Midwest Holding Inc. and
Subsidiaries
Supplemental Cash Flow
Information
(Unaudited)
|
|
March 31, 2017
|
|
March 31, 2016
|
Supplemental Disclosure of Non-Cash Information
|
|
|
|
|
|
|
|
Common stock issued
on Northstar Acquisition
|
|
|
-
|
|
|
2,405,874
|
|
|
|
$
|
-
|
|
$
|
2,405,874
|
|
See Notes to Consolidated
Financial Statements.
6
Midwest Holding Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of
Operations and Summary of Significant Accounting Policies
Nature of operations:
Midwest Holding Inc. (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 unaudited
consolidated financial statements have been prepared in accordance with United
States of America generally accepted accounting principles (GAAP) for interim
financial information and with the instructions from the Securities and Exchange
Commission (SEC) Quarterly Report on Form 10-Q, including Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. Therefore, the
information contained in the Notes to Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K for the year ended December 31,
2016
(2016 Form 10-K), should be read in connection with the reading of these
interim unaudited consolidated financial statements.
In the opinion of management,
these statements include all normal recurring adjustments necessary for a fair
presentation of the Companys results. Operating results for the three months
period ended March 31, 2017, are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2017. All material
inter-company accounts and transactions have been eliminated in
consolidation
.
Investments:
All fixed maturities and a
portion of the equity securities owned by the Company are considered
available-for-sale and are included in the consolidated financial statements at
their fair value as of the financial statement date. Bond premiums and discounts
are amortized using the scientific-yield method over the term of the bonds.
Realized gains and losses on securities sold during the year are determined
using the specific identification method. Unrealized holding gains and losses,
net of applicable income taxes, are included in comprehensive loss.
Declines in the fair value of
available for sale securities below their amortized cost are evaluated to assess
whether any other-than-temporary impairment loss should be recorded. In
determining if these losses are expected to be other-than-temporary, 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 three
months ended March 31, 2017 or 2016.
Investment income consists of
interest, dividends, and real estate income, which are recognized on an accrual
basis and amortization of premiums and discounts.
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.
7
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 March 31, 2017 and December 31, 2016, the Company had no cash
equivalents.
Deferred acquisition costs:
Deferred acquisition costs
(DAC) consist of incremental direct costs, net of amounts ceded to reinsurers,
that result directly from and are essential to the contract acquisition
transaction and would not have been incurred by the Company had the contract
acquisition not occurred. These costs are capitalized, to the extent
recoverable, and amortized over the life of the premiums produced. The Company
evaluates the types of acquisition costs it capitalizes. The Company capitalizes
agent compensation and benefits and other expenses that are directly related to
the successful acquisition of contracts. The Company also capitalizes expenses
directly related to activities performed by the Company, such as underwriting,
policy issuance, and processing fees incurred in connection with successful
contract acquisitions.
Recoverability of deferred
acquisition costs is evaluated periodically by comparing the current estimate of
the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the
difference is charged to expense.
The Company performs a recoverability
analysis annually in the fourth quarter unless events occur which require an immediate review.
The Company determined that no events occurred in the three months ended March 31, 2017 that suggest
a review should be undertaken.
The following table provides
information about deferred acquisition costs for the periods ended March 31,
2017 and December 31, 2016, respectively.
|
Three Months
|
|
Year
Ended
|
|
Ended March 31,
|
|
December 31
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
2,568,799
|
|
|
$
|
2,765,063
|
|
Capitalization of commissions, sales and issue
expenses
|
|
93,674
|
|
|
|
178,419
|
|
Change in DAC due to unrealized investment
losses
|
|
(4,661
|
)
|
|
|
(7,448
|
)
|
Gross amortization
|
|
(158,705
|
)
|
|
|
(367,235
|
)
|
Balance at end of period
|
$
|
2,499,107
|
|
|
$
|
2,568,799
|
|
V
alue 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 that no events occurred in the three months ended
March 31, 2017 that suggest a review should be undertaken.
8
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
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 $16,390 and $35,490 for the three
months ended March 31, 2017 and 2016, respectively. Accumulated depreciation
totaled $978,254 and $961,864 as of March 31, 2017 and December 31, 2016,
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. Management has determined that
no such events occurred in the three months ended March 31, 2017 that would
indicate the carrying amounts may not be recoverable.
Reinsurance:
In the normal course of business,
the Company seeks to limit any single exposure to losses on large risks by
purchasing reinsurance. The amounts reported in the consolidated balance sheets
as reinsurance recoverable include amounts billed to reinsurers on losses paid
as well as estimates of amounts expected to be recovered from reinsurers on
insurance liabilities that have not yet been paid. Reinsurance recoverable on
unpaid losses are estimated based upon assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts.
Insurance liabilities are reported gross of reinsurance recoverable. Management
believes the recoverables are appropriately established. The Company generally
strives to diversify its credit risks related to reinsurance ceded. Reinsurance
premiums are generally reflected in income in a manner consistent with the
recognition of premiums on the reinsured contracts. Reinsurance does not
extinguish the Companys primary liability under the policies written.
Therefore, the Company regularly evaluates the financial condition of its
reinsurers including their activities with respect to claim settlement practices
and commutations, and establishes allowances for uncollectible reinsurance
recoverable as appropriate. There were no allowances as of March 31, 2017 or
December 31, 2016.
Benefit reserves:
The Company establishes
liabilities for amounts payable under insurance policies, including traditional
life insurance and annuities. Generally, amounts are payable over an extended
period of time. Liabilities for future policy benefits of traditional life
insurance have been computed by a net level premium method based upon estimates
at the time of issue for investment yields, mortality and withdrawals. These
estimates include provisions for experience less favorable than initially
expected. Mortality assumptions are based on industry experience expressed as a
percentage of standard mortality tables.
Policy claims:
Policy claims are based on
reported claims plus estimated incurred but not reported claims developed from
trends of historical data applied to current exposure.
Deposit-type contracts:
Deposit-type contracts consist of
amounts on deposit associated with deferred annuity riders, premium deposit
funds and supplemental contracts without life contingencies.
9
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Income taxes:
The Company is subject to income
taxes in the U.S. federal and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of the related tax
laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state or local tax
examinations by tax authorities for the years before 2010. The provision for
income taxes is based on income as reported in the financial statements. The
income tax provision is calculated under the asset and liability method.
Deferred tax assets are recorded based on the differences between the financial
statement and tax basis of assets and liabilities at the enacted tax rates. The
principal assets and liabilities giving rise to such differences are
investments, insurance reserves, and deferred acquisition costs. A deferred tax
asset valuation allowance is established when there is uncertainty that such
assets would be realized. The Company has no uncertain tax positions that it
believes are more-likely-than not that the benefit will not to be realized. When
applicable, the Company recognizes interest accrued related to unrecognized tax
benefits and penalties in income tax expense. The Company had no accruals for
payments of interest and penalties at March 31, 2017 and December 31,
2016.
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 premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts, which generally remain in force for the
lifetime of the insured.
Comprehensive loss:
Comprehensive loss is comprised
of net loss and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses from marketable securities
classified as available for sale, net of applicable taxes.
Common and preferred stock
and earnings (loss) per share:
The par value per common share is $0.001 with 120,000,000 voting common
shares authorized, 20,000,000 non-voting common shares authorized, and
10,000,000 preferred shares authorized. At March 31, 2017 and December 31, 2016,
the Company had 22,558,956 voting common shares issued and outstanding.
At December 31, 2016, the
Company had 1,179 warrants outstanding. The warrants were exercisable through
December 31, 2016 for 10 shares of voting common stock per warrant at an
exercise price of $6.50 per share. No warrants were exercised during 2016 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 Class A share is $0.001 with 2,000,000 shares authorized. At
March 31, 2017 and December 31, 2016, the Company had 74,159 Class A preferred
shares issued and outstanding.
The Class B preferred shares
are non-cumulative, non-voting and convertible by the holder 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 $21,560 and $43,120 were paid as of March 31,
2017 and December 31, 2016, respectively. At March 31, 2017 and December 31,
2016, the Company had 102,669 Class B preferred shares issued and
outstanding.
10
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Earnings (loss) per share
attributable to the Companys common stockholders were computed based on the
weighted average number of shares outstanding during each period. The weighted
average number of shares outstanding during the three months ended March 31,
2017 and 2016 were 22,558,956 and 18,806,110 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 February 2016, the FASB
issued ASU 2016-02,
Leases
(Topic 842). The
guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under
the new guidance, lessees are required to recognize lease assets and lease
liabilities on the balance sheet for all leases with terms longer than 12
months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A
modified retrospective transition approach is required for lessees for capital
and operating leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, with certain
practical expedients available. We are currently evaluating the impact of our
pending adoption of the new standard on our consolidated financial statements.
In January 2016, the FASB
issued ASU 2016-1,
Financial
InstrumentsOverall
(Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities.
This guidance changes how entities account for equity investments
that do not result in consolidation and are not accounted for under the equity
method of accounting. Entities will be required to measure these investments at
fair value at the end of each reporting period and recognize changes in fair
value in net income. A practicability exception will be available for equity
investments that do not have readily determinable fair values; however; the
exception requires the Company to adjust the carrying amount for impairment and
observable price changes in orderly transactions for the identical or a similar
investment of the same issuer. This guidance also changes certain disclosure
requirements and other aspects of current GAAP. This guidance is effective for
fiscal years beginning after December 15, 2017, and is applicable to the Company
in fiscal 2018. The Company is currently evaluating the impact of the adoption
of ASU 2016-01 on its consolidated financial statements.
Note 2. Acquisitions and
Divestitures
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.
Effective as of August 29,
2016, American Life sold its interest in its dormant subsidiary, Capital Reserve
Life Insurance Company (Capital Reserve) to an unrelated third party for cash
which approximated the statutory surplus of Capital Reserve, resulting in a net
gain of approximately $26,000 including $50,000 cash above book value and
unrealized gains on the fair market value of bonds becoming realized at the date
of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain was
included in the net realized gain (loss) on investments on the consolidated
statement of comprehensive income.
11
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Note 3.
Investments
The cost or amortized cost
and estimated fair value of investments classified as available-for-sale as of
March 31, 2017 and December 31, 2016 are as follows:
|
Cost
or
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
$
|
2,668,919
|
|
$
|
-
|
|
$
|
130,783
|
|
$
|
2,538,136
|
States
and political subdivisions -- general obligations
|
|
382,281
|
|
|
819
|
|
|
1,909
|
|
|
381,191
|
States
and political subdivisions -- special revenue
|
|
275,246
|
|
|
6,431
|
|
|
380
|
|
|
281,297
|
Corporate
|
|
24,767,299
|
|
|
17,855
|
|
|
953,998
|
|
|
23,831,156
|
Total fixed
maturities
|
$
|
28,093,745
|
|
$
|
25,105
|
|
$
|
1,087,070
|
|
$
|
27,031,780
|
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
|
The Company has five
securities that individually exceed 10% of the total of the state and political
subdivisions categories as of March 31, 2017. The amortized cost, fair value,
credit ratings, and description of each security is as follows:
|
Amortized
|
|
Estimated
|
|
|
|
Cost
|
|
Fair Value
|
|
Credit Rating
|
March 31, 2017:
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
States
and political subdivisions -- general obligations
|
|
|
|
|
|
|
|
Bellingham
Wash
|
$
|
110,731
|
|
$
|
110,015
|
|
AA+
|
Longview
Washington Refunding
|
|
162,383
|
|
|
161,190
|
|
Aa3
|
Memphis
Tenn
|
|
109,167
|
|
|
109,986
|
|
AA
|
States
and political subdivisions -- special revenue
|
|
|
|
|
|
|
|
Philadelphia
PA Auth For Indl Dev City Svc Agreement
|
|
149,430
|
|
|
149,647
|
|
AA
|
Riviera
Beach FLA Pub Impt Rev
|
|
100,384
|
|
|
106,598
|
|
AA
|
Total
|
$
|
632,095
|
|
$
|
637,436
|
|
|
12
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following table
summarizes, for all securities in an unrealized loss position at March 31, 2017
and December 31, 2016, the estimated fair value, pre-tax gross unrealized loss
and number of securities by length of time that those securities have been
continuously in an unrealized loss position.
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Gross
|
|
Number
|
|
|
|
|
Gross
|
|
Number
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
Estimated
|
|
Unrealized
|
|
of
|
|
Fair Value
|
|
Loss
|
|
Securities
(1)
|
|
Fair Value
|
|
Loss
|
|
Securities
(1)
|
Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations
|
$
|
2,538,136
|
|
$
|
130,783
|
|
14
|
|
$
|
3,224,219
|
|
$
|
166,326
|
|
17
|
States and
political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
general
obligations
|
|
271,205
|
|
|
1,909
|
|
2
|
|
|
271,093
|
|
|
3,066
|
|
2
|
States and
political subdivisions --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
special
revenue
|
|
25,052
|
|
|
380
|
|
1
|
|
|
171,711
|
|
|
3,160
|
|
2
|
Corporate
|
|
20,183,615
|
|
|
796,561
|
|
118
|
|
|
19,737,965
|
|
|
935,546
|
|
112
|
Greater than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
2,031,178
|
|
|
157,437
|
|
15
|
|
|
2,558,275
|
|
|
199,643
|
|
12
|
Total fixed maturities
|
$
|
25,049,186
|
|
$
|
1,087,070
|
|
150
|
|
$
|
25,963,263
|
|
$
|
1,307,741
|
|
145
|
____________________
(1)
We may reflect a security in more
than one aging category based on various purchase dates.
Based on our review of the
securities in an unrealized loss position at March 31, 2017 and December 31,
2016, no other-than-temporary impairments were deemed necessary. Management
believes that the Company will fully recover its cost basis in the securities
held at March 31, 2017, and management does not have the intent to sell nor is
it more likely than not that the Company will be required to sell such
securities until they recover or mature. The temporary impairments shown herein
are primarily the result of the current interest rate environment rather than
credit factors that would imply other-than-temporary impairment.
The amortized cost and
estimated fair value of fixed maturities at March 31, 2017, 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
|
|
1,258,982
|
|
|
1,241,358
|
Due
after five years through ten years
|
|
13,179,616
|
|
|
12,799,039
|
Due
after ten years
|
|
13,655,147
|
|
|
12,991,383
|
|
$
|
28,093,745
|
|
$
|
27,031,780
|
The Company is required to
hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At March 31, 2017 and December 31, 2016, these
required deposits had a total amortized cost of $2,754,354 and $2,747,571 and
fair values of $2,660,996 and $2,635,225, respectively.
13
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The components of net
investment income for the three months ended March 31, 2017 and 2016 are as
follows:
|
Three months ended March
31,
|
|
2017
|
|
2016
|
Fixed maturities
|
$
|
264,581
|
|
|
$
|
209,656
|
|
Equity securities
|
|
-
|
|
|
|
5,250
|
|
Other
|
|
16,007
|
|
|
|
11,659
|
|
|
|
280,588
|
|
|
|
226,565
|
|
Less
investment expenses
|
|
(25,908
|
)
|
|
|
(13,437
|
)
|
Investment income,
net of expenses
|
$
|
254,680
|
|
|
$
|
213,128
|
|
Proceeds for the three
months ended March 31, 2017 and 2016 from sales of investments classified as
available-for-sale were $4,712,145 and $3,619,463, respectively. Gross gains of
$10,141 and $23,756 and gross losses of $45,645 and $20,871 were realized on
those sales during the three months ended March 31, 2017 and 2016,
respectively.
Note 4. Fair Values of
Financial Instruments
Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. We use valuation techniques
that are consistent with the market approach, the income approach and/or the
cost approach. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be
observable, meaning those that reflect the assumptions market participants would
use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the
reporting entitys own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, accounting standards
establish a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
●
|
Level 1: Quoted
prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
|
●
|
Level 2: Significant
other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
●
|
Level 3: Significant
unobservable inputs that reflect a reporting entitys own assumptions
about the assumptions that market participants would use in pricing an
asset or liability.
|
A review of fair value
hierarchy classifications is conducted on a quarterly basis. Changes in the
valuation inputs, or their ability to be observed, may result in a
reclassification for certain financial assets or liabilities. Reclassifications
impacting Level 3 of the fair value hierarchy are reported as transfers in/out
of the Level 3 category as of the beginning of the period in which the
reclassifications occur.
A description of the
valuation methodologies used for assets measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy,
is set forth below.
Fixed
maturities:
Fixed maturities are
recorded at fair value on a recurring basis utilizing a third-party pricing
source. The valuations are reviewed and validated quarterly through random
testing by comparisons to separate pricing models or other third party pricing
services. For the period ended March 31, 2017, 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.
14
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Policy loans:
Policy loans are stated at unpaid
principal balances. As these loans are fully collateralized by the cash
surrender value of the underlying insurance policies, the carrying value of the
policy loans approximates their fair value. Policy loans are categorized as
Level 3 in the fair value hierarchy.
Deposit-type contracts:
The fair value for direct and
assumed liabilities under deposit-type insurance contracts (accumulation
annuities) is calculated using a discounted cash flow approach. Cash flows are
projected using actuarial assumptions and discounted to the valuation date using
risk-free rates adjusted for credit risk and nonperformance risk of the
liabilities. These liabilities are categorized as Level 3 in the fair value
hierarchy.
Surplus notes:
The fair value for surplus notes
is calculated using a discounted cash flow approach. Cash flows are projected
utilizing scheduled repayments and discounted to the valuation date using market
rates currently available for debt with similar remaining maturities. These
notes are structured such that all interest is paid at maturity. In the
following fair value tables, the Company has included accrued interest expense,
which is recorded in the accounts payable and accrued expenses, of approximately
$269,979 and $261,971 in carrying value of the surplus notes as of March 31,
2017 and December 31, 2016, respectively. These liabilities are categorized as
Level 3 in the fair value hierarchy.
The following table
presents the Companys fair value hierarchy for those financial instruments
measured at fair value on a recurring basis as of March 31, 2017 and December
31, 2016.
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted
|
|
Other
|
|
Significant
|
|
|
|
|
In
Active
|
|
Observable
|
|
Unobservable
|
|
Estimated
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Fair
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
$
|
-
|
|
$
|
2,538,136
|
|
$
|
-
|
|
$
|
2,538,136
|
States
and political subdivisions general obligations
|
|
-
|
|
|
381,191
|
|
|
-
|
|
|
381,191
|
States
and political subdivisions special revenue
|
|
-
|
|
|
281,297
|
|
|
-
|
|
|
281,297
|
Corporate
|
|
-
|
|
|
23,831,156
|
|
|
-
|
|
|
23,831,156
|
Total
fixed maturities
|
$
|
-
|
|
$
|
27,031,780
|
|
$
|
-
|
|
$
|
27,031,780
|
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
|
There were no transfers of
financial instruments between any levels during the three months ended March 31,
2017 or during the year ended December 31, 2016.
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.
15
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
The following disclosure
contains the carrying values, estimated fair values and their corresponding
placement in the fair value hierarchy, for financial assets and financial
liabilities as of March 31, 2017 and December 31, 2016, respectively:
|
March 31, 2017
|
|
|
|
|
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
|
$
|
414,721
|
|
$
|
-
|
|
$
|
-
|
|
$
|
414,721
|
|
$
|
414,721
|
Cash
|
|
1,221,510
|
|
|
1,221,510
|
|
|
-
|
|
|
-
|
|
|
1,221,510
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deposit-type
contracts)
|
|
16,773,409
|
|
|
-
|
|
|
-
|
|
|
16,773,409
|
|
|
16,773,409
|
Surplus notes and
accrued interest payable
|
|
819,979
|
|
|
-
|
|
|
-
|
|
|
816,577
|
|
|
816,577
|
|
|
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
|
|
661,545
|
|
|
661,545
|
|
|
-
|
|
|
-
|
|
|
661,545
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Investment-type
contracts)
|
|
16,012,567
|
|
|
-
|
|
|
-
|
|
|
16,012,567
|
|
|
16,012,567
|
Surplus notes and
accrued interest payable
|
|
811,971
|
|
|
-
|
|
|
-
|
|
|
808,602
|
|
|
808,602
|
Note 5. Income Tax
Matters
Significant components of
the Companys deferred tax assets and liabilities as of March 31, 2017 and
December 31, 2016 are as follows:
|
March 31, 2017
|
|
December 31, 2016
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Loss
carryforwards
|
$
|
10,138,604
|
|
|
$
|
9,705,974
|
|
Capitalized
costs
|
|
667,264
|
|
|
|
667,264
|
|
Unrealized losses
on investments
|
|
361,068
|
|
|
|
436,949
|
|
Benefit
reserves
|
|
925,673
|
|
|
|
984,640
|
|
Total deferred tax
assets
|
|
12,092,609
|
|
|
|
11,794,827
|
|
Less valuation
allowance
|
|
(10,446,571
|
)
|
|
|
(10,170,638
|
)
|
Total deferred tax
assets, net of valuation allowance
|
|
1,646,038
|
|
|
|
1,624,189
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Policy acquisition
costs
|
|
639,331
|
|
|
|
571,148
|
|
Due
premiums
|
|
204,326
|
|
|
|
228,136
|
|
Value of business
acquired
|
|
564,381
|
|
|
|
586,905
|
|
Intangible
assets
|
|
238,000
|
|
|
|
238,000
|
|
Total deferred tax
liabilities
|
|
1,646,038
|
|
|
|
1,624,189
|
|
Net
deferred tax assets
|
$
|
-
|
|
|
$
|
-
|
|
16
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
At March 31, 2017 and
December 31, 2016, the Company recorded a valuation allowance of
$10,446,571
and
$10,170,638, respectively, on the deferred tax assets to reduce the total to an
amount that management believes will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income.
Loss carryforwards for tax
purposes as of March 31, 2017, have expiration dates that range from 2024
through 2036.
There was no income tax
expense for the three months ended March 31, 2017 and 2016. This differed from
the amounts computed by applying the statutory U.S. federal income tax rate of
34% to pretax income, as a result of the following:
|
Three months ended March
31,
|
|
2017
|
|
2016
|
Computed expected income tax benefit
|
$
|
(354,927
|
)
|
|
$
|
(261,433
|
)
|
Increase (reduction) in income taxes resulting
from:
|
|
|
|
|
|
|
|
Meals,
entertainment and political contributions
|
|
2,877
|
|
|
|
9,157
|
|
Other
|
|
236
|
|
|
|
(31,694
|
)
|
|
|
3,113
|
|
|
|
(22,537
|
)
|
Tax
benefit before valuation allowance
|
|
(351,814
|
)
|
|
|
(283,970
|
)
|
Change in valuation allowance
|
|
351,814
|
|
|
|
283,970
|
|
Net
income tax expenses
|
$
|
-
|
|
|
$
|
-
|
|
Note 6.
Reinsurance
A summary of significant
reinsurance amounts affecting the accompanying consolidated financial statements
as of March 31, 2017 and December 31, 2016 and for the three months ended March
31, 2017 and 2016 is as follows:
|
March 31, 2017
|
|
December 31, 2016
|
Balance sheets:
|
|
|
|
|
|
Benefit and claim reserves assumed
|
$
|
2,613,888
|
|
$
|
2,470,063
|
Benefit and claim reserves ceded
|
|
11,647,173
|
|
|
11,704,055
|
|
|
Three months ended March
31,
|
|
2017
|
|
2016
|
Statements of comprehensive income:
|
|
|
|
|
|
Premiums assumed
|
$
|
6,514
|
|
$
|
6,765
|
Premiums ceded
|
|
50,015
|
|
|
66,157
|
Benefits assumed
|
|
15,766
|
|
|
5,023
|
Benefits ceded
|
|
115,846
|
|
|
355,126
|
Commissions assumed
|
|
10
|
|
|
8
|
Commissions ceded
|
|
-
|
|
|
639
|
The following table
provides a summary of the significant reinsurance balances recoverable on paid
and unpaid policy claims by reinsurer along with the A.M. Best credit rating as
of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
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-
|
|
$
|
-
|
|
$
|
71,247
|
|
$
|
182,627
|
|
$
|
-
|
|
$
|
253,874
|
Security National Life Insurance
|
|
NR
|
|
|
-
|
|
|
117,980
|
|
|
-
|
|
|
-
|
|
|
117,980
|
Sagicor Life Insurance Company
|
|
A-
|
|
|
-
|
|
|
224,430
|
|
|
11,290,742
|
|
|
239,853
|
|
|
11,275,319
|
|
|
|
|
$
|
-
|
|
$
|
413,657
|
|
$
|
11,473,369
|
|
$
|
239,853
|
|
$
|
11,647,173
|
17
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
At March 31, 2017 and
December 31, 2016, total benefit reserves, policy claims, deposit-type
contracts, and due premiums ceded by American Life to Sagicor were $11,275,319
and $11,446,342, 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 American Life believes that any reinsurer would not be able
to satisfy its obligations with American Life, a separate contingency reserve
may be established. At March 31, 2017 and December 31, 2016, no contingency
reserve was established.
Note 7. 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 quarter ended March 31, 2017 and the year
ended December 31, 2016:
|
Quarter
Ended
|
|
Year
Ended
|
|
March 31,
2017
|
|
December 31,
2016
|
Beginning balance
|
$
|
16,012,567
|
|
|
$
|
13,897,421
|
|
Deposits
received
|
|
863,617
|
|
|
|
2,433,781
|
|
Investment
earnings
|
|
219,232
|
|
|
|
776,541
|
|
Withdrawals
|
|
(319,707
|
)
|
|
|
(1,086,661
|
)
|
Contract
Charges
|
|
(2,300
|
)
|
|
|
(8,515
|
)
|
Ending balance
|
$
|
16,773,409
|
|
|
$
|
16,012,567
|
|
Under the terms of American
Lifes coinsurance agreement with SNL, American Life assumes certain
deposit-type contract obligations, as shown in the table above. The remaining
deposits, withdrawals and interest credited represent those for American Lifes
direct business.
Note 8. 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
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 insurance regulatory examination for the period 2013 through 2016 as
required by state statutes.
18
Midwest Holding Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements Continued
Office
Lease:
The Company leases office
space in Lincoln, Nebraska under an agreement executed October 17, 2013 that
expires on January 31, 2024. The Company executed an amendment to its lease for
an additional 2,876 square feet of office space 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 three months ended March
31, 2017 and 2016 was $56,219 and $73,210, respectively. Future minimum lease
payments
for the remainder of 2017 and the subsequent years
are as follows:
2017
|
$
|
109,729
|
2018
|
|
136,557
|
2019
|
|
141,412
|
2020
|
|
146,477
|
2021
|
|
151,543
|
Later years
|
|
331,790
|
Total
|
$
|
1,017,508
|
Note 9. 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 into American Life as of September 1,
2016 and December 31, 2016, respectively. Capital Reserve was sold effective
August 29, 2016. The March 31, 2016 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 March 31 31, 2017 statutory statement
filing. The following table summarizes the statutory net loss and statutory
capital and surplus of American Life as of March 31, 2017 and December 31, 2016
and for the three months ended March 31, 2017 and 2016.
|
Statutory
Net Loss for the three months ended March 31,
|
|
2017
|
|
2016
|
American Life
|
$
|
722,991
|
|
$
|
293,524
|
Capital Reserve
|
|
N/A
|
|
$
|
38,731
|
|
|
Statutory Capital and Surplus as
of
|
|
March 31, 2017
|
|
December 31, 2016
|
American Life
|
$
|
3,075,681
|
|
$
|
3,817,756
|
Capital Reserve
|
|
N/A
|
|
|
N/A
|
The Company is considering many alternatives in order to improve surplus and liquidity. Managements focus is on raising additional capital from outside investors. We cannot assure that additional capital will be raised, or if raised, on terms that will be economical to us. Such capital will further strengthen the Company and American Life and allow us to expand our writing of new business. Until the additional capital is raised, the Company is evaluating other activities such as sales or cessions of blocks of business and reducing expenditures.
Note 10. Surplus
Notes
The following provides a
summary of the Companys surplus notes along with issue dates, maturity dates,
face amounts, and interest rates as of March 31, 2017:
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 March
31, 2017, the Company has accrued $269,979 of interest expense under accounts
payable and accrued expenses on the consolidated balance sheet. No payments were
made in the three months ended March 31, 2017, or during the year ended December
31, 2016. 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.
19
Note 11. Related Party
Transactions
The Company commenced its
third party administrative (TPA) services in 2012 as an additional revenue
source. These services were offered to American Life through February 28, 2017,
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 three months ended March 31, 2017 and 2016 were $16,500 and $14,500,
respectively.
Note 12. Subsequent
Events
All of the effects of
subsequent events that provide additional evidence about conditions that existed
at March 31, 2017, including the estimates inherent in the process of preparing
consolidated financial statements, are recognized in the consolidated financial
statements. The Company does not recognize subsequent events that provide
evidence about conditions that did not exist at the date of the consolidated
financial statements but arose after, but before the consolidated financial
statements were available to be issued. In some cases, non-recognized subsequent
events are disclosed to keep the consolidated financial statements from being
misleading.
The Company has evaluated
subsequent events through the date that the consolidated financial statements
were issued and found no events to report.