ITEM 1. FINANCIAL
STATEMENTS.
Midwest Holding Inc. and
Subsidiaries
Consolidated Balance Sheets
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments, available for
sale, at fair value
|
|
|
|
|
|
|
|
|
Fixed
maturities (amortized cost: $27,443,918 and $24,279,231,
respectively)
|
|
$
|
27,375,374
|
|
|
$
|
23,271,277
|
|
Equity securities, at
cost
|
|
|
53,816
|
|
|
|
140,250
|
|
Real estate, held for
investment
|
|
|
520,739
|
|
|
|
529,769
|
|
Policy loans
|
|
|
400,393
|
|
|
|
420,775
|
|
Total
investments
|
|
|
28,350,322
|
|
|
|
24,362,071
|
|
Cash and cash
equivalents
|
|
|
2,390,031
|
|
|
|
1,192,336
|
|
Amounts recoverable from
reinsurers
|
|
|
11,809,580
|
|
|
|
12,212,656
|
|
Interest and dividends due
and accrued
|
|
|
308,431
|
|
|
|
264,791
|
|
Due premiums
|
|
|
680,938
|
|
|
|
640,073
|
|
Deferred acquisition costs,
net
|
|
|
2,571,878
|
|
|
|
2,765,063
|
|
Value of business acquired,
net
|
|
|
1,791,534
|
|
|
|
2,039,110
|
|
Intangible assets
|
|
|
700,000
|
|
|
|
700,000
|
|
Goodwill
|
|
|
1,129,824
|
|
|
|
1,129,824
|
|
Property and equipment,
net
|
|
|
171,396
|
|
|
|
217,565
|
|
Assets associated with
business held for sale (see Note 3)
|
|
|
-
|
|
|
|
16,870,241
|
|
Other assets
|
|
|
448,887
|
|
|
|
532,674
|
|
Total
assets
|
|
$
|
50,352,821
|
|
|
$
|
62,926,404
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Benefit reserves
|
|
$
|
24,474,953
|
|
|
$
|
24,155,140
|
|
Policy claims
|
|
|
553,415
|
|
|
|
839,859
|
|
Deposit-type
contracts
|
|
|
15,361,883
|
|
|
|
13,897,421
|
|
Advance premiums
|
|
|
53,501
|
|
|
|
57,699
|
|
Total policy
liabilities
|
|
|
40,443,752
|
|
|
|
38,950,119
|
|
Accounts payable and
accrued expenses
|
|
|
1,564,723
|
|
|
|
1,013,313
|
|
Liabilities associated with
business held for sale (see Note 3)
|
|
|
-
|
|
|
|
15,508,998
|
|
Surplus notes
|
|
|
550,000
|
|
|
|
550,000
|
|
Total
liabilities
|
|
|
42,558,475
|
|
|
|
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 September 30, 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 September 30, 2016 and December 31, 2015.
|
|
|
103
|
|
|
|
103
|
|
Common stock, $0.001 par
value. Authorized 120,000,000 shares;
|
|
|
|
|
|
|
|
|
issued
and outstanding 22,558,956 as of September 30, 2016
|
|
|
|
|
|
|
|
|
and
18,006,301 shares as of December 31, 2015.
|
|
|
22,559
|
|
|
|
18,006
|
|
Additional paid-in
capital
|
|
|
33,034,824
|
|
|
|
31,584,529
|
|
Accumulated
deficit
|
|
|
(25,196,383
|
)
|
|
|
(23,685,525
|
)
|
Accumulated other
comprehensive loss
|
|
|
(66,831
|
)
|
|
|
(1,013,213
|
)
|
Total
Midwest Holding Inc.'s stockholders' equity
|
|
|
7,794,346
|
|
|
|
6,903,974
|
|
Total
liabilities and stockholders' equity
|
|
$
|
50,352,821
|
|
|
$
|
62,926,404
|
|
See Notes to Consolidated
Financial Statements.
3
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Comprehensive
Income
(Unaudited)
|
|
Three months ended September 30,
|
|
Nine months ended September
30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
738,522
|
|
|
$
|
819,017
|
|
|
$
|
2,597,997
|
|
|
$
|
2,691,122
|
|
Investment
income, net of expenses
|
|
|
219,778
|
|
|
|
157,686
|
|
|
|
634,684
|
|
|
|
470,081
|
|
Loss on
equity method investment
|
|
|
(420,720
|
)
|
|
|
(79,000
|
)
|
|
|
(420,720
|
)
|
|
|
(95,650
|
)
|
Net
realized gain (loss) on investments
|
|
|
121,578
|
|
|
|
(16,088
|
)
|
|
|
67,834
|
|
|
|
(12,383
|
)
|
Miscellaneous
income
|
|
|
21,558
|
|
|
|
53,963
|
|
|
|
85,115
|
|
|
|
153,207
|
|
|
|
|
680,716
|
|
|
|
935,578
|
|
|
|
2,964,910
|
|
|
|
3,206,377
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death
and other benefits
|
|
|
213,351
|
|
|
|
194,398
|
|
|
|
621,469
|
|
|
|
655,697
|
|
Interest
credited
|
|
|
195,566
|
|
|
|
105,657
|
|
|
|
548,555
|
|
|
|
361,255
|
|
Increase
in benefit reserves
|
|
|
112,948
|
|
|
|
74,051
|
|
|
|
504,617
|
|
|
|
572,602
|
|
Amortization
of deferred acquisition costs
|
|
|
122,788
|
|
|
|
119,282
|
|
|
|
270,515
|
|
|
|
373,132
|
|
Salaries
and benefits
|
|
|
589,254
|
|
|
|
438,128
|
|
|
|
1,702,577
|
|
|
|
1,429,963
|
|
Other
operating expenses
|
|
|
595,198
|
|
|
|
473,919
|
|
|
|
2,154,561
|
|
|
|
1,886,790
|
|
|
|
|
1,829,105
|
|
|
|
1,405,435
|
|
|
|
5,802,294
|
|
|
|
5,279,439
|
|
Operating loss
|
|
|
(1,148,389
|
)
|
|
|
(469,857
|
)
|
|
|
(2,837,384
|
)
|
|
|
(2,073,062
|
)
|
Bargain
purchase gain for business acquisition
|
|
|
1,326,526
|
|
|
|
-
|
|
|
|
1,326,526
|
|
|
|
-
|
|
Income
(loss) before income taxes
|
|
|
178,137
|
|
|
|
(469,857
|
)
|
|
|
(1,510,858
|
)
|
|
|
(2,073,062
|
)
|
Income tax
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income
(loss)
|
|
|
178,137
|
|
|
|
(469,857
|
)
|
|
|
(1,510,858
|
)
|
|
|
(2,073,062
|
)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arising
during period
|
|
|
84,298
|
|
|
|
128,952
|
|
|
|
1,014,216
|
|
|
|
(372,958
|
)
|
Less:
reclassification adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
(gains) losses
on investments
|
|
|
(121,578
|
)
|
|
|
16,088
|
|
|
|
(67,834
|
)
|
|
|
12,383
|
|
Other
comprehensive (loss) income
|
|
|
(37,280
|
)
|
|
|
145,040
|
|
|
|
946,382
|
|
|
|
(360,575
|
)
|
Comprehensive
income
(loss)
|
|
$
|
140,857
|
|
|
$
|
(324,817
|
)
|
|
$
|
(564,476
|
)
|
|
$
|
(2,433,637
|
)
|
Net
income
(loss) per common share,
basic and diluted
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.16
|
)
|
See Notes to Consolidated
Financial Statements.
4
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements of Cash
Flows
(Unaudited)
|
|
Nine Months ended September
30,
|
|
|
2016
|
|
2015
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,510,858
|
)
|
|
$
|
(2,073,062
|
)
|
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
|
|
|
158,793
|
|
|
|
114,777
|
|
Depreciation
and amortization
|
|
|
297,736
|
|
|
|
294,248
|
|
Deferred
acquisition costs capitalized
|
|
|
(110,918
|
)
|
|
|
(524,000
|
)
|
Amortization
of deferred acquisition costs
|
|
|
270,515
|
|
|
|
373,132
|
|
Net
realized (gain) loss on investments
|
|
|
(67,834
|
)
|
|
|
28,343
|
|
Bargain
purchase gain for business acquired
|
|
|
(1,326,526
|
)
|
|
|
-
|
|
Loss
on
equity method
investment
|
|
|
420,720
|
|
|
|
95,650
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Amounts
recoverable from reinsurers
|
|
|
403,076
|
|
|
|
600,746
|
|
Interest
and dividends due and accrued
|
|
|
(43,640
|
)
|
|
|
(29,015
|
)
|
Due
premiums
|
|
|
(40,865
|
)
|
|
|
(38,278
|
)
|
Policy
liabilities
|
|
|
572,112
|
|
|
|
716,066
|
|
Other
assets and liabilities
|
|
|
575,047
|
|
|
|
(322,553
|
)
|
Other
assets and liabilities held for sale
|
|
|
-
|
|
|
|
(81,068
|
)
|
Net
cash (used for) operating activities
|
|
|
(402,642
|
)
|
|
|
(845,014
|
)
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(15,744,683
|
)
|
|
|
(11,533,877
|
)
|
Proceeds
from sale or maturity
|
|
|
12,539,971
|
|
|
|
9,583,796
|
|
Securities associated with business held for sale
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
52,703
|
|
|
|
(964,451
|
)
|
Proceeds
from sale or maturity
|
|
|
-
|
|
|
|
941,528
|
|
Net change in equity
securities carried at cost:
|
|
|
|
|
|
|
|
|
Proceeds
from sale
|
|
|
26,434
|
|
|
|
9,000
|
|
Sale of Capital Reserve
Life Insurance Company
|
|
|
1,432,446
|
|
|
|
-
|
|
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
|
|
|
20,382
|
|
|
|
(44,236
|
)
|
Net change in short-term
investments
|
|
|
-
|
|
|
|
633
|
|
Purchases of property and
equipment
|
|
|
(30,611
|
)
|
|
|
(4,566
|
)
|
Net
cash provided by (used for) investing activities
|
|
|
724,036
|
|
|
|
(1,662,787
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Issuance of common
stock
|
|
|
-
|
|
|
|
214,720
|
|
Preferred stock
dividend
|
|
|
(45,220
|
)
|
|
|
(56,057
|
)
|
Receipts on deposit-type
contracts
|
|
|
1,786,850
|
|
|
|
1,725,623
|
|
Withdrawals on
deposit-type contracts
|
|
|
(865,329
|
)
|
|
|
(477,400
|
)
|
Net
cash provided by financing activities
|
|
|
876,301
|
|
|
|
1,406,886
|
|
Net
increase
(decrease)
in cash and cash equivalents
|
|
|
1,197,695
|
|
|
|
(1,100,915
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,192,336
|
|
|
|
2,310,047
|
|
Ending
|
|
$
|
2,390,031
|
|
|
$
|
1,209,132
|
|
See Notes to Consolidated
Financial Statements.
5
Midwest Holding Inc. and
Subsidiaries
Supplemental Cash Flow
Information
(Unaudited)
|
|
September 30, 2016
|
|
September 30, 2015
|
Supplemental
Disclosure of Non-Cash Information
|
|
|
|
|
|
|
|
Measurement period adjustment
on the First Wyoming acquisition
|
|
$
|
(905,806
|
)
|
|
$
|
-
|
Common stock
issued on Northstar Acquisition
|
|
|
2,405,874
|
|
|
|
-
|
|
|
$
|
1,500,068
|
|
|
$
|
-
|
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,
2015
(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 nine
month period ended September 30, 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 (calculated by multiplying the
adjusted basis by the yield at issuance and then subtracting the coupon
interest) over the term of the bonds. Realized gains and losses on securities
sold during the year are determined by the specific security sold. Unrealized
holding gains and losses, net of applicable income taxes, are included in
comprehensive
income (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 nine months ended September 30, 2016 or 2015.
Investment income consists
of interest, dividends, 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.
Losses related to equity method investments
relates
to the Companys previous minority interest in First Wyoming are reported in the Loss on equity method investment line in the Consolidated Statement of Comprehensive Income.
The Company does not
control these entities economically, and therefore does not consolidate these
entities in its financial statements.
7
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 September 30, 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
(DAC)
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
September 30, 2016 and December 31, 2015, respectively.
|
|
Nine Months
Ended
|
|
Year
Ended
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Balance at
beginning of period
|
|
$
|
2,765,063
|
|
|
$
|
2,646,970
|
|
Capitalization of commissions, sales and issue
expenses
|
|
|
110,918
|
|
|
|
552,466
|
|
Change in
DAC due to unrealized investment (gains) losses
|
|
|
(33,588
|
)
|
|
|
35,301
|
|
Gross
amortization
|
|
|
(270,515
|
)
|
|
|
(469,674
|
)
|
Balance at
end of period
|
|
$
|
2,571,878
|
|
|
$
|
2,765,063
|
|
8
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Value of business acquired:
Value of business acquired (VOBA) 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. The remaining capitalized VOBA asset balance at the sale date of August 29, 2016 of $40,714 was written off as a loss on American Life.
American Life paid an upfront ceding commission of $375,000 to Security National Life (SNL) at the time of acquisition of Capital Reserve in a separate transaction. An initial asset was established for the value of this business acquired totaling $348,010, representing primarily the ceding commission. 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 $53,570 and $43,813 for the three months ended September 30, 2016 and 2015, respectively relative to these transactions. The Company recognized amortization expense of $166,528 and $131,441 for the nine months ended September 30, 2016 and 2015, respectively related 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 September 30, 2016 and 2015 totaled
$12,168 and $14,002, respectively. Amortization recognized during the nine
months ended September 30, 2016 and 2015 totaled $40,344 and $33,714,
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 nine months ended September 30, 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.
Midwest sold Capital Reserve effective August 29, 2016 and the VOBA related to Capital Reserve
was written off by American Life.
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 nine
months ended September 30, 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 $20,275 and $37,230 for the three
months ended September 30, 2016 and 2015, respectively. Depreciation expense
totaled $81,366 and $120,063 for the nine months ended September 30, 2016 and
2015, respectively. Accumulated depreciation totaled $946,370 and $864,526 as of
September 30, 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 nine months ended September 30,
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 September 30, 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
2012
. 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 September 30, 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.
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.
10
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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
income (loss)
:
Comprehensive
income (loss)
is comprised
of net
income (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 September 30, 2016 and
December 31, 2015, the Company had 22,558,956 and 18,006,301 common shares
issued and outstanding, respectively.
At September 30, 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 September 30, 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%. Dividends of $45,220 and $56,057 were paid
as of September 30, 2016 and December 31, 2015 respectively. At September 30,
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 September 30,
2016 and 2015 were 22,558,956 and 13,212,653 shares, respectively. The weighted
average number of shares outstanding during the nine months ended September 30,
2016 and 2015 were 21,312,581 and 13,195,416 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, can be
referenced 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), and should be read in connection with the reading of these interim
unaudited consolidated financial statements.
New accounting
standards:
In June 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2016-13,
Financial
Instruments Credit Losses (Topic 326)
. Under the new guidance, this replaces the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and
supportable information to perform credit loss estimates. This update changes
the methodology from an incurred loss to an expected credit loss. An allowance
for the expected credit loss will be set up and the net income will be impacted.
The credit losses will be evaluated in the current period and an adjustment to
the allowance can be made. The new standard becomes effective after December 15,
2019. We are currently evaluating the impact of our pending adoption of the new
standard on our consolidated financial statements.
In March 2016, the FASB
issued ASU 2016-07,
Investments
Equity Method and Joint Ventures (Topic 323).
Under the new guidance, when an investment
qualifies for use of the equity method as a result of an increase in the level
of ownership interest or degree of influence,
this ASU
requires that the equity method
investor add the cost of acquiring the additional interest in the investee to
the current basis of the investors previously held interest and adopt the
equity method of accounting as of the date the investment becomes qualified for
equity method accounting. Therefore, upon qualifying for the equity method of
accounting, no retroactive adjustment of the investment is required. The new
standard becomes effective December 15, 2016. Early adoption of this update is
permitted and we will adopt this Update should an investment change from the
cost method to the equity method due to a change in ownership or degree of
influence.
11
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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.
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 consolidation 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 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.
Effective January 1, 2016, the Company adopted ASU No. 2015-16,
Business
Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments
, which requires (i) that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, (ii) that the acquirer record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, (iii) that an entity present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The company reflected these changes in Note
2 below
.
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
The
merger of Northstar
was recorded
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 by and among the Company, First Wyoming and
Midwest Acquisition, Inc., a Wyoming corporation and wholly-owned subsidiary of
the Company (Merger Subsidiary) (the Merger Agreement). Under the Merger
Agreement, the Merger Subsidiary merged with and into First Wyoming (the
Merger); the separate corporate existence of the Merger Subsidiary ceased and
First Wyoming became the surviving corporation of the Merger and a wholly owned
subsidiary of Midwest. Pursuant to the Merger Agreement, Midwest agreed to
exchange 1.37 shares of its voting common stock for each share of First Wyoming
common stock, or approximately 4,767,400 shares. The fair value of the Midwest
shares exchanged to acquire 100% of the remaining outstanding shares of First
Wyoming that it did not previously own was estimated by applying the income
approach to be $905,806, which is different from our preliminary estimate of
$1,811,612 as disclosed in Note 2 of the 2015 10-K. This fair value measurement
is based on significant inputs that are not observable in the market. Key
assumptions include projected total income growth of between 3% and 16%,
expected long term growth of 3%, a discount rate of 16.0%, and a terminal value
based on earnings and a capitalization rate of 13.0%. Subsequent to the
Closing, First Wyoming merged into Midwest.
On September 1, 2016 First Wyoming Life was merged into American Life.
12
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The First Wyoming
acquisition was accounted for under the acquisition method of accounting, which
requires the consideration transferred and all assets and liabilities assumed to
be recorded at fair value. Prior to the acquisition, Midwest held 22.1% of the
outstanding shares of First Wyoming, which it had recorded in its financial
statements under the equity method of accounting at a book value of $810,500
with a related accumulated other comprehensive loss of $30,410. The fair value
of our previously held equity interest in First Wyoming was determined to be
$221,430, resulting in a loss of $619,480 on the previously held equity
interest. The
preliminary
fair value of our previously held equity interest in First Wyoming as disclosed
in Note 2 of the 2015 10-K was determined to be $642,150 resulting in a loss of
$198,760, which was included in net investment income (loss) in the 2015 10-K
Consolidated Statement of Comprehensive Income for the year ended December 31,
2015 and the remaining $420,720 was recognized in the period ended September 30,
2016
in
Loss
on
equity method
investment on
the Consolidated Statement of Comprehensive
Income. The
fair value of the previously held equity interest in First
Wyoming was estimated by applying the income approach using significant inputs
that are not observable in the market. Key assumptions include projected total
income growth of between 3% and 13%, expected long term growth of 3%, a discount
rate of 18.0%, a terminal value based on earnings and a capitalization rate of
13.0%, and adjustments due to lack of control that market participants would
consider when estimating the fair value of the previously held equity interest
in First Wyoming.
The following table
summarizes the fair value of the consideration transferred and the fair value of
First Wyoming assets acquired and liabilities assumed:
Fair
value of Common stock of Midwest issued as consideration
|
$
|
905,806
|
Fair
value of Midwest's previously held equity interest in First
Wyoming
|
|
221,430
|
|
$
|
1,127,236
|
Recognized amounts of
identifiable assets acquired and liabilities assumed:
Investment securities
|
|
$
|
3,961,937
|
|
Cash
|
|
|
315,546
|
|
VOBA
|
|
|
506,600
|
|
Other assets
|
|
|
92,045
|
|
Benefit reserves
|
|
|
(611,110
|
)
|
Policy claims
|
|
|
(41,754
|
)
|
Deposit-type contracts
|
|
|
(799,990
|
)
|
Other liabilities
|
|
|
(64,934
|
)
|
Total
identifiable net assets
|
|
|
3,358,340
|
|
Bargain purchase gain
|
|
|
(2,231,104
|
)
|
|
|
$
|
1,127,236
|
|
All amounts related to the
business combination are finalized and are no longer provisional. The
transaction resulted in a bargain purchase gain of $2,231,104 and, of that
amount, $904,578 was included in the Bargain
purchase gain for business
acquisition
line item in the Consolidated Statement of Comprehensive Income for
the year ended December 31, 2015. The remaining $1,326,526 was included in the
Consolidated Statement of Comprehensive Income for the period ended September
30, 2016. The bargain purchase gain was driven by the fact that as a stand alone
company, First Wyoming Life would have been required to significantly increase
its administrative operations in Cheyenne, Wyoming, in the near future, the cost
of which would be prohibitive to a small life insurance company.
Value of business acquired
(VOBA) is being amortized on a straight-line basis over ten years which
approximates the earnings pattern of the related policies.
Acquisition costs relating
to the business combination totaling $123,219 were expensed as incurred and are
included in the other operating expenses line item in the Consolidated Statement
of Comprehensive Income for the year ended December 31, 2015.
13
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Total income and net loss
of $71,165 and $73,939, respectively, were included in the 2015 10-K
Consolidated Statements of Comprehensive Income from the October 27, 2015
acquisition date through December 31, 2015. Operations of the acquired entity
and its subsidiary (First Wyoming Life) were immediately integrated with the
Companys operations.
The following table
presents unaudited pro forma consolidated total income and net loss as if the
acquisition had occurred as of January 1, 2014.
|
|
Three months ended
|
|
Nine
months ended
|
|
|
September 30, 2015
|
|
September 30, 2015
|
|
|
(unaudited)
|
|
(unaudited)
|
Premiums
|
|
$
|
886,307
|
|
|
$
|
2,980,998
|
|
Investment income
|
|
|
157,314
|
|
|
|
518,799
|
|
Miscellaneous income
|
|
|
23,094
|
|
|
|
57,844
|
|
Total
income
|
|
$
|
1,066,715
|
|
|
$
|
3,557,641
|
|
|
Net
loss
|
|
$
|
(759,888
|
)
|
|
$
|
(2,778,616
|
)
|
The unaudited pro forma
total income and net loss above was adjusted
to eliminate
the equity method
investment loss of $79,000 and $95,650 for the three and nine months ended
September 30, 2015, respectively. The pro forma amounts above also included an
adjustment for the elimination of TPA fees paid by First Wyoming to Midwest of
$30,919 for the three
months ended
September 30, 2015 and of
$95,513 for the nine months ended September 30, 2015. The unaudited pro forma
net loss presented above also includes adjustments for the amortization of VOBA
of $12,665 and $37,995 for the three
and nine
months ended September
30, 2015.
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 was dormant. Under the terms of the purchase agreement, American Life received cash which approximated the statutory surplus of Capital Reserve. The sale of Capital Reserve was effective as of August 29, 2016 with a purchase price of $1,432,446. Prior to the sale of Capital Reserve, Midwest had $16.9 million and $15.4 million of assets and liabilities, respectively, classified as held for sale on the Consolidated Balance
Sheet
. The sale of Capital Reserve resulted in a net gain of approximately $26,000 which includes the $50,000 cash above book value and the unrealized gains on the fair market value of bonds at August 29, 2016 becoming realized at the date of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain is included in the Net realized gain (loss) on investments on the Consolidated Statement of Comprehensive Income.
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.
14
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The amortized
cost
and estimated fair value of investments classified as available-for-sale as of
September 30, 2016 and December 31, 2015 are as follows:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
3,397,371
|
|
$
|
17,820
|
|
$
|
3,490
|
|
$
|
3,411,701
|
States
and political subdivisions -- general obligations
|
|
|
385,184
|
|
|
12,334
|
|
|
-
|
|
|
397,518
|
States
and political subdivisions -- special revenue
|
|
|
275,285
|
|
|
14,911
|
|
|
-
|
|
|
290,196
|
Corporate
|
|
|
23,386,078
|
|
|
205,075
|
|
|
315,194
|
|
|
23,275,959
|
Total fixed
maturities
|
|
$
|
27,443,918
|
|
$
|
250,140
|
|
$
|
318,684
|
|
$
|
27,375,374
|
|
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 September 30, 2016. The amortized cost, fair
value, credit ratings, and description of the security is as
follows:
|
|
Amortized
|
|
Estimated
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Credit Rating
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
States
and political subdivisions -- general obligations
|
|
|
|
|
|
|
|
|
Bellingham
Wash
|
|
$
|
111,245
|
|
$
|
116,321
|
|
AA+
|
Longview
Washington Refunding
|
|
|
163,969
|
|
|
166,971
|
|
NR
|
Memphis
Tenn
|
|
|
109,970
|
|
|
114,226
|
|
AA
|
States
and political subdivisions -- special revenue
|
|
|
|
|
|
|
|
|
Philadelphia
PA Auth For Indl Dev City Svc Agreement
|
|
|
149,398
|
|
|
154,953
|
|
AA
|
Riviera
Beach FLA Pub Impt Rev
|
|
|
100,399
|
|
|
109,628
|
|
AA
|
Total
|
|
$
|
634,981
|
|
$
|
662,099
|
|
|
15
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
summarizes, for all securities in an unrealized loss position at September 30,
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.
|
|
September 30, 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
|
|
$
|
1,799,558
|
|
$
|
3,490
|
|
8
|
|
$
|
2,484,188
|
|
$
|
62,343
|
|
14
|
States
and political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general
obligations
|
|
|
-
|
|
|
-
|
|
-
|
|
|
660,569
|
|
|
5,004
|
|
5
|
States
and political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special
revenue
|
|
|
-
|
|
|
-
|
|
-
|
|
|
248,146
|
|
|
1,618
|
|
2
|
Corporate
|
|
|
10,479,113
|
|
|
180,456
|
|
48
|
|
|
15,320,916
|
|
|
796,204
|
|
97
|
Greater than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
|
-
|
|
|
-
|
|
-
|
|
|
305,055
|
|
|
7,472
|
|
3
|
States
and political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general
obligations
|
|
|
-
|
|
|
-
|
|
-
|
|
|
334,481
|
|
|
1,938
|
|
1
|
States
and political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special
revenue
|
|
|
-
|
|
|
-
|
|
-
|
|
|
25,190
|
|
|
379
|
|
1
|
Corporate
|
|
|
2,630,059
|
|
|
134,738
|
|
12
|
|
|
3,166,108
|
|
|
141,074
|
|
22
|
Total fixed maturities
|
|
$
|
14,908,730
|
|
$
|
318,684
|
|
68
|
|
$
|
22,544,653
|
|
$
|
1,016,032
|
|
145
|
Based on our review of the
securities in an unrealized loss position at September 30, 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 September 30, 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 September 30, 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
|
|
$
|
-
|
|
$
|
-
|
Due
after one year through five years
|
|
|
1,329,264
|
|
|
1,333,666
|
Due
after five years through ten years
|
|
|
13,573,316
|
|
|
13,559,392
|
Due
after ten years
|
|
|
12,541,338
|
|
|
12,482,316
|
|
|
$
|
27,443,918
|
|
$
|
27,375,374
|
The Company is required to
hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At September 30, 2016 and December 31, 2015,
these required deposits had a total amortized cost of $7,958,319 and $6,186,865
and fair values of $7,951,180 and $6,000,376, respectively.
16
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The components of net
investment income for the three and nine months ended September 30, 2016 and
2015 are as follows:
|
|
Three months ended September
30,
|
|
Nine months ended September
30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Fixed maturities
|
|
$
|
218,689
|
|
|
$
|
167,947
|
|
|
$
|
635,840
|
|
|
$
|
488,562
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,250
|
|
|
|
186
|
|
Other
|
|
|
16,488
|
|
|
|
2,416
|
|
|
|
43,775
|
|
|
|
32,834
|
|
|
|
|
235,177
|
|
|
|
170,363
|
|
|
|
684,865
|
|
|
|
521,582
|
|
Less
investment expenses
|
|
|
(15,399
|
)
|
|
|
(12,677
|
)
|
|
|
(50,181
|
)
|
|
|
(51,501
|
)
|
Investment income,
net of expenses
|
|
$
|
219,778
|
|
|
$
|
157,686
|
|
|
$
|
634,684
|
|
|
$
|
470,081
|
|
Proceeds for the three
months ended September 30, 2016 and 2015 from sales of investments classified as
available-for-sale were $4,868,073 and $3,108,704, respectively. Gross gains of
$96,696 and $28,366 and gross losses of $629 and $44,454 were realized on those
sales during the three months ended September 30, 2016 and 2015,
respectively.
Proceeds for the nine months ended September 30,
2016 and 2015 from sales of investments classified as available-for-sale were
$12,384,674 and $10,274,724, respectively. Gross gains of $166,349 and $146,767
and gross losses of $56,526 and $159,150 were realized on those sales during the
nine months ended September 30, 2016 and 2015, respectively.
As of September 30,
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 September 30, 2016 and December 31, 2015.
|
|
Nine
months ended
|
|
Year
ended
|
|
|
September
30, 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.
|
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.
17
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 September 30, 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. 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
$253,785 and $229,405 in carrying value of the surplus notes as of September 30,
2016 and December 31, 2015, respectively. These liabilities are categorized as
Level 3 in the fair value hierarchy.
The following table
presents the Companys fair value hierarchy for those financial instruments
measured at fair value on a recurring basis as of September 30, 2016 and
December 31, 2015.
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted
|
|
Other
|
|
Significant
|
|
|
|
|
In Active
|
|
Observable
|
|
Unobservable
|
|
Estimated
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Value
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
$
|
-
|
|
$
|
3,411,701
|
|
$
|
-
|
|
$
|
3,411,701
|
States
and political subdivisions general obligations
|
|
-
|
|
|
397,518
|
|
|
-
|
|
|
397,518
|
States
and political subdivisions special revenue
|
|
-
|
|
|
290,196
|
|
|
-
|
|
|
290,196
|
Corporate
|
|
-
|
|
|
23,275,959
|
|
|
-
|
|
|
23,275,959
|
Total fixed
maturities
|
$
|
-
|
|
$
|
27,375,374
|
|
$
|
-
|
|
$
|
27,375,374
|
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
|
There were no transfers of
financial instruments between any levels during the nine months ended September
30, 2016 or during the year ended December 31, 2015.
18
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 September 30, 2016 and December 31, 2015,
respectively:
|
September 30,
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
|
$
|
400,393
|
|
$
|
-
|
|
$
|
-
|
|
$
|
400,393
|
|
$
|
400,393
|
Cash and cash
equivalents
|
|
2,390,031
|
|
|
2,390,031
|
|
|
-
|
|
|
-
|
|
|
2,390,031
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deposit-type
contracts)
|
|
15,361,883
|
|
|
-
|
|
|
-
|
|
|
15,361,883
|
|
|
15,361,883
|
Surplus notes and accrued
interest payable
|
|
803,785
|
|
|
-
|
|
|
-
|
|
|
800,450
|
|
|
800,450
|
|
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
|
19
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 6. Income Tax Matters
Significant components of
the Companys deferred tax assets and liabilities as of September 30, 2016 and
December 31, 2015 are as follows:
|
September 30, 2016
|
|
December 31,
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Loss carry
forwards
|
$
|
9,387,518
|
|
|
$
|
8,962,587
|
|
Capitalized
costs
|
|
648,016
|
|
|
|
667,264
|
|
Unrealized losses
on investments
|
|
23,305
|
|
|
|
356,495
|
|
Benefit
reserves
|
|
992,978
|
|
|
|
1,071,997
|
|
Total deferred tax
assets
|
|
11,051,817
|
|
|
|
11,058,343
|
|
Less valuation
allowance
|
|
(9,410,173
|
)
|
|
|
(9,287,024
|
)
|
Total deferred tax
assets, net of valuation allowance
|
|
1,641,644
|
|
|
|
1,771,319
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Policy acquisition
costs
|
|
563,003
|
|
|
|
593,654
|
|
Due
premiums
|
|
231,519
|
|
|
|
234,468
|
|
Value of business
acquired
|
|
609,122
|
|
|
|
693,297
|
|
Intangible
assets
|
|
238,000
|
|
|
|
238,000
|
|
Property and
equipment
|
|
-
|
|
|
|
11,900
|
|
Total deferred tax
liabilities
|
|
1,641,644
|
|
|
|
1,771,319
|
|
Net deferred tax assets
|
$
|
-
|
|
|
$
|
-
|
|
At September 30, 2016 and December 31, 2015, the Company recorded a valuation allowance of $
9,410,173
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 September 30, 2016, have expiration dates that range from 2024 through 2035.
There was no income tax expense for the three or nine months ended September 30, 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 September 30,
|
|
Nine months
ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Computed expected income tax
benefit
|
$
|
60,566
|
|
|
$
|
(159,751
|
)
|
|
$
|
(513,692
|
)
|
|
$
|
(704,841
|
)
|
Increase (reduction) in income taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meals,
entertainment and political contributions
|
|
7,753
|
|
|
|
-
|
|
|
|
26,508
|
|
|
|
24,084
|
|
Dividends received
deduction
|
|
1,250
|
|
|
|
7,550
|
|
|
|
1,250
|
|
|
|
(44
|
)
|
Other
|
|
4,529
|
|
|
|
160,280
|
|
|
|
29,595
|
|
|
|
419,501
|
|
|
|
13,532
|
|
|
|
167,830
|
|
|
|
57,353
|
|
|
|
443,541
|
|
Tax benefit before valuation
allowance
|
|
74,098
|
|
|
|
8,079
|
|
|
|
(456,339
|
)
|
|
|
(261,300
|
)
|
Change in valuation allowance
|
|
(74,098
|
)
|
|
|
(8,079
|
)
|
|
|
456,339
|
|
|
|
261,300
|
|
Net income tax expense
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
20
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 7.
Reinsurance
A summary of significant
reinsurance amounts affecting the accompanying consolidated financial statements
as of September 30, 2016 and December 31, 2015 and for the three and nine months
ended September 30, 2016 and 2015 is as follows:
|
September 30, 2016
|
|
December 31, 2015
|
Balance sheets:
|
|
|
|
|
|
Benefit and claim
reserves assumed
|
$
|
2,492,880
|
|
$
|
2,763,779
|
Benefit and claim
reserves ceded
|
|
11,809,580
|
|
|
12,212,656
|
|
Three
months ended September 30,
|
|
Nine months
ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Statements of comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
assumed
|
$
|
6,301
|
|
$
|
6,162
|
|
$
|
18,532
|
|
$
|
19,830
|
Premiums ceded
|
|
95,126
|
|
|
69,005
|
|
|
245,400
|
|
|
226,375
|
Benefits
assumed
|
|
10,539
|
|
|
3,206
|
|
|
40,697
|
|
|
55,165
|
Benefits ceded
|
|
124,503
|
|
|
217,543
|
|
|
696,159
|
|
|
750,036
|
Commissions
assumed
|
|
10
|
|
|
2
|
|
|
26
|
|
|
12
|
Commissions
ceded
|
|
361
|
|
|
875
|
|
|
1,649
|
|
|
2,729
|
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 September 30, 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-
|
|
$
|
-
|
|
$
|
67,857
|
|
$
|
182,176
|
|
$
|
-
|
|
$
|
250,033
|
Sagicor Life
Insurance Company
|
|
A-
|
|
|
-
|
|
|
294,798
|
|
|
11,506,949
|
|
|
242,200
|
|
|
11,559,547
|
|
|
|
|
$
|
-
|
|
$
|
362,655
|
|
$
|
11,689,125
|
|
$
|
242,200
|
|
$
|
11,809,580
|
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 September 30, 2016 and
December 31, 2015 total benefit reserves, policy claims, deposit-type contracts,
and due premiums ceded by Old Reliance to Sagicor were
$11,559,547
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 September 30, 2016 and December 31, 2015, no contingency
reserve was established.
21
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 nine months ended September 30, 2016 and year
ended December 31, 2015:
|
Nine Months
Ended
|
|
Year Ended
|
|
September 30,
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
|
|
1,786,850
|
|
|
|
2,387,104
|
|
Investment earnings
|
|
548,556
|
|
|
|
533,646
|
|
Withdrawals
|
|
(865,329
|
)
|
|
|
(533,762
|
)
|
Contract Charges
|
|
(5,615
|
)
|
|
|
(10,584
|
)
|
Ending Balance
|
$
|
15,361,883
|
|
|
$
|
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.
Office Lease:
The Company leases office space
in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires
on January 31, 2024. Great Plains entered into a lease on October 4, 2013 for
office space in Mitchell, South Dakota, which expires on November 30, 2016.
First Wyoming leased space in Cheyenne, Wyoming, which expired on August 31,
2016. Rent expense for the three months ended September 30, 2016 and 2015 was
$65,933 and $52,125 respectively. Rent expense for the nine months ended
September 30, 2016 and 2015 was $238,976 and $163,877 respectively. Future
minimum payments rental are as follows:
2016
|
$
|
42,547
|
2017
|
|
149,481
|
2018
|
|
136,557
|
2019
|
|
141,412
|
2020
|
|
146,477
|
Later years
|
|
483,333
|
Total
|
$
|
1,099,807
|
22
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 Nebraska Department of Insurance. Likewise,
Great Plains Life is required to prepare statutory financial statements in accordance with statutory accounting practices
prescribed or permitted by the South Dakota Department of Insurance. 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.
First Wyoming Life merged
with
American Life as of September 1, 2016. The
December 31,
2015
and September 30, 2015
numbers
in the table below
have been restated to include First Wyoming Life balances into American Life to be consistent with
the statutory statement
filing. The
following table summarizes the
statutory net loss and statutory capital and surplus of American Life and Great Plains Life as of September 30, 2016 and
December 31, 2015 and for the nine months ended September 30, 2016 and 2015.
|
Statutory
Capital and Surplus as of
|
|
September
30, 2016
|
|
December
31, 2015
|
American Life
|
$
|
4,279,855
|
|
|
$
|
5,241,886
|
|
Great Plains Life
|
$
|
1,514,555
|
|
|
$
|
1,663,368
|
|
Capital Reserve Life
|
$
|
-
|
|
|
$
|
1,464,044
|
|
|
|
Statutory
Net Income (Loss) for the Nine months ended September 30,
|
|
2016
|
|
2015
|
American Life
|
$
|
(1,358,777
|
)
|
|
$
|
(1,104,389
|
)
|
Great Plains Life
|
$
|
(158,607
|
)
|
|
$
|
(319,807
|
)
|
Capital Reserve Life
|
$
|
-
|
|
|
$
|
(43,513
|
)
|
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 September 30, 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 Nebraska Department of Insurance. As of
September 30, 2016, the Company has accrued $253,785 of interest expense under
accounts payable and accrued expenses on the consolidated balance sheet. No
payments were made in the nine months ending September 30, 2016, or during the
year ended December 31, 2015. The surplus notes for $300,000 and $250,000
matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature
of surplus notes, a repayment cannot be made without the prior approval of the
Nebraska insurance regulators.
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 September 30, 2016 and 2015 were $19,000 and
$44,419, respectively. Fees earned during the nine months ended September 30,
2016 and 2015 were $47,000 and $140,013, respectively.
Note 13. Subsequent
Events
All of the effects of
subsequent events that provide additional evidence about conditions that existed
at September 30, 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.
23
Consolidated Results of
Operations Three Months Ended September 30, 2016
Revenues are primarily
generated from premium revenues and investment income. Revenues for the three
months ended September 30, 2016 and 2015 are summarized in the table
below.
|
Three months ended September 30,
|
|
2016
|
|
2015
|
Premiums
|
$
|
738,522
|
|
|
$
|
819,017
|
|
Investment income, net of
expenses
|
|
219,778
|
|
|
|
157,686
|
|
Loss on
equity method
investment
|
|
(420,720
|
)
|
|
|
(79,000
|
)
|
Net realized gain (loss) on
investments
|
|
121,578
|
|
|
|
(16,088
|
)
|
Miscellaneous income
|
|
21,558
|
|
|
|
53,963
|
|
|
$
|
680,716
|
|
|
$
|
935,578
|
|
Premium
revenue:
Premium revenue for the
three months ended September 30, 2016 decreased compared to the same period in
2015 primarily due to the reduction of our selling efforts in the last twelve
months to preserve our regulatory capital and surplus. We expect to have limited
production of new business in order to preserve surplus for the next few months,
although management has begun to re-emphasize recruiting and new sales. The
decline is also related to the GAAP accounting for premiums from our Accumulator
life insurance product (our primary product). 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 and the other
50% of the payments received are applied towards the annuity premium which is
recognized as deposits to policyholder account balances rather than revenues.
These decreases were offset by $73,000 of premium earned by First Wyoming as a
result of our purchase of First Wyoming which was not included in the 2015
results.
Investment income, net
of expenses
: The components of
net investment income for the three months ended September 30, 2016 and 2015 are
as follows:
|
Three months ended September
30,
|
|
2016
|
|
2015
|
Fixed maturities
|
$
|
218,689
|
|
|
$
|
167,947
|
|
Other
|
|
16,488
|
|
|
|
2,416
|
|
|
|
235,177
|
|
|
|
170,363
|
|
Less
investment expenses
|
|
(15,399
|
)
|
|
|
(12,677
|
)
|
Investment
income, net of expenses
|
$
|
219,778
|
|
|
$
|
157,686
|
|
The increase in investment
income is due to increasing our bond portfolio using a part of the $2.4 million
of cash received from our acquisition of Northstar, the consolidation of First
Wyoming Life and its investment income of $32,000. Policy loan interest, real
estate investments, and miscellaneous investment income is included in the
Other line item above.
Loss on equity method investment:
The decrease in investment
income (loss) for equity method investments was due to the final valuation by
a
third party of Midwests investment in First Wyoming. The original
investment in First Wyoming was $810,500. The preliminary valuation prepared for
us by
the third
party was determined to be $642,150 which resulted in a
loss of
$168,350
for the
year ended December 31, 2015. The final valuation by
the third
party valued First Wyoming at $221,430 resulting in the $420,720
loss
for the three months ended
September 30, 2016.
Net realized gain (loss) on investments:
The increase is due to improved market conditions on sale of bonds and the $26,000 gain on the sale of Capital Reserve.
25
Miscellaneous
income:
Miscellaneous income
decreased primarily due to decreased third party administration fee income due
to the acquisition of First Wyoming in 2015 and the acquisition of Northstar in
March 2016. 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 September 30, 2016, we had three customers for whom we performed these
services. Fees earned during the three months ended September 30, 2016 and 2015
were $19,000 and $44,419, respectively.
Expenses for the three
months ended September 30, 2016 and 2015 are summarized in the table
below.
|
Three months ended September 30,
|
|
2016
|
|
2015
|
Death and other benefits
|
$
|
213,351
|
|
$
|
194,398
|
Interest credited
|
|
195,566
|
|
|
105,657
|
Increase in benefit reserves
|
|
112,948
|
|
|
74,051
|
Amortization of deferred
acquisition costs
|
|
122,788
|
|
|
119,282
|
Salaries and benefits
|
|
589,254
|
|
|
438,128
|
Other operating expenses
|
|
595,198
|
|
|
473,919
|
|
$
|
1,829,105
|
|
$
|
1,405,435
|
Death and other
benefits
: Death benefits
increased compared to the same period in 2015. An increase in our pending claims
and incurred but not reported claims contributed to the change. 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 in 2010. The Company maintains policy reserves to offset the effect of
such claims. No claims have been incurred on the new business written as of the
three months ended September 30, 2016 or related to the inclusion of First
Wyoming.
Interest
credited:
The increase was due to
the increase in the deposit-type liabilities owed to the policyholders and
inclusion of First Wyoming which added $967,000 of annuity deposits.
Increase in benefit
reserves
: The increase in benefit
reserves reflects the maturity of our in-force block of business, the inclusion
of First Wyoming which added $15,000 of reserves. The increase was offset by the
decrease in new business written, and the increase in surrenders.
Amortization of deferred
acquisition costs
: The increase
was due primarily to the increase in surrenders in 2016 offset by the decline in
new business written to conserve capital and surplus.
Salaries and
benefits
: The increase was due
to
the salaries that were previously related to Northstar of $76,000 and the
inclusion of First Wyoming salaries and benefits of $73,000 which would not have
been included in the 2015 consolidation. These were offset by decreases in
salaries and benefits due to staff reductions.
Other operating
expenses
: Other operating
expenses increased due to marketing of $112,000,
and inclusion of First Wyoming
of $75,000, and
travel due to capital raising
activities of $20,000. These increases
were offset by various smaller expenses.
Net income (loss):
Net income was $178,137 for the three months ended September 30, 2016, compared to a net loss of ($469,857) for the same period in 2015. The increase in net income was primarily due to the bargain purchase gain of $1,326,526 related to the measurement period adjustments recorded on the First Wyoming acquisition. Midwest engaged a third party to prepare a valuation of Midwest and First Wyoming which was finalized during the three months ended September 30, 2016. The total bargain purchase gain based upon the revised valuation was $2,231,104. Of that amount, $904,578 was recognized during the fourth quarter of 2015. The sale of Capital Reserve resulted in a net gain of approximately $26,000 which included the $50,000 cash above book value and the unrealized gain on the fair market value of bonds at August 29, 2016 becoming realized at the date of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain is included in the Net realized gain (loss) on investments on the Consolidated Statement of Comprehensive Income.These gains were offset by the losses of $420,720 on the equity method investment in First Wyoming that was mentioned above, $40,000 as a result of the inclusion of First Wyoming, non-recurring expenses relating to the redomestication of our life insurance subsidiaries, the increase in death benefits, and a decrease in investment income.
26
Consolidated Results of
Operations Nine months Ended September 30, 2016
Insurance revenues are
primarily generated from premium revenues and investment income. Revenues for
the nine months ended September 30, 2016 and 2015 are summarized in the table
below.
|
Nine months ended September 30,
|
|
2016
|
|
2015
|
Premiums
|
|
2,597,997
|
|
|
$
|
2,691,122
|
|
Investment income, net of
expenses
|
|
634,684
|
|
|
|
470,081
|
|
Loss on
equity method
investment
|
|
(420,720
|
)
|
|
|
(95,650
|
)
|
Net realized gain (loss) on
investments
|
|
67,834
|
|
|
|
(12,383
|
)
|
Miscellaneous income
|
|
85,115
|
|
|
|
153,207
|
|
|
$
|
2,964,910
|
|
|
$
|
3,206,377
|
|
Premium
revenue:
Premium revenue for the
nine months ended September 30, 2016 decreased compared to the same period in
2015 primarily due to the reduction of our selling efforts in the last twelve
months to preserve our regulatory capital and surplus. We expect to have limited
production of new business in order to preserve surplus for the next few months,
although management has begun to re-emphasize recruiting and new sales. The
decline was also related to the GAAP accounting for premiums from our
Accumulator life insurance product (our primary product). 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 and the other 50% of the payments received are applied towards
the annuity premium which is recognized as deposits to policyholder account
balances rather than revenues. These decreases were offset by $268,000 of
premiums earned by First Wyoming as a result of our purchase of First Wyoming
which was not included in prior year results.
Investment income, net
of expenses
: The components of
net investment income for the nine months ended September 30, 2016 and 2015 are
as follows:
|
Nine months ended September
30,
|
|
2016
|
|
2015
|
Fixed maturities
|
$
|
635,840
|
|
|
$
|
488,562
|
|
Equity securities
|
|
5,250
|
|
|
$
|
186
|
|
Other
|
|
43,775
|
|
|
$
|
32,834
|
|
|
|
684,865
|
|
|
|
521,582
|
|
Less
investment expenses
|
|
(50,181
|
)
|
|
$
|
(51,501
|
)
|
|
$
|
634,684
|
|
|
$
|
470,081
|
|
The increase in investment
income is due to increasing our bond portfolio using a part of the $2.4 million
of cash received from our acquisition of Northstar, the consolidation of First
Wyoming Life and its investment income of $90,000. Policy loan interest, real
estate investments, and miscellaneous investment income is included in the
Other line item above.
Loss on equity method investment:
The decrease in investment
income (loss) for equity method investments was due to the final valuation by
a
third party of Midwests investment in First Wyoming. The original
investment in First Wyoming was $810,500. The preliminary valuation prepared for
us by
the third
party was determined to be $642,150 which resulted in a
loss of
$168,350
for the
year ended December 31, 2015. The final valuation by
the third
party valued First Wyoming at $221,430 resulting in the $420,720
loss
for the nine months ended
September 30, 2016.
Net realized gain (loss) on investments:
The increase is due to improved market conditions on sale of bonds and the $26,000 gain on the sale of Capital Reserve.
These increases were offset by the loss on our investment in Hot Dot of $67,500.
Miscellaneous income:
Miscellaneous income decreased
primarily due to our TPA (as discussed above) fee income declined due to the
First Wyoming and Northstar mergers. 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 September 30, 2016, we had three customers for whom
we performed these services. Fees earned during the nine months ended September
30, 2016 and 2015 were $47,000 and $140,013, respectively.
27
Expenses for the nine
months ended September 30, 2016 and 2015 are summarized in the table below.
|
Nine months ended September
30,
|
|
2016
|
|
2015
|
Death and other benefits
|
$
|
621,469
|
|
$
|
655,697
|
Interest credited
|
|
548,555
|
|
|
361,255
|
Increase in benefit reserves
|
|
504,617
|
|
|
572,602
|
Amortization of deferred
acquisition costs
|
|
270,515
|
|
|
373,132
|
Salaries and benefits
|
|
1,702,577
|
|
|
1,429,963
|
Other operating expenses
|
|
2,154,561
|
|
|
1,886,790
|
|
$
|
5,802,294
|
|
$
|
5,279,439
|
Death and other
benefits
: Death benefits
decreased slightly compared to the same period in 2015, as a decrease in our
pending claims and incurred but not reported claims for American Life
contributed primarily to the change. 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 of Midwest in 2010. The Company
maintains policy reserves to offset the effect of such claims. No claims have
been incurred on the new business written during the nine months ended September
30, 2016, for American Life or Great Plains Life. These decreases were offset by
$30,000 of claims relating to the inclusion of First Wyoming.
Interest credited:
The increase was due to the
increase in the deposit-type liabilities owed to the policyholders and the
inclusion of First Wyoming which added $967,000 of annuity deposits.
Increase in benefit
reserves
: The decrease in benefit
reserves reflects the maturity of our in-force block of business, the decrease
in new business written, and the increase in surrenders. These decreases were
offset by First Wyoming which added $68,000.
Amortization of deferred
acquisition costs
: The decline is
due primarily to the decrease in surrenders in 2016 and the decline in new
business written to conserve capital and surplus.
Salaries and
benefits
: The increase was due to
the inclusion of First Wyoming salaries and benefits of $220,000 and the merger
of Northstar of
$127,000
. These were offset by personnel reductions.
Other operating
expenses
: Other operating
expenses increased due to the inclusion of First Wyoming of $292,000, expenses
related to Northstar and First Wyoming mergers and the redomestication and
merger of our life subsidiaries of $246,000, and increase in travel and legal
expenses due to capital raising efforts of $69,000; offset by the reimbursement
for Great Plains Life examination fees of $67,000.
Net Loss:
Net loss was ($1,510,858) for the nine months ended September 30, 2016, compared to a net loss of ($2,073,062) for the same period in 2015. The decrease in net loss was due to the bargain purchase gain on the revised valuation of the Midwest and First Wyoming merger of $1,326,526. Midwest engaged a third party to prepare a valuation of Midwest and First Wyoming. The total bargain purchase gain recorded based upon the final valuation was $2,231,104. Of that amount, $904,578 was recognized in the fourth quarter of 2015. The sale of Capital Reserve resulted in a net gain of approximately $26,000 which included the $50,000 cash above book value and the unrealized gain on the fair market value of bonds at August 29, 2016 becoming realized at the date of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain is included in the Net realized gain (loss) on investments on the Consolidated Statement of Comprehensive Income. There were also lower death benefits, decrease in reserves, and decrease in amortization of deferred acquisition costs. These were offset by the $420,720 on the revised valuation of Midwests equity method investment in First Wyoming that was mentioned above, the net loss of $224,000 as a result of the inclusion of First Wyoming, the decline in premium revenue, increase in interest credited, and other operating expenses, lower investment income.
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 September 30, 2016 and December 31, 2015.
28
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
Percent
|
|
Carrying
|
|
Percent
|
|
|
Value
|
|
of Total
|
|
Value
|
|
of Total
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
3,411,701
|
|
11.1
|
%
|
|
$
|
3,193,499
|
|
12.5
|
%
|
States and political
subdivisions - general
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
|
|
|
397,518
|
|
1.3
|
|
|
|
822,094
|
|
3.2
|
|
States and political
subdivisions - special revenue
|
|
|
290,196
|
|
0.9
|
|
|
|
334,481
|
|
1.3
|
|
Corporate
|
|
|
23,275,959
|
|
75.7
|
|
|
|
18,921,203
|
|
74.0
|
|
Total fixed maturity securities
|
|
|
27,375,374
|
|
89.0
|
|
|
|
23,271,277
|
|
91.0
|
|
Cash
and cash equivalents
|
|
|
2,390,031
|
|
7.8
|
|
|
|
1,192,336
|
|
4.8
|
|
Equity securities, at cost
|
|
|
53,816
|
|
0.2
|
|
|
|
140,250
|
|
0.5
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, held for
investment
|
|
|
520,739
|
|
1.7
|
|
|
|
529,769
|
|
2.1
|
|
Policy loans
|
|
|
400,393
|
|
1.3
|
|
|
|
420,775
|
|
1.6
|
|
Total
|
|
$
|
30,740,353
|
|
100.0
|
%
|
|
$
|
25,554,407
|
|
100.0
|
%
|
Increases in fixed maturity
securities primarily resulted from the acquisition of Northstar
offset
by
decreases due to the
sale of
Capital Reserve effective August 29, 2016.
The following table shows
the distribution of the credit ratings of our portfolio of fixed maturity
securities by carrying value as of September 30, 2016 and December 31,
2015.
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
Value
|
|
Percent
|
|
Value
|
|
Percent
|
AAA
and U.S. Government
|
$
|
4,562,532
|
|
16.7
|
%
|
|
$
|
3,406,770
|
|
14.6
|
%
|
AA
|
|
1,470,883
|
|
5.4
|
|
|
|
1,711,366
|
|
7.4
|
|
A
|
|
7,521,017
|
|
27.5
|
|
|
|
6,341,991
|
|
27.2
|
|
BBB
|
|
13,653,971
|
|
49.9
|
|
|
|
11,534,042
|
|
49.6
|
|
Total
investment grade
|
|
27,208,403
|
|
99.4
|
|
|
|
22,994,169
|
|
98.8
|
|
BB
and other
|
|
166,971
|
|
0.6
|
|
|
|
277,108
|
|
1.2
|
|
Total
|
$
|
27,375,374
|
|
100.0
|
%
|
|
$
|
23,271,277
|
|
100.0
|
%
|
Reflecting the quality of
securities maintained by the Company,
99.4%
and 98.8% of all fixed maturity
securities were investment grade as of September 30, 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.
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.
29
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
$402,642
for the nine months ended
September 30, 2016, which was comprised primarily
of the net loss of
$1,510,858
partially offset by an increase in policy
liabilities. The primary uses of cash from operating activities were from
payments of commissions to agents. Net cash provided by investing activities was
$724,036
. The primary source of cash was from the acquisition of Northstar
Financial Corporation of $2.4 million, the sale of Capital Reserve of $1.4
million, and sales of available-for-sale securities. Offsetting this source of
cash was the Companys investments in available-for-sale
securities
. Net cash provided by
financing activities was $876,301. 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 September 30, 2016, the
Company had cash and cash equivalents totaling $2,390,031. 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. The surplus notes for $300,000 and
$250,000
matured on August
1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes
a repayment cannot be made without the prior approval of the Nebraska
regulators
and they have not approved any repayment to-date.
We
believe we have sufficient cash to fund anticipated operating expenses and pay claims for at least the next
two to three years due to
(i) our recent acquisition of Northstar, which we contributed approximately $1.0 million of capital
to American Life, our primary insurance subsidiary
and (ii) the merger of First Wyoming Life into American Life, which
significantly increased the capital and surplus of American Life. We
intend to seek to raise additional equity capital during
the last quarter of 2016.
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.
30
Contractual
Obligations
As a smaller reporting
company the Company is not required to provide the table of contractual
obligations required pursuant to this Item.