MIDWEST HOLDING INC. - Annual Report: 2015 (Form 10-K)

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COMMISSION FILE NUMBER 000-10685

Midwest Holding Inc.
(Exact name of registrant as specified in its charter)

Registrant’s 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    ☐    No    ☒

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    ☐    No    ☒

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    ☒    No    ☐

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    ☒     No    ☐

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 registrant’s knowledge, in definitive 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.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes    ☐    No    ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on the last business day of the most recently completed second quarter is not determinable, as there is no public market for such shares.

As of March 1, 2016, there were 18,006,301 shares of voting common stock, par value $0.001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed for its 2016 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
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PART I

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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 management’s 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 management’s 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., a Nebraska corporation, (“Midwest”, the “Company”, “we” or “us”) was formed on October 31, 2003 for the primary purpose of becoming a life insurance holding company. We have conducted life insurance business since 2009 through our primary life insurance subsidiary, American Life & Security Corp. (“American Life”). In addition to American Life, as of March 16, 2016, we owned:

We also own a dormant life insurance company, Capital Reserve Life Insurance Co., a Missouri domiciled life insurance company, and have less than majority ownership of two small startup entities that may seek to form insurance companies in the event they raise significant additional capital.

The principal executive offices for Midwest and its subsidiaries are at 2900 South 70^th Street, Suite 400, Lincoln, Nebraska 68506, phone number is (402) 489-8266.

Development of Our Business

Since our inception, we have raised approximately $18.0 million through sales of shares of voting common stock and non-voting convertible preferred stock in several private placements and an intrastate offering in Nebraska. Each of these offerings was intended primarily to provide capital for our operations.

We were a development stage company until American Life commenced its insurance operations in 2009. We have incurred significant net losses since inception totaling approximately $23.7 million through December 31, 2015. These losses have resulted primarily from costs incurred in raising capital and establishing and operating American Life. We expect to continue to incur operating losses until we achieve a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

In 2009, American Life began conducting life insurance business in Nebraska. Capital and surplus contributed to American Life was approximately $10.6 million as of December 31, 2015, capital and surplus of American Life at that date was approximately $2.5 million. For the years ended December 31, 2015 and 2014, American Life generated approximately $2.4 million and $2.9 million in premium revenue, respectively.

On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life. We intend to sell Capital Reserve in 2016 and have a contract with an unaffiliated party to sell this entity to it as discussed further below.

In early 2011, we completed the private sale of 74,159 shares of our Series A Preferred Stock to certain investors in Latin America. Proceeds after expenses, were approximately $415,750. These proceeds were used to further capitalize our insurance operations, for working capital and for general corporate purposes. The preferred shares are non-voting and may be converted by the holders into our voting common shares. The shares were sold at $6.00 per share and may be converted at the option of the holder for 1.3 shares of voting common stock for each share of Series A Preferred Stock.

In February 2011, we completed an intrastate offering in Nebraska of 1,554,320 voting common shares with gross proceeds after expenses of approximately $7.7 million. These proceeds were used to fund the acquisition of Old Reliance Insurance Company (“Old Reliance”) as described below, and to further capitalize our insurance operations, for working capital and for general corporate purposes.

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In 2011, we acquired all of the issued and outstanding capital stock of Old Reliance, an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with the surviving company changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of our voting common stock.

In August 2011, we acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), a startup company formed to develop, manufacture, and market the Hot Dot Alert Patch a body heat sensor. The operating results of Hot Dot were consolidated with ours, due to our control of Hot Dot’s board of directors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of its common stock from us for $750,000. As a result, we ceased to have a controlling financial interest in Hot Dot and we deconsolidated it in our financial statements on that date. In October 2014, Hot Dot repurchased our 1,500,000 remaining Hot Dot shares for $775,000.

We commenced third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee income for us. Services provided vary based on the respective needs of the client 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.

In October of 2013, we completed a private placement offering under Regulation D of the Securities Act of 1933 of Units, with each Unit consisting of 50 shares of voting common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016, for gross proceeds of $353,700. A total of 58,950 shares of voting common stock and 1,179 warrants were sold in the offering.

On July 21, 2014, we consummated an exchange agreement with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their shareholders (other than those shares already held by us). The Great Plains shareholders received approximately 1.298 shares of our voting common stock for each share of Great Plains common stock held by the Great Plains shareholders and the Security Capital shareholders received approximately 0.162 shares of our voting common stock for each share of Security Capital common stock held by them. On August 5, 2014, Great Plains and Security Capital were merged into us. We issued a total of 4,767,400 voting common shares pursuant to these transactions.

In September, 2014, we completed a private offering of a newly-created class of preferred shares, Series B preferred stock, at $6.00 per share. The Series B shares are non-cumulative, non-voting and convertible into our voting common shares after May 1, 2017 at a rate of 2.0 voting common shares for each share of Series B preferred stock. A total of 102,669 shares of Series B preferred stock were sold for total gross proceeds of $616,012.

On October 27, 2015, we acquired First Wyoming Capital Corporation, a Wyoming corporation (“First Wyoming”) pursuant to an Agreement and Plan of Merger dated July 31, 2015 by exchanging 1.37 shares of our voting common stock for each share of First Wyoming common stock, or approximately 4,767,000 shares. Subsequent to the closing, First Wyoming merged into us.

In December, 2015, an agreement was reached to sell Capital Reserve to an unaffiliated party for $50,000 plus statutory capital and surplus. We expect the sale to occur in early to mid 2016.

On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015. Northstar became a wholly-owned subsidiary of ours. We have exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’s primary asset at the time of its acquisition by us was cash of approximately $2.2 million.

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Life Insurance

General

American Life, as it exists today, is the product of the August 2011 merger of Old Reliance and American Life and the contribution of Great Plains Life to American Life in 2014. Organized in 1960, Old Reliance primarily focused on the sale of final expense or burial products which typically are small face amount policies with limited underwriting. American Life historically did not offer similar products and instead focused on the sale of its American Accumulator product (a multi-benefit life insurance policy) and its Future Cornhusker Plan (a single premium term life product for children), as described below. The final expense and burial products have been offered by Old Reliance through a small network of independent agents in the southwest United States. Sales over the past several years have been nominal as American Life lacked the capital and surplus to support broad sales of the products.

American Life underwrites and markets life insurance products within the State of Nebraska, but is licensed in 14 states. American Life is required to comply with the insurance laws of its state of domicile, Arizona. Great Plains Life underwrites and markets life insurance products within South Dakota and is domiciled solely in that state. First Wyoming Life underwrites and markets life insurance products within Wyoming and is domiciled solely in that state. Over time, we may apply with other state insurance departments in order to obtain certificates of authority to market life insurance products in those states. We are in the process of redomesticating these two life insurance subsidiaries in Nebraska.

Types of Policies

American Life initially offered two insurance products, the “American Accumulator”, which is a multi-benefit life insurance policy that combines cash value life insurance with a tax deferred annuity and the “Future Cornhusker Plan”, which is a single premium term life product offered for children aged three months to 15 years. The Future Cornhusker 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. Great Plains Life sells a product similar to the “American Accumulator” called the “Great Plains Life Accumulator.” First Wyoming Life sells a product similar to the “American Accumulator” called the “First Wyoming Accumulator.”

Three new products were developed in the last quarter of 2014 to be sold by all of Midwest’s insurance subsidiaries except Capital Reserve: (i) the “Accelerator”, which is a non-participating whole life insurance policy with guaranteed level death benefits and premiums; (ii) the “American Protector”, which is a 7-year pay non-participating whole life insurance policy with modified death and premiums; and (iii) the “Accumulator X”, which is a 10-year pay non-participating whole life insurance policy with 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. 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.

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Product Pricing

The current products offered for sale have been approved by the appropriate insurance regulatory authorities and incorporate the following features:

All products have been developed by using the services of an independent qualified consulting actuary, Miller and Newberg of Kansas City, Missouri. In addition to product development, Miller and Newberg serve as valuation actuary to American Life, Great Plains Life, and First Wyoming Life.

Underwriting Standards

Underwriting guidelines have a direct impact on the operating results of American Life, Great Plains Life, and First Wyoming 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 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, Great Plains Life, and First Wyoming Life have established similar underwriting guidelines consistent with their products’ pricing structure. The companies utilize 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 applicant’s medical history, the companies also consider 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. The companies’ consulting actuary and reinsurers assist the insurance subsidiaries in establishing their underwriting standards. The underwriting for American Life, Great Plains Life, and First Wyoming Life is performed by their third party administrator, Midwest.

Marketing

The insurance products of our insurance subsidiaries are marketed using a personal, face-to-face marketing concept. The insurance agents use the shareholder base of ours and their referrals as potential clients for life insurance products. For 2016, we do not anticipate that our insurance subsidiaries will generate a significant amount of new life insurance sales due to the lack of significant capital and surplus of our life insurance subsidiaries and due to the time and expense of us redomesticating First Wyoming Life and Great Plains Life in Nebraska. We expect to focus on new policy sales after our life insurance subsidiaries are redomesticated in Nebraska and when we are able to raise additional capital. Upon our recent acquisition of Northstar, we contributed approximately $1.0 million of capital to American Life, which will allow it to market life insurance throughout 2016 without jeopardizing the financial viability of American Life.

New insurance sales agents are recruited through referrals from shareholders, newspaper advertisements, and solicitation through the use of on-line job sites. Each potential candidate must go through a three interview process. 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.

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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 year’s policy premium and, accordingly, in the early years of an unseasoned life insurance company, these initial costs and the required provisions for reserves have an adverse effect on operating results. American Life, First Wyoming Life and Great Plains Life, as is common among an unseasoned life insurance companies, are expected to continue to operate at losses for a number of years because of the substantial costs of writing new life insurance. 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 24%. 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.

Our operating results are reported in accordance with GAAP for stock life companies; although our life insurance subsidiaries will also prepare financial statements in accordance with accounting practices prescribed or permitted by their respective states 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 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.

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. Our insurance companies have adopted investment policies in compliance with the insurance laws of the State of Arizona, Missouri, Wyoming, and South Dakota, respectively.

As a new company grows, 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, our insurance companies have developed a conservative investment policy in an effort to minimize investment risk. An independent professional investment advisor who specializes in the insurance industry assists us with our investment decisions.

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Reinsurance

Our insurance subsidiaries reinsure with other companies (reinsurers) portions of the life insurance risks they underwrite and occasionally will reinsure portions of life insurance risks underwritten by other (ceding) companies. 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, our insurance companies remain 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 our insurance subsidiaries. This reduction in premium income has a direct impact on the profitability of the ceding company.

The average face amount of all of our life insurance policies in force is approximately $35,000, with the American Accumulator averaging $63,000, Future Cornhusker averaging $9,000, the Accelerator averaging $83,000, the American Protector averaging $10,000, the Accumulator X averaging $79,000, and the policies acquired through Old Reliance averaging $9,000. With respect to the American Accumulator and Future Cornhusker policies, the Company retains $40,000 to $55,000 of risk on any one life. With respect to the policies acquired through Old Reliance, the Company retains $25,000 of risk on any one life. As of December 31, 2015, approximately 22% of the gross outstanding life insurance policies in force are reinsured with third parties. Overall it cedes approximately $39.11 of premium per year for each $1,000 of gross life insurance in force. All accidental death benefits are reinsured.

Reserves

Each of our insurance subsidiaries establishes as liabilities actuarially computed reserves to meet the obligations on the policies they write, in accordance with the insurance laws and the regulations of the applicable state insurance regulators, 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.

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, offering a broader line of insurance products, having larger selling organizations, and possessing significantly greater financial resources than us and our subsidiaries. Our insurance subsidiaries are not rated by industry analysts and likely will not be rated for the foreseeable future. This has a negative impact on the companies’ ability to compete with rated insurance companies. There is also considerable competition among insurance companies in obtaining qualified sales agents, which might require our insurance subsidiaries to pay higher commissions to attract such agents.

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 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 which constitute suitable acquisition candidates, we will consider factors including, but not limited to, the target company’s 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.

We also may seek to acquire insurance-related companies such as: (i) third-party administrators; (ii) existing marketing agencies; (iii) life insurance reinsurance brokerage companies; and (iv) life and health insurance data processing servicers.

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.

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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 22.4%, 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 non-voting 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 development stage company with an insignificant amount of assets 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.

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 500000 shares or approximately 11.7% 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 200,000 shares of its common stock. Todd Boeve, an executive officer of Midwest, is Secretary and a member of the Board of Directors of New Mexico Capital and owns 75,000 shares of its common stock. Other of Midwest’s present and former directors also own capital stock of New Mexico Capital. 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.

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Regulation

Each of our insurance subsidiaries is subject to the regulation and supervision of the insurance regulatory authorities of its state of domicile, and/or 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 our insurance subsidiaries will be subject to examination by insurance regulatory agencies in their respective states of domicile, as well as insurance departments of any other states in which we may do business.

As the holder of a controlling interest in our insurance subsidiaries, we are also subject to regulation as an insurance holding company system under the insurance laws of states of each subsidiary’s domicile. The provisions of these laws generally provide for restrictions on a change in control of the insurance holding company, require the filing of certain reports with the relevant department of insurance, and limit 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, 2015, we had approximately 30 full-time employees as well as approximately 100 insurance agents who operate as independent contractors.

MARKET FOR MIDWEST’S COMMON STOCK

Market Information

There is no established public trading market for our voting common stock. Our securities are not listed for trading or quoted on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation system.

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 has approved the payment of dividends of $56,057 during the year ended December 31, 2015.

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.

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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. Our insurance subsidiaries, as is common among young 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. At December 31, 2015 we had an accumulated deficit of $23.7 million. These losses were attributable primarily to our organization and capital raising efforts and to our expansive entry into the life insurance business.

Our lack of capital prevents us from writing any significant amounts of new life insurance business, which will adversely affect our future prospects for profitability.

At present, we do not have sufficient capital and surplus for our life insurance subsidiaries in order to seek to sell a meaningful amount of new life insurance products. We are seeking to address this lack of capital through (i) our recent acquisition of Northstar, in which we contributed approximately $1.0 million of capital to American Life, our primary insurance subsidiary, (ii) we intended to seek to raise additional equity capital during 2016, and (iii) we intended to redomesticate First Wyoming Life in Nebraska and merge it into American Life, which will significantly increase the capital and surplus of American Life. Because of this lack of capital and our efforts to redomesticate First Wyoming Life and Great Pains Life in the state of Nebraska (which requires a significant amount of management time and attention), we cannot allocate significant resources to marketing and we will also be required to rename our policies so that they may be deemed to be issued through a Nebraska insurance company. Accordingly, our new life insurance product sales were significantly limited in 2015 and will be in 2016 as well. As a result, our agency force has been significantly depleted. In the event we commence any significant marketing efforts, we will need to retain 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, that we will be successful in retaining agents who are successful in selling significant new insurance policies for our life insurance subsidiaries in a cost effective manner for us. A lack of new insurance policy sales will have a negative long-term impact on our profitability.

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 our insurance subsidiaries and to seek 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 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.

We have a limited operating history and own a limited amount of assets.

We have a limited operating history and have incurred substantive losses every year since we were organized. We face all of the risks inherent in establishing a new 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 of our limited history of operations and significant operating losses incurred to date. These risks and the lack of 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 our acquisition strategy with any degree of success, which could cause our business and future growth prospects to suffer.

A primary component of our business plan is to pursue strategic acquisitions of insurance related companies that meet our acquisition criteria. However, suitable acquisition candidates may not be available on terms and conditions that are economic to us. In pursuing acquisitions, we 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:

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Our insurance marketing efforts may fail to achieve their proposed business plan.

Our life insurance subsidiaries market their insurance products through the services of licensed insurance agents. New agents are recruited through referrals from shareholders, newspaper advertisements, and solicitation through use of online job sites; however we have not recruited any new agents since early 2015 due to our lack of capital in our insurance subsidiaries. Each potential sales agent candidate must complete a lengthy interview process. If hired to sell insurance, the candidate must complete a 40 hour training course conducted by a third party as well as pass a state insurance licensing examination. Once licensed, each candidate must complete a week long product and sales training class. Following course completion, each candidate has a training week where his or her manager will work side by side by conducting sales meetings with him or her.

Our insurance products are marketed 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 solicitation to the public 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.

Our insurance subsidiaries may fail as a result of being inadequately capitalized.

Our insurance subsidiaries 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 the states in which they are domiciled. 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, which was increased to approximately $5.5 million (based upon statutory accounting principles) on September 1, 2009. Subsequent to year-end, we made a $1.0 million capital contribution to American Life, as a result, American Life had approximately $2.5 million (based upon statutory accounting principles) at December 31, 2015 and $2.4 million (based upon statutory accounting principles) in capital and surplus at December 31, 2014. Great Plains Life had capital and surplus of $1.7 million (based upon statutory accounting principles) and $2.0 million (based upon statutory accounting principles) as of December 31, 2015 and 2014, respectively. First Wyoming Life had capital and surplus of $2.7 million (based upon statutory accounting principles) and $3.3 million (based upon statutory accounting principles) as of December 31, 2015 and 2014, respectively. The department of insurance of an insurance company’s state of domicile may require additional amounts of capital and surplus to support its business 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 Arizona, South Dakota, and Wyoming Departments of Insurance and other regulators. 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 insurer’s 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 any of American Life, Great Plains Life or First Wyoming Life fails to maintain required capital levels in accordance with the “risk-based capital” system, such company’s ability to conduct business would be compromised and the ability of us to seek to expand our insurance business would be reduced absent a prompt infusion of capital to the insurance subsidiary.

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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 and our subsidiaries 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 National Association of Insurance Commissioners (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 our insurance subsidiaries will be able to satisfy the regulatory requirements of the Departments of Insurance of their respective state of domicile or a similar department in any other state in which they 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.

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 highly 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, our life insurance subsidiaries encounter significant competition from other insurance companies, most of whom have financial and human resources substantially greater than ours, as well as competition from other investment alternatives available to customers. We do not anticipate that American Life, Capital Reserve or Great Plains Life will be rated by industry analysts for several years. This will likely have a negative impact on their ability to compete with rated insurance companies.

Our insurance subsidiaries compete with up to 2,000 other life insurance companies in the United States, and American Life also competes with some of these companies internationally, which are facing increased competitive pressures due to industry consolidation, where larger, more efficient organizations are emerging from consolidation. Additionally, legislation became effective in 2000 permitting commercial banks, insurance companies and investment banks to combine. This law permits, for instance, a commercial bank to acquire or form an insurance company.

Most life insurance companies have greater financial resources, longer business histories, and more diversified lines of insurance coverage than our insurance subsidiaries have. These larger companies also generally have large sales forces. We also face competition from companies operating in foreign countries and marketing in person as well as from direct mail sales campaigns.

Our ability to compete is dependent upon, among other things, our ability:

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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, its Chief Executive Officer and 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.

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 product’s 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 rate and crediting rate. 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.

Our insurance subsidiaries may not be able to obtain favorable insurance ratings.

Insurance ratings are an important factor in establishing the competitive position of insurance companies. Ratings reflect the rating agencies’ opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders. Our insurance subsidiaries will not receive a rating until they have maintained operations for a minimum of three to five years. There can be no assurance that our insurance subsidiaries will be rated by a rating agency or that any rating, if and when received, will be favorable to our insurance subsidiary. The lack of a rating could impact the ability to make sales in the broad insurance marketplace. For example, potential insureds may choose not to purchase a policy from an unrated company, or our insurance subsidiaries may be required to charge lower rates and offer discounts to attract business, which in turn would adversely affect our results of operations.

Fluctuations in interest rates could adversely affect our business and profitability.

Interest rate fluctuations could impair an insurance company’s 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 the insurance company is required to pay under the contracts and the amounts the insurance subsidiary is able to earn on its investments intended to support its obligations under the contracts. Spread is a key component of revenues.

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 an insurance subsidiary 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. Our life insurance subsidiaries 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 could reduce our investment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the 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 Midwest’s results of operations.

Our goodwill may become impaired, which may adversely impact our results of operations and financial condition.

The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. In testing for impairment, the fair value of net assets is estimated based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a noncash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2015, we had goodwill of $1,129,824, or 17% of our total stockholders' equity.

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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.

Our life insurance subsidiaries cede a substantial amount of their insurance to other insurance companies. However, the relevant life insurance subsidiary remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. 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 our relevant life insurance subsidiary for the reinsurance. However, if the cost of reinsurance were to increase with respect to policies for which our relevant life insurance subsidiary has guaranteed the rates, the relevant life insurance subsidiary could be adversely affected, which would in turn adversely affect us.

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 subsidiaries develop.

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 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 in the expansion of 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 no cash flow from its 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 its voting common stock will depend upon any future appreciation in its 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.

Policy lapses in excess of those actuarially anticipated would have a negative impact on our financial performance.

Our profitability could 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 substantial expenses in connection with complying with applicable regulations, and we are subject to the risk that more burdensome regulations could be imposed on it.

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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:

Each of our life insurance subsidiaries is subject to this regulation in each state in the U.S. in which it is licensed to do business. This regulation involves additional costs and restricts operations. We cannot predict the form of any future regulatory initiatives.

In addition, as the owner of a life insurance subsidiary, we are regulated by various state insurance regulated agencies under the Holding Company Systems Act. Certain "extraordinary" intercorporate transfers of assets and dividend payments from our life insurance subsidiaries require prior approval by the applicable state insurance regulator. We also file detailed annual reports with the Arizona Department of Insurance and all of the states in which we are licensed. The business and accounts of our life insurance subsidiaries are subject to examination by the Arizona Department of Insurance, as well as inquiries and follow up, including investigations, of the various insurance regulatory authorities of the states in which our insurance subsidiaries are 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 18,006,301 shares of our voting common stock outstanding as of March 1, 2016. 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

As a “smaller reporting company,” we are not required to provide disclosure pursuant to this item.

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 expires on May 31, 2017. Great Plains entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota, which expires on November 30, 2016. First Wyoming Life entered into a lease August 28, 2013 for office space located in Cheyenne, Wyoming for approximately 1,421 square feet which expires on August 31, 2016.

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 REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

There is no established public trading market for our voting common stock. Our securities are not listed for trading or quoted on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation system

As of December 31, 2015, we had issued and outstanding 18,006,301 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 15, 2016, there were approximately 11,493 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 $56,057 were paid during 2015.

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.

Recent Sales of Unregistered Securities

Please see Item 7 -- "Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and Item 1 -- “Business, Development of the Business” for information regarding securities sold by Midwest and its subsidiaries during the past three years.

ITEM 6. SELECTED FINANCIAL DATA.

As a “smaller reporting company,” we are not required to provide disclosure pursuant to this Item.

ITEM 7. MANAGEMENT’S 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 Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Overview

Midwest Holding Inc., a Nebraska corporation, (“we”, “us”, “our”, “Midwest”, the “Company” or the “Registrant”) was formed on October 31, 2003 for the primary purpose of becoming a financial services holding company. We presently conduct our business through our primary life insurance subsidiary, American Life & Security Corp. (“American Life”). On August 5, 2014, Great Plains Financial (“Great Plains”) was acquired by us. Its wholly owned subsidiary, Great Plains Life Assurance Company (“Great Plains Life”) became a subsidiary of Midwest and then became a wholly owned subsidiary of American Life through a capital contribution from us. First Wyoming Capital Corporation (“First Wyoming”) was acquired by us on October 27, 2015. First Wyoming Life Insurance Company (“First Wyoming Life”) became a subsidiary of Midwest with an ownership interest of 99.9%. We are currently seeking to redomesticate First Wyoming Life and Great Plains Life in Nebraska contingent on regulatory approval.

We were a development stage company until American Life commenced insurance operations in 2009. We have incurred significant net losses since inception in 2003 totaling approximately $23.7 million through December 31, 2015. These losses have resulted primarily from costs incurred while raising capital and establishing and operating American Life. We expect to continue to incur operating losses until we achieve a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

From our inception, we have raised approximately $18.0 million through sales of shares of voting common stock and convertible non-voting preferred stock in several private placements exempt from registration under Section 4(2) of the Securities Act of 1933 and pursuant to an intrastate offering in the State of Nebraska.

In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. Capital and surplus contributed to American Life was approximately $10.6 million as of December 31, 2015, capital and surplus of American Life at that date was approximately $2.5 million. At December 31, 2015 and 2014, American Life generated approximately $2.4 million and $2.9 million in premium revenue, respectively.

On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life. Capital and surplus of Capital Reserve as of December 31, 2015 and 2014 was $1.5 million and $1.3 million, respectively. Capital Reserve is presently a dormant company and it incurred a $77,720 and $123,940 net loss for the years ended December 31, 2015 and 2014, respectively. We have entered into an agreement to sell Capital Reserve for its net book value to an unaffiliated third party and we expect the sale to close in early to mid 2016.

In January 2011, we completed the private sale of 74,159 shares of our Series A Preferred Stock to certain investors in Latin America. The net proceeds of this sale, after expenses, were approximately $415,750. These proceeds were used to further capitalize our insurance operations, for working capital and for general corporate purposes.

In February, 2011, we completed an offering of 1,554,320 shares of voting common stock to existing shareholders who were residents of the State of Nebraska for gross proceeds of approximately $7.7 million. Net proceeds were used to fund the acquisition of Old Reliance Insurance Company as described below, to further capitalize our insurance operations, for working capital and general corporate purposes.

In 2011, we acquired all of the issued and outstanding capital stock of Old Reliance, an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with the surviving company changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of our voting common stock.

During the third quarter of 2011, we obtained control of an entity in which we previously had a noncontrolling interest in, Security Capital Corp. (“Security Capital”), an Arkansas corporation. Security Capital was a development stage company that had not conducted operations apart from raising capital. Security Capital was acquired by us on August 5, 2014, through a share exchange described below.

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In August 2011, we acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), a startup company formed to develop, manufacture, and market the Hot Dot Alert Patch, a body heat sensor. The operating results of Hot Dot were consolidated with those of ours, due to our control of Hot Dot’s board of directors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of its common stock from us for $750,000. As a result, we ceased to have a controlling financial interest in Hot Dot and we deconsolidated it in our financial statements on that date. In October 2014, Hot Dot repurchased our 1,500,000 remaining Hot Dot shares for $775,000.

We commenced third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee income for us. Services provided vary based on the respective needs of the client 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.

In October 2013, we completed a private placement offering under Regulation D of the Securities Act of 1933 of Units, with each Unit consisting of 50 shares of voting common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016 for gross proceeds of $353,700. A total of 58,950 shares of voting common stock and 1,179 warrants were sold in the offering. Net proceeds were used for general corporate purposes.

On July 21, 2014, we consummated an exchange agreement with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their shareholders (other than those shares already held by us.) The Great Plains shareholders received approximately 1.298 shares of our voting common stock for each share of Great Plains common stock held and the Security Capital shareholders received approximately 0.162 shares of our voting common stock for each share of Security Capital common stock held. On August 5, 2014, Great Plains and Security Capital were merged into us. We issued a total of 4,767,400 voting common shares pursuant to these transactions.

In September, 2014, we completed a private offering of a newly-created class of preferred shares, Series B preferred stock, at $6.00 per share. The Series B shares are non-cumulative, non-voting and convertible into our voting common shares after May 1, 2017 at a rate of two voting common shares for each share of Series B preferred stock. A total of 102,669 shares of Series B preferred stock were sold for total gross proceeds of $616,012 and the net proceeds were used for general corporate purposes.

On October 27, 2015, we acquired First Wyoming Capital Corporation, a Wyoming corporation (“First Wyoming”) pursuant to an Agreement and Plan of Merger dated July 31, 2015 by exchanging 1.37 shares of our voting common stock for each share of First Wyoming common stock, or approximately 4,767,000 shares. Subsequent to the closing, First Wyoming was merged into us.

On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015 and Northstar became a wholly-owned subsidiary of ours. We exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’s primary asset as of its purchase date was cash of approximately $2.2 million.

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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 these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s 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.

Valuation of Investments

Our principal investments are in fixed maturity and equity securities. Fixed maturity and equity securities, 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 routines, processes, and controls in place to review prices received from service providers for reasonableness and unusual fluctuations. 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 investments in development stage entities. These equity securities approximate carrying value and are invested in privately-held 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. These companies are regularly bringing new investors into their entities at or above the prices paid by us. Accordingly, we have asserted that a willing market participant would purchase the security for the same price as we paid until such time as the development stage company commences operations.

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 an other-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.

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Deferred Acquisition Costs

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 us had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the 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 management’s 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. Management’s 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.

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 emerging 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 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.

We 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, 2015, the fair value of each of our reporting units exceeded the carrying value of the net assets assigned to that unit; therefore we were not required to perform further testing for impairment. Management's determination of the fair value of each reporting unit incorporates peer company price to earnings multiples and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections. Determining the fair value of goodwill is considered a critical accounting estimate because of its sensitivity to market based economics. In addition, any allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements variability in market conditions and key assumptions or subjective measurements used to estimate and allocate fair value are reasonably possible and could have a material impact on our consolidated financial statements.

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, 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.

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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. Therefore, we regularly evaluate the financial condition of our reinsurers including their activities with respect to claim settlement practices and commutations, and establish allowances for uncollectible reinsurance recoverable as appropriate.

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.

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 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.

New Accounting Standards

A detailed 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.

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Consolidated Results of Operations

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 2015 to 2014.

Premium revenue: Premium revenue declined primarily due to the accounting treatment for renewal premiums on our Accumulator of approximately $500,000 and surrenders of $287,000. These decreases were offset by new premiums written of $158,000 and First Wyoming Life premiums of $50,000 due to the merger of First Wyoming. We recognize 100% of the first year payments received for our Accumulator life insurance products as premiums earned when due. In subsequent years, 50% of the payments received on the Accumulator life insurance products are applied toward the traditional life insurance premium. The other 50% of the payments received are applied towards the annuity premium which is recognized as deposits to policyholder account balances and included in future insurance policy benefits rather than revenues. Premiums on our other insurance products are recognized as earned when due. Production of new life premium decreased significantly because actuarial development and regulatory approval of American Life’s new life insurance products took a significant amount of time, as well as decreased agents due to our low levels of capital and surplus. We have limited production of new business to preserve surplus of American Life, First Wyoming Life and Great Plains Life.

Miscellaneous income: Miscellaneous income decreased primarily due to lower TPA fee income due to our divestment of our interest in Northern Plains and Hot Dot in 2014. The decrease was also due to the acquisition of First Wyoming and the recognition of First Wyoming TPA fees only through October 27, 2015.

Net realized (losses) gains on investments: This increase was primarily due to the change in bond prices during 2015. In 2014, we recognized $90,812 and $251,102 gains on the divestments of Northern Plains and Hot Dot, respectively.

Investment income, net of expenses: The components of net investment income (loss) for 2015 and 2014 are as follows:

The increase in investment income was primarily due to the increased size of our bond portfolio, the consolidation of First Wyoming Life investment income following the acquisition of First Wyoming, the losses from equity method investments decreased due to changing prior year treatment for the investment in Pacific Northwest Corporation from cost to equity method of accounting which brought our investment to zero at December 31, 2014, and the divestment of our interest in Hot Dot, Inc. These increases were offset by the market value adjustment to our equity method investment in First Wyoming of $198,760 due to the merger of First Wyoming. Interest income from real estate investment, policy loan interest, and miscellaneous investment income is included in the “Other” line item above. The decrease in “Other” was primarily due to the decrease in interest income from real estate investments.

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Expenses are summarized in the table below.

Death and other benefits: Death benefits decreased primarily due to a lawsuit settlement in 2014 of $205,000 for American Life which did not recur and the decrease in overall claims. Death benefits continue to be paid out primarily on the Old Reliance block of business.

Interest credited: Interest credited increased was a result of the increase in the deposit-type liability owed to the policyholders as described above.

Increase in benefit reserves: The decrease in benefit reserves reflects the maturity of our in-force block of business, and increase in surrenders as well as the effect of the structure of the initial life insurance policy sold by American Life, Great Plains Life and First Wyoming Life.

Amortization of deferred acquisition costs: This decline is a result of fewer policies written in 2014 and 2015 as discussed above.

Salaries and benefits: The decrease primarily relates to marketing-related salaries transitioned to commission in January 2015 and the efficiencies gained from the acquisition of Great Plains as well as staff reductions.

Other operating expenses: Other operating expenses decreased due to non-recurring higher professional fees associated with the acquisition of Great Plains Financial and Security Capital in 2014, as well as fees related to routine regulatory examinations occurring in 2014 conducted by agencies from the states of Arizona, Missouri, and Wyoming as required by state statues. The decreases were offset professional fees associated with the acquisition of First Wyoming and the fees incurred for proposed acquisition of Northstar.

Bargain purchase gain for business acquisition: The gain in 2015 was a result of the acquisition of First Wyoming in October 2015.

Net Loss: The decrease in net loss was primarily due to the gain on the acquisition of First Wyoming, higher investment income, a decrease in reserves, lower salary expense, net gains on investments, and a reduction in other operating expenses, offset by a decline in premium revenue.

Loss attributable to noncontrolling interests: We owned approximately 60% of the capital stock of Security Capital, and approximately 25.7% of Great Plains Financial through August 5, 2014 at which time we acquired the remaining outstanding common shares of each company not held by us. Great Plains Financial and Security Capital were included in the 2014 consolidated financials and we subtracted from our earnings the portion of the gain/loss that we did not own, or 40% for Security Capital and 74.3% for Great Plains Financial. As a result of the acquisition for the year ended December 31, 2015, we did not have a gain/loss attributable to noncontrolling interests compared to the same period in 2014.

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, mortgage loans on 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.

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Increases in fixed maturity securities primarily resulted from additional purchases made by American Life and Great Plains Life during 2015.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2015 and 2014.

Reflecting the high quality of securities maintained by us, 98.8% and 99.4% of all fixed maturity securities were investment grade as of December 31, 2015 and 2014, respectively. Due to the low interest rate environment, we have invested in bonds with “A” or “BBB” ratings

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Market Risks of Financial Instruments