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spk01: Hello everyone and welcome to the Midwest Holdings Q3 2021 conference call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I will now hand over to your host, Tom Bumbelow, Head of Business Development at Midwest Holdings to begin. Tom, please go ahead.
spk04: Good afternoon and welcome to Midwest Holdings third quarter 2021 earnings call. This is Tom Bumbalo, head of business development at Midwest. Joining me for today's presentation will be our co-CEOs and founders, Michael Sandelman and Mike Minnick, as well as our president and chief financial officer, Georgette Nicklaus. Yesterday evening, Midwest issued our Q3 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 httpsir.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 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 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 savings. 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 can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release in 10-Q. With that, I will now turn the call over to Michael Fallon to share our results in the third quarter. Michael?
spk02: Michael Fallon Thanks, Tom, and good afternoon, everyone. Thank you for joining us today. We are pleased to be with you to report on Midwest holding third quarter results. We continue to be proud of the progress we are making as a company. We are executing across each aspect of our business, including products, distribution, asset management, technology, and operations. We are on track to finish out 2021 with a solid performance and well positioned for future growth. When this year is said and done, we expect that we will have achieved double-digit top-line year-over-year premium growth That's 200% growth over the last two years. We expect that we will have seeded upwards of 80% of our total production through three institutional reinsurance relationships. While short-term forecasting for a high-growth company like ours is difficult, and we will fall short of our 2021 premium target, we are doing the important work to position ourselves for long-term sustainable growth. While the market remains competitive, we will maintain our disciplined approach. We have strong, profitable products with leading technology and customer service operations. Our market share is less than 25 basis points of the individual annuity market, and we are confident in our ability to reach our long-term target of $2 billion of premium per annum. Before I pass things over to Mike, I want to take a minute to share some perspectives. Nothing about what we're doing is easy. It isn't supposed to be easy. We don't expect our success to happen in a straight line. But we have put ourselves in the right place at the right time, and we are committed, capable, and aligned with our stakeholders to take advantage of this enormous opportunity. And with that, I'll turn it over to Mike.
spk03: Thanks, Michael. And good afternoon, everyone. We continue to build on our solid foundation, broadening our reach in insurance products as well as our reinsurance income product offering. In the last year alone, we've launched six new insurance products, entered the RAA channel with an innovative commission-free product, grown our active agents by almost 50%, and expanded our geographic footprint by 15%. On the asset and reinsurance side, we have successfully invested our capital and the capital of our reinsurance partners with strong alignment and solid returns. We have developed a strong asset management relationship with multiple asset managers that bring us a differentiated asset pipeline. On our reinsurance income product side, we have built a deep pipeline of institutional investors for our income product. Additionally, we continue to innovate with a new syndicated reinsurance income product that will be distributed to both individual and institutional investors. Going forward, we will continue to enhance our insurance and income products, including adding innovative index options, entering new distribution channels, and growing our geographic footprint, which we can accelerate through acquisition. We are able to accomplish all of this because of our incredible team and culture, which we continue to strengthen with talented and committed people, such as Georgette Nicholas, who recently joined Midwest as our new president and CFO. Georgette brings to Midwest decades of success as a leader in operations, financial reporting, and investor relations. We are thrilled to have her. And with that, welcome, Georgette. I'll now turn it over to you.
spk00: Thank you, Mike, and thank you to everyone for joining us today. I look forward to speaking with all of you over time as I settle into my role here at Midwest Holdings. I'm pleased to be able to report on the company's financial highlights for the third quarter of 2021. The net loss was $3.1 million in the quarter, down from a net loss of $5.5 million last year. Revenue was $5.8 million, driven by an increase in investment income from growth in the asset portfolio and market performance, along with continued service fee revenue. Our premium volumes remain strong, but we're down year over year by 11% to $117.9 million in the quarter. Written premiums are being impacted by a competitive fixed annuity market. We have seen growth in the MIGA annuity volumes, bringing us closer to our targeted product mix. Seeded premiums for the third quarter of 2021 increased 2% to $60.1 million compared to $59 million in the third quarter of 2020. And our overall seeded percentage increased to 51% from 45% compared to the third quarter of last year. Invested assets grew to $942.8 million at the end of the quarter, up from $518.2 million of December 31st, 2020. Investment income net of expenses was $6.2 million for the quarter compared to $400,000 the prior year. Investment income net of expenses consists of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to investment income earned on bonds and mortgage loans purchased during the period as well as the deployment of excess cash towards credit investments with attractive yields and risk return profiles. Net realized losses on investments were $2.1 million in the quarter, compared to $2 million in the prior year, and included a gain of $1.3 million and a loss of $4.1 million from a total return swap embedded derivative in 2021 and 2020, respectively. Service fee revenue for asset management services provided to third party clients, some of whom are our reinsurers, was flat for the quarter at $600,000 when compared to the prior year. The management team uses certain operating metrics to monitor and manage the business. Revenue metrics consist of investment income of $6.2 million, service fee revenue of $600,000, and other revenue of $400,000. We also evaluate the amount of fees received for reinsurance, which were $3.6 million in the third quarter of 2021, compared to $4.5 million in the third quarter of 2020. We are investing to capitalize on the opportunities in front of us. For the third quarter of 2021, GAAP general and administrative expenses totaled $8.1 million for the quarter, compared to $3.2 million for the prior year. Included in these expenses is mainly salaries, benefits, and other operating expenses, along with $1 million of non-cash stock-based compensation and $900,000 of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A. We will now open the line for questions.
spk01: Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. And preparing to ask your question, please ensure you're unmuted locally. Our first question comes from John Barnage of Piper Sandler. John, your line is now open.
spk02: Hi. Good afternoon. Thank you for taking my question.
spk05: The first one, can you talk about the comment about three institutional reinsurance relationships and hitting that 80% seeding rate for the year? How many of those are going to be new?
spk03: So one of them is the American Republic transaction that has already occurred effectively in the third quarter. It was in the second quarter for statutory purposes. And we're expecting another transaction here in the fourth quarter. So two would be new and one is continuing.
spk02: Okay, and then given the revised outlook for double-digit growth around sales for the year, can you talk about maybe how that influences your outlook for 2022 sales now that we're just six or seven weeks away from that? Thank you.
spk03: Yeah, so for 2022 sales, we are expecting to continue to build on the 2021 outlook work that we have done. We are expecting further work with respect to the state expansion. One thing that has hindered us in 2021 was some of the management changes as well as the board changes, which did delay some of our progress on state expansion. But that we expect to get back on track for 2022. With respect to our premium production, we're expecting to continue to increase our distribution channels. So we did mention that we launched a fee-based MIGA for the RAA channel. While we don't know exactly how much production that will produce, we do expect that that will help us in years to come. Additionally, we continue to add additional channels in the ILO area as well as continue to innovate on products. So as mentioned, we did launch six new products this past year. The three-year MIGAN has been very successful for us. And we're expecting to launch some new indices on our FIA products here in the fourth quarter. That should put us in a good situation going into 2022. Yeah, and thank you.
spk02: I just want to kind of add to that. Just kind of stepping back, John, we're very happy with where we are as a company, understanding that we haven't gotten the growth we expected in the second half of the year, but we do consider that to be really temporary. As Mike mentioned, there are a number of levers that we can pull and that we are pulling. to continue to get to scale and reach our long-term premium targets. Obviously, state expansion is something that we'll continue to do. We had some delays based on the management and board changes this year. We expect that to be more successful next year. And as we mentioned in our comments, there's also opportunity through acquisition to materially accelerate that entire process. So there's opportunity for step-like growth through state expansion. Additionally, There was a competitive environment in the third quarter and really this year where some companies we believe were writing business at levels that not necessarily we think are sustainable. And that ate into, I would say, some of our growth. But we're going to stay disciplined on our pricing. And the way we think of it is it really is a marathon, not a sprint. And, you know, our long-term outlook hasn't changed at all based on the opportunity set. The two new indices that we're going to be coming out with in December, you know, should be very positive for our products. The seven-year FIA that we launched recently is a very strong product. So we really are very well positioned in the market. And, you know, the growth is going to come. Can we maybe touch the last question about that comment around M&A you brought up? Is it shells that really accelerate it?
spk05: Is it distribution, capabilities, technology, or a combination thereof?
spk02: Yeah, I mean, just, I know we've spoken about this before, but just as a very baseline, you know, acquiring a shell, you know, 40-plus licenses, something of that nature, you know, is something that, you know, if we find the right opportunity, you know, we'll move on that, and that kind of instantly, you know, expands our geographic footprint. That being said, we'll look at other potential assets to an acquisition. I don't think that we're looking to acquire distribution in that manner or technology, but there may be other things. We're capable of analyzing all of the above, but I think the main objective would be real estate expansion.
spk05: Thank you very much.
spk02: Thank you.
spk01: Thank you, John. Our next question comes from Matt Coletti of JMP Securities. Matt, your line is now open.
spk05: Hey, thanks. Good morning. You covered a lot of what I had there with John, but maybe if I could ask you to dig into the competitive market conditions you're seeing a little bit. Can you help us with what leads you to believe that they will be transitory? Have you seen any change in competitors' actions so far during Q4 versus what you saw during Q3? Is it across all your geographies? Is it in some spots more than others? Just trying to get a little more granularity on what you're seeing.
spk02: Thanks for the question, Matt. Look, I think it's going to be a competitive environment, but our business model really is set up for that if you think about it, right? Because that competitive environment we are seeing also on our reinsurance capacity side and the demand really for our products, the income products and the reinsurance products. So over time, our business model is well positioned for a strong competitive environment across the board. The transient nature of, I think, the growth really is around ourselves positioning within the competitive environment. What I mean is really that our business is not exactly one that you just kind of turn on a dime. It takes a month, it takes a quarter, you know, it takes and really we do it more quickly, but other companies are planning, you know, a year out and those sorts of things. And so what I really mean is that as we're positioning going into 2022, we should do well in a competitive environment. Expand, you know, right now we have very limited distribution, just as an example. and expanding that distribution within the IMO channel is something that's a lever that we can pull and we'll look to pull. Growing into new channels, the RIA channel as one, that's something that we've done. We're very excited about the long-term prospects of that channel, and then other channels beyond that as we continue to build out our business. So we think it's going to stay competitive, but we think we're extremely well positioned within that competitive environment.
spk05: Very helpful. Thank you.
spk01: Ladies and gentlemen, as another reminder, please press star followed by one on your telephone keypad if you wish to submit a question. At this current time, we currently have no further questions. This concludes today's call. You may now disconnect your lines and have a lovely day.
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