Midwest Holding Inc.

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00:27 Good afternoon, and welcome to Midwest Holdings third quarter twenty twenty one earnings call. This is Tom Bumbolow, Head of Business Development at Midwest.

Joining me for today's presentation will be our Co-CEOs and Founders, Michael Salem and Mike Minnich, as well as our President and Chief Financial Officer, Georgette Nicholas. 00:46 Yesterday evening, Midwest issued our Q3 twenty twenty one earnings release, announcing our financial results.

During today's call, we will reference this letter, a copy of which can be found on the investor relations page of our website at https://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 Form 10-Q, which has been filed with the Securities and Exchange Commission.

01:19 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 this information as a result of new developments that may occur.

01:42 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 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.

02:19 I would also like to remind you that during the call, we'll discuss some non-GAAP measures in discussing Midwest performance. You can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release in 10-Q.

02:34 With that, I'll now turn the call over to Michael Salem to share results in the third quarter. Michael?

02:39 Thanks, Tom and good afternoon, everyone. Thank you for joining us today.

We are pleased to be with you to report on Midwest Holding third quarter results. We continue to be proud of the progress we are making in the company.

We are executing across each aspect of our business, including products, distribution, asset management, technology and operations. We are on track to finish out twenty twenty one with a solid performance and well positioned for future growth.

03:11 When this year is set and done, we expect that we will have achieved double-digit top line year-over-year premium growth, that's two hundred percent growth over the last two years. We expect that we will exceeded upwards of eighty percent of our total production, three institutional reinsurance relationships.

While short term forecasting for a high growth company like ours is difficult and we will fall short of our twenty twenty one premium target, we are doing important work to position ourselves for long-term sustainable growth. 03:45 While the market remains competitive, we will maintain our disciplined approach.

We have strong profitable products with leading technology and customer service operations. Our market share is less than twenty five basis points of the individual annuity market and we are confident in our ability to reach our long term target of two billion dollars of premium per annum.

04:11 Before I pass things over to Mike, I want to take a minute to share some perspective. Nothing about what we're doing is easy.

It isn't supposed to be easy. We don't expect our success to happen in a straight line, but we have put ourselves in the right place at the right time and we are committed, capable and aligned with our stakeholders to take advantage of this enormous opportunity.

04:36 And with that, I'll turn it over to Mike.

04:40 Thanks, Michael and good afternoon, everyone. We continue to build on our solid foundation, broadening our reach in insurance products, as well as our reinsurance product offering.

In the last year alone, we've launched six new insurance products and entered the RIA channel with an innovative commission free product, growing our asset agents by almost fifty percent and expanded our geographic footprint by fifteen percent 05:07 On the asset and reinsurance side, we have successfully invested in our capital and the capital of our reinsurance partners with strong alignment and solid returns. We have developed a strong asset management relationship with multiple asset managers that bring us a differentiated asset pipeline.

On a reinsurance income product side, we have built a deep pipeline of institutional investors for our income product. 05:34 Additionally, we continue to innovate a new syndicated reinsurance income product that will be distributed to both individual and institutional investors.

Going forward, we will continue to enhance our insurance and income products, including adding innovative index options, entering new distribution channels and growing our geographic footprint, which we can accelerate through acquisition. We are able to accomplish all of this because of our incredible team and culture, which we will continue to strengthen with talent and committed people such as Georgette Nicholas, who recently joined Midwest as our new President and CFO.

06:17 Georgette brings to Midwest decade of success as a leader in operations, financial reporting and investor relations. We were thrilled to have her.

06:28 And with that, welcome Georgette. I'll now turn it over to you.

06:33 Thank you, Mike and thank you to everyone for joining us today. I look forward to speaking with all of you over time, as I settle into my role here at Midwest Holdings.

I'm pleased to be able to report on the company's financial highlights for the third quarter of twenty twenty one. The net loss was three point one million dollars in the quarter, down from a net loss of five point five million dollars last year.

06:56 Revenue was five point eight million dollars driven by an increase in investment income from growth in the asset portfolio and market performance, along with continued service fee revenue. Our premium volumes remained strong, but were down year-over-year by eleven percent to one hundred and seventeen point nine million dollars in the quarter.

Written premiums are being impacted by the competitive fixed annuity market. We have seen growth in MYGA, annuity volume bringing us closer to our targeted product mix.

07:27 Ceded premiums for the third quarter of twenty twenty one increased two percent to sixty point one million dollars compared to fifty nine million dollars in the third quarter of twenty twenty. And our overall ceded percentage increased to fifty one percent from forty five percent compared to the third quarter of last year.

Invested assets grew to nine hundred and forty two point eight million dollars at the end of the quarter, up from five hundred and eighteen point two million dollars at December thirty one, twenty twenty. 07:55 Investment income net of expenses was six point two million dollars for the quarter compared to four hundred thousand dollars in the prior year.

Investment income net of expenses as list of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to investment income earned on bonds and mortgage loans purchased during the period, as well as the deployment of excess cash towards credit investments with attractive yields and risk return profiles.

08:26 Net realized losses on investments were two point one million dollars in the quarter compared to two million in the prior year and included a gain of one point three million dollars and a loss of four point one million dollars from a total return swap embedded derivatives in twenty twenty one and twenty twenty respectively. Service fee revenue for asset management services provided to third-party clients some of whom are our reinsurers was flat for the quarter at six hundred thousand and compared to the prior year.

08:56 The management team uses certain operating metrics to monitor and manage the business. Revenue metrics consist of investment income of six point two million dollars, service fee revenue of six hundred thousand dollars, and other revenue of four hundred thousand.

We also evaluate the amount of fees received for reinsurance, which were three point six million dollars in the third quarter of twenty twenty one, compared to four point five million dollars in the third quarter of twenty twenty. 09:23 We are investing to capitalize on the opportunities in front of us.

For the third quarter of twenty twenty one, GAAP general and administrative expenses, totaled eight point one million dollars for the quarter compared to three point two million dollars for the prior year. Included in these expenses is mainly salaries, benefits and other operating expenses along with one million dollars of non-cash stock-based compensation and nine hundred thousand dollars of non-cash mark to market expense of our derivative option allowance, which we exclude in our management G&A.

09:55 We will now open the line for questions.

10:21 Hi, good afternoon. Thank for taking my question.

The first one, can you talk about the comment about three institutional reinsurance relationships and hitting that eighty percent CV rate for the year? How many of those are still are going to be new?

10:41 So, one of them is the American Republic transaction that has already occurred effectively in the third quarter. It was in the second quarter for statutory purposes and we're expecting another transaction here in the fourth quarter.

So two would be new and one is that continuing.

11:07 Okay. And then given the revised outlook for double-digit growth around sales of the year.

Can you talk about maybe how that influences your outlook for twenty twenty through sales now that we're just six to seven weeks away from that? Thank you.

11:26 Yes. So for twenty twenty two sales, we are expecting to continue to build on the twenty twenty one work that we have done.

We are expecting further -- with respect to the state expansion. One thing that has hindered us in twenty twenty one was some of the management changes as well as the board changes, which did delay some of our progress on say expansion, but that we expect to get back on track for twenty twenty two.

12:07 With respect to our premium production and we're expecting to continue to increase our distribution channels. So, we did mention that we launched an fee based MYGA for the RIA channel, while we don't know exactly how much production that will produce.

We do expect that that will help us in years to come. Additionally, we continue to add additional channels in [indiscernible] area as well as continue to innovate on products.

12:50 So as mentioned, we did launch six new products this past year, the three year are MYGA has been successful for us. And we're expecting to launch some new indices on our RIA products here in the fourth quarter that should put us in a good situation going into twenty twenty two.

13:10 Yes. I just wanted to kind of add to that.

Just kind of stepping back, John, we're very happy with where we are as a company. Understanding that we haven't gotten the growth we expected in the second half of the year, but we do consider that to be really temporary.

As Mike mentioned, there are a number of levers that we can pull and that we are pulling to continue to get to scale and reach our long term premium targets. Obviously, state expansion is something that we'll continue to do.

We had some delays based on the management and board changes this year. We expect that to be more successful next year.

And as we mentioned in our comments, there's also opportunity through acquisition to materially accelerate that entire process. So there's opportunity for step like growth through state expansion.

14:15 Additionally, there was a competitive environment in the third quarter and really this year where some companies we believe were rising business at levels that not necessarily we think are sustainable and that aid into, I would say some of our growth, but we're going to stay disciplined on our pricing. And the way we think of it is it really is marathon not a sprint.

And our long term outlook hasn't changed all based on the opportunity set. The two new industries that we're going to be coming out in December should be very positive for our products, the seven year FIA that we launched recently is a very strong product.

So we really are very well positioned in the market and the growth is going to come.

15:15 Can we maybe touch the last question about that comment around M&A, you brought up. Is it shells that really accelerated, is the distribution capability is technology or a combination thereof?

15:31 Yes. I mean I know we spoken about this before, but just as a very big line, acquiring a shell, forty plus license is something of that nature is something that if we find the right opportunity, we'll move on that and that kind of instantly expands our geographic footprint.

That being said, we'll look at other potential assets to an acquisition. I don't think that we're looking to acquire distribution in that manner or technology, but there may be other things or we're capable of analyzing all of the above.

But I think the main objective would be really state expansion.

16:28 Thank you very much.

16:26 Thank you.

16:36 Hey, thanks. Good morning.

You covered a lot of what I have there with John, but maybe if I could ask you to dig into the competitive market conditions you're seeing a little bit. Kind of can you help us with kind of what means you to believe that they will be transitory?

Have you seen any change kind of in kind of competitors actions so far during Q4 versus what you saw during Q3? Is it across all your geographies?

Is it in some spots more than others just trying to get a little more granularity on what you're seeing?

17:13 Yeah. And I think thanks for the question, Matt.

Look, I think it's going to be a competitive environment, but our business model will is to set up for that if you think about it, right, because that competitive environment, we are seeing also on our reinsurance capacity side and the demand really for our products, the income products and the reinsurance products. So over time, our business model is well positioned for a strong competitive environment across the board.

The transient be nature of I think the growth really is around ourselves positioning within the competitive environment. What I mean is really that our business is not exactly one that you just kind of turn on an eye.

It takes a month it takes a quarter, it takes and we do it more quickly, but other companies are planning a year around and those sorts of thing. So what I really mean is that as we're positioning going into twenty twenty two, we should do well in a competitive environment.

Right now, we have very limited distribution just as an example and expanding that distribution within the IMO channel is something that the lever that we can pull and we'll look to pull. Growing into new channels, the RIA channel has one, that's something that we've done.

We're very excited about the long term prospects of that channel. And then other channels beyond that as we continue to build out our business.

So, we think it's going to stay competitive, but we think we're extremely well positioned within that competitive environment.

19:02 Great. Very helpful.

Thank you.

19:29 Thank you.