ITEM 1. FINANCIAL
STATEMENTS.
Midwest Holding Inc. and
Subsidiaries
Consolidated Balance Sheets
|
March 31, 2016
|
|
December 31,
2015
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Investments, available for
sale, at fair value
|
|
|
|
|
|
|
|
Fixed
maturies (amortized cost: $24,544,279 and $24,279,231,
respectively)
|
$
|
23,971,517
|
|
|
$
|
23,271,277
|
|
Equity
securities, at cost
|
|
121,316
|
|
|
|
140,250
|
|
Real
estate, held for investment
|
|
526,759
|
|
|
|
529,769
|
|
Policy
loans
|
|
411,317
|
|
|
|
420,775
|
|
Total
investments
|
|
25,030,909
|
|
|
|
24,362,071
|
|
Cash and
cash equivalents
|
|
3,640,463
|
|
|
|
1,192,336
|
|
Amounts
recoverable from reinsurers
|
|
11,983,984
|
|
|
|
12,212,656
|
|
Interest
and dividends due and accrued
|
|
258,183
|
|
|
|
264,791
|
|
Due
premiums
|
|
588,088
|
|
|
|
640,073
|
|
Deferred
acquisition costs, net
|
|
2,654,918
|
|
|
|
2,765,063
|
|
Value of
business acquired, net
|
|
1,967,601
|
|
|
|
2,039,110
|
|
Intangible assets
|
|
700,000
|
|
|
|
700,000
|
|
Goodwill
|
|
1,129,824
|
|
|
|
1,129,824
|
|
Property
and equipment, net
|
|
214,241
|
|
|
|
217,565
|
|
Assets
associated with business held for sale (see Note 3)
|
|
16,671,841
|
|
|
|
16,870,241
|
|
Other
assets
|
|
470,190
|
|
|
|
532,674
|
|
Total
assets
|
$
|
65,310,242
|
|
|
$
|
62,926,404
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Benefit
reserves
|
$
|
24,269,191
|
|
|
$
|
24,155,140
|
|
Policy
claims
|
|
602,517
|
|
|
|
839,859
|
|
Deposit-type
contracts
|
|
14,566,838
|
|
|
|
13,897,421
|
|
Advance
premiums
|
|
78,189
|
|
|
|
57,699
|
|
Total
policy liabilities
|
|
39,516,735
|
|
|
|
38,950,119
|
|
Accounts
payable and accrued expenses
|
|
1,000,379
|
|
|
|
1,013,313
|
|
Liabilities associated with
business held for sale (see Note 3)
|
|
15,274,751
|
|
|
|
15,508,998
|
|
Surplus
notes
|
|
550,000
|
|
|
|
550,000
|
|
Total
liabilities
|
|
56,341,865
|
|
|
|
56,022,430
|
|
Commitments and Contingencies (See Note
9
)
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
Preferred stock, Series A,
$0.001 par value. Liquidation preference $6.00 per share.
|
|
|
|
|
|
|
|
Authorized
2,000,000 shares; issued and outstanding 74,159 shares
|
|
|
|
|
|
|
|
as
of March 31, 2016 and December 31, 2015.
|
|
74
|
|
|
|
74
|
|
Preferred stock, Series B,
$0.001 par value. Liquidation preference $6.00 per share.
|
|
|
|
|
|
|
|
Authorized
1,000,000 shares; issued and outstanding 102,669 shares
|
|
|
|
|
|
|
|
as
of March 31, 2016 and December 31, 2015.
|
|
103
|
|
|
|
103
|
|
Common
stock, $0.001 par value. Authorized 120,000,000 shares;
|
|
|
|
|
|
|
|
issued
and outstanding 22,558,811 as of March 31, 2016
|
|
|
|
|
|
|
|
and
18,006,301 shares as of December 31, 2015.
|
|
22,559
|
|
|
|
18,006
|
|
Additional paid-in
capital
|
|
33,964,290
|
|
|
|
31,584,529
|
|
Accumulated deficit
|
|
(24,454,445
|
)
|
|
|
(23,685,525
|
)
|
Accumulated
other comprehensive loss
|
|
(564,204
|
)
|
|
|
(1,013,213
|
)
|
Total
Midwest Holding Inc.'s stockholders' equity
|
|
8,968,377
|
|
|
|
6,903,974
|
|
Total
liabilities and stockholders' equity
|
$
|
65,310,242
|
|
|
$
|
62,926,404
|
|
See Notes to Consolidated
Financial Statements.
3
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Comprehensive
Income
(Unaudited)
|
Three
months ended March 31,
|
|
2016
|
|
2015
|
Income:
|
|
|
|
|
|
|
|
Premiums
|
$
|
927,433
|
|
|
$
|
878,551
|
|
Investment income, net of
expenses
|
|
213,128
|
|
|
|
195,624
|
|
Net
realized gain on investments
|
|
2,885
|
|
|
|
78,248
|
|
Miscellaneous income
|
|
50,307
|
|
|
|
54,852
|
|
|
|
1,193,753
|
|
|
|
1,207,275
|
|
Expenses:
|
|
|
|
|
|
|
|
Death
and other benefits
|
|
229,022
|
|
|
|
198,867
|
|
Interest
credited
|
|
170,594
|
|
|
|
129,352
|
|
Increase
in benefit reserves
|
|
167,025
|
|
|
|
250,624
|
|
Amortization of deferred
acquisition costs
|
|
122,494
|
|
|
|
130,347
|
|
Salaries
and benefits
|
|
520,230
|
|
|
|
512,551
|
|
Other
operating expenses
|
|
753,308
|
|
|
|
765,654
|
|
|
|
1,962,673
|
|
|
|
1,987,395
|
|
Loss before
income taxes
|
|
(768,920
|
)
|
|
|
(780,120
|
)
|
Income tax expense
|
|
-
|
|
|
|
-
|
|
Net loss
|
$
|
(768,920
|
)
|
|
$
|
(780,120
|
)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
Unrealized gains on
investments
|
|
|
|
|
|
|
|
arising
during period
|
|
451,894
|
|
|
|
144,143
|
|
Less:
reclassification adjustment for net
|
|
|
|
|
|
|
|
realized
gains on investments
|
|
(2,885
|
)
|
|
|
(78,248
|
)
|
Other
comprehensive income
|
|
449,009
|
|
|
|
65,895
|
|
Comprehensive loss
|
$
|
(319,911
|
)
|
|
$
|
(714,225
|
)
|
Net
loss per
common share, basic and diluted
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
See Notes to Consolidated
Financial Statements.
4
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Cash
Flows
(Unaudited)
|
Three Months ended March
31,
|
|
2016
|
|
2015
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(768,920
|
)
|
|
$
|
(780,120
|
)
|
Adjustments to reconcile
net loss to net cash and cash equivalents provided by
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Net
adjustment for premium and discount on investments
|
|
53,305
|
|
|
|
35,942
|
|
Depreciation
and amortization
|
|
110,007
|
|
|
|
95,325
|
|
Deferred
acquisition costs capitalized
|
|
(29,338
|
)
|
|
|
(321,377
|
)
|
Amortization
of deferred acquisition costs
|
|
122,494
|
|
|
|
130,347
|
|
Net
realized (gain) on investments
|
|
(2,885
|
)
|
|
|
(78,248
|
)
|
(Gain)
from equity method investments
|
|
-
|
|
|
|
(39,061
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Amounts
recoverable from reinsurers
|
|
228,672
|
|
|
|
186,140
|
|
Interest
and dividends due and accrued
|
|
6,608
|
|
|
|
(23,165
|
)
|
Due
premiums
|
|
51,985
|
|
|
|
14,768
|
|
Policy
liabilities
|
|
74,984
|
|
|
|
539,873
|
|
Other
assets and liabilities
|
|
16,387
|
|
|
|
(80,569
|
)
|
Other
assets and liabilities held for sale
|
|
(9,435
|
)
|
|
|
21,950
|
|
Net
cash (used for) operating activities
|
|
(146,136
|
)
|
|
|
(298,195
|
)
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Securities available for
sale:
|
|
|
|
|
|
|
|
Purchases
|
|
(4,131,457
|
)
|
|
|
(4,915,445
|
)
|
Proceeds
from sale or maturity
|
|
3,819,463
|
|
|
|
4,425,048
|
|
Net change in equity
securities carried at cost:
|
|
|
|
|
|
|
|
Purchases
|
|
25,000
|
|
|
|
-
|
|
Proceeds
from sale or maturity
|
|
1,434
|
|
|
|
3,000
|
|
Proceeds from payments on
mortgage loans on real estate, held for investment
|
-
|
|
|
|
349,386
|
|
Acquisition of Northstar
Financial Corporation
|
|
2,427,394
|
|
|
|
-
|
|
Net change in policy
loans
|
|
9,458
|
|
|
|
(29,359
|
)
|
Purchases of property and
equipment
|
|
(27,101
|
)
|
|
|
(2,432
|
)
|
Net
cash provided by (used for) investing activities
|
|
2,124,191
|
|
|
|
(169,802
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Issuance of common
stock
|
|
-
|
|
|
|
135,000
|
|
Preferred stock
dividend
|
|
(21,560
|
)
|
|
|
-
|
|
Receipts on deposit-type
contracts
|
|
713,317
|
|
|
|
619,229
|
|
Withdrawals on
deposit-type contracts
|
|
(221,685
|
)
|
|
|
(148,148
|
)
|
Net
cash provided by financing activities
|
|
470,072
|
|
|
|
606,081
|
|
Net
increase in cash and cash equivalents
|
|
2,448,127
|
|
|
|
138,084
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Beginning
|
|
1,192,336
|
|
|
|
2,310,047
|
|
Ending
|
$
|
3,640,463
|
|
|
$
|
2,448,131
|
|
See Notes to Consolidated
Financial Statements.
5
Midwest Holding Inc. and
Subsidiaries
Supplemental Cash Flow
Information
(Unaudited)
|
March 31, 2016
|
|
December 31, 2015
|
Supplemental Disclosure of Non-Cash Information
|
|
|
|
|
|
Common stock issued
on Northstar Acquition
|
$
|
2,405,874
|
|
$
|
-
|
Common stock issued
on the First Wyoming acquisition
|
|
-
|
|
|
1,811,612
|
|
$
|
2,405,874
|
|
$
|
1,811,612
|
See Notes to Consolidated
Financial Statements.
6
Midwest Holding Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of
Operations and Summary of Significant Accounting Policies
Nature of
operations:
Midwest Holding Inc.
and its wholly owned subsidiaries (Midwest or the Company, which also may be
referred to as we, our or us) operate multiple insurance businesses
through one business segment. These insurance companies are: American Life
&
Security Corporation (American Life), Capital Reserve Life Insurance Company
(Capital Reserve), First Wyoming Life Insurance Company (First Wyoming Life)
and Great Plains Life Assurance Company (Great Plains). Through these
insurance companies we sell traditional, non-traditional and multi-benefit life
insurance policies.
Basis of presentation:
The accompanying unaudited
consolidated financial statements have been prepared in accordance with United
States of America generally accepted accounting principles (GAAP) for interim
financial information and with the instructions from the Securities and Exchange
Commission (SEC) Quarterly Report on Form 10-Q, including Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. Therefore, the
information contained in the Notes to Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2105
(2015 Form 10-K), should be read in connection with the reading of these
interim unaudited consolidated financial statements.
In the opinion of
management, these statements include all normal recurring adjustments necessary
for a fair presentation of the Companys results. Operating results for the
three month period ended March 31, 2016, are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2016. All
material inter-company accounts and transactions have been eliminated in
consolidation
.
Investments:
All fixed maturities and a
portion of the equity securities owned by the Company are considered
available-for-sale and are included in the consolidated financial statements at
their fair value as of the financial statement date. Bond premiums and discounts
are amortized using the scientific-yield method over the term of the bonds.
Realized gains and losses on securities sold during the year are determined
using the specific identification method. Unrealized holding gains and losses,
net of applicable income taxes, are included in comprehensive loss.
Declines in the fair value
of available for sale securities below their amortized cost are evaluated to
assess whether any other-than-temporary impairment loss should be recorded. In
determining if these losses are expected to be other-than-temporary, we consider
severity of impairment, duration of impairment, forecasted recovery period,
industry outlook, financial condition of the issuer, issuer credit ratings and
the intent and ability of us to hold the investment until the recovery of the
cost.
The recognition of
other-than-temporary impairment losses on debt securities is dependent on the
facts and circumstances related to the specific security. If the Company intends
to sell a security or it is more likely than not that the Company would be
required to sell a security prior to recovery of the amortized cost, the
difference between amortized cost and fair value is recognized in the statement
of comprehensive income as an other-than-temporary impairment. If the Company
does not expect to recover the amortized basis, does not plan to sell the
security and if it is not more likely than not that the Company would be
required to sell a security before the recovery of its amortized cost, the
recognition of the other-than-temporary impairment is bifurcated. The Company
recognizes the credit loss portion in the income statement and the noncredit
loss portion in accumulated other comprehensive loss. The credit component of
the other-than-temporary impairment is determined by comparing the net present
value of projected cash flows with the amortized cost basis of the debt
security. The net present value is calculated by discounting the Companys best
estimate of projected future cash flows at the effective interest rate implicit
in the fixed income security at the date of acquisition. Cash flow estimates are
driven by assumptions regarding probability of default, including changes in
credit ratings, and estimates regarding timing and amount of recoveries
associated with a default. No other-than-temporary impairments were recognized
during the three months ended March 31, 2016 or 2015.
7
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Investment income consists
of interest, dividends, gains and losses from equity method investments, and
real estate income, which are recognized on an accrual basis and amortization of
premiums and discounts.
Included within the
Companys equity securities are certain privately purchased common stocks. These
investments are recorded using the cost basis method of accounting. These
securities do not have a readily determinable fair value. The Company does not
control these entities economically, and therefore does not consolidate these
entities in its financial statements.
Policy
loans:
Policy loans are carried
at unpaid principal balances. Interest income on policy loans is recognized in
net investment income at the contract interest rate when earned. No valuation
allowance is established for these policy loans as the amount of the loan is
fully secured by the death benefit of the policy and cash surrender
value.
Real estate, held for
investment:
Real estate, held for
investment is comprised of ten condominiums in Hawaii. Real estate is carried at
depreciated cost. Depreciation on residential real estate is computed on a
straight-line basis over 50 years.
Cash and cash
equivalents:
The Company
considers all liquid investments with original maturities of three months or
less when purchased to be cash equivalents. At March 31, 2016 and December 31,
2015, the Company had no cash equivalents. The Company has cash on deposit with
financial institutions which at times may exceed the Federal Deposit Insurance
Corporation insurance limits. The Company has not suffered any losses in the
past and does not believe it is exposed to any significant credit risk in these
balances.
Deferred acquisition
costs:
Deferred acquisition costs
consist of incremental direct costs, net of amounts ceded to reinsurers, that
result directly from and are essential to the contract acquisition transaction
and would not have been incurred by the Company had the contract acquisition not
occurred. These costs are capitalized, to the extent recoverable, and amortized
over the life of the premiums produced. The Company evaluates the types of
acquisition costs it capitalizes. The Company capitalizes agent compensation and
benefits and other expenses that are directly related to the successful
acquisition of contracts. The Company also capitalizes expenses directly related
to activities performed by the Company, such as underwriting, policy issuance,
and processing fees incurred in connection with successful contract
acquisitions.
Recoverability of deferred
acquisition costs is evaluated periodically by comparing the current estimate of
the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the
difference is charged to expense. The Company performs a recoverability analysis
annually in the fourth quarter of its fiscal year unless events occur which
require an immediate review. The Company determined during its December 31, 2015
analysis that all deferred acquisition costs were recoverable.
The following table
provides information about deferred acquisition costs for the periods ended
March 31, 2016 and December 31, 2015, respectively.
|
Three Months
|
|
Year
Ended
|
|
Ended March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
2,765,063
|
|
|
$
|
2,646,970
|
|
Capitalization of commissions, sales and issue
expenses
|
|
29,337
|
|
|
|
552,466
|
|
Change in DAC due to unrealized investment
(gains)
losses
|
|
(16,989
|
)
|
|
|
35,301
|
|
Gross amortization
|
|
(122,494
|
)
|
|
|
(469,674
|
)
|
Balance at end of period
|
$
|
2,654,918
|
|
|
$
|
2,765,063
|
|
8
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
V
alue of business acquired:
Value of business acquired represents the
estimated value assigned to purchased companies or insurance in force of the
assumed policy obligations at the date of acquisition of a block of policies.
American Life purchased Capital Reserve during 2010, resulting in an initial
capitalized asset for value of business acquired of $116,326. Additionally, the
Company paid an upfront ceding commission of $375,000 to Security National Life
(SNL) in respect of the purchase of Capital Reserve. An initial asset was
established for the value of this business acquired totaling $348,010,
representing primarily the ceding commission. The agreement has an automatic
renewal provision unless the Company notifies SNL of its intention not to renew,
no less than 180 days prior to the expiration of the then current agreement.
Each automatic renewal period is for one year. This reinsurance remains in
place. The remaining capitalized and SNL asset balances at March 31, 2016, of
$43,622 and $130,504, respectively, will be included in the accounting for the
anticipated sale of Capital Reserve in mid 2016. Midwest acquired Great Plains
Financial in 2014 and established an asset for value of business acquired of
$1,288,207. Midwest acquired First Wyoming Capital during 2015 and established
an asset for value of business acquired of $506,600. These assets are being
amortized on a straight-line basis, which approximates the earnings pattern of
the related policies, over ten years. The Company recognized amortization
expense of
$56,478
and $43,814 for the three months ended March 31, 2016 and
2015, respectively relative to these transactions.
Additionally, American Life
purchased Old Reliance in August 2011, resulting in an initial capitalized asset
for value of business acquired of $824,485. This asset is being amortized over
the life of the related policies (refer to revenue recognition and related
expenses discussed later regarding amortization methods). Amortization
recognized during the three months ended March 31, 2016 and 2015 totaled $15,031
and $554, respectively.
Recoverability of value of
business acquired is evaluated periodically by comparing the current estimate of
the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the
difference is charged to expense. If this current estimate is less than the
existing balance, the difference is charged to expense. Management has
determined that no events occurred in the three months ended March 31, 2016 that
suggest a review should be undertaken.
Goodwill and Other
Intangible Assets:
Goodwill
represents the excess of the amounts paid to acquire subsidiaries and other
businesses over the fair value of their net assets at the date of acquisition.
Goodwill is tested for impairment at least annually in the fourth quarter or
more frequently if events or circumstances change that would indicate that a
triggering event has occurred. Management has determined that no events occurred
in the three months ended March 31, 2016 that suggest a review should be
undertaken.
The Company assesses the
recoverability of indefinite-lived intangible assets at least annually or
whenever events or circumstances suggest that the carrying value of an
identifiable indefinite-lived intangible asset may exceed the sum of the future
discounted cash flows expected to result from its use and eventual disposition.
If the asset is considered to be impaired, the amount of any impairment is
measured as the difference between the carrying value and the fair value of the
impaired asset. Management has determined that no events occurred in the three
months ended March 31, 2016 that suggest a review should be
undertaken.
Property and equipment:
Property and equipment are stated
at cost net of accumulated depreciation. Annual depreciation is primarily
computed using straight-line methods for financial reporting and straight-line
and accelerated methods for tax purposes. Furniture and equipment is depreciated
over 3 to 7 years and computer software and equipment is generally depreciated
over 3 years. Depreciation expense totaled $35,490 and $42,491 for the three
months ended March 31, 2016 and 2015, respectively. Accumulated depreciation
totaled $900,015 and $864,526 as of March 31, 2016 and December 31, 2015,
respectively.
Maintenance and repairs are
expensed as incurred. Replacements and improvements which extend the useful life
of the asset are capitalized. The net book value of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
earnings.
9
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognized if the carrying amount of an asset may not be recoverable and exceeds
estimated future undiscounted cash flows of the asset. A recognized impairment
loss reduces the carrying amount of the asset to its fair value. Management has
determined that no such events occurred in the three months ended March 31, 2016
that would indicate the carrying amounts may not be recoverable.
Reinsurance:
In the normal course of business,
the Company seeks to limit any single exposure to losses on large risks by
purchasing reinsurance. The amounts reported in the consolidated balance sheets
as reinsurance recoverable include amounts billed to reinsurers on losses paid
as well as estimates of amounts expected to be recovered from reinsurers on
insurance liabilities that have not yet been paid. Reinsurance recoverable on
unpaid losses are estimated based upon assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts.
Insurance liabilities are reported gross of reinsurance recoverable. Management
believes the recoverables are appropriately established. The Company generally
strives to diversify its credit risks related to reinsurance ceded. Reinsurance
premiums are generally reflected in income in a manner consistent with the
recognition of premiums on the reinsured contracts. Reinsurance does not
extinguish the Companys primary liability under the policies written.
Therefore, the Company regularly evaluates the financial condition of its
reinsurers including their activities with respect to claim settlement practices
and commutations, and establishes allowances for uncollectible reinsurance
recoverable as appropriate. There were no allowances as of March 31, 2016 or
December 31, 2015.
Benefit reserves:
The Company establishes
liabilities for amounts payable under insurance policies, including traditional
life insurance and annuities. Generally, amounts are payable over an extended
period of time. Liabilities for future policy benefits of traditional life
insurance have been computed by a net level premium method based upon estimates
at the time of issue for investment yields, mortality and withdrawals. These
estimates include provisions for experience less favorable than initially
expected. Mortality assumptions are based on industry experience expressed as a
percentage of standard mortality tables.
Policy claims:
Policy claims are based on
reported claims plus estimated incurred but not reported claims developed from
trends of historical data applied to current exposure.
Deposit-type contracts:
Deposit-type contracts consist of
amounts on deposit associated with deferred annuity riders, premium deposit
funds and supplemental contracts without life contingencies.
Income taxes:
The Company is subject to income
taxes in the U.S. federal and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of the related tax
laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state or local tax
examinations by tax authorities for the years before 2010. The provision for
income taxes is based on income as reported in the financial statements. The
income tax provision is calculated under the asset and liability method.
Deferred tax assets are recorded based on the differences between the financial
statement and tax basis of assets and liabilities at the enacted tax rates. The
principal assets and liabilities giving rise to such differences are
investments, insurance reserves, and deferred acquisition costs. A deferred tax
asset valuation allowance is established when there is uncertainty that such
assets would be realized. The Company has no uncertain tax positions that it
believes are more-likely-than not that the benefit will not to be realized. When
applicable, the Company recognizes interest accrued related to unrecognized tax
benefits and penalties in income tax expense. The Company had no accruals for
payments of interest and penalties at March 31, 2016 and December 31,
2015.
Revenue recognition and
related expenses:
Revenues on
traditional life insurance products consist of direct and assumed premiums
reported as earned when due.
Amounts received as payment
for annuities and/or non-traditional contracts such as interest sensitive whole
life contracts, single payment endowment contracts, single payment juvenile
contracts and other contracts without life contingencies are recognized as
deposits to policyholder account balances and included in future insurance
policy benefits. Revenues from these contracts are comprised of fees earned for
administrative and contract-holder services and cost of insurance, which are
recognized over the period of the contracts, and included in revenue. Deposits
are shown as a financing activity in the Consolidated Statements of Cash
Flows.
10
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Amounts received under our
multi-benefit policy form are allocated to the life insurance portion of the
multi-benefit life insurance arrangement and the annuity portion based upon the
signed policy.
Liabilities for future
policy benefits are provided and acquisition costs are amortized by associating
benefits and expenses with earned premiums to recognize related profits over the
life of the contracts. Acquisition costs are amortized over the premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts, which generally remain in force for the
lifetime of the insured.
Comprehensive loss:
Comprehensive loss is comprised
of net loss and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses from marketable securities
classified as available for sale, net of applicable taxes.
Common and preferred
stock and earnings (loss) per share:
The par value per common share is $0.001 with
100,000,000
shares
authorized
and 20,000,000 preferred shares authorized
. At March 31, 2016 and December 31, 2015, the Company had 22,558,811
and 18,006,301 common shares issued and outstanding, respectively.
At March 31, 2016 and
December 31, 2015, the Company had 1,179 warrants outstanding. The warrants are
exercisable through December 31, 2016 for 10 shares of voting common stock at an
exercise price of $6.50 per share.
The Class A preferred
shares are non-cumulative, non-voting and convertible by the holder to voting
common shares after May 2015, at a rate of 1.3 common shares for each preferred
share (subject to customary anti-dilution adjustments). There is no stated
dividend rate on the Class A shares, but the holders of Class A shares will
receive a dividend on each outstanding share of Class A preferred stock in an
amount equal to the amount of the dividend payable on each share of common
stock. The par value per preferred
Class A
share is $0.001 with 2,000,000 shares
authorized. At March 31, 2016 and December 31, 2015, the Company had 74,159
Class A preferred shares issued and outstanding.
The Class B preferred
shares are non-cumulative, non-voting and convertible by the holder to voting
common shares after May 1, 2017 at a rate of 2.0 common shares for each
preferred share. The Company may only affect a conversion through a deemed
liquidation or initial public offering. The par value per preferred
Class B
share is
$0.001 with 1,000,000 shares authorized. The stated dividend rate on the Class B
preferred shares is 7%, commencing after December 31, 2014. Dividends of $21,560
and $56,057 were paid as of March 31, 2016 and December 31, 2015 respectively.
At March 31, 2016, and December 31, 2015, the Company had 102,669 Class B
preferred shares issued and outstanding.
Earnings (loss) per share attributable to the
Companys common stockholders were computed based on the weighted average number
of shares outstanding during each period. The weighted average number of shares
outstanding during the three months ended March 31, 2016 and 2015 were
18,806,110 and
13,177,987
shares, respectively.
Risk and uncertainties:
Certain risks and uncertainties
are inherent in our day-to-day operations and in the process of preparing our
consolidated financial statements. The more significant of those risks and
uncertainties, as well as the Companys method for mitigating the risks, are
presented below and throughout the notes to the consolidated financial
statements.
●
|
Estimates
The preparation of the consolidated
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
Included among the material (or potentially material) reported amounts and
disclosures that require extensive use of estimates are: fair value of
certain invested assets, deferred acquisition costs, value of business
acquired, goodwill, and future contract
benefits.
|
●
|
Reinsurance
Reinsurance contracts do not relieve us
from our obligations to insureds. Failure of reinsurers to honor their
obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectible when
necessary. We evaluate the financial condition of our reinsurers to
minimize our exposure to losses from reinsurer insolvencies. Management
believes that any liabilities arising from this contingency would not be
material to the Companys financial position.
|
●
|
Investment Risk
The Company is exposed to risks that
issuers of securities owned by the Company will default or that interest
rates will change and cause a decrease in the value of our investments. As
interest rates decline, the velocity at which these securities pay down
the principal may increase. Management mitigates these risks by investing
in investment-grade securities and by matching maturities of our
investments with the anticipated payouts of our
liabilities.
|
11
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
●
|
Liquidity Risk
The Company has investments in development
stage companies, which are either seeking to raise capital to form life
insurance subsidiaries in their respective states of
incorporation. The
shares have very limited marketability for an
indefinite period of time. There is not currently, and may never be, a
public market in these securities, and there is no assurance that any of
these securities will ever become publicly traded or that an active
trading market will develop or be sustained. Consequently, we may not be
able to liquidate our investment in these
securities.
|
●
|
Interest Rate Risk
Interest rate risk arises from the price
sensitivity of investments to changes in interest rates. Interest and
dividend income represent the greatest portion of an investments return
for most fixed maturity securities in stable interest rate environments.
The changes in the fair value of such investments are inversely related to
changes in market interest rates. As interest rates fall, the interest and
dividend streams of existing fixed-rate investments become more valuable
and fair values rise. As interest rates rise, the opposite effect occurs.
The Company attempts to mitigate its exposure to adverse interest rate
movements through staggering the maturities of the fixed maturity
investments and through maintaining cash and other short term investments
to assure sufficient liquidity to meet its obligations and to address
reinvestment risk considerations. Due to the composition of our book of
insurance business, we believe it is unlikely that we would encounter
large surrender activity due to an interest rate increase that would force
the disposal of fixed maturities at a loss.
|
●
|
Credit Risk
The Company is exposed to credit risk
through counterparties and within its investment portfolio. Credit risk
relates to the uncertainty associated with an obligors ability to make
timely payments of principal and interest in accordance with the
contractual terms of an instrument or contract. The Company manages its
credit risk through established investment policies and guidelines which
address the quality of creditors and counterparties, concentration limits,
diversification practices and acceptable risk levels. These policies and
guidelines are regularly reviewed and approved by senior
management.
|
●
|
Regulatory Factors
The Company is highly regulated by the
jurisdictions in which our insurance subsidiaries are domiciled and
licensed to conduct business. Such regulations, among other things, limit
the amount of rate increases on policies and impose restrictions on the
amount and type of investments and the minimum surplus required to conduct
business in the state. The impact of the regulatory initiatives in
response to the recent financial crisis, including the Dodd-Frank Wall
Street Reform and Consumer Protection Act, could subject the Company to
substantial additional regulation.
|
●
|
Vulnerability Due to Certain
Concentrations
We monitor
economic and regulatory developments that have the potential to impact our
business. Federal legislation has allowed banks and other financial
organizations to have greater participation in insurance businesses. This
legislation may present an increased level of competition for sales of our
products.
|
New accounting standards:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with
Customers (Topic 606)
regarding accounting for revenue recognition that identifies the
accounting treatment for an entity's contracts with customers. Although
insurance contracts are excluded from this ASU, other customer contracts
of the Company would be covered.
In August of 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company is currently evaluating this guidance, but it does not believe that there will be a material impact to the consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases (Topic
842)
. The guidance in this ASU
supersedes the leasing guidance in Topic 840,
Leases
. Under the new guidance, lessees are required to recognize lease assets
and lease liabilities on the balance sheet for all leases with terms longer than
12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A
modified retrospective transition approach is required for lessees for capital
and operating leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, with certain
practical expedients available. We are currently evaluating the impact of our
pending adoption of the new standard on our consolidated financial statements.
12
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
In January 2016, the FASB issued ASU 2016-1,
Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
This guidance changes how entities account for equity investments that do not result in consideration and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values, however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current US GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.
Note 2. Acquisitions
On March 15, 2016, Midwest
acquired Northstar Financial Corporation (Northstar),
an inactive
Minnesota corporation,
pursuant to an Agreement and Plan of Merger dated December 18, 2015, under which
Midwest Acquisition Minnesota, Inc. (Acquisition) a wholly owned subsidiary of
Midwest merged (the Merger) with and into Northstar, with Northstar being the
survivor. Pursuant to the Merger, Midwest exchanged 1.27 shares of its voting
common stock for each share of Northstar common stock, or approximately
4,553,000 shares. In addition, as of March 15, 2016, all filings necessary to
consummate the Merger under applicable state corporate laws were completed and
the transactions contemplated by the Merger were completed. Approval of the
Merger was not required by the shareholders of Midwest. Subsequent to the
closing
, Northstar merged into Midwest.
We are treating the merger
of Northstar into Midwest as an asset acquisition. The assets
(primarily cash)
and liabilities of
Northstar were recorded in the Companys consolidated financial statements at
their estimated fair values as of the acquisition
date.
On October 27, 2015, Midwest acquired 100% of the remaining outstanding shares of First Wyoming, a
Wyoming corporation, that it did not previously own pursuant to an Agreement and Plan of Merger dated July 31, 2015. The accounting for this acquisition is still preliminary.
The fair value of the Midwest common stock issued as consideration, the fair value of our previously held equity interest in First Wyoming, and the assets acquired and liabilities
assumed from our acquisition of First Wyoming was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary
areas that are not yet finalized are related to the fair value of Midwest common stock issued, the fair value of our previously held equity interest in First Wyoming, and the fair
value of VOBA. Measurement period adjustments will be applied to the period that the adjustment is identified in our consolidated financial statements.
The
following table presents unaudited pro forma consolidated total income and net loss as if the acquisition had occurred as of January 1, 2015.
Quarter ended March 31, (unaudited)
|
2015
|
Premiums
|
$
|
993,567
|
|
Investment income
|
|
261,758
|
|
Miscellaneous income
|
|
28,878
|
|
Total
income
|
$
|
1,284,203
|
|
|
Net loss
|
$
|
(1,000,970
|
)
|
The unaudited pro forma total income and net loss above was adjusted to eliminate the equity method investment income of $39,061 for the quarter ended March 31, 2015 and eliminate TPA fees paid by First Wyoming to Midwest of $25,794 for the quarter ended March 31, 2015. The unaudited pro forma net loss presented above also includes adjustments for the amortization of VOBA for the period ended March 31, 2015 of $12,665.
Note 3. Assets and
Liabilities Held for Sale
In December, 2015, American
Life entered into a purchase agreement with an outside third party to sell its
interest in Capital Reserve Life Insurance Company (Capital Reserve), which is
dormant. The sale of Capital Reserve is subject to insurance regulatory
approval.
As of March 31, 2016 and
December 31, 2015, Midwest classified $16.7 million and $16.9 million,
respectively, of assets related to Capital Reserve as a business held-for-sale
within total assets and $15.3 million and $15.5 million, respectively, of
liabilities related to Capital Reserve as a business held-for-sale within total
liabilities on the Consolidated Balance Sheet. The held for sale assets are
primarily comprised of amounts recoverable from reinsurers, and the held for
sale liabilities are primarily comprised of benefit reserves and deposit-type
contracts.
13
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 4.
Investments
See Note 1 in our 2015 Form
10-K for information regarding our accounting policy relating to
available-for-sale (AFS) securities, which also includes additional
disclosures regarding our fair value measurements.
The cost or amortized cost
and estimated fair value of investments classified as available-for-sale as of
March 31, 2016 and December 31, 2015 are as follows:
|
|
Cost or
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
3,266,346
|
|
$
|
28,470
|
|
$
|
21,611
|
|
$
|
3,273,205
|
States
and political subdivisions -- general obligations
|
|
|
723,823
|
|
|
8,440
|
|
|
728
|
|
|
731,535
|
States
and political subdivisions -- special revenue
|
|
|
275,328
|
|
|
13,989
|
|
|
91
|
|
|
289,226
|
Corporate
|
|
|
20,278,782
|
|
|
55,758
|
|
|
656,989
|
|
|
19,677,551
|
Total fixed
maturities
|
|
$
|
24,544,279
|
|
$
|
106,657
|
|
$
|
679,419
|
|
$
|
23,971,517
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
3,256,704
|
|
$
|
6,610
|
|
$
|
69,815
|
|
$
|
3,193,499
|
States
and political subdivisions -- general obligations
|
|
|
1,001,993
|
|
|
-
|
|
|
6,942
|
|
|
995,051
|
States
and political subdivisions -- special revenue
|
|
|
275,333
|
|
|
-
|
|
|
1,997
|
|
|
273,336
|
Corporate
|
|
|
19,745,201
|
|
|
1,468
|
|
|
937,278
|
|
|
18,809,391
|
Total fixed
maturities
|
|
$
|
24,279,231
|
|
$
|
8,078
|
|
$
|
1,016,032
|
|
$
|
23,271,277
|
The Company has five
securities that individually exceed 10% of the total of the state and political
subdivisions categories as of March 31, 2016. The amortized cost, fair value,
credit ratings, and description of the security is as follows:
|
|
Amortized
|
|
Estimated
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Credit
Rating
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
States
and political subdivisions -- general obligations
|
|
|
|
|
|
|
|
|
Bellingham
Wash
|
|
$
|
111,746
|
|
$
|
115,088
|
|
AA+
|
Longview
Washington Refunding
|
|
|
165,531
|
|
|
167,831
|
|
NR
|
Memphis
Tenn
|
|
|
110,761
|
|
|
113,558
|
|
AA
|
Maricopa
County Arizona School District No. 31
|
|
|
335,787
|
|
|
335,059
|
|
AA
|
States
and political subdivisions -- special revenue
|
|
|
|
|
|
|
|
|
Philadelphia
PA Auth For Indl Dev City Svc Agreem
|
|
|
149,371
|
|
|
154,656
|
|
AA
|
Total
|
|
$
|
873,196
|
|
$
|
886,191
|
|
|
14
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
summarizes, for all securities in an unrealized loss position at March 31, 2016
and December 31, 2015, the estimated fair value, pre-tax gross unrealized loss
and number of securities by length of time that those securities have been
continuously in an unrealized loss position.
|
|
March 31, 2016
|
|
December 31,
2015
|
|
|
|
|
Gross
|
|
Number
|
|
|
|
Gross
|
|
Number
|
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
|
Fair Value
|
|
Loss
|
|
Securities
|
|
Fair Value
|
|
Loss
|
|
Securities
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
1,510,561
|
|
$
|
21,191
|
|
5
|
|
$
|
2,484,188
|
|
$
|
62,343
|
|
14
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general
obligations
|
|
|
335,059
|
|
|
728
|
|
1
|
|
|
660,569
|
|
|
5,004
|
|
5
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special revenue
|
|
|
-
|
|
|
-
|
|
-
|
|
|
248,146
|
|
|
1,618
|
|
2
|
Corporate
|
|
|
6,843,819
|
|
|
179,722
|
|
36
|
|
|
15,320,916
|
|
|
796,204
|
|
97
|
Greater than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
|
405,297
|
|
|
420
|
|
3
|
|
|
305,055
|
|
|
7,472
|
|
3
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general
obligations
|
|
|
-
|
|
|
-
|
|
-
|
|
|
334,481
|
|
|
1,938
|
|
1
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special
revenue
|
|
|
25,452
|
|
|
91
|
|
1
|
|
|
25,190
|
|
|
379
|
|
1
|
Corporate
|
|
|
9,726,890
|
|
|
477,267
|
|
46
|
|
|
3,166,108
|
|
|
141,074
|
|
22
|
Total fixed maturities
|
|
$
|
18,847,078
|
|
$
|
679,419
|
|
92
|
|
$
|
22,544,653
|
|
$
|
1,016,032
|
|
145
|
Based on our review of the
securities in an unrealized loss position at March 31, 2016 and December 31,
2015, no other-than-temporary impairments were deemed necessary. Management
believes that the Company will fully recover its cost basis in the securities
held at March 31, 2016, and management does not have the intent to sell nor is
it more likely than not that the Company will be required to sell such
securities until they recover or mature. The temporary impairments shown herein
are primarily the result of the current interest rate environment rather than
credit factors that would imply other-than-temporary impairment.
The amortized cost and
estimated fair value of fixed maturities at March 31, 2016, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
|
|
Amortized
|
|
Estimated
|
|
|
Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
7,994
|
|
$
|
8,110
|
Due after one year through five years
|
|
|
1,815,645
|
|
|
1,826,723
|
Due after five years through ten
years
|
|
|
14,370,383
|
|
|
13,970,572
|
Due after ten years
|
|
|
8,350,257
|
|
|
8,166,112
|
|
|
$
|
24,544,279
|
|
$
|
23,971,517
|
The Company is required to
hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At March 31, 2016 and December 31, 2015, these
required deposits had a total amortized cost of $6,481,586 and $6,186,865 and
fair values of $6,381,218 and $6,000,376, respectively.
15
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The components of net
investment income for the three months ended March 31, 2016 and 2015 are as
follows:
|
|
Three months ended
March 31,
|
|
|
2016
|
|
2015
|
Fixed maturities
|
|
$
|
209,656
|
|
|
$
|
158,963
|
|
Equity securities
|
|
|
5,250
|
|
|
|
24
|
|
Cash and short-term
investments
|
|
|
4
|
|
|
|
1
|
|
Gain for equity method investments
|
|
|
-
|
|
|
|
39,061
|
|
Other
|
|
|
11,655
|
|
|
|
14,617
|
|
|
|
|
226,565
|
|
|
|
212,666
|
|
Less investment expenses
|
|
|
(13,437
|
)
|
|
|
(17,042
|
)
|
|
|
$
|
213,128
|
|
|
$
|
195,624
|
|
Proceeds for the three
months ended March 31, 2016 and 2015 from sales of investments classified as
available-for-sale were
$3,619,463
and $4,425,048, respectively. Gross gains of
$23,756 and $103,788 and gross losses of $20,871 and $25,540 were realized on
those sales during the three months ended March 31, 2016 and 2015, respectively.
As of March 31, 2016, all mortgage loans were sold. The following table
summarizes the activity in the mortgage loans on real estate, held for
investment account for the periods ended March 31, 2016 and December 31, 2015.
|
|
Three months ended
|
|
Year ended
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Balance at beginning of
period
|
|
$
|
-
|
|
$
|
349,386
|
|
Proceeds from settlement on mortgage loans on real estate, held for
investment
|
|
|
-
|
|
|
(349,386
|
)
|
Balance at end of period
|
|
$
|
-
|
|
$
|
-
|
|
Note 5. Fair Values of
Financial Instruments
Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. We use valuation techniques
that are consistent with the market approach, the income approach and/or the
cost approach. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be
observable, meaning those that reflect the assumptions market participants would
use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the
reporting entitys own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, accounting standards
establish a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
●
|
Level 1: Quoted
prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
|
●
|
Level 2: Significant other observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data.
|
●
|
Level 3: Significant unobservable inputs
that reflect a reporting entitys own assumptions about the assumptions
that market participants would use in pricing an asset or
liability.
|
16
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
A review of fair value
hierarchy classifications is conducted on a quarterly basis. Changes in the
valuation inputs, or their ability to be observed, may result in a
reclassification for certain financial assets or liabilities. Reclassifications
impacting Level 3 of the fair value hierarchy are reported as transfers in/out
of the Level 3 category as of the beginning of the period in which the
reclassifications occur.
A description of the
valuation methodologies used for assets measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy,
is set forth below.
Fixed
maturities:
Fixed maturities are
recorded at fair value on a recurring basis utilizing a third-party pricing
source. The valuations are reviewed and validated quarterly through random
testing by comparisons to separate pricing models or other third party pricing
services. For the period ended March 31, 2016, there were no material changes to
the valuation methods or assumptions used to determine fair values, and no
broker or third party prices were changed from the values received. Securities
with prices based on validated quotes from pricing services are reflected within
Level 2.
Cost method investments:
The cost method investments are
comprised of New Mexico Capital Corporation. This security has no active trading
and the fair value for this security is not readily determinable. Therefore,
this investment has been omitted from the fair value disclosure tables.
Cash:
The carrying value of cash and cash equivalents
and short-term investments approximate the fair value because of the short
maturity of the instruments.
Policy loans:
Policy loans are stated at unpaid
principal balances. As these loans are fully collateralized by the cash
surrender value of the underlying insurance policies, the carrying value of the
policy loans approximates their fair value. Policy loans are categorized as
Level 3 in the fair value hierarchy.
Deposit-type contracts:
The fair value for direct and
assumed liabilities under deposit-type insurance contracts (accumulation
annuities) is calculated using a discounted cash flow approach. Cash flows are
projected using actuarial assumptions and discounted to the valuation date using
risk-free rates adjusted for credit risk and nonperformance risk of the
liabilities. Liabilities under deposit-type insurance contracts that are wholly
ceded by Capital Reserve to a non-affiliated reinsurer are carried at cash
surrender value which approximates fair value. These liabilities are categorized
as Level 3 in the fair value hierarchy.
Surplus notes:
The fair value for surplus notes
is calculated using a discounted cash flow approach. Cash flows are projected
utilizing scheduled repayments and discounted to the valuation date using market
rates currently available for debt with similar remaining maturities. These
notes are structured such that all interest is paid at maturity. In the
following fair value tables, the Company has included accrued interest expense,
which is recorded in the accounts payable and accrued expenses, of approximately
$237,502 and $229,405 in carrying value of the surplus notes as of March 31,
2016 and December 31, 2015, respectively. These liabilities are categorized as
Level 3 in the fair value hierarchy.
17
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
presents the Companys fair value hierarchy for those financial instruments
measured at fair value on a recurring basis as of March 31, 2016 and December
31, 2015.
There were no transfers of
financial instruments between any levels during the three months ended March 31,
2016 or during the year ended December 31, 2015.
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted
|
|
Other
|
|
Significant
|
|
|
|
|
|
In Active
|
|
Observable
|
|
Unobservable
|
|
Estimated
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
-
|
|
$
|
3,273,205
|
|
$
|
-
|
|
$
|
3,273,205
|
States
and political subdivisions general obligations
|
|
|
-
|
|
|
731,535
|
|
|
-
|
|
|
731,535
|
States
and political subdivisions special revenue
|
|
|
-
|
|
|
289,226
|
|
|
-
|
|
|
289,226
|
Corporate
|
|
|
-
|
|
|
19,677,551
|
|
|
-
|
|
|
19,677,551
|
Total fixed
maturities
|
|
$
|
-
|
|
$
|
23,971,517
|
|
$
|
-
|
|
$
|
23,971,517
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
-
|
|
$
|
3,193,499
|
|
$
|
-
|
|
$
|
3,193,499
|
States
and political subdivisions general obligations
|
|
|
-
|
|
|
995,051
|
|
|
-
|
|
|
995,051
|
States
and political subdivisions special revenue
|
|
|
-
|
|
|
273,336
|
|
|
-
|
|
|
273,336
|
Corporate
|
|
|
-
|
|
|
18,809,391
|
|
|
-
|
|
|
18,809,391
|
|
|
$
|
-
|
|
$
|
23,271,277
|
|
$
|
-
|
|
$
|
23,271,277
|
Accounting standards
require disclosure of the fair value of financial assets and financial
liabilities, including those financial assets and financial liabilities that are
not measured and reported at fair value on a recurring basis or
non-recurring basis. The methodologies for estimating
the fair value of financial assets and financial liabilities that are measured
at fair value on a recurring basis are discussed above. There were no financial
assets or financial liabilities measured at fair value on a non-recurring basis.
Equity securities carried at cost are privately purchased common stocks. These
common stocks are recorded using the cost basis of accounting. These securities
have no active trading and the fair value for these securities is not readily
determinable. The Company does not control these entities economically, and
therefore does not consolidate these entities.
The following disclosure
contains the carrying values, estimated fair values and their corresponding
placement in the fair value hierarchy, for financial assets and financial
liabilities as of March 31, 2016 and December 31, 2015, respectively:
|
|
March 31, 2016
|
|
|
|
|
|
Fair Value Measurements at
Date Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
Assets and
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
411,317
|
|
$
|
-
|
|
$
|
-
|
|
$
|
411,317
|
|
$
|
411,317
|
Cash and cash
equivalents
|
|
|
3,640,463
|
|
|
3,640,463
|
|
|
-
|
|
|
-
|
|
|
3,640,463
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deposit-type
contracts)
|
|
|
14,566,838
|
|
|
-
|
|
|
-
|
|
|
14,566,838
|
|
|
14,566,838
|
Surplus notes and accrued
interest payable
|
|
|
787,502
|
|
|
-
|
|
|
-
|
|
|
771,470
|
|
|
771,470
|
18
Midwest Holding Inc. and
Subsidiaries
Notes to Consolidated
Financial Statements Continued
|
|
|
December 31, 2015
|
|
|
|
|
|
Fair Value Measurements
at Date Using
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
Identical
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
Assets and
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
420,775
|
|
$
|
-
|
|
$
|
-
|
|
$
|
420,775
|
|
$
|
420,775
|
Cash and cash
equivalents
|
|
|
1,192,336
|
|
|
1,192,336
|
|
|
-
|
|
|
-
|
|
|
1,192,336
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deposit-type
contracts)
|
|
|
13,897,421
|
|
|
-
|
|
|
-
|
|
|
13,897,421
|
|
|
13,897,421
|
Surplus notes and accrued
interest payable
|
|
|
779,405
|
|
|
-
|
|
|
-
|
|
|
768,022
|
|
|
768,022
|
Note 6. Income Tax
Matters
Significant components of
the Companys deferred tax assets and liabilities as of March 31, 2016 and
December 31, 2015 are as follows:
|
|
March 31,
2016
|
|
December 31,
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss carry
forwards
|
|
$
|
9,325,442
|
|
|
$
|
8,962,587
|
|
Capitalized costs
|
|
|
648,016
|
|
|
|
667,264
|
|
Unrealized losses on
investments
|
|
|
198,057
|
|
|
|
356,495
|
|
Benefit reserves
|
|
|
1,033,863
|
|
|
|
1,071,997
|
|
Total deferred tax
assets
|
|
|
11,205,378
|
|
|
|
11,058,343
|
|
Less valuation
allowance
|
|
|
(9,412,556
|
)
|
|
|
(9,287,024
|
)
|
Total deferred tax assets,
net of valuation allowance
|
|
|
1,792,822
|
|
|
|
1,771,319
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Policy acquisition
costs
|
|
|
660,649
|
|
|
|
593,654
|
|
Due premiums
|
|
|
218,389
|
|
|
|
234,468
|
|
Value of business
acquired
|
|
|
668,984
|
|
|
|
693,297
|
|
Intangible assets
|
|
|
238,000
|
|
|
|
238,000
|
|
Property and
equipment
|
|
|
6,800
|
|
|
|
11,900
|
|
Total deferred tax
liabilities
|
|
|
1,792,822
|
|
|
|
1,771,319
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At March 31, 2016 and
December 31, 2015, the Company recorded a valuation allowance of
$9,412,556
and
$9,287,024, respectively, on the deferred tax assets to reduce the total to an
amount that management believes will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income.
Loss carryforwards for tax
purposes as of March 31, 2016, have expiration dates that range from 2024
through 2035.
19
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
There was no income tax
expense for the three months ended March 31, 2016 and 2015. This differed from
the amounts computed by applying the statutory U.S. federal income tax rate of
34% to pretax income, as a result of the following:
|
|
Three months ended
March 31,
|
|
|
2016
|
|
2015
|
Computed expected income tax
benefit
|
|
$
|
(261,433
|
)
|
|
$
|
(265,241
|
)
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
Meals, entertainment and
political contributions
|
|
|
9,157
|
|
|
|
3,672
|
|
Dividends received
deduction
|
|
|
-
|
|
|
|
(6
|
)
|
Other
|
|
|
(31,694
|
)
|
|
|
66,166
|
|
|
|
|
(22,537
|
)
|
|
|
69,832
|
|
Tax benefit before valuation
allowance
|
|
|
(283,970
|
)
|
|
|
(195,409
|
)
|
Change in valuation allowance
|
|
|
283,970
|
|
|
|
195,409
|
|
Net income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 7.
Reinsurance
A summary of significant
reinsurance amounts affecting the accompanying consolidated financial statements
as of March 31, 2016 and December 31, 2015 and for the three months ended March
31, 2016 and 2015 is as follows:
|
|
March 31,
2016
|
|
December 31,
2015
|
Balance sheets:
|
|
|
|
|
|
|
Benefit and claim reserves
assumed
|
|
$
|
2,774,171
|
|
$
|
2,763,779
|
Benefit and claim reserves
ceded
|
|
|
11,983,984
|
|
|
12,212,656
|
|
|
Three months ended
March 31,
|
|
|
2016
|
|
2015
|
Statements of comprehensive
income:
|
|
|
|
|
|
|
Premiums assumed
|
|
$
|
6,765
|
|
$
|
7,251
|
Premiums ceded
|
|
|
66,157
|
|
|
81,621
|
Benefits assumed
|
|
|
5,023
|
|
|
4,589
|
Benefits ceded
|
|
|
355,126
|
|
|
258,956
|
Commissions
assumed
|
|
|
8
|
|
|
4
|
Commissions ceded
|
|
|
639
|
|
|
953
|
The following table
provides a summary of the significant reinsurance balances recoverable on paid
and unpaid policy claims by reinsurer along with the A.M. Best credit rating as
of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Recoverable on
|
|
|
|
|
Total Amount
|
|
|
|
|
Recoverable
|
|
Recoverable
|
|
Benefit
|
|
Ceded
|
|
Recoverable
|
|
|
AM Best
|
|
on Paid
|
|
on Unpaid
|
|
Reserves/Deposit-
|
|
Due
|
|
from
|
Reinsurer
|
|
Rating
|
|
Losses
|
|
Losses
|
|
type
Contracts
|
|
Premiums
|
|
Reinsurer
|
Optimum Re Insurance Company
|
|
A-
|
|
$
|
-
|
|
$
|
25,699
|
|
$
|
184,474
|
|
$
|
-
|
|
$
|
210,173
|
Sagicor Life Insurance Company
|
|
A-
|
|
|
-
|
|
|
369,173
|
|
|
11,636,482
|
|
|
231,844
|
|
|
11,773,811
|
|
|
|
|
$
|
-
|
|
$
|
394,872
|
|
$
|
11,820,956
|
|
$
|
231,844
|
|
$
|
11,983,984
|
20
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
During 1999, Old Reliance
entered into a 75% coinsurance agreement with Sagicor Life (Sagicor) whereby 75%
of the business written by Old Reliance is ceded to Sagicor. During 2000, Old
Reliance coinsured the remaining 25% with Sagicor. At March 31, 2016 and
December 31, 2015 total benefit reserves, policy claims, deposit-type contracts,
and due premiums ceded by Old Reliance to Sagicor were $11,773,811 and
$11,873,254, respectively. Old Reliance remains contingently liable on this
ceded reinsurance should Sagicor be unable to meet their obligations.
The use of reinsurance does
not relieve the Company of its primary liability to pay the full amount of the
insurance benefit in the event of the failure of a reinsurer to honor its
contractual obligation. No reinsurer of business ceded by the Company has failed
to pay policy claims (individually or in the aggregate) with respect to our
ceded business.
The Company monitors
several factors that it considers relevant to satisfy itself as to the ongoing
ability of a reinsurer to meet all obligations of the reinsurance agreements.
These factors include the credit rating of the reinsurer, the financial strength
of the reinsurer, significant changes or events of the reinsurer, and any other
relevant factors. If the Company believes that any reinsurer would not be able
to satisfy its obligations with the Company, a separate contingency reserve may
be established. At March 31, 2016 and December 31, 2015, no contingency reserve
was established.
Note 8. Deposit-Type
Contracts
The Companys deposit-type
contracts represent the contract value that has accrued to the benefit of the
policyholder as of the balance sheet date. Liabilities for these deposit-type
contracts are included without reduction for potential surrender charges. This
liability is equal to the accumulated account deposits, plus interest credited,
and less policyholder withdrawals. The following table provides information
about deposit-type contracts for quarter ended March 31, 2016 and year ended
December 31, 2015:
|
|
Quarter Ended
|
|
Year Ended
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Beginning balance
|
|
$
|
13,897,421
|
|
|
$
|
10,722,227
|
|
First Wyoming Life beginning balance
|
|
|
-
|
|
|
|
799,990
|
|
Change in deposit-type
contracts assumed from SNL
|
|
|
-
|
|
|
|
(1,200
|
)
|
Deposits received
|
|
|
713,317
|
|
|
|
2,387,104
|
|
Investment
earnings
|
|
|
170,594
|
|
|
|
533,646
|
|
Withdrawals
|
|
|
(211,185
|
)
|
|
|
(533,762
|
)
|
Contract Charges
|
|
|
(3,309
|
)
|
|
|
(10,584
|
)
|
Ending balance
|
|
$
|
14,566,838
|
|
|
$
|
13,897,421
|
|
Under the terms of American
Lifes coinsurance agreement with SNL, American Life assumes certain
deposit-type contract obligations, as shown in the table above. The remaining
deposits, withdrawals and interest credited represent those for American Lifes
direct business.
Note 9. Commitments and
Contingencies
Legal Proceedings:
We are involved in litigation
incidental to our operations from time to time. We are not presently a party to
any legal proceedings other than litigation arising in the ordinary course of
our business, and we are not aware of any claims that could materially affect
our financial position or results of operations.
Regulatory
Matters
: State and federal
regulatory bodies regularly make inquiries and conduct examinations or
investigations concerning the Companys compliance with laws in relation to, but
not limited to, insurance and securities. The issues involved in information
requests and regulatory matters vary widely. The Company cooperates in these
inquiries.
21
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Office Lease:
The Company leases office space
in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires
on January 31, 2024. The Company also subleases office space for a satellite
office in Kearney, Nebraska, which was executed on June 11, 2012 which was
closed and cancelled January 2015. Great Plains entered into a lease on October
4, 2013 for office space in Mitchell, South Dakota, which expires on November
30, 2016. Rent expense for the three months ended March 31, 2016 and 2015 was
$73,210 and
$56,375
respectively. Future minimum payments rental are as
follows:
2016
|
|
|
165,495
|
2017
|
|
|
158,149
|
2018
|
|
|
136,557
|
2019
|
|
|
141,412
|
2020
|
|
|
146,477
|
Later years
|
|
|
483,333
|
Total
|
|
$
|
1,231,423
|
Note 10. Statutory Net
Income and Surplus
American Life is required
to prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the Arizona Department of
Insurance. Likewise, Capital Reserve, Great Plains Life, and First Wyoming Life
are required to prepare statutory financial statements in accordance with
statutory accounting practices prescribed or permitted by the Missouri, South
Dakota, and Wyoming Departments of Insurance, respectively Statutory practices
primarily differ from GAAP by charging policy acquisition costs to expense as
incurred, establishing future policy benefit liabilities using different
actuarial assumptions as well as valuing investments and certain assets and
accounting for deferred taxes on a different basis. The following table
summarizes the statutory net loss and statutory capital and surplus of American
Life, Capital Reserve, and Great Plains Life, and First Wyoming Life as of March
31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and
2015.
|
|
Statutory Capital and
Surplus as of
|
|
|
March 31,
2016
|
|
December 31,
2015
|
American Life
|
|
$
|
2,287,251
|
|
|
$
|
2,526,392
|
|
Capital Reserve
|
|
$
|
1,425,860
|
|
|
$
|
1,464,044
|
|
Great Plains Life
|
|
$
|
1,663,703
|
|
|
$
|
1,663,368
|
|
First Wyoming Life
|
|
$
|
2,624,061
|
|
|
$
|
2,715,494
|
|
|
|
|
Statutory Net Income
(Loss) for the three months ended March 31,
|
|
|
2016
|
|
2015
|
American Life
|
|
$
|
(196,533
|
)
|
|
$
|
(331,604
|
)
|
Capital Reserve
|
|
$
|
(38,731
|
)
|
|
$
|
(38,078
|
)
|
Great Plains Life
|
|
$
|
(1,832
|
)
|
|
$
|
(136,886
|
)
|
First Wyoming Life
|
|
$
|
(95,159
|
)
|
|
$
|
(59,774
|
)
|
22
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 11. Surplus
Notes
The following provides a
summary of the Companys surplus notes along with issue dates, maturity dates,
face amounts, and interest rates as of March 31, 2016:
Creditor
|
|
Issue
Date
|
|
Maturity
Date
|
|
Face
Amount
|
|
Interest
Rate
|
David G. Elmore
|
|
September 1, 2006
|
|
September 1, 2016
|
|
$
|
250,000
|
|
7%
|
David G. Elmore
|
|
August 4, 2011
|
|
August 1, 2016
|
|
|
300,000
|
|
5%
|
Any payments and/or
repayments must be approved by the Arizona Department of Insurance. As of March
31, 2016, the Company has accrued $237,502 of interest expense under accounts
payable and accrued expenses on the consolidated balance sheet. No payments were
made in the three months ending March 31, 2016, or during the year ended
December 31, 2015.
Note 12. Related Party
Transactions
The Company commenced its
third party administrative (TPA) services in 2012 as an additional revenue
source. These agreements, for various levels of administrative services on
behalf of each customer, generate fee income for the Company. Services provided
to each customer vary based on their needs and can include some or all aspects
of back-office accounting and policy administration. We have been able to
perform our TPA services using our existing in-house resources. Fees earned
during the three months ended March 31, 2016 and 2015 were $14,500 and $54,986,
respectively.
Note 13. Subsequent
Events
All of the effects of
subsequent events that provide additional evidence about conditions that existed
at March 31, 2016, including the estimates inherent in the process of preparing
consolidated financial statements, are recognized in the consolidated financial
statements. The Company does not recognize subsequent events that provide
evidence about conditions that did not exist at the date of the consolidated
financial statements but arose after, but before the consolidated financial
statements were available to be issued. In some cases, non-recognized subsequent
events are disclosed to keep the consolidated financial statements from being
misleading.
The Company has evaluated
subsequent events through the date that the consolidated financial statements
were issued and found no events to report.
Consolidated Results of
Operations
Insurance revenues are
primarily generated from premium revenues and investment income. Insurance
revenues for the three months ended March 31, 2016 and 2015 are summarized in
the table below.
|
|
Three months ended March
31,
|
|
|
2016
|
|
2015
|
Premiums
|
|
$
|
927,433
|
|
$
|
878,551
|
Investment income, net of
expenses
|
|
|
213,128
|
|
|
195,624
|
Net
realized gain (loss) on investments
|
|
|
2,885
|
|
|
78,248
|
Miscellaneous income
|
|
|
50,307
|
|
|
54,852
|
|
|
$
|
1,193,753
|
|
$
|
1,207,275
|
Premium
revenue:
Premium revenue for the
three months ended March 31, 2016 increased compared to the same period in 2015
due primarily to the consolidation of First Wyoming Life as a result of our
purchase of First Wyoming in October 2015. We recognize 100% of the first year
payments received for our Accumulator life insurance products as premiums earned
when due. In subsequent years, 50% of the payments received on the Accumulator
life insurance products are applied toward the traditional life insurance
premium. The other 50% of the payments received are applied towards the annuity
premium which is recognized as deposits to policyholder account balances and
included in future insurance policy benefits rather than revenues. Premiums on
our other insurance products are recognized as earned when due. Production of
new life premium decreased significantly on a quarter to quarter comparison
because actuarial development and regulatory approval of American Lifes new
life insurance products have taken a significant amount of time. Due to our low
levels of capital and surplus we have reduced our selling
efforts.
We will
continue to have limited production of new business in order to preserve surplus
of American Life, First Wyoming Life and Great Plains Life.
Investment income, net
of expenses
: The components of
net investment income for the three months ended March 31, 2016 and 2015 are as
follows:
|
|
Three months ended March
31,
|
|
|
2016
|
|
2015
|
Fixed maturities
|
|
$
|
209,656
|
|
|
$
|
158,963
|
|
Equity securities
|
|
|
5,250
|
|
|
|
24
|
|
Cash
and short-term investments
|
|
|
4
|
|
|
|
1
|
|
Gain from equity method
investments
|
|
|
-
|
|
|
|
39,061
|
|
Other
|
|
|
11,655
|
|
|
|
14,617
|
|
|
|
|
221,315
|
|
|
|
212,666
|
|
Less
investment expenses
|
|
$
|
(13,437
|
)
|
|
|
(17,042
|
)
|
|
|
$
|
213,128
|
|
|
$
|
195,624
|
|
The increase in investment
income was due primarily to the increased size of our bond portfolio and the
consolidation of First Wyoming Life investment income following the acquisition
of First Wyoming. This increase was offset by us no longer having equity method
investments as a result of the mergers of First Wyoming Life and Northstar.
Policy loan interest and miscellaneous investment income is included in the
Other line item above. The decrease in Other was primarily due to decreased
policy loan amounts.
Net realized gains on
investments:
The net realized
gain decreased
primarily
due to the
sale of one bond in 2015 that generated a gain of $77,000.
Miscellaneous
income:
Miscellaneous income
decreased primarily due to decreased third party administration fee income due
to the acquisition of First Wyoming Life in 2015.
We expect this source of revenue to remain small as these services are not performed for any companies in which we do not have an equity ownership. At March 31, 2016, we had two customers for whom we performed these services. Fees earned during the three months ended March 31, 2016 and 2015 were $14,500 and $54,986, respectively.
25
Expenses for the three
months ended March 31, 2016 and 2015 are summarized in the table
below.
|
|
Three months ended
March 31,
|
|
|
2016
|
|
2015
|
Death and other benefits
|
|
$
|
229,022
|
|
$
|
198,867
|
Interest credited
|
|
|
170,594
|
|
|
129,352
|
Increase in benefit reserves
|
|
|
167,025
|
|
|
250,624
|
Amortization of deferred acquisition
costs
|
|
|
122,494
|
|
|
130,347
|
Salaries and benefits
|
|
|
520,230
|
|
|
512,551
|
Other operating expenses
|
|
|
753,308
|
|
|
765,654
|
|
|
$
|
1,962,673
|
|
$
|
1,987,395
|
Death and other
benefits
: Death benefits
increased slightly. Death benefits are expected to continue on the Old Reliance
block of business as a result of the age of the block and the type of policy
sold prior to the acquisition by Midwest. The Company maintains policy reserves
to offset the effect of such claims. No claims have been incurrred on the new
business written as of March 31, 2016.
Interest credited:
The increase was due to the
increase in the deposit-type liabilities owed to the policyholders due to the
First Wyoming Life merger.
Increase in benefit
reserves
: The decrease in benefit
reserves reflects the maturity of our in-force block of business and increase in
surrenders as well as the effect of the structure of the initial life insurance
policy sold by American Life, Great Plains Life and First Wyoming Life.
Amortization of deferred
acquisition costs
: The decline is
a result of fewer policies written in 2016.
Salaries and
benefits
: The slight increase is
related to increased salaries due to the acquisition of First Wyoming Life
offset by a reduction in staff.
Other operating
expenses
: Other operating
expenses decreased slightly due to a decrease in exam fees due to a refund from
South Dakota for 2015 fees recognized in 2016 offset by an increase in operating
expenses due to the acquisition of First Wyoming Life.
Net Loss:
Net loss was ($768,920) for the
three months ended March 31, 2016, compared to a net loss of ($780,120) for the
same period in 2015. The decrease in net loss was primarily due to an increase
in premium revenue, higher investment income, a decrease in reserves, a decrease
in amortization of deferred acquisition costs and a reduction in other operating
expenses; offset by an increase in death benefits and salaries and
benefits
and a decrease in realized gains on investments
.
26
Investments
The Companys overall
investment philosophy is reflected in the allocation of its investments. The
Company emphasizes investment grade debt securities, with smaller holdings in
equity securities, real
estate held
for investment,
and
policy
loans. The
following table shows the carrying value of our investments by
investment category and cash and cash equivalents, and the percentage of each to
total invested assets as of March 31, 2016 and December 31, 2015.
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
Percent
|
|
Carrying
|
|
Percent
|
|
|
Value
|
|
of Total
|
|
Value
|
|
of Total
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
3,273,205
|
|
11.4
|
%
|
|
$
|
3,193,499
|
|
12.5
|
%
|
States
and political subdivisions - general
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
|
|
|
731,535
|
|
2.6
|
|
|
|
822,094
|
|
3.2
|
|
States
and political subdivisions - special revenue
|
|
|
289,226
|
|
1.0
|
|
|
|
334,481
|
|
1.3
|
|
Corporate
|
|
|
19,677,551
|
|
68.6
|
|
|
|
18,921,203
|
|
74.0
|
|
Total fixed maturity securities
|
|
|
23,971,517
|
|
83.6
|
|
|
|
23,271,277
|
|
91.0
|
|
Cash and cash
equivalents
|
|
|
3,640,463
|
|
12.7
|
|
|
|
1,192,336
|
|
4.8
|
|
Equity securities, at cost
|
|
|
121,316
|
|
0.4
|
|
|
|
140,250
|
|
0.5
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate, held for investment
|
|
|
526,759
|
|
1.8
|
|
|
|
529,769
|
|
2.1
|
|
Policy
loans
|
|
|
411,317
|
|
1.5
|
|
|
|
420,775
|
|
1.6
|
|
Total
|
|
$
|
28,671,372
|
|
100.00
|
%
|
|
$
|
25,554,407
|
|
100
|
%
|
Increases in fixed maturity
securities primarily resulted from
the acquisition of First Wyoming Life.
The following table shows
the distribution of the credit ratings of our portfolio of fixed maturity
securities by carrying value as of March 31, 2016 and December 31,
2015.
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
Percent
|
|
Value
|
|
Percent
|
AAA
and U.S. Government
|
|
$
|
3,490,731
|
|
14.6
|
%
|
|
$
|
3,406,770
|
|
14.6
|
%
|
AA
|
|
|
1,689,266
|
|
7.0
|
|
|
|
1,711,366
|
|
7.4
|
|
A
|
|
|
6,022,146
|
|
25.1
|
|
|
|
6,341,991
|
|
27.2
|
|
BBB
|
|
|
12,601,543
|
|
52.6
|
|
|
|
11,534,042
|
|
49.6
|
|
Total
investment grade
|
|
|
23,803,686
|
|
99.3
|
|
|
|
22,994,169
|
|
98.8
|
|
BB
and other
|
|
|
167,831
|
|
0.7
|
|
|
|
277,108
|
|
1.2
|
|
Total
|
|
$
|
23,971,517
|
|
100.0
|
%
|
|
$
|
23,271,277
|
|
100.0
|
%
|
Reflecting the quality of
securities maintained by the Company, 99.3% and 98.8% of all fixed maturity
securities were investment grade as of March 31, 2016 and December 31, 2015,
respectively. Due to the low interest rate environment, the Company has invested
in bonds with A or BBB ratings.
Market Risks of
Financial Instruments
The Company holds a
portfolio of investments that primarily includes cash, bonds, stocks, and real
estate, held for investment. Each of these investments is subject to market
risks that can affect their return and their fair value. A majority of the
investments are fixed maturity securities including debt issues of corporations,
U.S. Treasury securities, or securities issued by government agencies. The
primary market risks affecting the investment portfolio are interest rate risk,
credit risk, and equity risk.
27
Interest Rate
Risk
Interest rate risk arises
from the price sensitivity of investments to changes in interest rates. Interest
and dividend income represent the greatest portion of an investments return for
most fixed maturity securities in stable interest rate environments. The changes
in the fair value of such investments are inversely related to changes in market
interest rates. As interest rates fall, the interest and dividend streams of
existing fixed-rate investments become more valuable and fair values rise. As
interest rates rise, the opposite effect occurs.
The Company seeks to
mitigate its exposure to adverse interest rate movements through staggering the
maturities of the fixed maturity investments and through maintaining cash and
other short term investments to assure sufficient liquidity to meet its
obligations and to address reinvestment risk considerations. Due to the
composition of our book of insurance business, we believe it is unlikely that we
would encounter large surrender activity due to an interest rate increase that
would force the disposal of fixed maturities at a loss.
Credit
Risk
The Company is exposed to
credit risk through counterparties and within the investment portfolio. Credit
risk relates to the uncertainty associated with an obligors ability to make
timely payments of principal and interest in accordance with the contractual
terms of an instrument or contract. The Company manages its credit risk through
established investment credit policies and guidelines which address the quality
of creditors and counterparties, concentration limits, diversification practices
and acceptable risk levels. These policies and guidelines are regularly reviewed
and approved by senior management.
Liquidity and Capital
Resources
Since inception in 2003,
the Companys operations have been financed primarily through the sale of voting
common stock and non-voting preferred stock. Its operations have not been
profitable and have generated significant operating losses.
Premium income, deposits to
policyholder account balances, and investment income are the primary sources of
funds while withdrawals of policyholder account balances, investment purchases,
policy benefits in the form of claims, and operating expenses are the primary
uses of funds. To ensure we will be able to pay future commitments, the funds
received as premium payments and deposits are invested in primarily fixed income
securities. Funds are invested with the intent that the income from investments,
plus proceeds from maturities, will meet our ongoing cash flow needs. The
approach of matching asset and liability durations and yields requires an
appropriate mix of investments. The Companys investments consist primarily of
marketable debt securities that could be readily converted to cash for liquidity
needs. Cash flow projections and cash flow tests under various market interest
scenarios are also performed annually to assist in evaluating liquidity needs
and adequacy. We currently anticipate that available liquidity sources and
future cash flows will be adequate to meet our needs for funds.
Net cash used by operating
activities was
$146,136
for the three months ended March 31, 2016. The primary
sources of cash from operating activities were from premium receipts, collection
amounts due from
reinsurers,
amortization of deferred acquisition costs and
policy liabilities. The primary uses of cash from operating activities were from
payments of commissions to agents. Net cash
provided by
investing activities was
$2,124,191
. The primary source of cash was from the acquisition of Northstar
Financial Corporation and sales of available for sale securities. Offsetting
this source of cash was the Companys investments in available for sale
securities and the purchase of property and equipment. Net cash provided by
financing activities was $470,072. The primary source of cash was receipts on
deposit type contracts. These were offset by withdrawals on deposit type
contracts and a preferred stock dividend.
At March 31, 2016, the
Company had cash and cash equivalents totaling $3,640,463. The Company believes
that its existing cash and cash equivalents will be sufficient to fund the
anticipated operating expenses and capital expenditures for at least twelve
months. The Company has based this estimate upon assumptions that may prove to
be wrong and the Company could use its capital resources sooner than they
currently expect. Our insurance subsidiaries will require additional capital as
they continue to incur operating losses in the early stage of their insurance
operation.
28
Impact of
Inflation
Insurance premiums are
established before the amount of losses and loss adjustment expenses, or the
extent to which inflation may affect such losses and expenses, are known. The
Company attempts, in establishing premiums, to anticipate the potential impact
of inflation. If, for competitive reasons, premiums cannot be increased to
anticipate inflation, this cost would be absorbed by us. Inflation also affects
the rate of investment return on the investment portfolio with a corresponding
effect on investment income.
Off-Balance Sheet
Arrangements
We have no off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Contractual
Obligations
As a smaller reporting
company the Company is not required to provide the table of contractual
obligations required pursuant to this Item.