Midwest Holding Inc.

Hello and welcome to today's Midwest Holdings First Quarter 2022 earnings call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Tom Bumbalo, Head of Business Development and Distribution. Tom, please go ahead.

Good morning, and welcome to Midwest Holdings' first quarter 2022 earnings call. This is Tom Bumalow, Head of Business Development and Distribution here at Midwest. Joining me for today's presentation will be our CEO, Georgette Nichols. Yesterday evening, Midwest issued its Key One 2022 earnings 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.midwestholdings.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 Q1 2022 Form 10Q and 2021 Form 10K, which has both been filed with the Securities 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 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 Q1 2022 Form 10Q and 2021 Form 10K, 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's performance. You can find the reconciliation of those historical measures to the nearest comparable gap measures in our earnings release in our Q1 2022 Form 10-Q and 2021 Form 10-K. Now I'll turn the call over to Georgette Nicholas to share our results.

Thanks, Tom. Welcome to Midwest's first quarter 2022 earnings call. We appreciate you joining for an update on the company's progress. Today I'll cover our strategic focus and opportunity for growth, the financial results of the first quarter, and the trends driving the business forward. During the first quarter, we took action to position the company for further growth relating to pricing, product, and investing in technology and foundational capabilities. We saw encouraging trends and premiums written at the end of the first quarter and into the second quarter. We're benefiting from movements in interest rates in our investment portfolio, along with the capabilities we've been developing, and we saw service fee revenue continue to grow. Overall, the first quarter has provided a base for us to continue to expand on. Our growth opportunities are substantial, and our focus on the key drivers of the business positions us for strong results now and longer term. Strategically, we're working to capitalize on a growing market aided by demographics by distinguishing ourselves in product, industry indices, and technology. We can be nimble and quick without the legacy business and technology that encumbers others. We're working to invest and leverage modern technology to enhance processes that improve the efficiency and effectiveness of the agent and customer experience. And we're working to create and use reinsurance structures, including our captive reinsurer, to mitigate risk and provide capital support for which interest and demand is strong from our partners. And finally, we continue to provide management services around investing assets in those reinsurance structures and leveraging core capabilities to support the administration of those vehicles. Midwest is designed to be a services-oriented company generating recurring fee revenue with a business model supported by capital and reinsurance that allows us to provide best-in-class products for our customers. We combine a flexible capital model with a long-term outlook allowing us to maintain stability while we quickly meet the changing demands of our customers and the marketplace. The result is striving for higher returns for our shareholders over time compared to the traditional insurance model. Turning to results for the first quarter of 2022, we reported gap net income of $187,000 compared to a net loss of $1.6 million reported in last year's first quarter. Driving this improvement was an increase in total revenue, which reached 2.6 million in the quarter, compared with negative total revenue of $614,000 reported in the prior year first quarter. This increase results from increased investment income, along with increased seating commission amortization and service fee revenue. Overall, GAAP-reported expenses were helped by negative interest credited due to the fall in value of the options embedded in our liabilities and the increase in the mark-to-market value of our options allowance. We did see an increase in salaries and benefits and other operating expenses, excluding the option mark, as we continue to build the business and processes and work on technology initiatives. Salaries and benefits were $4.3 million for the quarter, up from $2.9 million in the prior year's first quarter. As we grow, managing expenses continues to be an area of focus and balance, We will continue to take steps to bring costs in line as the year progresses. Overall, annuity direct written premiums on a statutory accounting basis for the first quarter of 2022 were 98.1 million compared to 104.2 million at the fourth quarter of 2021 and 123.7 million in the first quarter of 2021. We continue to see intense competition in the market for annuities with aggressive pricing and potential new competitors expected to enter the market. We have been taking actions to maintain our competitive position. It was a slow start in the first quarter of 2022, but we are seeing the positive results of these actions and encouraging trends as we move into the second quarter. State expansion efforts remain the priority. We have active applications in process and anticipate additional filings this quarter. and expect to have more to say on this later in the year. Seeded premium was 40.1 million in 2022 first quarter or 40.9% compared to 47.5 million or 38.4% in the first quarter of last year. Overall, we received $2.4 million in seeding 2022 compared to 2.9 million in the first quarter of 2021. For GAAP purposes, CD commission is deferred and earned over the life of the policies. As of March 31st, there was 30 million on the balance sheet under deferred gain on coinsurance transactions, which will be recognized in revenue over time. Our invested asset base continues to grow at 1.1 billion as of March 31st, up from 976 million at year end. Overall, we're benefiting from core capabilities developed to source alternative assets in the areas of private credit commercial mortgages, and structured products, which is producing an overall portfolio yield of approximately 5.5%. We're reaffirming guidance for 2022 based on our current view of the business and the market. Anticipated premiums written are expected to be in the range of 500 to 600 million, influenced by state expansion, IMO expansion, reallocated personnel, and other initiatives. The goal is to see it on average approximately 70 to 90% of the premium in the year to generate seated commission fees and manage capital. Demand from our partners is strong and we have capacity in place to cover anticipated written premium through existing reinsurers that have the potential to grow along with potential transactions in the pipeline. We're working to bring general and administrative expenses on a management basis, a non-GAAP measure to be approximately 27 to 28 million for the full year 2022. I want to take a moment to address the leadership transition on the finance team. As noted in our press release, Daniel Maloney will be joining Midwest as Executive Vice President of Accounting and Finance on May 23rd. Dan is a CPA with more than 30 years of experience in the insurance industry at companies including Players Health, Horace Mann, American Fidelity, and AIG. He also has a background in public accounting and has worked in various roles related to SEC reporting, statutory reporting, and controllership. We're very excited to have Dan join Midwest, and we believe he's a strong addition to our team. We also disclosed in our press release that Eric Berg will be stepping down as Senior Vice President and Chief Financial Officer effective immediately. This was a mutual decision that Midwest and Eric felt was in the best interest of both parties. There was no disagreement relating to our accounting, strategy, management, operations, policies, regulatory matters or practices, financial or otherwise. And we wish Eric well as he moves forward. Finally, we acknowledge that the stock price has been under pressure as we've transitioned through the last few months. The value of the business is not being reflected by the market. The continued performance of the business, actions being taken, and the potential for growth continues to build value in the platform. As we move forward, our opportunity is strong, and the team at Midwest is committed to positioning the business for continued growth. Now I'll open it up for questions.