Midwest Holding Inc.

Hello everyone and welcome to Midwest Holding Q3 2022 earnings call. We will begin shortly. If you'd like to register a question ready for the Q&A session, please press star followed by one on your telephone keypads now. Thank you for your patience. ladies and gentlemen welcome to the midwest holding q3 2022 earnings call my name is charlie and i'll be coordinating the call today if you'd like to ask a question during the presentation You may do so by pressing star followed by one on your telephone keypad. Our host is Tom Bumbelow. Tom, please go ahead.

Good morning and welcome to Midwest Holdings' third 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 Nicholas, as well as our president and CIO, Mike Minnick. Yesterday evening, Midwest issued our Q3 2022 earnings release, announcing our financial results. During today's call, we will reference this announcement, a copy of which will 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 Q3 2022 Quorum 10-Q, and 2021 Form 10-K, which have been filed with the Securities and Exchange Commission at scc.gov. Before we begin, I want to remind you that matters from today's call will include forward-looking statements relating 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 a more detailed description of our risk factors, once again, please review our Q3 2022 Form 10-Q and 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'd also like to remind you that during the call, we'll discuss some non-GAAP measures in addressing Midwest's performance. You'll find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our Q3 2022 Forum 10Q, and 21 form 10K. Now I'll turn the call over to Georgette Nicholas to share our results.

Thanks, Tom. Welcome to Midwest Holdings' third quarter 2022 earnings call. We appreciate you joining for an update on the company's progress. Today I'll cover our strategic focus, results for the third quarter, and the trends driving the business through the rest of the year. We're very pleased with the strong results for the quarter, specifically around our increase in written premiums, the performance of the investment portfolio, and the execution of another reinsurance transaction. We're seeing the results of our focus and hard work on the core business of selling annuity products and investing in reinsuring those liabilities to generate returns. For the third quarter of 2022, we achieved GAAP net income of $7.4 million compared to a net loss of $3.1 million in last year's third quarter. Driving this improvement was an increase in written premium at $255.5 million for the quarter, supporting performance of the investment portfolio, which generated $12.9 million in revenue in the quarter, compared with $6.2 million in the prior year third quarter. This increase was offset by a continuing decline in the market value of derivatives, which is captured in realized losses, along with a mark-to-market gain on the embedded derivatives related to the reinsurance contracts. We saw continued improvement in earned seating commission amortization and administration fees, offset by a decline in service fee revenue. Third quarter saw strong trends in annuity direct written premiums on a statutory accounting basis, which were $255.5 million for the third quarter of 2022, up 63.8% compared to $156 million for the second quarter of 2022, which was up 59% compared to 98.1 million at first quarter of 2022 and up from 117.9 million in the third quarter of 2021. We continue to see intense competition in the fixed annuity market around pricing the new competitors. The market is strong and we've remained in a competitive position and we're seeing positive results from our actions and improved sales momentum in both the second and third quarter now. State expansion efforts remain the priority and are active with several applications in process. We continue to work with the states to provide information and will update the market as they progress. Our growth is strong given these market dynamics, even with a smaller state footprint. We continue to focus on new product development and on our distribution partners to accelerate growth, making key investments in technology and people. Seeded premium was 113.7 million in the third quarter of 2022, or 44.5%, compared with 60.1 million in the third quarter of last year, or 51%. The increase in the dollar amount of seeded premium was driven by the execution of another reinsurance arrangement effective September 30th through the Seneca Re Protective Cell form last quarter. We continue to have strong interest from many reinsurance partners and continue to work through structures and processes with them. Overall, we received $4.5 million in Seeding Commission fees during the quarter, compared to $3.6 million in the third quarter of last year. For GAAP purposes, Seeded Commission is deferred and earned over the life of the policies. As of September 30, 2022, there was $35 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 $1.4 billion as of September 30, 2022, up from $976 million at year-end 2021. Overall, we're benefiting from core capabilities developed to source alternative assets in the areas of private credit, commercial mortgages, and structured products, along with an increase in interest rates, which is producing overall portfolio yield of approximately 5.5%. Overall, gap-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 the mark-to-market value of our options allowance. Salaries and benefits were $3.8 million for the quarter, down from $4 million in the prior year's third quarter. We continue to realize expense efficiencies and improvements, even as we added new employees in our insurance operations, given the increase in new business. Other operating expenses, excluding the gain on the mark-to-market of the options allowance, were up. From continuing to build foundational capabilities to support potential growth in the business, along with costs that are variable with increased premiums written related to technology support, distribution, product design, and premium taxes. Overall, the growth in expenses was smaller in relation to the growth in new premium written as we continue to scale the business and accelerate growth. Now turning to guidance for the end of 2022, based on our current view of the business and the market. With the improved sales momentum we saw in the third quarter and the premium written so far in the fourth quarter, we'll have a strong finish for the year. We're very confident in the anticipated premiums written exceeding our previous range of 500 to 600 million. And we're updating our range now to be 700 to 750 million for new premium written for the year. Given the close of the additional reinsurance arrangement at the end of the third quarter and the current margins being generated on the retained business, we now anticipate seeding approximately 40% to 45% of new business overall for the year. The ongoing goal will be to seed, on average, approximately 70% to 90% of premium in a year to generate seeded commission fees and managed capital. But given the strong investment performance, retaining more at this time drives additional value for the business. Demand from our existing reinsurance partners is strong, and we can grow our arrangements with them. But we have partners in the pipeline to add additional capacity as we continue to scale the business. We're also working to warehouse more premium in our reinsurer Seneca RE for potential use in future reinsurance arrangements, which we've done before with other transactions. Overall, we've made progress on managing costs and bringing them in line as we transition through the year. Given the increase in premiums written expected for the year now and the impact that will have on premium taxes, technology support, and product fees, we now expect general and administrative expenses on a management basis, a non-GAAP measure, to be within approximately $31 to $32 million for the full year 2022. We positioned the company for further growth by focusing on distribution, pricing and product, investment management, and reinsurance. And we're advancing various investments in technology and foundational capabilities to strengthen the business overall. We're benefiting from a strong annuity market, but we're growing and scaling above the market growth, even with our smaller state footprint. Overall, the third quarter showed very positive trends and positioned us for a very strong finish for the year. Our focus is on executing the key drivers of the business to provide consumers with the insurance products needed and to deliver strong results now and longer term for both policyholders and shareholders. While Midwest is designed to be a services-oriented company generating recurring fee revenue with a business model supported by capital and reinsurance, given our capital position, we've been able to retain more business this year as we expect strong margin performance given market conditions. This flexibility allows us to provide best-in-class products for our customers and strive for higher returns for our shareholders over time. Our strategic focus remains on premiums written to capitalize on a growing market by distinguishing ourselves in product, indices, and technology, on investing in and leveraging modern technology to enhance processes that improve the efficiency and effectiveness of the agent and customer experience, on creating and using reinsurance structures, including our captive reinsurer, to mitigate risk and provide capital support, And finally, on providing management services around investing assets and leveraging core capabilities to support the administration of reinsurance vehicles. Our focus and execution on key drivers are resulting in the growth of the business and its performance, which will continue to build value in the platform. As we move forward, our opportunity remains strong and the team at Midwest is committed to positioning the business for continued growth. Now I'll open it up for questions.