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spk03: Hello everyone and thank you for joining the Midwest Holden Inc. report second quarter 2022 results. My name is Darius and I'll be moderating your call today. Before handing over to your host Tom Bambelow, I would like to remind you that if you would like to ask a question during a Q&A session at the end of the call, please press star follow vote 1 on your telephone keypad. I now have the pleasure of handing over to your host Tom Bambelow. Please go ahead Tom, you may start.
spk00: Good afternoon, and welcome to Midwest Holdings' second quarter 2022 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 Nicklin. Yesterday evening, Midwest issued our Q2 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 Q2 2022 Form 10-Q and our 2021 Form 10-K, which have been filed with the Securities and Exchange Commission at sec.gov. 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 that 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 Q2 2022 Form 10-Q and 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 our forward-looking 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 will find the reconciliation of those historical measures to the nearest comparable gap measures in our earnings release and in our Q2 2022 Form 10Q and 2021 Form 10K. Now I'll turn the call over to Georgette Nicholas to share our results.
spk02: Thanks, Tom. Welcome to Midwest Holdings' second quarter 2022 earnings call. We appreciate you joining for an update on the company's progress. Today, I'll cover our strategic focus, the financial results for the second quarter, and the trends driving the business forward. We are actively working to position the company for further growth by focusing on distribution, pricing and products, investment management, and reinsurance. We're investing in technology and foundational capabilities to strengthen the business overall. We're benefiting from the strong performance of our investment portfolio as the portfolio and our capabilities to source attractive yielding assets grows. Overall, the second quarter showed very positive trends and positioned us for a strong start to the third quarter. Our growth opportunities remain strong as investments are earning higher yields from increasing rates and credit spreads are moving given market volatility. Consumers are seeking out annuities for stable returns. Our focus is on executing the key drivers of the business to provide consumers with the insurance products needed and deliver strong results now and longer term for them and shareholders. 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 and strive for higher returns for our shareholders over time. Strategically, we continue to work on capitalizing on a growing market by distinguishing ourselves in products, indices, and technology. To invest in and leverage modern technology to enhance processes that improve the efficiency and effectiveness of the agent and customer experience. To create and use reinsurance structures, including our captive reinsurer, to mitigate risk and provide capital support. And finally, to provide management services around investing assets and reinsurance structures and to leverage core capabilities to support the administration of those vehicles. Turning to results for the second quarter of 2022, we achieved gap net income of $9.3 million compared to a net loss of $5 million in last year's second quarter. Driving this improvement was performance of the investment portfolio, which generated $10.5 million in revenue in the quarter. compared with $3.2 million in the prior year second quarter. This increase was offset by a continuing decline in the market value of derivatives, which has captured and realized losses, and drove slight overall negative revenue for the quarter. We saw continued improvement in earned seating commission amortization and service fee revenue. Second quarter saw strong trends in annuity direct written premiums on a statutory accounting basis, which were 156 million for the second quarter of 2022, up 59% compared to 98.1 million at first quarter of 2022, and up from 125.9 million in the second quarter of 2021, a year-over-year growth rate of 24%. We continue to see intense competition in the fixed annuity market around pricing and new competitors. We have been taking actions to maintain a competitive position and are benefiting from the actions that we took at the start of the year and are seeing strong premium written trends as we move into the third quarter. State expansion efforts remain the priority. We have several active applications in process and will update the market as they progress. Seeded premium was $59.9 million in the second quarter of 2022, or 38.4%. compared with 40.1 million in the first quarter of 2022 of 40.9%. We continue to have interest from reinsurance partners and to work through structures and processes with them. We did form another cell in our Vermont captive at the end of the quarter. Overall, we received 3.2 million in seating commission fees during the second quarter of 2022, compared to 4.9 million in the second quarter of 2021. For GAAP purposes, CD commission is deferred and earned over the life of the policies. As of June 30, 2022, there was $32 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 $1.2 billion as of June 30, 2022, up from $976 million at year end. Overall, we are 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%. Overall, GAAP-reported expenses were helped by negative interest credited due to the fall in the value of the options embedded in our liabilities and the increase in mark-to-market value of the options allowance. Salaries and benefits and other operating expenses, excluding the option marks, saw a small improvement as we continue to build the business and work on technology initiatives. Salaries and benefits were $4.3 million for the quarter, down 4%, compared to $4.5 million in the prior year's second quarter. As we grow, managing expenses continues to be an area of focus, and we're making progress to bring costs further in line as the year progresses. Now turning to guidance for 2022, based on our current views of business and the markets. With the positive trends we saw in the second quarter and the premium written at the start of the third quarter, along with the backlog and process, we're confident in the anticipated premiums written being in the range of $500 to $600 million for the year. While our goal continues to be to seed, on average, approximately 70% to 90% of premium in the year, we're currently running at approximately 40%. Timing of closing additional reinsurance deals can be delayed due to various factors and will vary quarter to quarter as new agreements are reached. Demand from our existing reinsurance partners is strong, and we have capacity in place to cover anticipated written premium through them with the potential to grow along with potential reinsurance transactions in the pipeline. We're also working to warehouse more premium in our reinsurer Seneca RE for potential use in the future reinsurance arrangements. We are making progress towards bringing general and administrative expenses on a management basis, a non-GAAP measure, within approximately 27 to 28 million for the full year of 2022. The continued performance of the business, actions being taken, and the potential for growth continue to build value in the platform. And 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.
spk03: Thank you. So if you would like to ask a question, please press star followed by 1 and telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone's unmuted locally. The first question comes from John Barnage from Piper Sandler. John, you may begin.
spk01: Thank you very much, and good morning. With MIGA's going to be 60% of sales in 2022, how should we be thinking about a blended seeding commission rate for the second half of the year?
spk02: Yeah, good morning, John. I think, again, as we see kind of more of the production coming through MIGA, given some of the movement in rates, investors and consumers kind of trending towards that product, You know, on average, we get somewhere between 2.5% to 3.5% commission versus kind of 5% on a FIA. We do think, again, that that'll potentially put some pressure on the downward trend on the seating commission in the third quarter and the fourth. We're running right now at about 5.25% seating commission. So, again, it depends a little bit on the product that we write and the reinsurance arrangements that we get in place. I think overall, though, We feel very confident that we're holding our premium or our seeded commission up as we look at, again, the reinsurance transactions that we're looking at.
spk01: Okay, great. Thank you. And a follow-up to that, I know the hope is to do 70% to 90% reinsurance as relationships expand. But if no new relationships are added, does the level of – premiums that were reinsured off in the first half of the year seem like a reasonable run rate barring that?
spk02: Yeah, I think if we didn't do anything different, right, that's not an unreasonable rate. I think we feel like we have the opportunity to grow a couple of our existing relationships where there's capacity and they're relatively new. So we think there's opportunity there, as well as we do think that there's opportunity to close, you know, a transaction or two in the back half of the year. We look at the pipeline of interest and reinsurers that we have in place and some of the work that we've been doing. So, you know, I think we're, we feel very confident that to write the 500 to 600 million, we've got capacity in place to hold that. If not, we also, you know, have capital in place to retain it, which, you know, has a positive impact in the sense of you see that in the investment income as we hold and retain more, we're benefiting from that.
spk01: Great. Thank you very much. Best of luck on the quarter ahead.
spk02: Thanks, John.
spk03: As a reminder, to ask any other questions, please press star followed by one on your telephone keypad. So that's star followed by one. It appears we have no questions at this moment, so I'm going to hand back to the management team for any final remarks.
spk02: Thanks. We appreciate all of you joining today and your interest in Midwest and look forward to talking to you over the next few weeks. Take care. Have a great day.
spk03: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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