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spk00: Ladies and gentlemen, welcome to the Midwest Holdings fourth quarter and full year 2021 earnings call. My name is Lauren and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Tom Bumbelow, to begin. Tom, please go ahead.
spk03: Good afternoon and welcome to Midwest Holdings fourth quarter and full year 2021 earnings call. This is Tom Bumbelow, head of business development and distribution here at Midwest. Joining me for today's presentation will be our CEO, Georgette Nicholas, as well as our chief financial officer, Eric Berg, who's a claimant and CFO of the company, was announced earlier today. Yesterday evening, Midwest issued its Q4 and full year 2021 earning release, announcing our financial results. During today's call, we will reference this announcement. a copy of which may 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 2021 Form 10-K, 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 opinion 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 2021 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 addressing Midwest performance. You can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our 2021 Form 10-K. Now I'll turn the call over to Georgette Nicholas to share our results.
spk01: Thanks, Tom. Welcome to Midwest's fourth quarter and full year 2021 earnings call. We appreciate you joining for an update on the company's progress, and today I'll cover the financial results for the fourth quarter and the full year, then discuss market and business trends, our strategic focus, and the steps we are taking to carry out our strategy and grow the business. As we reflect on 2021, Midwest had a challenging year with various changes and headwinds encountered in the execution of its strategy. The year showed growth and key accomplishments, but also the challenge of growing a new business in a dynamic market and establishing a foundation to build upon. We are taking steps and focusing our efforts on the key drivers of the business to position ourselves to rebuild during 2022. Results for the fourth quarter of 2021 showed a reported gap net loss of $7 million, down from 11.9 million net loss reported in the prior year quarter. Driving this improvement was an increase in total revenue, which reached $16 million in the quarter, compared to negative total revenue of $831,000 reported in the prior year fourth quarter. For the full year 2021, Midwest had a gap net loss of $16.6 million compared to $12.4 million in the prior year. Revenue increased to $30.1 million this year, up from $10.6 million in the prior year, driven by an increase in investment income and realized gains along with service fee revenue. This was offset by an increase in total expenses of $41.9 million, up from $21.4 million in the prior year. The increases from interest credited given the growth in premium year over year and an increase in salaries and benefits and other operating expenses to support the business. These additional costs were incurred to attract employees for legal and consulting to support transactions and investment structures along with state expansion and technology initiatives. General and administrative expenses on a management basis, a non-GAAP measure of $24.6 million for the year, up from $12.9 million in the prior year. Overall, annuity direct written premiums on a statutory accounting basis for the year was $471.6 million, up from $415.6 million for a 13.5% increase. The growth year-over-year reflects a strong first half of 2021, while the back half of the year encountered a challenging sales environment. Premiums written were $104.2 million in the fourth quarter of 2021 and paired with $136.1 million in the year earlier quarter and down from $117.9 million in the third quarter of 2021. We're experiencing intense competition in the market for annuities with aggressive pricing. We've been reviewing pricing along with our reinsurer appetite to ensure we continue to grow the business while managing risk and profitability. State expansion efforts have taken more time than anticipated, and states would like to see a more meaningful financial footprint. We are working to file in more states, responding and providing increased information to regulators, and discussing how the model ensures policyholders are protected, given the capital held and supported by the use of reinsurance. This will take time, but it is a strong focus and priority for the U.S. Seeded premium, or that portion of our new business we passed to non-consolidated reinsurers, was $43.8 million in 2021's fourth quarter, or 42.1%, compared with $50.1 million, or 36.8% in the fourth quarter of last year. For the full year 2021, we've seeded 50.3% of premium, compared to 54.9% in 2020. Another consideration in looking at seeded premium is the amount that goes to our captive reinsurer, Seneca Re, where we warehouse premiums and sell until a reinsurer is put in place. As part of the sale to Oryx, 70% of SRC1, or approximately $130 million of premium, was economically sold or reinsured but is not reflected in our GAAP financials due to our continued consolidation of SRC1. If we include the premium economically ceded to ORF through SRC1, for which statutory capital credit is received, the ceded premium for 2021 was 77.9% versus 54.9% in 2020. Overall, we received $13.4 million in ceding commission fees during 2021 compared to $12.5 million in 2020. For GAAP purposes, ceding commission is deferred and earned over the life of the policies. As of December 31st, 2021, there was $28.6 million on the balance sheet under deferred gain on coinsurance transactions, which will be recognized in revenue over time. Our invested asset base grew significantly to $976 million at the end of the year, up from $518 million at the end of 2020. Overall, we've benefited from core capabilities developed to source alternative assets in the areas of private credit, commercial mortgages, and structured products, Also, our strong and unique partnerships with asset managers allows us to source high-quality assets with attractive yields. We provide non-GAAP measures collectively referred to as management metrics and have updated those in our earnings release in 10-K. And while these measures are not a substitute for our GAAP results, we believe that when used in conjunction with our GAAP results, the management metrics can help further understand the progress of the business. During 2021, we achieved several important accomplishments. We introduced a new multi-year guaranteed annuity product for registered investment advisors, added two new index choices in our FIA products, one a multi-asset index from Goldman Sachs, the other an S&P 500 ESG index. We added two new independent marketed organizations to distribution and partnered with various institutional asset managers to provide alternative asset sourcing. We also launched a new wholly-owned Seneca reinsurance sale to assume the portion of our 2021 retained business, and we added two new third-party reinsurance partners for a total of six months. As we start 2022, we're building on those accomplishments and bringing our focus and activity to the key drivers of the business, Our opportunity remains strong, and our strategy is to capitalize on the growing market by distinguishing ourselves in providing annuity products to Americans who are saving for retirement, to create and use reinsurance structures, including our captive reinsurers, to mitigate risk and provide capital for which demand and interest is strong from our partners, and to provide management services around investing assets for those reinsurance structures and leveraging core capabilities to support the administration of those vehicles. all of which generate fee revenue. The result at Midwest is a capital-light business model that we believe should produce higher returns for our shareholders over time compared to the traditional insurance company model of selling new policies and holding them on balance sheets. We're providing guidance for 2022 around key metrics based on the current view of the market and the potential impact on Midwest, which could be modified if those conditions change. While Midwest can be impacted by the market and movement in interest rates affecting the pricing and cost of annuity products, we believe we can manage this along with potential volatility. The recent and expected further increase in interest rates could be beneficial to our investment portfolio, but we're also mindful of the increase in volatility over recent months and the impact that could have on the hedging of equity market exposure on our fiat products. We have a program in place to mitigate this risk and we continue to evaluate it. For annuity premiums written, we saw a slow start in the first quarter of 2022, similar to our experience in the fourth quarter of last year. We have approximately 83 million of premium written through today for the first quarter. We've taken pricing action on both our FIA and MIGA products in the quarter and continue to monitor our competitiveness in the market. We've also increased our focus on marketing, reestablishing and expanding our relationships on the distribution side through various channels, and reallocating or adding resources relating to this initiative. We're starting to see some encouraging trends as we end the first quarter of 2022. We've also prioritized expanding our state footprint as quickly as possible to become licensed in states where a significant number of retirees reside and where our IMOs are located. We're filing, responding, and providing increased information to regulators and discussing how the model ensures that policyholders are protected given the capital held and supported by using reinsurance structures. Given these dynamics, we anticipate premiums written to be in the range of $500 to $600 million for 2022. We still expect the mix in product sales to be consistent with 2021. All of this will be influenced by state expansion and the impact of efforts with distribution partners. Based on the potential premium growth, we currently have capacity in place to cover the capital needs of writing a new business through existing reinsurers that have the potential to grow, along with potential transactions in the pipeline anticipated to close in the year. The goal is to feed on average approximately 70% to 90% of premium in the year and generate city commission fees from them. As we grow, managing expenses continues to be an area of focus. We saw an increase in 2021 as we accelerated some costs to develop potential opportunities, along with adding employees, advancing technology initiatives, and continuing to build the foundation of Midwest. We have and continue to take steps to restructure the organization, monitor costs closely, and invest in the areas that drive growth. We anticipate general and administrative expenses on a management basis, a non-GAAP measure, to be approximately $27 to $28 million for the full year of 2022. As we move forward, I'm encouraged by the trends we're seeing around premium written, state expansion, and the ability to manage costs. The focus of the team is on the key drivers of growth in the business, premium, state expansion, reinsurance, and investment management, and building the operational foundation. Our opportunity is strong, and the team at Midwest is committed to positioning the business for further growth over time. I look forward to providing updates as we progress. And with that, I'll open it up for questions.
spk00: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your questions, please ensure your phone is unmuted locally. We will pause for a moment to allow questions to be registered. Our first question comes from John Barnage from Piper Sandler. John, please go ahead.
spk02: Thank you. At the six reinsurance partnerships you have now, what's the target for reinsurance relationships exiting 22?
spk01: yeah thanks john i think again what we're looking at is a combination of growing the existing partners that we have in place some of them have been there for a period of time and have reached capacity others right have an opportunity to continue to grow so i think as we look forward it's really about again the growth of the premium and the combination of products what the appetite is on those reinsurers and and potentially growing them i think you know as we said in the kind of earnings release that we do have capacity for 2022 uh in place to cover what we anticipate writing uh between our existing reinsurers and a couple of transactions that are in the pipeline that we'd expect to close during the year and so as we move into next year it certainly will again be based off of some of the growth projections that we have and achieve this year great and then another question based on the guide on seated premium
spk02: sales volume in GNA, we've got a good sense of profit, you know, the profitability metrics. Can you maybe walk us through how you see the earnings walk from an operating management view perspective as the year progresses? Because I know a lot of it's dependent on premium seated in any given quarter.
spk01: Yeah, I think, John, as we think about the start of the year, you know, first quarter is experiencing a slow start compared on the premium on the top line. We saw the experience in fourth quarter that trends continued into the first. You know, we've taken some action around pricing in the first quarter, and we're starting to see some shoots of that as we kind of close out. the first quarter. So we do think that the first half of the year will be kind of slower than the back. Certainly part of it is state expansion also. We're working hard to really kind of focus and grow our footprint, spending a lot of time ensuring that we're getting the right information to regulators and to start filing in new states coming off of the year-end results. I think that kind of then leads into how we think about seeding the premium. You know, again, I think our goal is to seed between 70 and 90. I think we feel very confident on the 70. I think the in-between gives us flexibility to use Seneca Re, which is our captive reinsurer, as kind of a warehouse vehicle to grow cells and grow books that we can then turn around and sell to reinsure in particular, you know, on the side. So I think what we're seeing is Again, the demand on the reinsurance side is strong. We've got a nice pipeline. We've developed a number of relationships internally to grow existing ones, but also there's a number of partners that are interested in participating. And so I think for us, it's about ensuring that, again, we've got the right mix of appetite and then the asset quality that we want to take and put into the reinsurance. So I think, again, That reinsure that, again, as you noted, we don't always see the impact of that on the financials from a GAAP perspective certainly gives us some flexibility around that feeding commission. So I think that, you know, ends up then impacting how we think about the revenue stream of seeded premium or seeding commission premium that we – or seeding commission that we receive off of the premiums and the earnings. I think, again, one thing to remember is we have $28.5 million sitting on the balance sheet, right, that we'll start to earn into revenue from premium that we've already seeded from a gap perspective, from a management perspective, right, that any premium off of that, any commission off of that would go into revenue. So again, a pretty good revenue stream. If you think about Seneca Re and that captive reinsurance, you know, the sale that we sold to Oryx would have probably generated about 10 to 12 million in seeded commission. So that, again, from a management perspective, would have been added to income. So as we think about, you know, that, we think that there's, again, a good path forward It then comes from a revenue perspective, and I think you saw that in the quarter-over-quarter and year-over-year results. It then becomes about managing our expenses. And I think there we're very focused on making sure that the expense base is invested in what can grow the business, in particular around distribution, making sure that we're getting the right support around marketing uh that we're being a strong partner with our distribution partners and providing information and support and out uh from a product and a pricing perspective that we're being innovative around that as we move through the year and then that we're you know also then building our foundation so that expense base is important for us to continue to manage you know we did incur Costs this year around transactions and some of the investment structures that we did and state expansion and some of our technology initiatives that will continue and that we do need to manage them and make sure that we're investing in the areas of business that drive growth.
spk02: Thank you. My last question, I'll read to you. What's your timeline for state expansion in either as of year end or as of the call? How many states have seen applications filed? Thank you.
spk01: yeah so i think uh you know state expansion is one of those things that's taken a little bit longer than we would have anticipated and partly we started out with two states where it's probably quite significant uh requests in addition to what we normally file across the naic um and so we started there and have made progress in in those states uh we don't have any kind of uh final results from there, but we've been spending quite a bit of time providing additional information and answering a lot of questions. I think what we're seeing is that a lot of it is looking at our historical footprint from a financial perspective, which is developing. Again, we've only got a few years, so a lot of focus on projections and the assumptions behind that. I think there's also a lot of discussion, and you've seen it in the market, around the use of a model like ours that is capital light and uses reinsurance, and not necessarily traditional reinsurance, but structures with asset managers backing those. And so what does that mean in ensuring that there's an understanding of the quality of those assets in those structures and how we monitor and navigate that. So spending a lot of time talking to regulators and answering questions around that. So I think we're filed in a few states, and we're getting ready to file in a number of states as we come off of full year-to-year earnings results and update all of our projections for that.
spk02: Thank you.
spk00: As a reminder, to ask any further questions, please press star followed by 1 on your telephone keypad. We currently have no further questions in the queue, so I'll now hand back over to you, Georgette, for any closing remarks.
spk01: just thank you everyone for joining us we're happy to follow up and take any other questions or comments on calls with you and look forward to speaking with you thank you for joining us this concludes today's call thank you for joining you may now disconnect
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