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UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2016
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER
000-10685
Midwest Holding
Inc.
(Exact name of registrant
as specified in its charter)
Nebraska
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20-0362426
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2900 S. 70
th
, Suite 400, Lincoln, NE
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68506
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(402) 489-8266
Securities registered
pursuant to Section 12(b) of the Act:
None
Securities registered
pursuant to Section 12(g) of the Act:
Voting Common Stock,
$0.001 par value
(Title of
class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in defini
tive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this
Form
10-K.
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Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a
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smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the shares of the registrant's common stock held by non-affiliates as of the last business day of the registrants most recently completed second fiscal quarter was $13.5 million.
As of March 1, 2017, there
were
22,558,956
shares
of voting common stock, par value $0.001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the
registrants definitive Proxy Statement to be filed for its
2017
Annual Meeting
of Shareholders, scheduled to be held, are incorporated by reference into Part
III of this Form 10-K.
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MIDWEST HOLDING
INC.
FORM 10-K
TABLE OF
CONTENTS
PART I
3
Table of
Contents
PART III
4
Table of Contents
PART I.
ITEM 1.
BUSINESS.
Special Note Regarding
Forward-Looking Statements
Certain statements in this
Form 10-K constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
managements expectations, estimates, projections and assumptions. In some
cases, you can identify forward-looking statements by terminology including
could, may, will, should, expect, plan, anticipate, believe,
estimate, predict, potential, intend, or continue, the negative of
these terms, or other comparable terminology used in connection with any
discussion of future operating results or financial performance. These
statements are only predictions, and reflect our managements present
expectation of future events and are subject to a number of important factors
and uncertainties that could cause actual results to differ materially from
those described in the forward-looking statements.
General
Information
Midwest Holding Inc.
(OTCQB: MDWT) (Midwest, the Company,
Registrant,
we
, our,
or us) was formed in Nebraska in
2003 to become a financial services holding company.
The Companys
sole operating
subsidiary, American Life & Security Corp. (American Life) was formed in
2009 as a Nebraska-domiciled life insurance company.
The principal executive
offices for Midwest and American Life are at 2900 South 70th Street, Suite 400,
Lincoln, Nebraska 68506, phone number is (402) 489-8266.
Development of Our
Business
We raised approximately
$18.0 million of capital to build Midwest through various exempt intra-state
offerings between 2003 and 2009. Since that time, Midwest has acquired eight
other small holding company/life insurance companies and consolidated them with
Midwest and American Life such that commencing December 31, 2016, Midwest
operated its life insurance business exclusively through American Life.
In 2009, American Life
began conducting life insurance business in Nebraska. As of December 31, 2016,
statutory capital and surplus of American Life was approximately $3.8 million.
For the years ended December 31, 2016 and 2015, American Life generated
approximately $5.9 million and $6.4 million in premium revenue on a statutory
accounting reporting basis, respectively.
Acquisitions
and Divestitures
Since
2014
On July 21, 2014, we
consummated an exchange agreement with Great Plains Financial Corporation, a
South Dakota corporation (Great Plains) and Security Capital Corporation, an
Arkansas corporation (Security Capital), acquiring the outstanding shares of
each company held by their shareholders (other than those shares already held by
us). Shortly thereafter, Great Plains and Security Capital were merged into us.
We issued a total of 4,120,000 voting common shares pursuant to these
transactions. On December 1, 2016, the former principal subsidiary of Great
Plains, Great Plains Life Assurance Company (Great Plains Life), a life
insurance company, was merged into American life.
On October 27, 2015, we
acquired the shares of First Wyoming Capital Corporation not already owned by
us, a Wyoming corporation (First Wyoming) by issuing approximately 4,767,000
shares to the former shareholders of First Wyoming. Subsequent to the closing,
First Wyoming merged into us. On September 1, 2016, the former principal
subsidiary of First Wyoming, First Wyoming Life Insurance Company (First
Wyoming Life), was merged into American Life.
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On March 15, 2016, we
acquired the outstanding shares of Northstar Financial Corp., a Minnesota
corporation (Northstar). We issued approximately
4,553,000
shares in the
transaction. Northstars primary asset at the time we acquired it was cash of
approximately $2.4 million.
On August 29, 2016, we sold
Capital Reserve to an unaffiliated party for $50,000 plus statutory capital and
surplus.
Life
Insurance
General
American Life, as it exists
today, is primarily the product of a merger in 2010 of Old Reliance and American
Life, the contribution of Great Plains Life to American Life in 2014 (which was
merged into American Life on December 1, 2016), and the merger with First
Wyoming Life into American Life on September 1, 2016
of
life insurance products.
American Life is authorized
to underwrite and market life insurance products within the State of Nebraska,
and in 14 other states.
Insurance
Policies
American Life initially
offered two insurance products, the American Accumulator, which is a
multi-benefit life insurance policy that combines cash value ordinary life
insurance with a tax deferred annuity and the Future Cornhusker Plan, a single
premium convertible term life product offered for children aged three months to
15 years. The Future Cornhusker Plan is available in annual premium amounts of
$125 or $250 and carries an initial face amount of $5,000 or $10,000. The
American Accumulator is sold in annual premium units of $2,000. The average
annual premium is approximately $2,000 with an average face amount of $66,000.
Premiums may be higher based upon the age and health of the insured.
Three new products have
been introduced over the past two
years:
(i) the Accelerator, which is a
participating whole life insurance policy with guaranteed level death benefits
and premiums; (ii) the American Protector, a 7-year pay participating whole
life insurance policy with an embedded flexible annuity and modified death and
premiums; and (iii) the Accumulator X, a 10-year pay non-participating whole
life insurance policy with an embedded flexible annuity and modified death
benefit and premiums. The Accelerator premiums vary according to issue age,
gender, and smoking classification with a minimum face amount of $25,000. The
American Protector premiums are payable for seven years, during which time the
face amount remains level. After the seven years the policy face amount
gradually decreases to the ultimate amount which is equal to 50% of the issued
policy face amount. Annual premiums per unit are $1,000 with a minimum of ½ a
unit and maximum of ten units. After the first year, 30% of the annual premiums
are allocated to the flexible annuity. The Accumulator X premiums are payable
for ten years, during which time the policy face amount remains level. After ten
years, the policy face amount gradually decreases to the ultimate amount which
is equal to 50% of the issued policy face amount. Annual premiums per unit are
$1,000 with a minimum of ½ a unit and maximum of ten units. After the first
year, 40% of the annual premiums are allocated to the flexible premium annuity.
Product
Pricing
Our products have been
approved by the appropriate insurance regulatory authorities and incorporate the
following features:
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Provide a
competitively priced product to the insurance
consumer;
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Provide sufficient
gross margins to us based upon achieving projected levels of volume to
allow the insurance subsidiary to achieve operating profits comparable to
the life insurance industry as a whole; and
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Provide sufficient
first year and renewal commission structures necessary to attract and
retain career-oriented insurance agents.
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All of our products were
developed using the services of an independent qualified consulting actuary,
Miller and Newberg
, Inc.,
of Kansas City, Missouri. In addition to product development,
Miller and Newberg serves as valuation actuary to American Life.
Underwriting
Standards
Underwriting guidelines
have a direct impact on the operating results of American Life. If the
underwriting standards that are established are not adequate, desired operating
results will not be realized. Generally, when underwriting standards are less
restrictive, more mortality claims and lower persistency will result.
Underwriting standards have a direct impact on the pricing structure of a
product. The less restrictive the underwriting standards, the higher the product
needs to be priced in order to allow for higher incidence of mortality. This
higher incidence of mortality is also reflected in greater policy reserves being
established.
American Life utilizes
information from applications and, in some cases, telephone interviews with
applicants, inspection reports, doctors statements and/or medical examinations
to determine whether a policy should be issued in accordance with an
application, with a different rating, with a rider, with reduced coverage or
rejected. In addition to an applicants medical history, the company also
considers other factors such as financial profile, foreign travel, vocations and
alcohol, drug and tobacco use. Requests for coverage are reviewed on their
merits and a policy is not issued unless the particular risk has been examined
and approved by our underwriters.
Miller and Newberg, Inc.,
and
reinsurers assist
American Life
in establishing its underwriting
standards. The underwriting for American Life is performed by its third party
administrator, Midwest. The Companys Chief Underwriter has more than 20 years
experience in such business.
Marketing
The insurance products of
American Life are marketed using a personal, face-to-face marketing concept. The
insurance agents use the shareholder base and the current policyholders of ours
and their referrals as potential clients for life insurance products. For most
of 2016, we were unable to generate a significant amount of new life insurance
sales due to the lack of excess capital and surplus. We focused on new policy
sales after our life insurance subsidiaries were consolidated with American
Life. During the final two months of 2016, new annualized premiums totaling more
than $75,000 were submitted.
Candidate agents that lack
insurance experience must complete a multiple interview process. These
individuals are secured through a recruiting agency, referrals from
shareholders, newspaper advertisements, and solicitation through the use of
on-line job sites. If hired to sell insurance, the candidate must complete a
40-hour training course conducted by a third party as well as pass the
applicable state examination. Once licensed, each agent must complete a week
long product and sales training class. Following course completion, each agent
has a training week where his or her manager will work side by side with the
agent by conducting sales meetings.
Operating
Results
There are certain factors
unique to the life insurance business in which we operate which have an adverse
effect on our operating results. One factor is that the cost of putting a new
policy in force is usually greater than the first years policy premium and,
accordingly, in the early years of a new life insurance company, these initial
costs and the required provisions for reserves have an adverse effect on
operating results. American Life, as is common among relatively young life
insurance companies, may be expected to sustain losses for several years until
such time as the block of business matures and the profit stream offsets the
cost of new business. The aggregate cost of writing new life insurance includes
such significant, nonrecurring items such as first year commissions, medical and
investigation expenses, and other expenses incidental to the issuance of new
policies, together with the initial reserves required to be established. For our
ordinary life products, the costs to cover expenses and the policyholder
liability that must be set up at policy issuance exceed the first year premium
by approximately 35%. Additionally, there is no excess of costs to cover
expenses and the policyholder liability for the Future Cornhusker product.
However, in accordance with accounting principles generally accepted in the
United States of America (GAAP), incremental direct costs that result directly
from and are essential to a life insurance company acquisition transaction and
would not have been incurred by us had the transaction not occurred, are
capitalized and amortized over the life of the premiums produced.
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Our operating results are
reported in accordance
with GAAP
for stock life companies; although
American Life will also prepare financial statements in accordance with
accounting practices prescribed or permitted by its state of domicile (statutory
basis of accounting) for the purpose of reporting to insurance regulatory
authorities. The statutory basis of accounting has many significant differences
to GAAP. For example, the incremental direct costs for acquiring new business,
which are capitalized under GAAP, as discussed in the preceding paragraph, are
expensed immediately under the statutory basis of accounting. In addition, under
GAAP, assumptions used in calculating reserves are less conservative than those
used under the statutory basis, thereby further reducing adverse effects on
operating results.
Administration
We commenced our
third party administration ("TPA")
services in 2012 by first offering the services to our life insurance
subsidiaries and other entities. These agreements, for various levels of
administrative services on behalf of each company, generate fee income for us.
Services provided to each company 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.
Management does not expect such service to be a significant source of future
revenue.
Investments
The type and amount of
investments which can be made by a life insurance company are specifically
controlled by applicable state statutes and rules and regulations of the
respective state departments of insurance. American Life has adopted investment
policies in compliance with the insurance laws of the State of Nebraska.
As an unseasoned company
ages, investment income will increase as a percent of total income due to
investment of policy reserves; therefore, it is critical that an insurer invests
its assets conservatively to ensure that investment income can become a
significant component of total revenue. Accordingly, American Life has developed
a conservative investment policy in an effort to minimize investment risk. Our
investments are managed by our Chief Executive Officer (CEO), who has over 30
years of portfolio management experience. He consults with a number of
investment bankers and traders in the management of our portfolio. Trades are
cleared through a common broker after competitive bids are solicited.
Reinsurance
American Life reinsures
with other companies (reinsurers) portions of the life insurance risks it
underwrites. The primary purpose of reinsurance is to allow a company to reduce
the amount of its risk on any particular policy by transferring a portion of the
risk to the reinsurers. However, American Life remains contingently liable for
the risk in the event any reinsurer is not able to meet its obligations under
the applicable reinsurance agreements. Further, when life insurance risks are
ceded to another insurer, the ceding company must pay a reinsurance premium to
the reinsurance company as consideration for the risk being transferred. The
payment of this reinsurance premium to the reinsurer represents a reduction of
the premium revenue received by American Life. This reduction in premium income
has a direct impact on the profitability of the ceding company. The types of
reinsurance treaties utilized are yearly renewable term based. As such, we pay
the assuming carrier an annual premium based upon term life rates which are
typically lower than those we charge.
The average face amount of
all of our life insurance policies in force is approximately $34,000, with the
American Accumulator averaging $63,000, Future Cornhusker Plan averaging $9,000,
the Accelerator averaging $81,000, the American
Protector
averaging $10,000, the
Accumulator X averaging $79,000, and death benefit policies acquired averaging
$9,000. With respect to the new policies written, American Life retains $40,000
of risk on any one life. As of December 31, 2016, approximately 22% of our gross
outstanding life insurance policies in force are reinsured with third parties.
Overall, ceded premium represents approximately $11.34 of premium per year for
each $1,000 of gross life insurance in force. All accidental death benefits are
reinsured.
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Reserves
American Life establishes
as liabilities actuarially computed reserves to meet the obligations on the
policies it writes, in accordance with the insurance laws and the regulations
Nebraska, for statutory accounting and GAAP. Reserves, whether calculated under
statutory accounting practices prescribed by various state insurance regulators
or GAAP, do not represent an exact calculation of exposure, but instead
represent our best estimates based on the relevant basis of accounting,
generally involving actuarial projections, of what we expect claims will be
based on mortality assumptions. The various actuarial factors are determined
from mortality tables and interest rates in effect when the policies are issued
and are applied against policy in force amounts. The National Association of
Insurance Commissioners (NAIC) has proposed reserve rules to be used for
Statutory Accounting purposes that are based solely on company experience.
However, these proposed rules must be adopted by a majority of states before
implementation. We have not yet performed analysis to determine the effects of
these rules. All of our reserves are established in conjunction with and
certified annually by an independent actuary.
Competition
The life insurance industry
is fiercely competitive. Many of the life insurance companies authorized to do
business in states that we conduct business in are well-established companies
with good reputations, offer a broader line of insurance products, have larger
selling organizations, and possessing significantly greater financial resources
than Midwest and American Life. American Life is not rated by industry analysts
and likely will not be rated for the foreseeable future. This has a negative
impact on the ability of American Life to compete with rated insurance
companies.
There is also considerable
competition among insurance companies in obtaining qualified sales agents, which
might require American Life to pay higher commissions to attract such agents. We
feel that we are uniquely positioned to serve our client base primarily rural
areas of the Midwest where competition from large companies is less intense due
to geographic and economic constraints.
Possible Acquisitions of
Other Companies
We may acquire one or more
life insurance or insurance-related companies in the future. Our acquisition
strategy, should this avenue continue to be pursued, will be to identify one or
more established insurance companies which have developed viable marketing
networks for their products and which are or could be managed from our Lincoln,
Nebraska administrative office. In selecting target insurance companies that
constitute suitable acquisition candidates, we will consider factors including,
but not limited to, the target companys financial statements and operating
history (including surplus adequacy and underwriting standards); the price and
features of insurance products sold and the markets serviced; the competency and
loyalty of its agents; certain income tax considerations; and the purchase
price.
The primary reasons we may
acquire an existing life insurance company or insurance-related company are: (i)
administrative, accounting and data processing systems that would allow us to
expand; (ii) to provide additional revenue streams to us through additional
marketing expansion or ancillary services; and (iii) to provide additional
profits through more effective cost management of an existing company as many
companies within the insurance industry have excessive administrative cost
levels relative to premium income.
Certain Relationships
and Affiliations
The Company and certain of
our directors and officers have current or past relationships and affiliations
with businesses that operate, once operated, or plan to operate in the life
insurance industry and that have conducted public and private stock offerings in
connection with their operations. Additional information on these relationships
and affiliations, organized by company, is as follows:
Pacific Northwest:
Pacific Northwest was
incorporated in Idaho in October 2010 with the purpose of organizing a life
insurance subsidiary in that state. We own approximately
24
.7%, or 850,000
shares, of Pacific Northwest common stock. Mark A. Oliver, the Chief Executive
Officer and the Chairman of the Board of Directors of Midwest, is Treasurer and a
member of the Board of Directors of Pacific Northwest and owns 100,000 shares of
capital stock of Pacific Northwest. Todd C. Boeve, an officer of Midwest, is
Secretary and a member of the Board of Directors of Pacific Northwest and owns
25,000 shares of capital stock of Pacific Northwest. Pacific Northwest is a
dormant company with an insignificant amount of
assets
. There is no plan at this time
to raise more capital or pursue forming a life insurance subsidiary.
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New Mexico
Capital:
New Mexico Capital was
incorporated in New Mexico in November 2010 with the purpose of organizing a
life insurance subsidiary in that state. Midwest owns 500,000 shares or
approximately 11.5% of New Mexico Capital. Mark A. Oliver, the Chief Executive
Officer and Chairman of the Board of Directors of Midwest, is Chief Executive
Officer and Chairman of the Board of New Mexico Capital and owns 186,667 shares
of its common stock or 4.3% of the outstanding common shares. Other of Midwests
present and former officers and directors also own 391,667 shares of common
stock of New Mexico Capital, or 9.0% of the outstanding shares. New Mexico
Capital is a development stage company that has not conducted operations apart
from raising capital. It needs to raise significant capital before it may seek
to form a life insurance subsidiary.
Regulation
American Life is subject to
the regulation and supervision of the insurance regulatory authorities of
Nebraska, and other state insurance regulators where it is licensed to do
business. Such regulation is primarily for the benefit of policyholders rather
than shareholders. These regulators possess broad administrative powers,
including the power to grant and revoke licenses to transact business, to
approve the form of insurance contracts, to regulate capital requirements, to
regulate the character of permitted investments, and to require deposits for the
protection of investments. These insurance laws require the filing of a detailed
annual report with the department of insurance in each state, as do other
states laws. The business and financial accounts of American Life are subject
to examination by the Nebraska Department of
Insurance
, as well as insurance
departments of any other states in which we may do business.
As the holder of a
controlling interest in American Life, we are also subject to regulation as an
insurance holding company system under the insurance laws of the state of
Nebraska. The provisions of these laws generally provide for restrictions on a
change in control of the insurance holding company, requires the filing of
certain reports with the relevant department of insurance, and limits the amount
of dividends which may be received by the holding company.
On July 21, 2010, the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
became law. The Dodd-Frank Act reshapes financial regulations in the United
States by creating new regulators, regulating new markets and firms, and
providing new enforcement powers to regulators. Virtually all major areas of the
Dodd-Frank Act will be subject to regulatory interpretation and implementation
rules requiring rulemaking that may take several years to complete. Although the
ultimate outcome of the regulatory rulemaking proceedings cannot be predicted
with certainty, we do not believe that the provisions of the Dodd-Frank Act or
the regulations promulgated thereunder will have a material impact on our
consolidated financial results or financial condition.
Employees and
Agents
As of December 31, 2016, we
had 19 full-time employees as well as approximately 90 insurance agents who
operate as independent contractors.
MARKET FOR MIDWESTS
COMMON STOCK
Market Information
Our voting common stock
became eligible for trading on the OTCQB in mid-2016 where it trades under the
ticker symbol: MDWT. At December 31, 2016, there were approximately 11,900
shareholders of record of our common stock.
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Dividends
We have not paid cash
dividends on our voting common stock and do not anticipate paying cash dividends
in the foreseeable future. Instead, we intend to retain any future earnings for
reinvestment in our business. Any future determination to pay cash dividends on
our voting common stock will be at the discretion of the Board of Directors and
will be dependent upon our financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
The stated annual dividend
on the Class B preferred shares is 7% which commenced in 2015. The Board of
Directors approved the payment of dividends of $43,120 and $56,057 during the
years ended December 31, 2016 and 2015, respectively.
ITEM 1A. RISK
FACTORS.
We face many significant
risks in the operating of our business and may face significant unforeseen risks
as well. An investment in our voting common stock should be considered
speculative. Our significant material risks are set forth below.
Ownership of shares of
Midwest voting common stock involves substantial risk, and the entire value of
those shares may be lost.
Shares of our voting common
stock constitute a high-risk investment in a developing business that has
incurred substantial losses to-date and expects to continue to incur substantial
losses for several years. No assurance or guaranty can be given that any of the
potential benefits envisioned by our business plan will prove to be available to
our shareholders, nor can any assurance or guaranty be given as to the actual
amount of financial return, if any, which may result from ownership of our
voting common shares.
The entire
value of your shares of Midwest voting common stock may be lost.
We expect significant
operating losses for a number of years.
We commenced life insurance
operations in 2009, and we expect to incur significant losses for a number of
years. American Life, as is common among unseasoned life insurance companies,
likely will incur significant losses for a number of years because the costs of
administration and the substantial nonrecurring costs of writing new life
insurance. The costs of writing new business, which are deferred and amortized
in accordance with our deferred acquisition policy, include first year
commissions payable to insurance agents, medical and investigation expenses, and
other expenses incidental to the issuance of new policies, together with the
initial reserves required to be established for each policy. We have a
significant accumulated deficit attributable primarily to our organization and
capital raising efforts and to our expensive entry into the life insurance
business.
Capital constraints
prevented us from writing any significant amounts of new life insurance business
in 2016 and 2015, which adversely affects our future prospects for
profitability
.
At present, we do not have
sufficient capital and surplus for American Life in order for it to seek to sell
a significant amount of new life insurance products. Our new life insurance
product sales were limited in 2015 and in 2016. As a result, our agency force
has
been depleted.
We intend to commence marketing efforts in 2017
and have begun to recruit new agents, which is an expensive and time consuming
process. We cannot assure that in the event we are able to alleviate our capital
constraints, we will be successful in retaining agents who are successful in
selling significant new insurance policies for American Life in a cost efficient
manner for us. A continued lack of new insurance policy sales will have a
negative long-term impact on our revenues, results of operations and financial
viability.
Midwest is a holding company and has no ability to generate revenues other than payments from American Life, which are presently not adequate to fund the
operations of Midwest.
Midwest is a holding company whose only operating subsidiary is American Life. Midwest depends on reimbursement of costs from American Life
but has no other source of revenue from American Life, particularly at this time, since American Life has limited
capital
as well. These payments are not adequate to cover the costs of Midwests operations.
Lack of available funds of Midwest could restrict its operations significantly and without additional capital, Midwest could be forced to curtail its operations significantly. This would likely have an adverse
effect on Midwest and its
liquidity and
financial
results.
We intend to raise
additional equity capital which will likely dilute the ownership interests of
our existing shareholders.
In order to fund the
capital and surplus required for American Life and to seek to grow assets and
revenue to support our business plan, we plan to seek to raise additional
capital, which we envision will sought to be raised through the issuance of
additional shares of our voting common stock
and/or
preferred stock which would be
convertible into voting common stock. If additional shares are issued, the
ownership interests of existing shareholders will be diluted. We cannot assure
we will obtain additional equity capital, or if any capital is raised, it will
be on terms beneficial to our shareholders or to us.
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We have a
limited
operating history
and amount
of assets.
We have a
limited
operating
history and have incurred substantial losses every year since we were organized.
We face all of the risks inherent in establishing an unseasoned business,
including limited capital, uncertain product markets, lack of significant
revenues, as well as fierce competition from better capitalized and more
seasoned companies. We have no control over general economic conditions,
competitors products or their pricing, customer demand and costs of marketing
or advertising to build and expand our life insurance business. There can be no
assurance that our life insurance operations will be successful or result in any
significant revenues to the extent that we achieve profits and, the likelihood
of any success must be considered in light significant operating losses incurred
to date and lack of capital to pursue expansion and significant policy sales.
These risks and the lack of a seasoned operating history make it difficult to
predict our future revenues or results of operations. As a result, our financial
results may fluctuate and fall below expectations. This could cause the value of
our voting common stock to decline.
We may not be able to
execute an acquisition strategy with any degree of success, which could cause
our business and future growth prospects to suffer
.
We intend to continue to
pursue acquisitions of insurance related companies. However, suitable
acquisition candidates may not be available on terms and conditions that are
economic to us, particularly with our limited capital resources. In pursuing
acquisitions, we will compete with other companies, most of which have greater
financial and other resources than us. Further, if we succeed in consummating
acquisitions, our business, financial condition and results of operations may be
negatively affected because:
●
|
Some of the acquired businesses may not
achieve anticipated revenues, earnings or cash flows;
|
●
|
We may assume liabilities that were not
disclosed or exceed estimates;
|
●
|
We may be unable to integrate acquired
businesses successfully and realize anticipated economic, operational and
other benefits in a timely manner;
|
●
|
Acquisitions could disrupt our on-going
business, distract our management and divert our financial and human
resources;
|
●
|
We may experience difficulties operating in
markets in which we have no or only limited direct experience;
and
|
●
|
There is the potential for loss of customers
and key employees of any acquired company.
|
Our insurance marketing
efforts may fail to achieve their proposed business plan.
American Life markets its
insurance products through the services of licensed insurance agents. New agents
are recruited through a staffing agency, referrals from shareholders, newspaper
advertisements, and solicitation through use of on-line job sites. Most of these
agents do not become successful life insurance agents. Our agency force may not
be successful in generating any significant insurance policy sales on cost
efficient terms for us.
Also, insurance products have been marketed by us using
a face-to-face, referral based marketing concept. Historically our insurance
agents have used our shareholder base and their referrals as potential clients
for our life insurance products. We cannot predict how marketing efforts will
succeed when our agents conduct general public solicitation regarding insurance
products.
It should be expected that
many of our agents will have little or no prior insurance selling experience
and, accordingly, this lack of experience may have a negative impact on the
amount of premium volume we write. The extent of this negative impact on the
premium volume written will depend primarily on our ability to timely and
adequately train agents to sell insurance products and the effectiveness of the
face-to-face marketing concept used by us.
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American Life may fail
as a result of being inadequately capitalized.
American Life must have
adequate capital and surplus capital, calculated in accordance with statutory
accounting principles prescribed by state insurance regulatory authorities to
meet regulatory requirements in Nebraska. American Life was granted a
certificate of authority by the Nebraska Department of Insurance based on
initial capital and surplus (based upon statutory accounting principles) of
approximately $3.5 million to American Life; as a result, American Life had
approximately $3.8 million (based upon statutory accounting principles) at
December 31, 2016. The Nebraska Department of Insurance may require additional
amounts of capital and surplus to support the business of American Life going
forward. The amount of capital and surplus ultimately required will be based on
certain risk-based capital standards established by statute and regulation and
administered by the Nebraska Department of Insurance. The risk-based capital
system establishes a framework for evaluating the adequacy of the minimum amount
of capital and surplus, calculated in accordance with statutory accounting
principles, necessary for an insurance company to support its overall business
operations. It identifies insurers that may be inadequately capitalized by
reviewing certain inherent risks of each insurers assets and liabilities and
its mix of net premiums written. Insurers falling below a calculated threshold
may be subject to varying degrees of regulatory action, including supervision,
rehabilitation, or liquidation. If American Life, fails to maintain required
capital levels in accordance with the risk-based capital system, its ability
to conduct business would be compromised and our ability to seek to expand our
insurance business would be significantly reduced absent a prompt infusion of
capital into American Life.
The insurance industry
is subject to numerous laws and regulations, and compliance costs and/or changes
in the regulatory environment could adversely affect our business.
Our insurance operations
are subject to government regulation in each of the states in which we conduct
business. Such regulatory authority is vested in state agencies having broad
administrative power dealing with all aspects of the insurance business,
including premium rates, policy forms, and capital adequacy, and is concerned
primarily with the protection of policyholders rather than shareholders. During
the past several years, increased scrutiny has been placed upon the insurance
regulatory framework, and certain state legislatures have considered or enacted
laws that alter, and in many cases increase, state authority to regulate
insurance companies and insurance holding company
systems. The NAIC and
state insurance regulators
reexamine existing laws and regulations on an ongoing basis, and focus on
insurance company investments and solvency issues, risk-based capital
guidelines, interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. Future NAIC initiatives, and other regulatory changes,
could have a material adverse impact on our insurance business. There can be no
assurance that American Life will be able to satisfy the regulatory requirements
of the Nebraska Department of Insurance or a similar department in any other
state in which it may wish to transact business.
Individual state guaranty
associations assess insurance companies to pay benefits to policyholders of
insolvent or failed insurance companies. The impact of such assessments may be
partly offset by credits against future state premium taxes. We cannot predict
the amount of any future assessments, nor have we attempted to estimate the
amount of assessments to be made from known insolvencies.
On July 21, 2010, President
Obama signed into law financial regulatory reform legislation, known as the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act). The Dodd-Frank Act reshapes financial regulations in the United States by
creating new regulators, regulating new markets and firms, and providing new
enforcement powers to regulators. Virtually all major areas of the Dodd-Frank
Act will be subject to regulatory interpretation and implementation rules
requiring rulemaking that may take several years to complete.
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Impairment or negative
performance of other financial institutions could adversely affect
us
We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry. The operations of U.S.
and global financial services institutions are interconnected and a decline in
the financial condition of one or more financial services institutions may
expose us to credit losses or defaults, limit our access to liquidity or
otherwise disrupt our business operations.
We operate in a highly
competitive industry, and our business will suffer if we are unable to compete
effectively.
The operating results of
life insurance companies are subject to significant fluctuations due to
competition, economic conditions, interest rates, investment performance,
maintenance of insurance ratings from rating agencies such as A.M. Best and
other factors. The life insurance business is fiercely competitive. Our ability
to compete with other insurance companies is dependent upon, among other things,
our ability to attract and retain agents to market insurance products, our
ability to develop competitive and profitable products and our ability to obtain
acceptable ratings. In connection with the development and sale of products,
American Life encounters competition from other insurance companies, most of
whom have financial and human resources substantially greater than American
Lifes, as well as competition from other investment alternatives available to
potential policyholders. We do not anticipate that American Life will be rated
by industry analysts for several years. This will likely have a negative impact
on its ability to compete with rated insurance companies.
American Life competes with
up to 800 other life insurance companies in the United States. Most life
insurance companies have greater financial resources, longer business histories,
and more diversified lines of insurance coverage than American Life. These
larger companies also generally have large sales forces. We also face
competition from direct mail and email sales campaigns.
We are highly dependent
upon our Chief Executive Officer, and the loss this officer could materially and
adversely affect our business.
Our ability to operate
successfully is dependent primarily upon the efforts of Mark A. Oliver, our
Chief Executive Officer and the Chief Executive Officer of American Life. The
loss of the services of Mr. Oliver could have a material adverse effect on our
ability to execute our business plan. The Company has executed an employment
agreement with Mr. Oliver with a term ending of 2019.
Development of life
insurance products involves the use of certain assumptions, and the inaccuracy
of these assumptions could adversely affect profitability.
In our life insurance
business, we must make certain assumptions as to expected mortality, lapse rates
and other factors in developing the pricing and other terms of life insurance
products. These assumptions are based on industry experience and are reviewed
and revised regularly to reflect actual experience on a current basis. However,
variation of actual experience from that assumed in developing such terms may
affect a products profitability or sales volume and in turn adversely impact
our revenues.
If we underestimate our
liability for future policy benefits, our results of operations could
suffer.
Liabilities established for
future life insurance policy benefits are based upon a number of factors,
including certain assumptions, such as mortality, morbidity, lapse rates and
crediting rates. If we underestimate future policy benefits, we would incur
additional expenses at the time we become aware of the inadequacy. As a result,
our ability to achieve profits would suffer.
Fluctuations in interest
rates could adversely affect our business and profitability.
Interest rate fluctuations
could impair an insurance companys ability to pay policyholder benefits with
operating and investment cash flows, cash on hand and other cash sources. Our
annuity product exposes us to the risk that changes in interest rates will
reduce any spread, or the difference between the amounts that American Life is
required to pay under the contracts and the amounts American Life is able to
earn on its investments intended to support its obligations under the contracts.
Spread is a key component of revenues.
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To the extent that interest
rates credited are less than those generally available in the marketplace,
policyholder lapses, policy loans and surrenders, and withdrawals of life
insurance policies and annuity contracts may increase as contract holders seek
to purchase products with perceived higher returns. This process may result in
cash outflows requiring that American Life sell investments at a time when the
prices of those investments are adversely affected by the increase in market
interest rates, which may result in realized investment losses.
Increases in market
interest rates may also negatively affect profitability. In periods of
increasing interest rates, we may not be able to replace invested assets with
higher yielding assets needed to fund the higher crediting rates that may be
necessary to keep interest sensitive products competitive. American Life
therefore may have to accept a lower spread and thus lower profitability or face
a decline in sales and greater loss of existing contracts.
Our investments are
subject to risks of default and reductions in market values.
We are subject to credit
risk in our investment portfolio. Defaults by third parties in the payment or
performance of their obligations under these securities, bankruptcy filings and
other events could reduce our investment income and realized investment gains or
result in the recognition of investment losses and restrict our access to cash
and investments. The value of our investments may be materially adversely
affected by increases in interest rates, downgrades in bonds included in our
portfolio, financial market performance, general economic conditions, and by
other factors that may result in the recognition of other-than-temporary
impairments. Each of these events may cause us to reduce the carrying value of
our investment portfolio and may adversely affect our results of operations.
Reinsurers with which we
do business may not honor their obligations, leaving us liable for the reinsured
coverage, and our reinsurers could increase their premium rates.
American Life cedes a
substantial amount of its insurance to other insurance companies. However, it
remains liable with respect to ceded insurance should any reinsurer fail to meet
the obligations assumed by the reinsurer. The cost of reinsurance is, in some
cases, reflected in its premium rates. Under certain reinsurance agreements, the
reinsurer may increase the rate it charges American Life for the reinsurance.
However, if the cost of reinsurance were to increase with respect to policies
for which
American Life
has guaranteed the rates, the costs to
American Life would increase could be adversely affected, which would in turn
adversely affect our profitability.
Changes in the tax laws
could adversely affect our business.
Congress has from time to
time considered possible legislation that would eliminate the deferral of
taxation on the accretion of value within certain annuities and life insurance
products. This and similar legislation, including a simplified flat tax income
tax structure with an exemption from taxation for investment income, could
adversely affect the sale of life insurance compared with other financial
products if such legislation were to be enacted. There can be no assurance as to
whether such legislation will be enacted or, if enacted, whether such
legislation would contain provisions with possible adverse effects on any
annuity and life insurance products that we and our operating
subsidiary
develop.
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Under the Internal Revenue
Code, income taxes payable by policyholders on investment earnings is deferred
during the accumulation period of certain life insurance and annuity products.
This favorable tax treatment may give certain insurance products a competitive
advantage over other non-insurance products. To the extent that the Internal
Revenue Code may be revised to reduce the tax-deferred status of life insurance
and annuity products, or to increase the tax-deferred status of competing
products, all life insurance companies, including those owned by us, would be
adversely affected with respect to their ability to sell products. Also,
depending on grandfathering provisions, the surrenders of existing annuity
contracts and life insurance policies might increase. In addition, life
insurance products are often used to fund estate tax obligations. We cannot
predict what future tax initiatives may be proposed with respect to the estate
tax or other taxes which may adversely affect us.
We do not intend to
declare cash dividends on shares of our common stock for the foreseeable future.
We have never paid a cash
dividend on our voting common stock and we do not anticipate paying dividends
for the foreseeable future. We intend to retain available funds to be used for
operations. Future dividend policy will depend on earnings, capital
requirements, financial condition and other relevant factors. Moreover, we are a
holding company without independent operations and generate limited cash flow
from our operations.
Because we do not intend
to pay cash dividends for the foreseeable future, shareholders will benefit from
an investment in Midwest voting common stock only if the stock appreciates in
value.
Because we do not expect to
pay any cash dividends on our voting common stock for the foreseeable future,
the success of any investment in our voting common stock will depend upon any
future appreciation in our value. We cannot assure that our voting common stock
will appreciate in value or even achieve or maintain a value equal to the price
at which shares were purchased, particularly since we expect to incur losses.
Policy lapses in excess
of those actuarially anticipated would have a negative impact on our financial
performance.
Our profitability would
likely be reduced if our lapse and surrender rates were to exceed the
assumptions upon which we priced our insurance policies. Policy sales costs are
deferred and recognized over the life of a policy. Excess policy lapses,
however, cause the immediate expensing or amortizing of deferred policy sales
costs.
The insurance industry
is highly regulated and our activities are restricted as a result. We expend
substantial amounts of time and incur significant expenses in connection with
complying with applicable regulations, and we are subject to the risk that more
burdensome regulations could be imposed on us.
Compliance with insurance
regulation by us is costly and time consuming. Insurance companies in the U.S.
are subject to extensive regulation in the states where they do business. This
regulation primarily protects policyholders rather than stockholders. The
regulations require:
●
|
prior approval of acquisitions of insurance
companies;
|
●
|
certain solvency standards; licensing of
insurers and their agents;
|
●
|
investment
limitations;
|
●
|
deposits of securities for the benefit of
policyholders;
|
●
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approval of policy forms and premium
rates;
|
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periodic examinations;
and
|
●
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reserves for unearned premiums, losses and
other matters.
|
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American Life is subject to
this regulation in each state in the U.S. in which it is licensed to do
business. This regulation involves significant costs and restricts operations.
We cannot predict the form of any future regulatory initiatives.
In addition, as the owner
of a life insurance subsidiary, Midwest is regulated by various state insurance
regulatory agencies under the uniform insurance holding company act. Certain
"extraordinary" intercorporate transfers of assets and dividend payments from
American Life require prior approval by the applicable state insurance
regulator. We also file detailed annual reports with the
Nebraska
Department of
Insurance and all of the states in which we are licensed. The business and
accounts of
American Life
are subject to examination by the
Nebraska
Department of Insurance, as well as inquiries and follow up, including
investigations, of the various insurance regulatory authorities of the states in
which
American Life is
licensed.
There are a substantial
number of shares of Midwest common stock eligible for future sale in the public
market. The sale of a large number of these shares could cause the market price
of our common stock to fall.
There were 22,558,956
shares of our voting common stock outstanding as of
March 28, 2017.
As of that
date, nearly all outstanding shares may be sold without restriction. Sale of a
substantial number of these shares would likely have a significant negative
effect on the market price of our voting common stock, particularly if the sales
are made over a short period of time. If our shareholders sell a large number of
shares of our voting common stock, the market price of shares of our voting
common stock could decline significantly.
Breaches of security or
interference with our technology infrastructure could harm our business
Our business is reliant
upon technology systems and networks to process, transmit and store information
and to conduct many of our business activities and transactions. Maintaining the
integrity of our systems and networks is critical to the success of our business
operations and to the protection of our proprietary information and our clients'
personal information. Any such breaches or interference that may in the future
occur could have a material adverse impact on our business, financial condition
or results of operations. Moreover, any unauthorized access to or the disclosure
or loss of our proprietary information or our clients' personal information may
result in legal claims, damage to reputation, the incurrence of costs to
eliminate or mitigate further exposure, or other damage to our business. Despite
measures taken to address and mitigate these risks, we cannot assure that our
systems and networks will not be subject to breaches or interference.
ITEM 1B. UNRESOLVED
STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
We currently lease
approximately 13,007 square feet office space at 2900 South 70th Street, Suite
400, Lincoln, Nebraska 68506. This lease was executed October 17, 2013 and
expires on January 31, 2024. We executed an amendment to the above lease for the
additional 2,876 square feet of office space in Suite 450 on October 23, 2015,
which will expire on May 31, 2017, which we do not plan to renew.
ITEM 3. 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.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
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PART II.
ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market
Information
Our voting common stock
began trading on the OTCQB as of mid-2016 where it trades under the ticker
symbol: MDWT. Shares do not actively trade. Bid and ask information by quarter
is shown below:
As of March 28, 2017, we
had issued and outstanding 22,558,956 shares of our voting common stock, 74,159
shares of Class A preferred non-voting stock, and 102,669 shares of Class B
preferred non-voting stock. No other equity securities of the Company are
outstanding.
Holders of
Record
As of
March 28, 2017,
there
were approximately 11,900 holders of record of our voting common
stock.
Dividends
We have not paid cash
dividends on our voting common stock and do not anticipate paying cash dividends
in the foreseeable future. Instead, we intend to retain any future earnings for
reinvestment in our business.
The stated annual dividend
rate on the Class B preferred shares is
7%, which
commenced in 2015. Dividends
of $43,120 and $56,057 were paid during 2016 and 2015, respectively
.
Securities Authorized
for Issuance Under Equity Compensation Plans
We have not established any equity compensation plans or granted any equity awards under such plans. As a result, there are no securities authorized for issuance under such plans.
ITEM 6. SELECTED
FINANCIAL DATA.
As a smaller reporting
company, we are not required to provide disclosure pursuant to this
Item.
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion
and analysis of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes appearing
elsewhere in this report.
Cautionary Note
Regarding Forward-Looking Statements
Except for certain
historical information contained herein, this report contains certain statements
that may be considered forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act), and Section 27A of the Securities Act of 1933, as amended, and such
statements are subject to the safe harbor created by those sections. All
statements, other than statements of historical fact, are statements that could
be deemed forward-looking statements, including without limitation: any
projections of revenues, earnings, cash flows, capital expenditures, or other
financial items; any statement of plans, strategies, and objectives of
management for future operations; any statements concerning proposed acquisition
plans, new services, or developments; any statements regarding future economic
conditions or performance; and any statements of belief
and any statement of assumptions underlying any of the foregoing. Words such as
believe, may, could, expects, hopes, estimates, projects,
intends, anticipates, and likely, and variations of these words, or
similar expressions, terms, or phrases, are intended to identify such
forward-looking statements. Forward-looking statements are inherently subject to
risks, assumptions, and uncertainties, some of which cannot be predicted or
quantified, which could cause future events and actual results to differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled Item 1A. Risk Factors, along with any supplements in Part II below.
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All such forward-looking
statements speak only as of the date of this Form 10-K. You are cautioned not to
place undue reliance on such forward-looking statements. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or any change in the
events, conditions, or circumstances on which any such statement is
based.
Overview
We were formed on October 31, 2003
for the primary purpose of becoming a financial services company. We presently conduct our business through our sole life insurance subsidiary,
American Life & Security Corp. (American Life). In 2009, American Life was issued a certificate of authority to conduct life insurance
business in Nebraska. For the years ended December 31, 2016 and 2015, we generated approximately $3.5 million and $3.4 million in premium revenue, respectively.
We have incurred losses since inception that resulted
primarily from costs incurred while raising capital and establishing and operating American Life and other entities. We expect to continue
to incur operating losses until American Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient
to cover our operating expenses.
Critical Accounting
Policies and Estimates
Our accounting and
reporting policies are in accordance with generally accepted accounting
principles (GAAP) in the United States of America. Preparation of our
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses.
The following a summary of our significant accounting policies and estimates.
These accounting policies inherently require significant judgment and
assumptions and actual operating results could differ significantly from
managements estimates determined using these policies. We believe the following
accounting policies, judgments and estimates are the most critical to the
understanding of our results of operations and financial position. A detailed
discussion of significant accounting policies is provided in this report in Note
1 Nature of Operations and Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements in this Report.
Valuation of
Investments
Our principal investments
are in fixed maturities. Fixed maturities, which are classified as available for
sale, are carried at their fair value in the consolidated balance sheets, with
unrealized gains or losses recorded in comprehensive income (loss). We utilize
external independent third-party pricing services to determine the fair values
on investment securities available for sale. We have processes, and controls in
place to review prices received from service providers for reasonableness and
unusual fluctuations in prices. In the event that a price is not available from
a third-party pricing service, we pursue external pricing from brokers.
Generally, we pursue and utilize only one broker quote per security. In doing
so, we solicit only brokers which have previously demonstrated knowledge and
experience of the subject security.
Additionally, we have minor
investments in development stage entities. These equity securities approximate
carrying value and are invested in privately-held, development stage holding
companies. These securities have no active trading. The fair value for these
securities is determined through the use of unobservable assumptions about
market participants.
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We have a policy and
process in place to identify securities that could potentially have an
impairment that is other-than-temporary. The assessment of whether impairments
have occurred is based on a case-by-case evaluation of underlying reasons for
the decline in fair value. We consider severity of impairment, duration of
impairment, forecasted recovery period, industry outlook, financial condition of
the issuer, issuer credit ratings and whether we intend to sell a security or it
is more likely than not that we would be required to sell a security prior to
the recovery of the amortized 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 we intend to sell a
security or it is more likely than not that we 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 income statement as
another-than-temporary impairment. As it relates to debt securities, if we do
not expect to recover the amortized basis, do not plan to sell the security and
if it is not more likely than not that we would be required to sell a security
before the recovery of its amortized cost, the recognition of the other-than-
temporary impairment is bifurcated. We recognize the credit loss portion through
earnings in the income statement and the noncredit loss portion in accumulated
other comprehensive loss. The credit component of an 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 our 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.
Deferred Acquisition
Costs
Incremental direct costs,
net of amounts ceded to reinsurers, that result directly from and are essential
to a life insurance contract acquisition transaction and would not have been
incurred by us had the contract acquisition not occurred, are capitalized, to
the extent recoverable, and amortized over the life of the life insurance
premiums produced. 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.
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. At least annually, a review is performed of the models
and the assumptions used to develop expected future profits, based upon
managements current view of future events. VOBA is reviewed on an ongoing basis
to determine that the unamortized portion does not exceed the expected
recoverable amounts. Managements view primarily reflects our experience but can
also reflect emerging trends within the industry. Short-term deviations in
experience affect the amortization of VOBA in the period, but do not necessarily
indicate that a change to the long-term assumptions of future experience is
warranted. If it is determined that it is appropriate to change the assumptions
related to future experience, then an unlocking adjustment is recognized for the
block of business being evaluated. Certain assumptions, such as interest spreads
and surrender rates, may be interrelated. As such, unlocking adjustments often
reflect revisions to multiple assumptions. The VOBA balance is immediately
impacted by any assumption changes, with the change reflected through the
statements of comprehensive income as an unlocking adjustment in the amount of
VOBA amortized. These adjustments can be positive or negative with adjustments
reducing amortization limited to amounts previously deferred plus interest
accrued through the date of the adjustment.
In addition, we may
consider refinements in estimates due to improved capabilities resulting from
administrative or actuarial system upgrades. We consider such enhancements to
determine whether and to what extent they are associated with prior periods or
simply improvements in the projection of future expected gross profits due to
improved functionality. To the extent they represent such improvements, these
items are applied to the appropriate financial statement line items in a manner
similar to unlocking adjustments.
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VOBA is also reviewed on an
ongoing basis to determine that the unamortized portion does not exceed the
expected recoverable amounts. If it is determined from experience that the
premium margins or gross profits are less than unamortized deferred acquisition
costs, then the asset will be adjusted downward with the adjustment recorded as
an expense in the current period.
Goodwill and
Intangibles
Goodwill represents the
excess of the amounts paid to acquire 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.
The Company elected to forgo the qualitative impairment analysis and performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2016, the fair value of the Companys reporting unit was less than the carrying value of the net assets assigned to that unit therefore the Company was required to perform further testing for impairment. Managements determination of the fair value of the reporting unit incorporated assumptions that market participants would make in valuing the reporting unit. Based upon our fair value analysis, the Company determined that the full amount of the goodwill should be written off as of December 31, 2016.
We assess 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.
We compared the carrying
value of our identifiable indefinite-lived intangible assets to the sum of the
future discounted cash flows. As of December 31, 2016, the sum of the future
discounted cash flows exceeded the carrying value of the indefinite-lived
intangible assets. The assumptions and estimates used to determine future values
are complex and subjective. They can be affected by various factors, including
external factors such as industry and economic trends, and internal factors such
as changes in our business strategy and our revenue forecasts.
Reinsurance
In the normal course of
business, we seek to limit aggregate and 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.
We generally strive to diversify our 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 our primary liability under the policies written.
Future Policy
Benefits
We establish 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 using 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. Such liabilities are reviewed quarterly
by an independent consulting actuary.
21
Table of
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Income Taxes
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. We
have no uncertain tax positions that we believe are more-likely-than not that
the benefit will not to be realized.
Recognition of
Revenues
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, which are recognized over the
period of the contracts, and included in revenue. Deposits are shown as a
financing activity in the consolidated statement 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.
New Accounting
Standards
A discussion of new
accounting standards is provided in Note 1 Nature of Operations and Summary of
Significant Accounting Policies in the Notes to Consolidated Financial
Statements.
Consolidated Results of
Operations
Net Loss
: The
increase
in net loss
in 2016 compared to 2015
was due to the
impairment of the goodwill of $1,129,824, the loss of $420,720 on the revised valuation of Midwest's equity method investment in First
Wyoming
mentioned below, the net loss of $185,000 as a result of the inclusion of First Wyoming Life. the decline in premium revenue, increase in interest credited, and other operating expenses. These were offset by 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
on a provisional basis, with the remainder recorded
in 2016
. There were also lower death benefits, decrease in reserves, and
decrease in amortization of deferred acquisition costs
in
2016.
Insurance revenues are
primarily generated from premium revenues and investment income. Insurance
revenues are summarized in the table below. Unless the context requires
otherwise, all references compare 2016 to 2015.
|
|
Year Ended December
31,
|
|
|
2016
|
|
2015
|
Premiums
|
|
$
|
3,517,458
|
|
|
$
|
3,424,377
|
|
Investment
income,
net of expenses
|
|
|
878,991
|
|
|
|
663,968
|
|
Loss
on equity method investment
|
|
|
(420,720
|
)
|
|
|
(357,437
|
)
|
Net
realized gains
(losses)
on investments
|
|
|
31,504
|
|
|
|
(117,364
|
)
|
Miscellaneous income
|
|
|
107,015
|
|
|
|
171,571
|
|
|
|
$
|
4,114,248
|
|
|
$
|
3,785,115
|
|
22
Table of
Contents
Premium
revenue:
Premium revenue
increased primarily due to the
inclusion
of $
322
,000
of premiums attributable to
the acquisition of
First Wyoming
in late 2015;
such premiums
of $
49
,000
were only recognized for two months
in 2015. This increase was offset by our decision to significantly reduce new
life insurance policy sales in 2015 and selling efforts in 2016 in order to
preserve the regulatory capital and surplus of American Life. We expect to have
limited production of new insurance business in 2017 in order to continue to
preserve
surplus,
although new sales resulted in
$75,000 of new annual premium written in the fourth quarter of 2016. The
essential flat revenue number was also due to 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 and included in future insurance policy benefits rather than in
revenues.
Investment income, net
of expenses:
The components of
net investment
income for
2016 and 2015 are as follows:
|
|
Year Ended December
|
|
|
2016
|
|
2015
|
Fixed maturities
|
|
$
|
889,860
|
|
|
$
|
681,999
|
|
Equity securities
|
|
|
1,434
|
|
|
|
186
|
|
Other
|
|
|
58,849
|
|
|
|
44,870
|
|
|
|
|
950,143
|
|
|
|
727,055
|
|
Less
investment expenses
|
|
|
(71,152
|
)
|
|
|
(63,087
|
)
|
Investment
income, net of expenses
|
|
$
|
878,991
|
|
|
$
|
663,968
|
|
The increase in investment
income was due to increased size of our bond portfolio using a part of the $2.4
million of cash received from our acquisition of Northstar in early 2016, the
consolidation of First Wyoming Life and its investment income of $
122,000
for the full year of 2016 compared to $22,000
which only included two
months in
2015. Policy loan interest, real estate
investments, and miscellaneous investment income is included in the Other line
item above.
Loss on equity method investment:
The
increase
in
investment 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 year ended December
31, 2016, offset by the gain as discussed above.
Net realized gains
(losses)
on investments:
The increase was
due primarily to improved market conditions on sale of bonds.
Miscellaneous income:
Miscellaneous income decreased
due to our TPA fee income decline as we acquired two companies in 2015 and 2016
for
whom we were performing TPA
services. We
have three customers for whom we performed these services.
We do not expect such service to be a significant source of future revenue.
Fees
earned during the years ended December 31, 2016 and 2015 were $63,500 and
$154,670, respectively.
23
Table of
Contents
Expenses are summarized in
the table below.
|
|
Year Ended December
31,
|
|
|
2016
|
|
2015
|
Death and other benefits
|
|
$
|
803,091
|
|
$
|
908,658
|
Interest credited
|
|
|
776,541
|
|
|
533,646
|
Increase in benefit reserves
|
|
|
751,743
|
|
|
777,111
|
Amortization of deferred acquisition costs
|
|
|
367,235
|
|
|
469,674
|
Salaries and benefits
|
|
|
2,345,311
|
|
|
1,940,345
|
Goodwill impairment
|
|
|
1,129,824
|
|
|
-
|
Other operating expenses
|
|
|
3,114,951
|
|
|
2,578,288
|
|
|
$
|
9,288,696
|
|
$
|
7,207,722
|
Death and other
benefits:
Death benefits
decreased due primarily to a decrease in our pending claims and incurred but not
reported claims for American Life. Death benefits are expected to continue at
current levels on our older block of business as a result of the age of the
block. We maintain policy reserves to offset the effect of all claims. These
decreases were offset by $30,000 of claims relating to the inclusion of First
Wyoming Life
for the full year of 2016 compared to $4,000 for only two months of 2015.
Interest credited:
Interest credited
increased as
a
result of the increase in the annuity deposits and the inclusion of First
Wyoming Life which added
$950,000
of annuity deposits and
$49,000
of interest
credited
for the full year of 2016 compared to $7,000 for only two months of 2015
.
Increase in benefit
reserves
: The decrease in benefit
reserves reflects the decrease in new business written and the increase in
surrenders. These decreases were offset by the inclusion of First Wyoming Life
which added
$72,000
for the full year of 2016 compared to
$15,500 for
only two months in
2015 and the maturity of our in-force block of business.
Amortization of deferred
acquisition costs
: The decline
was due primarily to the decline in new business written in the first nine
months of 2016 to conserve capital and surplus. New business was written in the
fourth quarter of 2016 of $75,000 of annual premiums.
Salaries and benefits:
The increase was due to the inclusion of First Wyoming salaries and benefits of
$390,000
for
the full year of 2016 compared to $75,500 for only two months of 2015
and
similar
costs after
the merger of Northstar of $225,000
in March 2016.
These were offset by personnel reductions. We expect further salary and
benefit reductions of approximately $166,000
in 2017 compared to 2016 and $184,000 in 2018 compared to 2017.
Goodwill impairment:
During our goodwill analysis, we determined that we needed to impair the whole balance of $1,129,824.
Other operating
expenses
: Other operating
expenses increased due to
the inclusion
of First Wyoming Life expenses of
$354,000
for the full year of 2016 compared to $37,000 for only two months of 2015
, expenses related to Northstar and First Wyoming mergers and the
redomestication and merger of our
former
life subsidiaries of $289,159 and an increase
in travel and legal expenses due to capital raising efforts of $82,000; offset
by the reimbursement for Great Plains Life 2015 regulatory examination fees of
$67,000.
24
Table of
Contents
Investments
Our overall investment
philosophy is reflected in the allocation of our investments. We emphasize
investment grade debt securities, with smaller holdings in equity securities,
real estate held for investment, policy loans, and other investments. 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.
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
Percent
|
|
Carrying
|
|
Percent
|
|
|
Value
|
|
of Total
|
|
Value
|
|
of Total
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
3,224,219
|
|
11.0
|
%
|
|
$
|
3,193,499
|
|
12.5
|
%
|
States and political
subdivisions - general
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
|
|
|
381,395
|
|
1.3
|
|
|
|
995,051
|
|
3.9
|
|
States and political
subdivisions - special revenue
|
|
|
277,735
|
|
0.9
|
|
|
|
273,336
|
|
1.1
|
|
Corporate
|
|
|
23,855,590
|
|
81.3
|
|
|
|
18,809,391
|
|
73.5
|
|
Total fixed maturity securities
|
|
|
27,738,939
|
|
94.5
|
|
|
|
23,271,277
|
|
91.0
|
|
Cash
and cash equivalents
|
|
|
661,545
|
|
2.3
|
|
|
|
1,192,336
|
|
4.8
|
|
Equity securities, at cost
|
|
|
-
|
|
-
|
|
|
|
140,250
|
|
0.5
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, held for
investment
|
|
|
517,729
|
|
1.8
|
|
|
|
529,769
|
|
2.1
|
|
Policy loans
|
|
|
412,583
|
|
1.4
|
|
|
|
420,775
|
|
1.6
|
|
Total
|
|
$
|
29,330,796
|
|
100.0
|
%
|
|
$
|
25,554,407
|
|
100.0
|
%
|
Increases in fixed maturity
securities primarily resulted from the purchase of additional bonds from normal
operating activities.
The following table shows
the distribution of the credit ratings of our portfolio of fixed maturity
securities by carrying value as of December 31, 2016 and 2015.
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
Percent
|
|
Value
|
|
Percent
|
AAA
and U.S. Government
|
|
$
|
4,301,163
|
|
15.5
|
%
|
|
$
|
3,406,770
|
|
14.7
|
%
|
AA
|
|
|
1,612,897
|
|
5.8
|
|
|
|
1,711,366
|
|
7.4
|
|
A
|
|
|
8,319,121
|
|
30.1
|
|
|
|
6,341,991
|
|
27.1
|
|
BBB
|
|
|
12,827,754
|
|
46.2
|
|
|
|
11,534,042
|
|
49.6
|
|
Total investment
grade
|
|
|
27,060,935
|
|
97.6
|
|
|
|
22,994,169
|
|
98.8
|
|
BB
and other
|
|
|
678,004
|
|
2.4
|
|
|
|
277,108
|
|
1.2
|
|
Total
|
|
$
|
27,738,939
|
|
100.0
|
%
|
|
$
|
23,271,277
|
|
100.0
|
%
|
Reflecting the quality of
securities maintained by us, 97.6% and 98.8% of all fixed maturity securities
were investment grade as of December 31, 2016 and 2015, respectively. Due to the
low interest rate environment, we have invested in bonds with A ratings at the
time the investment was made.
Market Risks of
Financial Instruments
We hold a diversified
portfolio of investments that primarily includes cash, bonds, stocks, real
estate, held for investment, and notes receivable. 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.
25
Table of
Contents
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. We attempt to mitigate our
exposure to adverse interest rate movements through staggering the maturities of
the fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations. Due to the composition of our book of
insurance business, we believe it is unlikely that we would encounter large
surrender activity due to an interest rate increase that would force the
disposal of fixed maturities at a loss.
Credit
Risk
We are 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. We manage our credit risk
through
diversification of investments amongst many corporations and numerous industries. Additionally our investment policy limits the size of holding in any particular issuer.
Liquidity and Capital
Resources
At December 31, 2016, we
had cash and cash equivalents totaling
$661,545
. We believe that our existing
cash and cash equivalents will be sufficient to fund the anticipated operating
expenses and capital expenditures for at
least
twelve
months
when combined with
the level of maturing securities and the liquidity associated with our
investment
portfolio.
The
Company is also looking to raise additional capital in 2017. The Company has
based this estimate upon assumptions that may prove to be wrong and we could use
our capital resources sooner than they currently expect. Our 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.
Since inception, our
operations have been financed primarily through the sale of voting common stock
and preferred stock. Our operations have generated significant operating losses
since we were incorporated in 2003. We expect significant losses for several
years.
Aside from raising capital,
which has funded the vast majority of our operations, 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 meet 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 in the future meet our ongoing
cash flow needs. The approach of matching asset and liability durations and
yields requires an appropriate mix of investments. Our 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 for
2017.
Net cash used by operating
activities was
$927,125
for 2016, which was comprised primarily of the net
loss of
$3,847,922
partially offset by an increase in policy liabilities of
$939,095. Net cash used in investing activities from was
907,664.
. The primary
source of cash was from sales of available for sale securities, the sale of an
inactive subsidiary, and the acquisition of Northstar. Offsetting this source of
cash was our purchases of investments in available-for-sale securities and the
purchase of property and equipment. Net cash provided by financing activities
was $1,303,998. The primary source of cash was
net
receipts on deposit-type
contracts, offset by dividends paid to Class B Preferred Stock
shareholders.
26
Table of
Contents
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. We
attempt, in establishing premiums, to anticipate the potential impact of
inflation. If, for competitive reasons, premiums cannot be increased to
anticipate inflation, this cost would be absorbed by us. Inflation also affects
the rate of investment return on the investment portfolio with a corresponding
effect on investment income.
Off-Balance Sheet
Arrangements
We have no off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Contractual
Obligations
As a smaller reporting
company we are not required to provide the table of contractual obligations
required pursuant to this Item.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company we are not required to provide disclosure
pursuant to this item.
ITEM 8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial
statements are included as a part of this report beginning on page
F-1.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
27
Table of Contents
ITEM 9A. CONTROLS AND
PROCEDURES.
Managements Annual
Report on Internal Control over Financial Reporting
The information contained in this section addresses
management's evaluation of our disclosure controls and procedures and our assessment of our internal control over financial reporting
for the year ended December 31, 2016.
Evaluation of Disclosure
Controls and Procedures
Management (with the
participation of our principal executive officer/principal financial officer),
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Based on this evaluation, our principal executive officer/principal
financial officer concluded that, because of the material weakness described below, as of the end of the period covered in this
report, our disclosure controls and procedures along with the related internal
controls over financial reporting were not effective to provide reasonable
assurance that the information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission
(SEC) rules and forms, and is accumulated and communicated to our management,
including our principal executive officer/principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Inherent Limitations on
Effectiveness of Controls
Our management, including
the principal executive officer/principal financial officer, does not expect
that our disclosure controls or our internal control over financial reporting
will prevent or detect all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that its objectives will be met. Our controls and procedures are designed to
provide reasonable assurance that our control systems objective will be met and
our principal executive officer/principal financial officer has concluded that
our disclosure controls and procedures are not effective at the reasonable
assurance level. The design of a control system must reflect that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by individual acts of persons, by collusion of
two or more people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood
of future events and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of
any evaluation of the effectiveness of controls in future periods are subject to
risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures.
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external purposes
in accordance with U.S. generally accepted accounting principles (GAAP). Our
internal control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of our assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures by us are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on our
consolidated financial statements.
Under the supervision and
with the participation of our management, including our principal executive
officer/principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of the period
covered by this report based on the criteria for effective internal control
described in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on the
results of managements assessment and evaluation, principal executive
officer/principal financial officer concluded that our internal control over
financial reporting was not effective due to the material weaknesses described
below.
28
Table of Contents
This report does not
include an attestation report of our independent registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by our independent registered public accounting
firm pursuant to the rules of the SEC applicable to smaller reporting companies.
Changes in Internal
Control over Financial Reporting
Our efforts to improve our
internal controls are ongoing and focused on expanding our organizational
capabilities to improve our control environment and on implementing process
changes to strengthen our internal control and monitoring activities. In
addition, although we are implementing remedial measures to address all of the
identified material weaknesses as discussed below, our assessment of the impact
of these measures have not been completed as of the filing date of this report.
Material Weaknesses
A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A number of significant audit adjustments were
made to our consolidated financial statements as of December 31, 2016 and for
the year then ended, resulting in material changes to net loss and
stockholders equity. The audit adjustments related primarily to complex nonrecurring transactions with
our investees and how assets are evaluated for collectability and
impairment. The material weakness resulted from the Company not utilizing sufficient technical accounting capabilities in recording and analyzing these transactions.
Remediation
Management is developing certain remediation steps to address the material weaknesses discussed above and to improve our internal
control over financial reporting. If not remediated, these control deficiencies could result in material misstatements to our future
financial statements. Our management and our Board of Directors take the control and integrity of our financial statements seriously
and believe that the remediation steps described below are essential to maintaining an effective internal control environment. The
following remediation steps will be implemented by us as soon as practicable with respect to the material weaknesses described
herein and particularly with respect to future complex non-routine transactions:
|
1)
|
|
Continual evaluation and enhancement of internal technical accounting capabilities supported by the use of third-party
advisors where our Management and internal control personnel believe the complexity of a particular transaction exceeds
our internal capabilities;
|
|
|
|
|
|
2)
|
|
Enhanced management awareness and oversight to identify early on complex technical accounting issues and early
identification of situations and transactions which might require the use of third-part advisors and consultants.
|
We believe that these remediation actions will result in significant improvements in our controls. We intend to perform
such procedures and commit such resources as necessary to continue to allow us to overcome or mitigate the above
material weaknesses such that we can make materially and accurate quarterly and annual SEC financial filings.
29
Table of Contents
ITEM 9B. OTHER
INFORMATION.
None.
PART III.
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by
Item 10 is incorporated into Part III of this Annual Report on Form 10-K by
reference to our definitive Proxy Statement for the Annual Meeting of
Stockholders.
We have adopted a Code of
Ethics for Officers, Directors and Employees. The Code of Ethics is available on
our website at http://www.midwestholding.com.
ITEM 11. EXECUTIVE
COMPENSATION
The information required by
Item 11 is incorporated into Part III of this Annual Report on Form 10-K by
reference to our definitive Proxy Statement for the 2017 Annual Meeting of
Stockholders.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by
Item 12 is incorporated into Part III of this Annual Report on Form 10-K by
reference to our definitive Proxy Statement for the 2017 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by
Item 13 is incorporated into Part III of this Annual Report on Form 10-K by
reference to our definitive Proxy Statement for the 2017 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information required by
Item 14 is incorporated into Part III of this Annual Report on Form 10-K by
reference to our definitive Proxy Statement for the 2017 Annual Meeting of
Stockholders.
30
Table of Contents
PART IV.
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
(a)
|
1. Consolidated
Financial Statements:
|
|
|
|
The list of financial
statements filed as part of this Annual Report on Form 10-K is provided on
page F-1.
|
|
|
2. Financial
Statement Schedules:
|
|
|
The list of financial
statement schedules filed as part of this Annual Report on Form 10-K is
provided on page FS-1.
|
|
(b)
|
Exhibits:
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
2.1
|
|
Plan and Agreement of
Merger First Wyoming Capital Corporation, Midwest Holding Inc. and
Midwest Acquisition, Inc. dated July 31, 2015. (Incorporated by reference
to Appendix A to the Registration Statement on Form S-4, field on August
26, 2015.)
|
|
|
|
2.2
|
|
Plan and Agreement of
Exchange Midwest Holding Inc., Northstar Financial Corporation dated
December 18, 2015. (Incorporated by reference to Appendix A to the
Registration Statement on Form
S-4,
filed on January 8,
2016.)
|
|
|
|
3.1
|
|
Amended and Restated
Articles of Incorporation, dated March 29, 2010 (Incorporated by reference
to Exhibit 3.1 to the Companys Form 10 Registration Statement, filed
December 12, 2011.)
|
|
|
|
3.2
|
|
Articles of Amendment
to the Amended and Restated Articles of Incorporation, dated May 6, 2010.
(Incorporated by reference to Exhibit 3.2 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
3.3
|
|
Amended and Restated
Bylaws. (Incorporated by reference to Exhibit 3.3 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
3.4
|
|
Articles of Amendment
to the amended and Restated Articles of Incorporation of
Midwest
Holding Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Form 8-K, filed
May 15,
2014.)
|
|
|
|
3.5
|
|
American Life &
Security Corp. State of Nebraska Department of Insurance Amended
Certificate of Authority, issued August 3, 2011. (Incorporated by
reference to Exhibit 3.4 to the Companys Amendment No. 2 to Form 10
Registration Statement, filed March 20, 2012.)
|
|
|
|
10.1
|
|
Consulting and
Advisory Agreement, dated September 1, 2009, by and between Midwest
Holding Inc. and Bison Capital Corp. (f/k/a Corporate Development Inc.).
(Incorporated by reference to Exhibit 10.3 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.2
|
|
Administrative
Services Agreement, dated August 17, 2009, by and between American Life
& Security Corp. and Investors Heritage Life Insurance Company.
(Incorporated by reference to Exhibit 10.5 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.3
|
|
Employment Agreement,
dated July 1, 2011, by and between Midwest Holding Inc. and Mark Oliver.
(Incorporated by reference to Exhibit 10.2 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.4
|
|
Automatic Reinsurance
Agreement, dated August 1, 2009, by and between American Life &
Security Corp. and Optimum Re Insurance Company. (Incorporated by
reference to Exhibit 10.6 to the Companys Form 10 Registration Statement,
filed December 12, 2011.)
|
31
Table of Contents
Exhibit
Number
|
|
Description
|
10.5
|
|
Amendment Number One
to Automatic Reinsurance Agreement, dated August 1, 2009, by and between
American Life & Security Corp. and Optimum Re Insurance Company.
(Incorporated by reference to Exhibit 10.7 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.6
|
|
Amendment Number Two
to Automatic Reinsurance Agreement, dated August 1, 2009, by and between
American Life & Security Corp. and Optimum Re Insurance Company.
(Incorporated by reference to Exhibit 10.8 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.7
|
|
Bulk Reinsurance
Agreement, dated September 1, 2009, by and between American Life &
Security Corp. and Optimum Re Insurance Company. (Incorporated by
reference to Exhibit 10.9 to the Companys Form 10 Registration Statement,
filed December 12, 2011.)
|
|
|
|
10.8
|
|
Amendment to all
Reinsurance Agreements, dated August 4, 2011, by and between American Life
& Security Corp. and Optimum Re Insurance Company. (Incorporated by
reference to Exhibit 10.10 to the Companys Form 10 Registration
Statement, filed December 12, 2011.)
|
|
|
|
10.9
|
|
Automatic Reinsurance
Agreement, dated August 1, 2009, by and between American Life &
Security Corp. and Investors Heritage Life Insurance Company.
(Incorporated by reference to Exhibit 10.11 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
|
|
|
10.10
|
|
Reinsurance
Agreement, dated January 1, 2010, by and between American Life and
Security National Life Insurance Company. (Incorporated by reference to
Exhibit 10.12 to the Companys Form 10 Registration Statement, filed
December 12, 2011.)
|
|
|
|
10.11
|
|
Master Reinsurance
Agreement, dated December 20, 1999, by and between Old Reliance Insurance
Company and American Founders Life Insurance Company. (Incorporated by
reference to Exhibit 10.13 to the Companys Amendment No. 1 to Form 10
Registration Statement, filed February 3, 2012.)
|
|
|
|
10.12
|
|
Amendment Number One
to Master Reinsurance Agreement, dated December 20, 1999, by and between
Old Reliance Insurance Company and American Founders Life Insurance
Company. (Incorporated by reference to Exhibit 10.14 to the Companys
Amendment No. 1 to Form 10 Registration Statement, filed February 3,
2012.)
|
|
|
|
10.13
|
|
Reinsurance Agreement
Number One, dated December 31, 1999, by and between Old Reliance Insurance
Company and American Founders Life Insurance Company. (Incorporated by
reference to Exhibit 10.15 to the Companys Amendment No. 1 to Form 10
Registration Statement, filed February 3, 2012.)
|
|
|
|
10.14
|
|
Amendment Number One
to Reinsurance Agreement Number One, dated December 31, 1999, by and
between Old Reliance Insurance Company and American Founders Life
Insurance Company. (Incorporated by reference to Exhibit 10.16 to the
Companys Amendment No. 1 to Form 10 Registration Statement, filed
February 3, 2012.)
|
|
|
|
10.15
|
|
Master Reinsurance
Agreement, dated April 1, 2000, by and between Old Reliance Insurance
Company and American Founders Life Insurance Company. (Incorporated by
reference to Exhibit 10.17 to the Companys Amendment No. 1 to Form 10
Registration Statement, filed February 3, 2012.)
|
|
|
|
10.16
|
|
Reinsurance Agreement
Number One, dated April 1, 2000, by and between Old Reliance Insurance
Company and American Founders Life Insurance Company. (Incorporated by
reference to Exhibit 10.18 to the Companys Amendment No. 1 to Form 10
Registration Statement, filed February
3, 2012.)
|
32
Table of Contents
Exhibit
Number
|
|
Description
|
14.1
|
|
Code of Ethics
(Incorporated by reference to Exhibit 14.1 to the Companys Form 10-K,
filed April 2, 2012.)
|
|
21.1*
|
|
List of Subsidiaries.
|
|
|
|
31.1*
|
|
Certification of
Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2*
|
|
Certification of
Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS **
|
|
XBRL Instance
Document.
|
|
|
|
101.SCH **
|
|
XBRL Taxonomy
Extension Schema Document.
|
|
|
|
101.CAL **
|
|
XBRL Taxonomy
Extension Calculation Linkbase Document.
|
|
|
|
101.LAB **
|
|
XBRL Taxonomy
Extension Label Linkbase Document.
|
|
|
|
101.PRE **
|
|
XBRL Taxonomy
Extension Presentation Linkbase Document.
|
|
|
|
101.DEF **
|
|
XBRL Taxonomy
Extension Definition Linkbase Document.
|
____________________
ITEM 16. FORM 10-K SUMMARY
None.
33
Table of Contents
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March
28
,
2017
MIDWEST HOLDING INC.
|
|
|
By:
|
/s/
|
Mark A. Oliver
|
|
Name:
|
|
Mark
A. Oliver
|
Title:
|
|
Chief Executive Officer
|
(Principal
Executive Officer)
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Mark A.
Oliver
|
|
Chief Executive Officer,
Treasurer,
|
|
March
28
,
2017
|
Mark A. Oliver
|
|
Chairman of the Board
|
|
|
|
|
(Principal Executive Officer,
|
|
|
|
|
Principal Financial Officer)
|
|
|
|
/s/ Dana
Stapleton
|
|
Director
|
|
March
28
, 2017
|
Dana Stapleton
|
|
|
|
|
|
/s/ Jack Theeler
|
|
Director
|
|
March
28
, 2017
|
Jack Theeler
|
|
|
|
|
|
/s/ Scott
Morrison
|
|
Director
|
|
March
28
, 2017
|
Scott Morrison
|
|
|
|
|
|
|
|
Director
|
|
March
28
, 2017
|
Firman Leung
|
|
|
|
|
|
/s/ John T.
Hompe
|
|
Director
|
|
March
28
, 2017
|
John T. Hompe
|
|
|
|
|
|
/s/ Steve Connor
|
|
Director
|
|
March
28
, 2017
|
Steve Connor
|
|
|
|
|
34
Table of Contents
MIDWEST HOLDING INC. AND
SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Report of Independent
Registered Public Accounting Firm
To the Board of Directors
and Stockholders
Midwest Holding Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Holding, Inc. and subsidiaries (the Company) as of December 31, 2016 and 2015,
and the related consolidated statements of income, comprehensive income, changes in stockholders equity and cash flows for the years then ended. Our audits also included the financial statement schedules of Midwest Holding Inc. listed in Item 15. These financial statements
and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial
reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal controls over
financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Midwest Holding Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, which considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Omaha,
Nebraska
March
30
, 2017
F-2
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Consolidated Balance
Sheets
December 31, 2016 and
2015
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
|
|
|
Investments,
available for sale, at fair value
|
|
|
|
|
|
|
|
|
Fixed
maturities (amortized cost: $29,024,083 and
$24,279,231
,
respectively)
|
|
$
|
27,738,939
|
|
|
$
|
23,271,277
|
|
Equity
securities, at cost
|
|
|
-
|
|
|
|
140,250
|
|
Real
estate, held for investment
|
|
|
517,729
|
|
|
|
529,769
|
|
Policy
Loans
|
|
|
412,583
|
|
|
|
420,775
|
|
Total
investments
|
|
|
28,669,251
|
|
|
|
24,362,071
|
|
Cash
and cash equivalents
|
|
|
661,545
|
|
|
|
1,192,336
|
|
Amounts
recoverable from reinsurers
|
|
|
11,704,055
|
|
|
|
12,212,656
|
|
Interest due
and accrued
|
|
|
312,054
|
|
|
|
264,791
|
|
Due
premiums
|
|
|
670,989
|
|
|
|
640,073
|
|
Deferred
acquisition costs, net
|
|
|
2,568,799
|
|
|
|
2,765,063
|
|
Value
of business acquired, net
|
|
|
1,726,192
|
|
|
|
2,039,110
|
|
Intangible
assets
|
|
|
700,000
|
|
|
|
700,000
|
|
Goodwill
|
|
|
-
|
|
|
|
1,129,824
|
|
Property
and equipment, net
|
|
|
158,471
|
|
|
|
217,565
|
|
Assets
associated with business held for sale (see Note 3)
|
|
|
-
|
|
|
|
16,870,241
|
|
Other
assets
|
|
|
95,773
|
|
|
|
532,674
|
|
Total
assets
|
|
$
|
47,267,129
|
|
|
$
|
62,926,404
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Benefit
reserves
|
|
$
|
24,606,543
|
|
|
$
|
24,155,140
|
|
Policy
claims
|
|
|
565,148
|
|
|
|
839,859
|
|
Deposit-type
contracts
|
|
|
16,012,567
|
|
|
|
13,897,421
|
|
Advance
premiums
|
|
|
52,074
|
|
|
|
57,699
|
|
Total
policy liabilities
|
|
|
41,236,332
|
|
|
|
38,950,119
|
|
Accounts
payable and accrued expenses
|
|
|
1,211,875
|
|
|
|
1,013,313
|
|
Liabilities
associated with business held for sale (see Note 3)
|
|
|
-
|
|
|
|
15,508,998
|
|
Surplus
notes
|
|
|
550,000
|
|
|
|
550,000
|
|
Total
liabilities
|
|
|
42,998,207
|
|
|
|
56,022,430
|
|
Commitments and Contingencies (See Note
8)
|
|
|
|
|
|
|
|
|
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 December 31, 2016 and 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
|
|
|
|
|
|
|
|
|
December
31, 2016 and 2015.
|
|
|
103
|
|
|
|
103
|
|
Common
stock, $0.001 par value. Authorized 120,000,000 shares; issued
and
|
|
|
|
|
|
|
|
|
outstanding
22,558,956
and
18,006,301
shares as of December 31, 2016
|
|
|
22,559
|
|
|
|
18,006
|
|
and
2015, respectively.
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
33,036,924
|
|
|
|
31,584,529
|
|
Accumulated
deficit
|
|
|
(27,533,447
|
)
|
|
|
(23,685,525
|
)
|
Accumulated
other comprehensive loss
|
|
|
(1,257,291
|
)
|
|
|
(1,013,213
|
)
|
Total
stockholders' equity
|
|
|
4,268,922
|
|
|
|
6,903,974
|
|
Total
liabilities and stockholders' equity
|
|
$
|
47,267,129
|
|
|
$
|
62,926,404
|
|
See Notes to Consolidated
Financial Statements.
F-3
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements
of Comprehensive Income
Years Ended December 31,
2016 and 2015
|
|
2016
|
|
2015
|
Income:
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
3,517,458
|
|
|
$
|
3,424,377
|
|
Investment
income, net of expenses
|
|
|
878,991
|
|
|
|
663,968
|
|
Loss
on equity method investment
|
|
|
(420,720
|
)
|
|
|
(357,437
|
)
|
Net
realized gains (losses) on investments
|
|
|
31,504
|
|
|
|
(117,364
|
)
|
Miscellaneous
income
|
|
|
107,015
|
|
|
|
171,571
|
|
|
|
|
4,114,248
|
|
|
|
3,785,115
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Death
and other benefits
|
|
|
803,091
|
|
|
|
908,658
|
|
Interest
credited
|
|
|
776,541
|
|
|
|
533,646
|
|
Increase
in benefit reserves
|
|
|
751,743
|
|
|
|
777,111
|
|
Amortization
of deferred acquisition costs
|
|
|
367,235
|
|
|
|
469,674
|
|
Salaries
and benefits
|
|
|
2,345,311
|
|
|
|
1,940,345
|
|
Goodwill impairment
|
|
|
1,129,824
|
|
|
|
-
|
|
Other
operating expenses
|
|
|
3,114,951
|
|
|
|
2,578,288
|
|
|
|
|
9,288,448
|
|
|
|
7,207,722
|
|
Operating
loss
|
|
|
(5,174,448
|
)
|
|
|
(3,422,607
|
)
|
Bargain
purchase gain for business acquisition
|
|
|
1,326,526
|
|
|
|
904,578
|
|
Loss before
income taxes
|
|
|
(3,847,922
|
)
|
|
|
(2,518,029
|
)
|
Income tax
expense
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(3,847,922
|
)
|
|
|
(2,518,029
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
Unrealized
losses
on investments
|
|
|
|
|
|
|
|
|
arising
during period
|
|
|
(212,574
|
)
|
|
|
(737,832
|
)
|
Less:
reclassification adjustment for net
|
|
|
|
|
|
|
|
|
realized
(gains) losses on investments
|
|
|
(31,504
|
)
|
|
|
117,364
|
|
Other
comprehensive
loss
|
|
|
(244,078
|
)
|
|
|
(620,468
|
)
|
Comprehensive
loss
|
|
$
|
(4,092,000
|
)
|
|
$
|
(3,138,497
|
)
|
Net
loss
per common share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
See Notes to Consolidated
Financial Statements.
F-4
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements
of Stockholders Equity
Years Ended December 31,
2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
Total
|
|
|
Preferred
|
|
Common
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
Stockholders'
|
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Equity
|
Balance, December 31, 2014
|
|
$
|
177
|
|
$
|
13,168
|
|
$
|
29,583,631
|
|
|
$
|
(21,167,496
|
)
|
|
$
|
(392,745
|
)
|
|
$
|
8,036,735
|
|
Issuances of common stock
|
|
|
-
|
|
|
71
|
|
|
250,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,181
|
|
Preferred stock dividend
|
|
|
-
|
|
|
-
|
|
|
(56,057
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(56,057
|
)
|
Merger of First Wyoming Capital Corporation
|
|
|
-
|
|
|
4,767
|
|
|
1,806,845
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,811,612
|
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(2,518,029
|
)
|
|
|
-
|
|
|
|
(2,518,029
|
)
|
Other comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(620,468
|
)
|
|
|
(620,468
|
)
|
Balance, December 31, 2015
|
|
$
|
177
|
|
$
|
18,006
|
|
$
|
31,584,529
|
|
|
$
|
(23,685,525
|
)
|
|
$
|
(1,013,213
|
)
|
|
$
|
6,903,974
|
|
Preferred stock dividend
|
|
|
-
|
|
|
-
|
|
|
(43,120
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43,120
|
)
|
Acquisition of Northstar Financial Corporation
|
|
|
-
|
|
|
4,553
|
|
|
2,401,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,405,874
|
|
Merger of First Wyoming Capital
Corporation
|
|
|
-
|
|
|
-
|
|
|
(905,806
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(905,806
|
)
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
3,847,922
|
|
|
|
-
|
|
|
|
(3,847,922
|
)
|
Other comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(244,078
|
)
|
|
|
(244,078
|
)
|
Balance, December 31, 2016
|
|
$
|
177
|
|
$
|
22,559
|
|
$
|
33,036,924
|
|
|
$
|
(27,533,447
|
)
|
|
$
|
(1,257,291
|
)
|
|
$
|
4,268,922
|
|
See Notes to Consolidated
Financial Statements.
F-5
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Consolidated Statements
of Cash Flows
Years Ended December 31,
2016 and 2015
|
|
2016
|
|
2015
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,847,922
|
)
|
|
$
|
(2,518,029
|
)
|
Adjustments
to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Net
premium and discount on investments
|
|
|
213,055
|
|
|
|
173,915
|
|
Depreciation
and amortization
|
|
|
381,582
|
|
|
|
400,870
|
|
Deferred
acquisition costs capitalized
|
|
|
(178,419
|
)
|
|
|
(552,466
|
)
|
Amortization
of deferred acquisition costs
|
|
|
367,235
|
|
|
|
469,674
|
|
Net
realized losses (gains) on investments
|
|
|
(31,504
|
)
|
|
|
117,364
|
|
Goodwill impairment
|
|
|
1,129,824
|
|
|
|
-
|
|
Bargain
purchase gain for business acquired
|
|
|
(1,326,526
|
)
|
|
|
(904,578
|
)
|
Loss
on equity method investment
|
|
|
420,720
|
|
|
|
357,437
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Amounts
recoverable from reinsurers
|
|
|
508,601
|
|
|
|
424,254
|
|
Interest
and dividends due and accrued
|
|
|
(47,263
|
)
|
|
|
(44,596
|
)
|
Due
premiums
|
|
|
(30,916
|
)
|
|
|
(21,568
|
)
|
Policy
liabilities
|
|
|
939,095
|
|
|
|
1,185,036
|
|
Other
assets and liabilities
|
|
|
575,313
|
|
|
|
(219,213
|
)
|
Other
assets and liabilities held for sale
|
|
|
-
|
|
|
|
(68,864
|
)
|
Net cash
used for
operating activities
|
|
|
(927,125
|
)
|
|
|
(1,200,764
|
)
|
Cash Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(19,213,405
|
)
|
|
|
(16,090,449
|
)
|
Proceeds
from sale or maturity
|
|
|
14,387,936
|
|
|
|
13,594,158
|
|
Securities
associated with business held for sale
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
-
|
|
|
|
(964,450
|
)
|
Proceeds
from sale or maturity
|
|
|
52,703
|
|
|
|
869,528
|
|
Net
change in equity securities carried at cost:
|
|
|
|
|
|
|
|
|
Proceeds
from sale
|
|
|
30,250
|
|
|
|
9,000
|
|
Proceeds
from payments on mortgage loans on real estate, held for
investment
|
|
|
-
|
|
|
|
349,386
|
|
Sale
of Capital Reserve Life Insurance Company
|
|
|
1,432,446
|
|
|
|
-
|
|
Net
change in policy loans
|
|
|
8,192
|
|
|
|
(46,589
|
)
|
Acquisition
of Northstar Financial Corporation
|
|
|
2,427,394
|
|
|
|
-
|
|
Acquisition
of First Wyoming Capital Corporation
|
|
|
-
|
|
|
|
315,546
|
|
Net
purchases of property and equipment
|
|
|
(33,180
|
)
|
|
|
(37,084
|
)
|
Net cash
used for
investing
activities
|
|
|
(907,664
|
)
|
|
|
(2,000,954
|
)
|
Cash Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
286,722
|
|
Preferred
stock dividend
|
|
|
(43,120
|
)
|
|
|
(56,057
|
)
|
Receipts
on deposit-type contracts
|
|
|
2,433,781
|
|
|
|
2,387,104
|
|
Withdrawals
on deposit-type contracts
|
|
|
(1,086,663
|
)
|
|
|
(533,762
|
)
|
Net
cash provided by financing activities
|
|
|
1,303,998
|
|
|
|
2,084,007
|
|
Net
decrease
in cash and cash equivalents
|
|
|
(530,791
|
)
|
|
|
(1,117,711
|
)
|
Cash and
cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,192,336
|
|
|
|
2,310,047
|
|
Ending
|
|
$
|
661,545
|
|
|
$
|
1,192,336
|
|
See Notes to Consolidated
Financial Statements.
F-6
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Supplemental Cash Flow
Information
Years Ended December 31,
2016 and 2015
|
|
2016
|
|
2015
|
Supplemental
Disclosure of Non-Cash Information
|
|
|
|
|
|
|
|
Common stock issued on the
First Wyoming acquisition and
|
|
|
|
|
|
|
|
measurement
period adjustment
|
|
$
|
(905,806
|
)
|
|
$
|
1,811,612
|
Common stock issued on
Northstar Acquisition
|
|
|
2,405,874
|
|
|
|
-
|
|
|
$
|
1,500,068
|
|
|
$
|
1,811,612
|
See Notes to Consolidated
Financial Statements.
F-7
Table of Contents
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. (Midwest
or the Company) was incorporated in Nebraska on October 31, 2003 for the
primary purpose of operating a financial services company. The Company is in the
life insurance business and operates through its wholly owned subsidiary,
American Life & Security Corp. (American Life). The Company has made
several acquisitions of life insurance companies and related entities since
2008, all of which have been merged into the Company or into American Life.
Basis of presentation:
The accompanying consolidated
financial statements include the accounts of Midwest and/or our wholly owned
subsidiary American Life. Hereafter, entities are collectively referred to as
the Company, we, our or us.
Management evaluates the
Company as one reporting segment in the life insurance industry. The Company is
primarily engaged in the underwriting and marketing of life insurance products
through American Life. The product offerings, the underwriting processes, and
the marketing processes are similar. The Companys product offerings consist of
a multi- benefit life insurance policy that combines cash value life insurance
with a tax deferred annuity and a single premium term life product. These
product offerings are underwritten, marketed, and managed as a group of similar
products on an overall portfolio basis.
These consolidated
financial statements have been prepared in conformity with Generally Accepted
Accounting Principles (GAAP) in the United States of America. All intercompany
accounts and transactions have been eliminated in consolidation and certain
immaterial reclassifications have been made to the prior period results to
conform to the current periods presentation with no impact on results of
operations or total stockholders equity.
Investments:
All fixed maturities and a
portion of the equity securities owned by the Company are considered
available-for-sale and are included in the consolidated financial statements at
their fair value as of the financial statement date. Bond premiums and discounts
are amortized using the scientific-yield method over the term of the bonds.
Realized gains and losses on securities sold during the year are determined
using the specific identification method. Unrealized holding gains and losses,
net of applicable income taxes, are included in comprehensive loss.
Declines in the fair value
of available for sale securities below their amortized cost are evaluated to
assess whether any other-than-temporary impairment loss should be recorded. In
determining if these losses are expected to be other-than-temporary, the
Company considers 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 the Company 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 an
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 years
ended December 31, 2016 or 2015.
F-8
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to Consolidated Financial Statements Continued
Included within the
Companys equity securities carried at cost and equity method investments are
certain privately placed common stocks for some development stage holding
companies organized for the purpose of forming life insurance subsidiaries. Our
privately placed common stocks are recorded using cost basis or the equity
method of accounting, depending on the facts and circumstances of each
investment. These securities do not have a readily determinable fair value. The
Company does not control these entities economically, and therefore does not
consolidate these entities. The Company reports the earnings from privately
placed common stocks accounted for under the equity method in net investment
income.
Investment income consists
of interest, dividends, gains and losses from equity method investments, and
real estate income, which are recognized on an accrual basis and amortization of
premiums and discounts.
Mortgage loans on real
estate, held for investment:
Mortgage loans on real estate, held for investment are carried at unpaid
principal balances. Interest income on mortgage loans on real estate, held for
investment is recognized in net investment income at the contract interest rate
when earned. A mortgage loan is considered to be impaired when it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the mortgage agreement. Valuation allowances on mortgage
loans are established based upon losses expected by management to be realized in
connection with future dispositions or settlement of mortgage loans, including
foreclosures. The Company establishes valuation allowances for estimated
impairments on an individual loan basis as of the balance sheet date. Such
valuation allowances are based on the excess carrying value of the loan over the
present value of expected future cash flows discounted at the loans original
effective interest rate. These evaluations are revised as conditions change and
new information becomes available. No valuation allowance was established for
mortgage loans on real estate, held for investment as of December 31, 2016
due to the mortgage loans being sold in 2014 and 2015.
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.
Short-term
investments
:
Short-term investments are stated at cost and
consist of certificates of deposit. At December 31, 2016 and 2015 the Company
did not have any short-term investments.
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:
The Company considers all liquid investments with
original maturities of three months or less when purchased to be cash
equivalents. At December 31, 2016 and 2015, the Company had no cash
equivalents.
Deferred acquisition
costs:
Deferred acquisition costs
consist of incremental direct costs, net of amounts ceded to reinsurers, that
result directly from and are essential to the contract acquisition transaction
and would not have been incurred by the Company had the contract acquisition not
occurred, 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 unless events occur which require an immediate
review. The Company determined during its December 31, 2016 analysis that all
deferred acquisition costs were recoverable.
F-9
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
provides information about deferred acquisition costs (DAC) for the years
ended December 31, 2016 and 2015, respectively.
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Balance at
beginning of period
|
|
$
|
2,765,063
|
|
|
$
|
2,646,970
|
|
Capitalization of commissions, sales and issue expenses
|
|
|
178,419
|
|
|
|
552,466
|
|
Change in
DAC due to unrealized investment losses
|
|
|
(7,448
|
)
|
|
|
35,301
|
|
Gross
amortization
|
|
|
(367,235
|
)
|
|
|
(469,674
|
)
|
Balance at
end of period
|
|
$
|
2,568,799
|
|
|
$
|
2,765,063
|
|
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.
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. The Company performs a recoverability analysis
annually in the fourth quarter unless events occur which require an immediate
review. The Company determined during its December 31, 2016 and 2015 analysis
that all value of business acquired were recoverable.
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.
In September 2011, the FASB
issued ASU 2011-08 which amends the rules for testing goodwill for impairment.
Under the new rules, an entity has the option to first assess qualitative
factors to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of
events or circumstances, an entity determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then
performing the two-step impairment test is unnecessary.
The Company elected to
forgo the qualitative impairment analysis and performed the first step of the
goodwill quantitative analysis to determine if the fair value of the reporting
unit was in excess of the carrying value. As of December 31, 201
6,
the
fair value of the Companys reporting unit
was less than
the carrying value of the
net assets assigned to that unit
therefore
the Company
was required
to perform
further testing for impairment. Management's determination of the fair value of
the reporting unit incorporate
d
assumptions that market participants would make in
valuing the reporting unit.
Based upon our fair value analysis, the Company determined that the full amount of the goodwill should be written off as of December 31, 2016.
F-10
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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.
The Company compared the
carrying value of its identifiable indefinite-lived intangible assets to the sum
of the future discounted cash flows. As of December 31, 2016 and 2015, the sum
of the future discounted cash flows exceeded the carrying value of the
indefinite-lived intangible assets. The assumptions and estimates used to
determine future values are complex and subjective. They can be affected by
various factors, including external factors such as industry and economic
trends, and internal factors such as changes in our business strategy and our
revenue forecasts.
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
$103,623 and $157,387
for the years
ended December 31, 2016 and 2015, respectively. The accumulated depreciation
totaled $961,864 and $864,526 as of December 31, 2016 and 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.
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. The Company
determined that no such events occurred that would indicate the carrying amounts
may not be recoverable.
Reinsurance:
In the normal course of business,
the Company seeks to limit aggregate and 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 December 31, 2016 or 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.
F-11
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 December 31, 2016 and 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.
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 life of the
premiums produced. Traditional life insurance products are treated as long
duration contracts, which generally remain in force for the lifetime of the
insured.
Comprehensive loss:
Comprehensive loss is comprised
of net loss and other comprehensive income (loss). Other comprehensive 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 December 31, 2016 and 2015, the Company had 22,558,956 and
18,006,301 common shares issued and outstanding, respectively.
At December 31, 2016 and
2015, the Company had 1,179 warrants outstanding. The warrants were exercisable
through December 31, 2016 for 10 shares of voting common stock at an exercise
price of $6.50 per share. No warrants were exercised during 2016 and 2015
and are now expired.
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 share is $0.001 with 2,000,000 shares
authorized. At both December 31, 2016 and 2015, the Company had 74,159 Class A
preferred shares issued and outstanding.
F-12
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The Class B preferred
shares are non-cumulative, non-voting and convertible by the holder
or the Company
to voting
common shares after May 1, 2017 at a rate of 2.0 common shares for each
preferred
share. The
par value per preferred share is
$0.001 with 1,000,000 shares authorized. The stated annual dividend rate on the
Class B preferred shares is 7%. Dividends totaling $43,120 and $56,057 were paid
during the years ended December 31, 2016 and 2015, respectively. At December 31,
2016 and 2015, the Company had 102,669 Class B preferred shares issued and
outstanding.
The Company evaluated its
Class B preferred stock for potential embedded derivatives. In doing so, the
Company first concluded that the nature of the host contract was more equity
than debt like. The embedded conversion features were determined not to be
derivatives as net settlement does not exist given the lack of trading activity
in the Companys stock. Additionally, the conversion features are clearly and
closely related to an equity host contract. Consideration was also given to
whether a beneficial conversion feature should be recognized in additional paid
in capital for the intrinsic value of the conversion feature at the issuance
date. The Class B preferred stock is not mandatorily redeemable but may be
redeemed at the time of a deemed liquidation. Holders could elect redemption
upon the occurrence of certain deemed liquidation events, including mergers in
which the company is a constituent party and sales of substantially all the
assets of the Company, that are within the Companys control, if the Company
does not dissolve it. As such, the preferred stock is recognized in permanent
equity. The redemption feature was determined to not be a derivative as
settlement would be gross.
Earnings (loss) per share
attributable to the Companys common stockholders were computed based on the
weighted average number of shares outstanding during each year. The weighted
average number of shares outstanding during the years ended December 31, 2016
and 2015 were
21,625,878
and 14,081,926 shares, respectively.
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.
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.
F-13
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements Continued
In January 2016, the FASB
issued ASU 2016-1,
Financial InstrumentsOverall
(Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. This guidance
changes how entities account for equity investments that do not result in
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. Recent
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. Pursuant to this 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 all of the outstanding shares that it did not
previously own of First Wyoming Capital Corporation (First Wyoming), a Wyoming
corporation, pursuant to an Agreement and Plan of Merger dated July 31, 2015
under which First Wyoming became a wholly-owned subsidiary of Midwest. Pursuant
to the Merger Agreement, Midwest issued approximately 4,767,400 shares to the
former shareholders of First Wyoming other than Midwest. 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 our 2015 10-K. This fair value
measurement was 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 and on September 1, 2016 First
Wyoming Life, the life insurance subsidiary of First Wyoming, merged into
American Life.
F-14
Table of Contents
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
10-Q
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 preliminary fair value of the consideration transferred and the
preliminary 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 preliminary
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 standalone
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 such as First
Wyoming Life.
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.
F-15
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Acquisition costs relating
to the business combination with First Wyoming 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
.
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,
2015 (earliest period shown).
Year ended December 31, (unaudited)
|
|
|
2015
|
Premiums
|
|
$
|
3,723,084
|
|
Investment income
|
|
|
414,972
|
|
Miscellaneous income
|
|
|
48,864
|
|
Total income
|
|
$
|
4,186,920
|
|
|
Net
loss
|
|
$
|
(4,338,598
|
)
|
The unaudited pro forma
total income and net loss above was adjusted to eliminate the equity method
investment loss of $158,677 recorded for the year ended December 31, 2015. The
pro forma amounts above also included an adjustment for the elimination of TPA
fees paid by First Wyoming to Midwest of $122,903 for the year ended December
31, 2015. The unaudited proforma net loss presented above also includes
adjustments for the amortization of VOBA for the year ending December 31, 2015
of $50,660.
Note 3. Assets and
Liabilities Held for Sale
In December 2015, American
Life entered into a purchase agreement with a third party to sell its interest
in its dormant subsidiary, Capital Reserve Life Insurance Company (Capital
Reserve). 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. Prior to the sale of
Capital Reserve, Midwest had $16.9 million and
$15.5
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.
F-16
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 4. Investments
The amortized cost and
estimated fair value of investments classified as available-for-sale as of
December 31, 2016 and 2015 are as follows:
|
|
Cost or
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
3,390,545
|
|
$
|
-
|
|
$
|
166,326
|
|
$
|
3,224,219
|
States and political subdivisions -- general obligations
|
|
|
383,730
|
|
|
732
|
|
|
3,067
|
|
|
381,395
|
States and political subdivisions -- special revenue
|
|
|
275,262
|
|
|
5,633
|
|
|
3,160
|
|
|
277,735
|
Corporate
|
|
|
24,974,546
|
|
|
16,232
|
|
|
1,135,188
|
|
|
23,855,590
|
Total fixed
maturities
|
|
$
|
29,024,083
|
|
$
|
22,597
|
|
$
|
1,307,741
|
|
$
|
27,738,939
|
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 had
five
securities that individually
exceed 10% of the total of the state and political subdivisions categories as of
December 31, 2016. The amortized cost, fair value, credit rating, and
description of each such security is as follows:
|
|
Amortized
|
|
Estimated
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Credit Rating
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
States and political subdivisions -- general obligations
|
|
|
|
|
|
|
|
|
Bellingham Wash
|
|
$
|
110,988
|
|
$
|
109,633
|
|
AA+
|
Longview Washington Refunding
|
|
|
163,172
|
|
|
161,460
|
|
NR
|
Memphis Tenn
|
|
|
109,570
|
|
|
110,302
|
|
AA
|
States and political subdivisions -- special revenue
|
|
|
|
|
|
|
|
|
Philadelphia PA Auth For Indl Dev City Svc Agreement
|
|
|
149,411
|
|
|
146,973
|
|
AA
|
Riviera Beach FLA Pub Impt Rev
|
|
|
100,392
|
|
|
106,025
|
|
AA
|
Total
|
|
$
|
633,533
|
|
$
|
634,393
|
|
|
F-17
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
summarizes, for all securities in an unrealized loss position at December 31,
2016 and 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.
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Gross
|
|
Number
|
|
|
|
Gross
|
|
Number
|
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
|
Fair Value
|
|
Loss
|
|
Securities
|
|
Fair Value
|
|
Loss
|
|
Securities
|
Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
|
$
|
3,224,219
|
|
$
|
166,326
|
|
17
|
|
$
|
2,484,188
|
|
$
|
62,343
|
|
14
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general obligations
|
|
|
271,093
|
|
|
3,066
|
|
2
|
|
|
660,569
|
|
|
5,004
|
|
5
|
States and political
subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special revenue
|
|
|
171,711
|
|
|
3,160
|
|
2
|
|
|
248,146
|
|
|
1,618
|
|
2
|
Corporate
|
|
|
19,737,965
|
|
|
935,546
|
|
112
|
|
|
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
|
|
|
2,558,275
|
|
|
199,643
|
|
12
|
|
|
3,166,108
|
|
|
141,074
|
|
22
|
Total fixed maturities
|
|
$
|
25,963,263
|
|
$
|
1,307,741
|
|
145
|
|
$
|
22,544,653
|
|
$
|
1,016,032
|
|
145
|
Based on our review of the
securities in an unrealized loss position at December 31, 2016 and 2015, no
other-than-temporary impairments were deemed necessary.
The Company had one bond related to non-investment grade, Diamond Offshore Drilling, Inc., which has an unrealized loss of $90,807. The remaining unrealized loss of $1,216,934 was related to investment grade bonds.
Management believes that
the Company will fully recover its cost basis in the securities held at December
31, 2016, and management does not have the intent to sell nor is it more likely
than not that the Company will be required to sell such securities until they
recover or mature. The temporary impairments shown herein are primarily the
result of the current interest rate environment rather than credit factors that
would imply other-than-temporary impairment.
The amortized cost and
estimated fair value of fixed maturities at December 31, 2016, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
|
|
Amortized
|
|
Estimated
|
|
|
Cost
|
|
Fair Value
|
Due
in one year or less
|
|
$
|
-
|
|
$
|
-
|
Due
after one year through five years
|
|
|
1,319,856
|
|
|
1,299,868
|
Due
after five years through ten years
|
|
|
13,739,800
|
|
|
13,196,864
|
Due
after ten years
|
|
|
13,964,427
|
|
|
13,242,207
|
|
|
$
|
29,024,083
|
|
$
|
27,738,939
|
The Company is required to
hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At December 31, 2016 and 2015, these required
deposits had a total amortized cost of $2,747,571 and $6,186,865 and fair values
of $2,635,225 and $6,000,376, respectively.
F-18
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The components of net
investment
income for
the years ended December 31, 2016 and 2015 are as
follows:
|
Year Ended December
|
|
2016
|
|
2015
|
Fixed maturities
|
$
|
889,860
|
|
|
$
|
681,999
|
|
Equity securities
|
|
1,434
|
|
|
|
186
|
|
Other
|
|
58,849
|
|
|
|
44,870
|
|
|
|
950,143
|
|
|
|
727,055
|
|
Less
investment expenses
|
|
(71,152
|
)
|
|
|
(63,087
|
)
|
Investment
income, net of expenses
|
$
|
878,991
|
|
|
$
|
663,968
|
|
Proceeds for the years
ended December 31, 2016 and 2015 from sales of investments classified as
available for sale were
$14,179,936
and $13,394,158, respectively. Gross gains
of $178,104 and $148,661 and gross losses of $54,610 and $266,025 were realized
on those sales during the years ended December 31, 2016 and 2015, respectively.
As of December 31,
2014
,
all mortgage loans were under contract to be sold. The sales were completed on
January 15, 2015. The following table summarizes the activity in the mortgage
loans on real estate, held for investment account for the years ended December
31, 2016 and 2015.
|
|
Year Ended December
31,
|
|
|
2016
|
|
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.
|
F-19
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
A review of fair value
hierarchy classifications is conducted on a quarterly basis. Changes in the
valuation inputs, or their ability to be observed, may result in a
reclassification for certain financial assets or liabilities. Reclassifications
impacting Level 3 of the fair value hierarchy are reported as transfers in/out
of the Level 3 category as of the beginning of the period in which the
reclassifications occur.
A description of the
valuation methodologies used for assets measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy,
is set forth below.
Fixed
maturities:
Fixed maturities are recorded at fair value on a
recurring basis utilizing a third-party pricing source. The valuations are
reviewed and validated quarterly through random testing by comparisons to
separate pricing models or other third party pricing services. For the period
ended December 31, 2016, there were no material changes to the valuation methods
or assumptions used to determine fair values, and no broker or third party
prices were changed from the values received. Securities with prices based on
validated quotes from pricing services are reflected within Level 2.
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. The fair values for insurance contracts other than deposit-type
contracts are not required to be disclosed. 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 measurement tables, the Company has included accrued
interest expense of approximately $261,971 and $229,405 in carrying value of the
surplus notes as of December 31, 2016 and 2015, respectively. These liabilities
are categorized as Level 3 in the fair value hierarchy.
F-20
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
presents the Companys fair value hierarchy for those financial instruments
measured at fair value on a recurring basis as of December 31, 2016 and 2015.
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted
|
|
Other
|
|
Significant
|
|
|
|
|
|
In
Active
|
|
Observable
|
|
Unobservable
|
|
Estimated
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
-
|
|
$
|
3,224,219
|
|
$
|
-
|
|
$
|
3,224,219
|
States and political subdivisions general obligations
|
|
|
-
|
|
|
381,395
|
|
|
-
|
|
|
381,395
|
States and political subdivisions special revenue
|
|
|
-
|
|
|
277,735
|
|
|
-
|
|
|
277,735
|
Corporate
|
|
|
-
|
|
|
23,855,590
|
|
|
-
|
|
|
23,855,590
|
Total
fixed maturities
|
|
$
|
-
|
|
$
|
27,738,939
|
|
$
|
-
|
|
$
|
27,738,939
|
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
|
Total
fixed maturities
|
|
$
|
-
|
|
$
|
23,271,277
|
|
$
|
-
|
|
$
|
23,271,277
|
There were no transfers of
financial instruments between Level 1 and Level 2 during the years ended
December 31, 2016 or 2015.
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.
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 December 31, 2016 and 2015, respectively:
|
|
December 31, 2016
|
|
|
|
|
|
Fair
Value Measurements at Date Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
Identical
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
Assets and
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
loans
|
|
$
|
412,583
|
|
$
|
-
|
|
$
|
-
|
|
$
|
412,583
|
|
$
|
412,583
|
Cash and
cash equivalents
|
|
|
661,545
|
|
|
661,545
|
|
|
-
|
|
|
-
|
|
|
661,545
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deposit-type contracts)
|
|
|
16,012,567
|
|
|
-
|
|
|
-
|
|
|
16,012,567
|
|
|
16,012,567
|
Surplus
notes and accrued interest payable
|
|
|
811,971
|
|
|
-
|
|
|
-
|
|
|
808,602
|
|
|
808,602
|
F-21
Table of Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
|
|
|
December 31,
2015
|
|
|
|
|
|
Fair Value
Measurements at Date Using
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
|
Assets and
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Carrying
|
|
Liabilities
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
|
Amount
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
420,775
|
|
$
|
-
|
|
$
|
-
|
|
$
|
420,775
|
|
$
|
420,775
|
Cash
and cash equivalents
|
|
|
1,192,336
|
|
|
1,192,336
|
|
|
-
|
|
|
-
|
|
|
1,192,336
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Investment-type contracts)
|
|
|
13,897,421
|
|
|
-
|
|
|
-
|
|
|
13,897,421
|
|
|
13,897,421
|
Surplus notes and accrued
interest payable
|
|
|
779,405
|
|
|
-
|
|
|
-
|
|
|
768,022
|
|
|
768,022
|
Note 6. Income Tax
Matters
Significant components of
the Companys deferred tax assets and liabilities as of December 31, 2016 and
2015 are as follows:
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
9,705,974
|
|
|
$
|
8,962,587
|
|
Capitalized costs
|
|
|
667,264
|
|
|
|
667,264
|
|
Unrealized losses on
investments
|
|
|
436,949
|
|
|
|
356,495
|
|
Benefit reserves
|
|
|
984,640
|
|
|
|
1,071,997
|
|
Total deferred tax
assets
|
|
|
11,794,827
|
|
|
|
11,058,343
|
|
Less valuation
allowance
|
|
|
(10,170,638
|
)
|
|
|
(9,287,024
|
)
|
Total deferred tax assets, net
of valuation allowance
|
|
|
1,624,189
|
|
|
|
1,771,319
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Policy acquisition
costs
|
|
|
571,148
|
|
|
|
593,654
|
|
Due premiums
|
|
|
228,136
|
|
|
|
234,468
|
|
Value of business
acquired
|
|
|
586,905
|
|
|
|
693,297
|
|
Intangible assets
|
|
|
238,000
|
|
|
|
238,000
|
|
Property and equipment
|
|
|
-
|
|
|
|
11,900
|
|
Total deferred tax
liabilities
|
|
|
1,624,189
|
|
|
|
1,771,319
|
|
Net deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2016 and
2015, the Company recorded a valuation allowance of
10,170,638
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 carry forwards are expected to be available
to reduce taxable income.
Loss carry forwards for tax
purposes as of December 31, 2016, have expiration dates that range from 2024
through 2036.
F-22
Table of
Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
There was no income tax
expense for the years ended December 31, 2016 and 2015. This differed from the
amounts computed by applying the statutory U.S. federal income tax rate of 34%
to pretax income, as a result of the following:
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Computed
expected income tax benefit
|
|
$
|
(1,308,293
|
)
|
|
$
|
(856,129
|
)
|
Increase
(reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
Bargain purchase gain
|
|
|
(451,019
|
)
|
|
|
(307,557
|
)
|
Meals,
entertainment and political contributions
|
|
|
18,956
|
|
|
|
46,315
|
|
Goodwill impairment
|
|
|
384,140
|
|
|
|
-
|
|
Other
(Benefit reserves and NOL true-up/merger of First Wyoming 2015)
|
|
|
(53,722
|
)
|
|
|
178,519
|
|
|
|
|
(101,645
|
)
|
|
|
(82,767
|
)
|
Tax benefit
before valuation allowance
|
|
|
(1,409,938
|
)
|
|
|
(938,896
|
)
|
Change in
valuation allowance
|
|
|
1,409,938
|
|
|
|
938,896
|
|
Net income
tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 7.
Reinsurance
A summary of significant
reinsurance amounts affecting the accompanying consolidated financial statements
as of December 31, 2016 and 2015
and for the years ended December 31, 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Balance
sheets:
|
|
|
|
|
|
|
Benefit
and claim reserves assumed
|
|
$
|
2,470,063
|
|
$
|
2,763,779
|
Benefit
and claim reserves ceded
|
|
|
11,704,055
|
|
|
12,212,656
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Statements
of comprehensive income:
|
|
|
|
|
|
|
Premiums
assumed
|
|
$
|
24,064
|
|
$
|
36,777
|
Premiums
ceded
|
|
|
287,780
|
|
|
498,787
|
Benefits
assumed
|
|
|
43,602
|
|
|
57,317
|
Benefits
ceded
|
|
|
696,159
|
|
|
904,867
|
Commissions
assumed
|
|
|
35
|
|
|
21
|
Commissions
ceded
|
|
|
1,649
|
|
|
3,399
|
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 December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Recoverable on
|
|
|
|
|
Total Amount
|
|
|
|
|
Recoverable
|
|
Recoverable
|
|
Benefit
|
|
Ceded
|
|
Recoverable
|
|
|
AM
Best
|
|
on
Paid
|
|
on
Unpaid
|
|
Reserves/Deposit-
|
|
Due
|
|
from
|
Reinsurer
|
|
Rating
|
|
Losses
|
|
Losses
|
|
type Contracts
|
|
Premiums
|
|
Reinsurer
|
Optimum Re Insurance Company
|
|
A-
|
|
$
|
-
|
|
$
|
77,032
|
|
$
|
180,681
|
|
$
|
-
|
|
$
|
257,713
|
Sagicor Life
Insurance Company
|
|
A-
|
|
|
-
|
|
|
284,617
|
|
|
11,403,908
|
|
|
242,183
|
|
|
11,446,342
|
|
|
|
|
$
|
-
|
|
$
|
361,649
|
|
$
|
11,584,589
|
|
$
|
242,183
|
|
$
|
11,704,055
|
F-23
Table of
Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Effective 1999, American
Life entered into a 75% coinsurance agreement with Sagicor Life (Sagicor)
whereby 75% of certain business is ceded to Sagicor. During 2000, the remaining
25% was coinsured with Sagicor. At December 31, 2016 and 2015, total benefit
reserves, policy claims, deposit-type contracts, and due premiums ceded by
American Life to Sagicor were $11,446,342 and $11,873,254, respectively.
American Life remains contingently liable on this ceded reinsurance should
Sagicor be unable to meet their obligations
The use of reinsurance does
not relieve American Life 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 American Life has
failed to pay policy claims (individually or in the aggregate) with respect to
our ceded business.
American Life 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 December 31, 2016 and 2015, no contingency reserve was
established.
Note 8. Deposit-Type
Contracts
The Companys deposit-type
contracts represent the contract value that has accrued to the benefit of the
policyholder as of the balance sheet date. Liabilities for these deposit-type
contracts are included without reduction for potential surrender charges. This
liability is equal to the accumulated account deposits, plus interest credited,
and less policyholder withdrawals. The following table provides information
about deposit-type contracts for the years ended December 31, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2016
|
|
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
|
|
|
2,433,781
|
|
|
|
2,387,104
|
|
Investment
earnings
|
|
|
776,541
|
|
|
|
533,646
|
|
Withdrawals
|
|
|
(1,086,661
|
)
|
|
|
(533,762
|
)
|
Contract Charges
|
|
|
(8,515
|
)
|
|
|
(10,584
|
)
|
Ending
balance
|
|
$
|
16,012,567
|
|
|
$
|
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.
F-24
Table of
Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 regulatory bodies, the SEC,
and other 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. Agencies from the state of Nebraska are currently conducting a
routine regulatory examination for the period 2013 through 2016 as required by
state statutes.
Office Lease:
The Company leases office space
in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires
on January 31, 2024.
The
Company
executed an amendment to the above lease for the additional 2,876 square feet of office space in Suite 450 on October 23, 2015, which will expire on May 31, 2017, which we do not plan to renew.
Great Plains entered into a lease on October 4, 2013 for
office space in Mitchell, South Dakota, which expired on November 30, 2016.
First Wyoming leased space in Cheyenne, Wyoming, which expired on August 31,
2016. Rent expense for the years ended December 31, 2016 and 2015 was
$341,424
and $232,130, respectively. Future minimum payments are as follows:
2017
|
$
|
149,481
|
2018
|
|
136,557
|
2019
|
|
141,412
|
2020
|
|
146,477
|
2021
|
|
151,543
|
Later years
|
|
331,790
|
Total
|
$
|
1,057,260
|
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. 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 and Great Plains Life merged with American Life as of September 1,
2016 and December 31, 2016, respectively. Capital Reserve was sold effective
August 29, 2016. The December 31, 2015 numbers in the table below have been
restated to include the First Wyoming Life and Great Plains Life balances into
American Life to be consistent with the December 31, 2016 statutory statement
filing. The following table summarizes the statutory net loss and statutory
capital and surplus of American Life as of December 31, 2016 and 2015 and for
the years ended December 31, 2016 and 2015. The amounts below as of and for the
year ended December 31, 2015 are based on the respective companys audited
statutory financial statements. The
audit
of the
American Life's
financial
statements as of and for the year ended December 31, 2016
is
expected to be
completed by May 31, 2017
|
|
Statutory Net Loss for the Years Ended December
31,
|
|
|
2016
|
|
2015
|
American
Life
|
|
$
|
1,979,009
|
|
$
|
2,085,450
|
Capital
Reserve
|
|
|
N/A
|
|
$
|
77,720
|
|
|
|
Statutory Capital and Surplus as of December
31,
|
|
|
2016
|
|
2015
|
American
Life
|
|
$
|
3,817,756
|
|
$
|
5,288,649
|
Capital
Reserve
|
|
|
N/A
|
|
$
|
1,464,044
|
F-25
Table of
Contents
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 11. Surplus
Notes
The following provides a
summary of the American Lifes surplus notes along with issue dates, maturity
dates, face amounts, and interest rates as of December 31, 2016:
Creditor
|
|
Issue Date
|
|
Maturity Date
|
|
Face Amount
|
|
Interest Rate
|
David G. Elmore
|
|
September 1, 2006
|
|
September 1, 2016
|
|
$
|
250,000
|
|
7%
|
David G.
Elmore
|
|
August 4,
2011
|
|
August 1,
2016
|
|
|
300,000
|
|
5%
|
Any payments and/or
repayments must be approved by the Nebraska Department of Insurance. As of
December 31, 2016, the Company has accrued $261,971 of interest expense under
accounts payable and accrued expenses on the consolidated balance sheet. No
payments were made in the years ended December 31, 2016 and 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 services are offered to the Companys
subsidiary
and to
non-consolidated entities. These agreements, for various levels of
administrative services on behalf of each company, generate fee income for the
Company. Services provided 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 years ended December 31, 2016 and 2015 amounted to $63,500 and
$154,670, respectively.
Note 13. Subsequent
Events
All of the effects of
subsequent events that provide additional evidence about conditions that existed
at December 31, 2016, including the estimates inherent in the process of
preparing consolidated financial statements, are recognized in the consolidated
financial statements. The Company does not recognize subsequent events that
provide evidence about conditions that did not exist at the date of the
consolidated financial statements but arose after, but before the consolidated
financial statements were available to be issued. In some cases, non-recognized
subsequent events are disclosed to keep the consolidated financial statements
from being misleading
F-26
Table of
Contents
MIDWEST HOLDING INC. AND
SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Table of
Contents
Schedule I
Midwest Holding Inc. and
Subsidiaries
Summary of Investments Other Than Investments in
Related Parties
December 31, 2016
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Recognized
in
|
|
|
Amortized
|
|
|
|
|
Consolidated
|
|
|
Cost
|
|
Fair Value
|
|
Balance Sheets
|
Type of Investment
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
3,390,545
|
|
$
|
3,224,219
|
|
$
|
3,224,219
|
States
and political subdivisions -- general obligations
|
|
|
383,730
|
|
|
381,395
|
|
|
381,395
|
States
and political subdivisions -- special revenue
|
|
|
275,262
|
|
|
277,735
|
|
|
277,735
|
Corporate
|
|
|
24,974,546
|
|
|
23,855,590
|
|
|
23,855,590
|
Total
fixed maturity securities
|
|
$
|
29,024,083
|
|
$
|
27,738,939
|
|
$
|
27,738,939
|
|
Real
estate, held for investment
|
|
|
517,729
|
|
|
|
|
|
517,729
|
Policy
loans
|
|
|
412,583
|
|
|
|
|
|
412,583
|
Total
Investments
|
|
$
|
29,954,395
|
|
|
|
|
$
|
28,669,251
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-2
Table of
Contents
Schedule II
Midwest Holding Inc.
(Parent Company)
Condensed Financial
Information of Registrant
Balance
Sheets
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in
subsidiaries (1)
|
|
$
|
4,424,693
|
|
|
$
|
7,640,794
|
|
Equity
securities, at cost
|
|
|
-
|
|
|
|
140,250
|
|
Total
investments
|
|
|
4,424,693
|
|
|
|
7,781,044
|
|
Cash
and cash equivalents
|
|
|
112,563
|
|
|
|
212,422
|
|
Property
and equipment, net
|
|
|
78,790
|
|
|
|
85,339
|
|
Other
assets
|
|
|
153,502
|
|
|
|
381,149
|
|
Total
assets
|
|
$
|
4,769,548
|
|
|
$
|
8,459,954
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
500,626
|
|
|
|
1,555,980
|
|
Total
liabilities
|
|
|
500,626
|
|
|
|
1,555,980
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A
|
|
|
74
|
|
|
|
74
|
|
Preferred
stock, Series B
|
|
|
103
|
|
|
|
103
|
|
Common
stock
|
|
|
22,559
|
|
|
|
18,006
|
|
Additional
paid-in capital
|
|
|
33,036,924
|
|
|
|
31,584,529
|
|
Accumulated
deficit
|
|
|
(27,533,447
|
)
|
|
|
(23,685,525
|
)
|
Accumulated
other comprehensive loss
|
|
|
(1,257,291
|
)
|
|
|
(1,013,213
|
)
|
Total
Midwest Holding Inc.'s stockholders' equity
|
|
|
4,268,922
|
|
|
|
6,903,974
|
|
Total
liabilities and stockholders' equity
|
|
$
|
4,769,548
|
|
|
$
|
8,459,954
|
|
(1)
|
Eliminated
in consolidation.
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-3
Table of
Contents
Schedule II (Continued)
Midwest Holding Inc.
(Parent Company)
Condensed Financial
Information of Registrant
Statements of
Comprehensive Income
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Income:
|
|
|
|
|
|
|
|
|
Investment loss, net of
expenses
|
|
$
|
(5,635
|
)
|
|
$
|
(5,826
|
)
|
Net realized loss on
investments
|
|
|
(117,500
|
)
|
|
|
-
|
|
Loss on equity method
investment
|
|
|
(420,720
|
)
|
|
|
(357,437
|
)
|
Miscellaneous
income
|
|
|
515,667
|
|
|
|
536,997
|
|
|
|
|
(28,188
|
)
|
|
|
173,734
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General
|
|
|
2,054,032
|
|
|
|
1,562,147
|
|
|
Loss before
income tax expense
|
|
|
(2,082,220
|
)
|
|
|
(1,388,413
|
)
|
Income tax
expense
|
|
|
-
|
|
|
|
-
|
|
Loss before equity in loss of
consolidated subsidiaries
|
|
|
(2,082,220
|
)
|
|
|
(1,388,413
|
)
|
Equity in
loss of consolidated subsidiaries
|
|
|
(3,092,228
|
)
|
|
|
(2,034,194
|
)
|
Bargain
purchase gain for business acquisition
|
|
|
1,326,526
|
|
|
|
904,578
|
|
Net
loss
|
|
$
|
(3,847,922
|
)
|
|
$
|
(2,518,029
|
)
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
Unrealized
losses
on investments arising during period
|
|
|
(212,574
|
)
|
|
|
(737,832
|
)
|
Less: reclassification
adjustment for net realized
(gains) losses
on investments
|
|
|
(31,504
|
)
|
|
|
117,364
|
|
Other comprehensive
loss
|
|
|
(244,078
|
)
|
|
|
(620,468
|
)
|
Comprehensive
loss
|
|
$
|
(4,092,000
|
)
|
|
$
|
(3,138,497
|
)
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-4
Table of
Contents
Schedule II (Continued)
Midwest Holding Inc.
(Parent Company)
Condensed Financial
Information of Registrant
Statements of Cash
Flows
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,847,922
|
)
|
|
$
|
(2,518,029
|
)
|
Adjustments to reconcile
net loss to net cash and cash equivalents used in
operating
activities:
|
|
|
|
|
|
|
|
|
Equity
in net loss of consolidated subsidiaries
|
|
|
2,972,023
|
|
|
|
747,476
|
|
Depreciation
|
|
|
31,931
|
|
|
|
43,825
|
|
Net
realized gain on investments
|
|
|
117,500
|
|
|
|
-
|
|
Bargain
purchase gain for business acquired
|
|
|
(1,326,526
|
)
|
|
|
(904,578
|
)
|
Equity
in the net loss of unconsolidated subsidiaries
|
|
|
420,720
|
|
|
|
357,437
|
|
Other
assets and liabilities
|
|
|
(861,791
|
)
|
|
|
986,290
|
|
Net
cash
used in
operating activities
|
|
|
(2,494,065
|
)
|
|
|
(1,287,579
|
)
|
Cash Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Equity securities carried
at cost:
|
|
|
|
|
|
|
|
|
Proceeds
from equity securities carried at cost
|
|
|
30,250
|
|
|
|
9,000
|
|
Acquisition of First
Wyoming
Capital Corporation
|
|
|
-
|
|
|
|
165,759
|
|
Issurance of common stock
acquisition of Northstar Financial
|
|
|
2,427,394
|
|
|
|
-
|
|
Purchases of property and
equipment
|
|
|
(20,318
|
)
|
|
|
(37,480
|
)
|
Net
cash provided by investing activities
|
|
|
2,437,326
|
|
|
|
137,279
|
|
Cash Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Issurance of common
stock
|
|
|
-
|
|
|
|
286,722
|
|
Preferred stock
dividend
|
|
|
(43,120
|
)
|
|
|
(56,057
|
)
|
Net
cash provided by financing activities
|
|
|
(43,120
|
)
|
|
|
230,665
|
|
Net
decrease in
cash and cash equivalents
|
|
|
(99,859
|
)
|
|
|
(919,635
|
)
|
Cash and
cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
212,422
|
|
|
|
1,132,057
|
|
Ending
|
|
$
|
112,563
|
|
|
$
|
212,422
|
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-5
Table of
Contents
Schedule II (Continued)
Midwest Holding Inc.
(Parent Company)
Condensed Financial
Information of Registrant
Supplemental Cash Flow
Information
|
2016
|
|
2015
|
Supplemental Disclosure of Non-Cash
Information
|
|
|
|
|
|
|
Common stock issued on the
First Wyoming acquisition and
|
|
|
|
|
|
|
measurement period adjustment
|
$
|
(905,806
|
)
|
|
$
|
1,811,612
|
Common
stock issued on Northstar Acquisition
|
|
2,405,874
|
|
|
|
-
|
|
$
|
1,500,068
|
|
|
$
|
1,811,612
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-6
Table of
Contents
Schedule III
Midwest Holding Inc. and
Subsidiaries
Supplementary Insurance
Information
|
|
As of December 31,
2016
|
|
For the Year Ended December
31, 2016
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
Death and
|
|
Amortization
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
of Deferred
|
|
|
|
|
|
Deferred Policy
|
|
Claims and
|
|
|
|
|
|
|
|
Net
|
|
and Increase
|
|
Policy
|
|
Other
|
|
|
Acquisition
|
|
Deposit-type
|
|
Advance
|
|
Premium
|
|
Investment
|
|
in Benefit
|
|
Acquisition
|
|
Operating
|
|
|
Costs
|
|
Contracts
|
|
Premiums
|
|
Revenue
|
|
Income (Loss)
|
|
Reserves
|
|
Costs
|
|
Expenses
|
Life Insurance
|
|
$
|
2,568,799
|
|
$
|
41,184,258
|
|
$
|
52,074
|
|
$
|
3,517,458
|
|
$
|
878,991
|
|
$
|
2,331,375
|
|
$
|
367,235
|
|
$
|
6,590,086
|
|
|
|
As of December 31,
2015
|
|
For the Year Ended December
31, 2015
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
Death and
|
|
Amortization
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
of Deferred
|
|
|
|
|
|
Deferred Policy
|
|
Claims and
|
|
|
|
|
|
|
|
Net
|
|
and Increase
|
|
Policy
|
|
Other
|
|
|
Acquisition
|
|
Deposit-type
|
|
Advance
|
|
Premium
|
|
Investment
|
|
in Benefit
|
|
Acquisition
|
|
Operating
|
|
|
Costs
|
|
Contracts
|
|
Premiums
|
|
Revenue
|
|
Income (Loss)
|
|
Reserves
|
|
Costs
|
|
Expenses
|
Life Insurance
|
|
$
|
2,765,063
|
|
$
|
38,892,420
|
|
$
|
57,699
|
|
$
|
3,424,377
|
|
$
|
663,968
|
|
$
|
2,219,415
|
|
$
|
469,674
|
|
$
|
4,518,633
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-7
Table of
Contents
Schedule IV
Midwest Holding Inc. and
Subsidiaries
Reinsurance
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
of Amount
|
|
|
|
|
|
Ceded to Other
|
|
from Other
|
|
|
|
|
Assumed to
|
|
|
Gross Amount
|
|
Companies
|
|
Companies
|
|
Net Amount
|
|
Net
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in
force
|
|
$
|
229,981,000
|
|
$
|
110,670,000
|
|
$
|
3,879,000
|
|
$
|
123,190,000
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance premiums
|
|
$
|
3,253,742
|
|
$
|
287,780
|
|
$
|
24,064
|
|
$
|
3,517,458
|
|
0.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance in force
|
|
$
|
252,791,000
|
|
$
|
147,714,000
|
|
$
|
15,349,000
|
|
$
|
120,426,000
|
|
12.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
premiums
|
|
$
|
2,962,367
|
|
$
|
498,787
|
|
$
|
36,777
|
|
$
|
3,424,377
|
|
1.07
|
%
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-8
Table of
Contents
Schedule V
Midwest Holding Inc. and
Subsidiaries
Valuation and Qualifying
Accounts
|
Year Ended December
31,
|
|
2016
|
|
2015
|
Accumulated Depreciation:
|
|
|
|
|
|
|
|
Beginning of the
year
|
|
864,526
|
|
|
|
713,167
|
|
Depreciation expense
|
|
103,623
|
|
|
|
157,387
|
|
Disposals
|
|
(6,285
|
)
|
|
|
(6,028
|
)
|
End of
the year
|
$
|
961,864
|
|
|
$
|
864,526
|
|
See accompanying Report of
Independent Registered Public Accounting Firm
FS-9
Table of
Contents
INDEX OF
EXHIBITS
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
2.1
|
|
Plan and Agreement of Merger First Wyoming
Capital Corporation, Midwest Holding Inc. and Midwest Acquisition, Inc.
dated July 31, 2015. (Incorporated by reference to Appendix A to the
Registration Statement on Form S-4, filed on August 26,
2015.)
|
2.2
|
|
Plan and Agreement of Exchange - Midwest Holding Inc., Northstar
Financial Corporation dated December 18, 2015. (Incorporated by reference
to Appendix A to the Registration Statement on Form S-4, filed on January
8, 2016.)
|
3.1
|
|
Amended and Restated Articles of
Incorporation, dated March 29, 2010. (Incorporated by reference to Exhibit
3.1 to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
3.2
|
|
Articles of Amendment to the Amended and Restated Articles of
Incorporation, dated May 6, 2010. (Incorporated by reference to Exhibit
3.2 to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
3.3
|
|
Amended and Restated Bylaws. (Incorporated
by reference to Exhibit 3.3 to the Companys Form 10 Registration
Statement, filed December 12, 2011.)
|
3.4
|
|
Articles of Amendment to the Amended and Restated Articles of
Incorporation of Midwest Holding Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Form 8-K, filed May 15,
2014.)
|
3.5
|
|
American Life & Security Corp. State of
Nebraska Department of Insurance Amended Certificate of Authority, issued
August 3, 2011. (Incorporated by reference to Exhibit 3.4 to the Companys
Amendment No. 2 to Form 10 Registration Statement, filed March 20,
2012.)
|
10.1
|
|
Consulting and Advisory Agreement, dated September 1, 2009, by and
between Midwest Holding Inc. and Bison Capital Corp. (f/k/a Corporate
Development Inc.). (Incorporated by reference to Exhibit 10.3 to the
Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.2
|
|
Administrative Services Agreement, dated
August 17, 2009, by and between American Life & Security Corp. and
Investors Heritage Life Insurance Company. (Incorporated by reference to
Exhibit 10.5 to the Companys Form 10 Registration Statement, filed
December 12, 2011.)
|
10.3
|
|
Employment Agreement, dated July 1, 2011, by and between Midwest
Holding Inc. and Mark Oliver. (Incorporated by reference to Exhibit 10.2
to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.4
|
|
Automatic Reinsurance Agreement, dated
August 1, 2009, by and between American Life & Security Corp. and
Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.6
to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.5
|
|
Amendment Number One to Automatic Reinsurance Agreement, dated
August 1, 2009, by and between American Life & Security Corp. and
Optimum Re Insurance Company. (Incorporated by reference to Exhibit 10.7
to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.6
|
|
Amendment Number Two to Automatic
Reinsurance Agreement, dated August 1, 2009, by and between American Life
& Security Corp. and Optimum Re Insurance Company. (Incorporated by
reference to Exhibit 10.8 to the Companys Form 10 Registration Statement,
filed December 12, 2011.)
|
10.7
|
|
Bulk Reinsurance Agreement, dated September 1, 2009, by and between
American Life & Security Corp. and Optimum Re Insurance Company.
(Incorporated by reference to Exhibit 10.9 to the Companys Form 10
Registration Statement, filed December 12, 2011.)
|
10.8
|
|
Amendment to all Reinsurance Agreements,
dated August 4, 2011, by and between American Life & Security Corp.
and Optimum Re Insurance Company. (Incorporated by reference to Exhibit
10.10 to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.9
|
|
Automatic Reinsurance
Agreement, dated August 1, 2009, by and between American Life &
Security Corp. and Investors Heritage Life Insurance Company.
(Incorporated by reference to Exhibit 10.11 to the Companys Form 10
Registration Statement, filed December 12,
2011.)
|
Table of
Contents
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
10.10
|
|
Reinsurance Agreement, dated January 1,
2010, by and between American Life & Security Corp. and Security
National Life Insurance Company. (Incorporated by reference to Exhibit
10.12 to the Companys Form 10 Registration Statement, filed December 12,
2011.)
|
10.11
|
|
Master Reinsurance Agreement, dated December 20, 1999, by and
between Old Reliance Insurance Company and American Founders Life
Insurance Company. (Incorporated by reference to Exhibit 10.13 to the
Companys Amendment No. 1 to Form 10 Registration Statement, filed
February 3, 2012.)
|
10.12
|
|
Amendment Number One to Master Reinsurance
Agreement, dated December 20, 1999, by and between Old Reliance Insurance
Company and American Founders Life Insurance Company. (Incorporated by
reference to Exhibit 10.14 to the Companys Amendment No. 1 to Form 10
Registration Statement, filed February 3, 2012.)
|
10.13
|
|
Reinsurance Agreement Number One, dated December 31, 1999, by and
between Old Reliance Insurance Company and American Founders Life
Insurance Company. (Incorporated by reference to Exhibit 10.15 to the
Companys Amendment No. 1 to Form 10 Registration Statement, filed
February 3, 2012.)
|
10.14
|
|
Amendment Number One to Reinsurance
Agreement Number One dated December 31, 1999, by and between Old Reliance
Insurance Company and American Founders Life Insurance Company.
(Incorporated by reference to Exhibit 10.16 to the Companys Amendment No.
1 to Form 10 Registration Statement, filed February 3,
2012.)
|
10.15
|
|
Master Reinsurance Agreement, dated April 1, 2000, by and between
Old Reliance Insurance Company and American Founders Life Insurance
Company. (Incorporated by reference to Exhibit 10.17 to the Companys
Amendment No. 1 to Form 10 Registration Statement, filed February 3,
2012.)
|
10.16
|
|
Reinsurance Agreement Number One, dated
April 1, 2000, by and between Old Reliance Insurance Company and American
Founders Life Insurance Company. (Incorporated by reference to Exhibit
10.18 to the Companys Amendment No. 1 to Form 10 Registration Statement,
filed February 3, 2012.)
|
14.1
|
|
Code of Ethics (Incorporated by reference to Exhibit 14.1 to the
Companys Form 10-K, filed April 2, 2012.)
|
21.1*
|
|
List of Subsidiaries.
|
31.1*
|
|
Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification of Principal Accounting
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
101.INS
**
|
|
XBRL Instance
Document.
|
101.SCH **
|
|
XBRL Taxonomy Extension Schema Document.
|
101.CAL
**
|
|
XBRL Taxonomy Extension Calculation Linkbase
Document.
|
101.LAB **
|
|
XBRL Taxonomy Extension Label Linkbase
Document.
|
101.PRE **
|
|
XBRL Taxonomy Extension Presentation
Linkbase Document.
|
101.DEF **
|
|
XBRL Taxonomy Extension Definition Linkbase
Document.
|
____________________
* Filed herewith.