Midwest Holding Inc.

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.

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.

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.