareholders in the second quarter of 2021 increased to income of $0.8 million compared to a loss of $0.6 million in the second quarter of 2020. As Michael mentioned, We are moving quickly and are investing to capitalize on the opportunity in front of us. For the second quarter of 2021, G&A expenses, excluding stock-based compensation and the mark-to-market of the derivative option allowance, totaled $5.9 million compared to $3.7 million in the second quarter of 2020. We will now open the line for questions.
spk01: Thank you, Deborah. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. If you'd like to withdraw your question, please press star followed by 2. And when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from John Barnage of Piper Sandler. John, your line is now open. Please go ahead.
spk05: Thank you. I was hoping you could maybe talk about your new reinsurance partner that you announced and how we should be thinking about maybe the seated commission ratio going forward as you begin to work with new reinsurance counterparties.
spk02: Yeah, sure. Thanks, John. And thanks for joining us today. We're excited about the relationship that we've built with American Enterprise Group. They're a very strong counterparty, large mutual insurance company, did a tremendous amount of due diligence on our product and our reinsurance opportunity. So we feel that it's extremely validating of our business model and our reinsurance product and expect it to be a long-term relationship for Midwest and American life. In terms of our seeded commission ratios, those will vary based on our product mix. Our 10-year FIA product, because of the term, has higher seeding commission. As that mix may change to our MIGA product, which are a bit shorter dated, we could see those seeding commission rates come down. But overall, we're very happy with where our margins are as a business.
spk05: And then can you talk about your expectations around how maybe adding an external counterparty in American Enterprise, what that means for your outlook on new reinsurance relationships and the balance of the year and what your expectation is around that pipeline?
spk02: Yeah, sure. So our reinsurance pipeline, as you know, is a truly important aspect of our business. It's one of our most significant priorities, and we've built an incredible infrastructure and pipeline around distributing our reinsurance products to institutional investors and asset managers who are seeking uncorrelated, unique returns that can be derived from our annuity premium. The goal here is really to build long-term scalable partnerships, which do take some time, but we're expecting in the second half of the year to add maybe one or two additional partnerships. We expect to be able to get to our 90% seeded target in the year, and we're very pleased with the quality and scale of the partners that we're working with. And really, it's a fantastic opportunity. We have a very unique product in the marketplace that has a very, very strong traction.
spk05: That's helpful. Maybe my last question, and I'll requeue. Can you talk about net investment income in the quarter? Maybe was there continued cash drag? And if so, maybe sizing and when you anticipate to have that exited? Thank you.
spk02: Yep, so we did have a little bit of cash drag as well as some one-time items in our investment income in this quarter. We would expect in the second half of the year for that to trend higher to our target of 4.5% ROA. Where we are kind of going into the second half, we feel good about, and so we would expect that to trend higher over the next couple of quarters.
spk05: Thanks for the answers.
spk02: Thank you.
spk01: Thank you. Our next question comes from Matthew Colletti of JMP. Matthew, please go ahead.
spk04: Hey, thanks. Good morning. The first question, Michael, I was hoping you could give us a little bit of color. You touched on kind of building the business towards a couple billion dollar sort of business. Can you help us big picture with, as we think about the levers to get there, whether it be new products, bigger share of wallet with your existing IMO partners, new IMO partners? new distribution channels, geographic expansion. You guys have a lot of paths ahead of you. Do you have a view on which of those are most meaningful to Midwest both in the nearer term and in the longer term as you work towards those targets?
spk02: Thanks, Matt. That's a great question. Really, the answer is all of the above. Our strategy is to make sure we're doing a lot of little things to add value to our end financial advisor and distribution partners. The most meaningful thing we can do in really the IMO channel is to add states and expand our geographic footprint. So we're... Still at around 22 states, we do have applications that we're going to be submitting in the second half, and so we expect to expand our state footprint over the next 12 to 18 months significantly, and that's something that we're working and focused on. In addition to that, we have a seven-year FIA product that we'll be launching shortly. We're going to be launching a fee-only product in the RIA channel that we're quite excited about, and also adding additional indices to our FIA product in the second half. So when we look at it, we're taking a strategy which we want to build and deepen our IMO relationships. expand our distribution to the RIA and BD channels and expand our state footprint as well as our product mix.
spk04: Great. And then just kind of a numbers question. I know you've been investing a lot to support the long-term growth of the business. As I look at the G&A expense line, is there any even back half guidance or just how should we think about kind of the numbers in the current quarter and the first quarter versus where you might see that going as you think about hiring people and investing in future growth?
spk02: Yeah, sure. So I think in terms of, you know, the way we're looking at the back half, it's, you know, pretty stable run rate. You know, we feel that we're on. There may be some additional expenses that, you know, kind of could have been in the second quarter, but will be pushed, you know, the third quarter. So although we, you know, did beat our expectations on second quarter expenses, that could in the short term catch up a bit. overall, our expenses as a highly quickly growing company is something that we're not exactly optimizing at this point. You know, our focus really is on our speed and our infrastructure and making sure that we're making the right investment to get to that 2 billion platform target. And there should be a lot of room, I would say, in our expenses as we grow to optimize and get more out of our current budget. So although, as we've mentioned, our expenses have been a bit higher than forecasted, we're really bringing on strong people, building a fantastic team, building a very strong infrastructure. We're very happy with where we are.
spk04: Great. Thanks very much for taking my questions, and congrats on a nice quarter.
spk02: Thanks, Matt.
spk01: We've had a follow-up question from John Barnage of Piper Sandler. John, please go ahead.
spk05: Thank you. Can you talk about maybe your G&A expectations for 2021 and 2022?
spk02: I think, Nojun, do you want to talk a little bit about 2021? I don't think we're prepared to talk for 2021, but I think we could talk a bit about 2021.
spk06: Yeah. Hi, John. Yeah. I think, you know, if you sort of look at the 5.9 million for the quarter of DNA, you know, I would say that's slightly below run rate for DNA that we expect for the year. So, you know, if you sort of take a little bit more than that run rate, implied run rate number, then that's, That's kind of where you're shaking out. So, like, around $24 million, maybe a tad bit more, is kind of what we expect for the year.
spk05: Okay. That's helpful. And then with American Enterprise coming online, being a mutual, well-capitalized, has this changed, like, your existing reinsurance counterparties? Now that you're getting more diversified, is there the potential for their appetite and ability to take more to increase?
spk02: Yeah, I mean, I think with any partner, we look to deliver on our side of the relationship, obviously drive a strong product and a strong return for our reinsurance partners, and then partner with scalable counterparties that we can add to once the relationship is built. So we would hope with any counterparty that we're bringing on that we can scale with them, and certainly American Enterprise is no different.
spk05: That sounds great. Thanks for the answers. Best of luck in the quarter ahead.
spk02: Thanks, John.
spk01: Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypads now. We have no further questions in the queue, so I'll hand back to Michael Salem for closing remarks.
spk02: Thank you, and thank you everyone for joining us today. We hope you enjoy the balance of your summer and look forward to speaking to investors that would like to talk privately. Thank you.
spk01: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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