MIDWEST HOLDING INC. - Annual Report: 2017 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

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 ☒

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.c405 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. ☒

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviewed financial accounting standards provided pursuant to Section 13(a) 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 shares of the registrant’s common stock held by non-affiliates as of the last day of the registrant’s most recently completed second fiscal quarter was $39,444 calculated by reference to the average of the bid and ask price of such common stock on June 30, 2017.

As of March 1, 2018, there were 22,860,701 shares of voting common stock, par value $0.001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

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MIDWEST HOLDING INC.
FORM 10-K
TABLE OF CONTENTS

PART I

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PART III

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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. (“Midwest,” the “Company,” “Registrant,” “we,” “our,” or “us”) was formed in Nebraska in 2003 to become a financial services holding company. The Company’s sole operating subsidiary, American Life & Security Corp. (“American Life”), was formed in 2009 as a Nebraska-domiciled life insurance company.

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

Development of Our Business

We raised capital to build Midwest through various exempt intra-state offerings between 2003 and 2009. Since that time, Midwest has acquired eight other small holding company/life insurance companies and consolidated them with Midwest and American Life such that commencing December 31, 2016, Midwest operated its life insurance business exclusively through American Life.

In 2009, American Life began conducting life insurance business in Nebraska. As of December 31, 2017, statutory capital and surplus of American Life was approximately $3.0 million. For the years ended December 31, 2017 and 2016, American Life generated approximately $5.2 million and $5.9 million, respectively, in premium revenue on a statutory accounting basis.

Acquisitions and Divestitures Since 2014

On July 21, 2014, we consummated an exchange agreement with Great Plains Financial Corporation, a South Dakota corporation (“Great Plains”) and Security Capital Corporation, an Arkansas corporation (“Security Capital”), acquiring the outstanding shares of each company held by their shareholders (other than those shares already held by us). Shortly thereafter, Great Plains and Security Capital were merged into us. We issued a total of 4,120,000 voting common shares pursuant to these transactions. On December 1, 2016, the former principal subsidiary of Great Plains, Great Plains Life Assurance Company (“Great Plains Life”), a life insurance company, was merged into American life.

On October 27, 2015, we acquired the shares of First Wyoming Capital Corporation, a Wyoming corporation (“First Wyoming”), not already owned by us by issuing approximately 4,767,000 shares to the former shareholders of First Wyoming. Subsequent to the closing, First Wyoming merged into us. On September 1, 2016, the former principal subsidiary of First Wyoming, First Wyoming Life Insurance Company (“First Wyoming Life”), was merged into American Life.

On March 15, 2016, we acquired the outstanding shares of Northstar Financial Corp., a Minnesota corporation (“Northstar”). We issued approximately 4,553,000 shares in the transaction. Northstar’s primary asset at the time we acquired it was cash of approximately $2.4 million.

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On August 29, 2016, we sold Capital Reserve to an unaffiliated party for $50,000 plus statutory capital and surplus.

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance and Security Company (“US Alliance”) to transfer 100% of the risk related to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction was to provide statutory capital and surplus for American Life and had minimal effect on accepted accounting principles (“GAAP”) financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liability to the policyholders; the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $8,928,223 as of September 30, 2017. We transferred $9,629,623 of GAAP net adjusted reserves to US Alliance for cash of $7,078,223 which was net of a ceding allowance of $1,850,000 was treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life ceded approximately $883,000 of annual GAAP revenues and $1,758,250 of statutory revenues. US Alliance assumed all responsibilities for incurred claims, surrenders and commission from the effective date. See Note 6.

Life Insurance

General

American Life, as it exists today, is the product of a merger in 2010 of Old Reliance and American Life with Old Reliance surviving and being renamed American Life, the contribution of Great Plains Life to American Life in 2014 (which was merged into American Life on December 1, 2016), and the merger with First Wyoming Life into American Life on September 1, 2016. American Life is authorized to underwrite and market life insurance products within the State of Nebraska, and in 13 other states.

Insurance Policies

American Life initially offered two insurance products, the “American Accumulator”, which is a multi-benefit life insurance policy that combines cash value ordinary life insurance with a tax deferred annuity and the “Protect America’s Future”, a single premium convertible term life product offered for children aged three months to 15 years. The Protect America’s Future 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 $62,000. Premiums may be higher based upon the age and health of the insured.

Three new products were introduced in 2014: (i) the “Accelerator”, which is a participating whole life insurance policy with guaranteed level death benefits and premiums; (ii) the “American Protector”, a 7-year pay non-participating whole life insurance policy with an embedded flexible annuity and modified death and premiums; and (iii) the “Accumulator X”, a 10-year pay non-participating whole life insurance policy with an embedded flexible annuity and modified death benefit and premiums. The Accelerator premiums vary according to issue age, gender, and smoking classification with a minimum face amount of $25,000. Its premiums are substantially higher than the other products in the portfolio. The American Protector premiums are payable for seven years, during which time the face amount remains level. After the seven years the policy face amount gradually decreases to the ultimate amount which is equal to 50% of the issued policy face amount. Annual premiums per unit are $1,000 with a minimum of ½ a unit and maximum of ten units. After the first year, 30% of the annual premiums are allocated to the flexible annuity. The Accumulator X premiums are payable for ten years, during which time the policy face amount remains level. After ten years, the policy face amount gradually decreases to the ultimate amount which is equal to 50% of the issued policy face amount. Annual premiums per unit are $1,000 with a minimum of ½ a unit and maximum of ten units. After the first year, 40% of the annual premiums are allocated to the flexible premium annuity.

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Product Pricing

Our products have been approved by the appropriate insurance regulatory authorities and incorporate the following features:

All of our products were developed using the services of an independent qualified consulting actuary, Miller and Newberg, Inc., of Kansas City, Missouri. In addition to product development, Miller and Newberg, Inc., serves as valuation actuary to American Life. The Company utilizes a third party firm, First Consulting Inc. of Kansas City, Missouri, for product compliance and filings with various regulatory authorities.

Underwriting Standards

Underwriting guidelines have a direct impact on the operating results of American Life. If the underwriting standards that are established are not adequate, desired operating results will not be realized. Generally, when underwriting standards are less restrictive, more mortality claims and lower persistency will result. Underwriting standards have a direct impact on the pricing structure of a product. The less restrictive the underwriting standards, the higher the product needs to be priced in order to allow for higher incidence of mortality. This higher incidence of mortality is also reflected in greater policy reserves being established.

American Life utilizes information from applications and, in some cases, telephone interviews with applicants, inspection reports, doctors’ statements and/or medical examinations to determine whether a policy should be issued in accordance with an application, with a different rating, with a rider, with reduced coverage or rejected. In addition to an applicant’s medical history, American Life also considers other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Requests for coverage are reviewed on their merits and a policy is not issued unless the particular risk has been examined and approved by our underwriters. Miller and Newberg, Inc., and reinsurers assist American Life in establishing its underwriting standards. The Company’s Chief Underwriter has more than 20 years’ experience in such business.

Marketing

The insurance products of American Life are marketed using a personal, face-to-face marketing concept. The insurance agents use the shareholder base and the current policyholders of ours and their referrals as potential clients for life insurance products. For most of 2017, we were unable to generate a significant amount of new life insurance sales due to the lack of excess capital and surplus of American Life.

Candidate agents that lack insurance experience must complete a multiple interview process. These individuals are secured through a recruiting agency, referrals from shareholders, newspaper advertisements, and solicitation through the use of on-line job sites. If hired to sell insurance, the candidate must complete a 40-hour training course conducted by a third party as well as pass the applicable state examination. Once licensed, each agent must complete a week long product and sales training class. Following course completion, each agent has a training week where his or her manager will work side by side with the agent by conducting sales meetings.

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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 a new life insurance company, these initial costs and the required provisions for reserves have an adverse effect on operating results. American Life, as is common among relatively young life insurance companies, may be expected to sustain losses for several years until such time as the block of business matures and the profit stream offsets the cost of new business. The aggregate cost of writing new life insurance includes such significant, nonrecurring items such as first year commissions, medical and investigation expenses, and other expenses incidental to the issuance of new policies, together with the initial reserves required to be established. For our ordinary life products, the costs to cover expenses and the policyholder liability that must be set up at policy issuance exceed the first year premium by approximately 35%. Additionally, there is no excess of costs to cover expenses and the policyholder liability for the Protect America’s Future product. However, in accordance with 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 American Life also prepares financial statements in accordance with accounting practices prescribed or permitted by its state of domicile (statutory basis of accounting) for the purpose of reporting to insurance regulatory authorities. The statutory basis of accounting has many significant differences to GAAP. For example, the incremental direct costs for acquiring new business, which are capitalized under GAAP, as discussed in the preceding paragraph, are expensed immediately under the statutory basis of accounting. In addition, under GAAP, assumptions used in calculating reserves are less conservative than those used under the statutory basis, thereby further reducing adverse effects on operating results.

Administration

We commenced our third party administrative (“TPA”) services in 2012 as an additional revenue source. These services were offered to American Life through February 28, 2017, and to non-consolidated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for us. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Management does not expect such service to be a significant source of future revenue.

Investments

The type and amount of investments which can be made by a life insurance company are specifically controlled by applicable state statutes and rules and regulations of the respective state departments of insurance. American Life has adopted investment policies in compliance with the insurance laws of the State of Nebraska.

As an unseasoned company ages, investment income will increase as a percent of total income due to investment of policy reserves; therefore, it is critical that an insurer invests its assets conservatively to ensure that investment income can become a significant component of total revenue. Accordingly, American Life has developed a conservative investment policy in an effort to minimize investment risk. Our investments are managed by our Chief Executive Officer (“CEO”), who has over 30 years of portfolio management experience. He consults with a number of investment bankers and traders in the management of our portfolio. Trades are cleared through a common broker after competitive bids are solicited.

Reinsurance

American Life reinsures with other companies (reinsurers) portions of the life insurance risks it underwrites. The primary purpose of reinsurance is to allow a company to reduce the amount of its risk on any particular policy by transferring a portion of the risk to the reinsurers. However, American Life remains contingently liable for the risk in the event any reinsurer is not able to meet its obligations under the applicable reinsurance agreements. Further, when life insurance risks are ceded to another insurer, the ceding company must pay a reinsurance premium to the reinsurance company as consideration for the risk being transferred. The payment of this reinsurance premium to the reinsurer represents a reduction of the premium revenue received by American Life. This reduction in premium income has a direct impact on the profitability of the ceding company. The types of reinsurance treaties utilized are yearly renewable term based and indemnity coinsurance. For the yearly renewable term, we pay the assuming carrier an annual premium based upon “term life” rates which are typically lower than those we charge. The indemnity coinsurance reinsurer receives 100% of the premiums and benefits.

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The average face amount of all of our life insurance policies in force is approximately $34,000, with the American Accumulator averaging $62,000, Protect America’s Future Plan averaging $9,000, the Accelerator averaging $81,000, the American Protector averaging $10,000, the Accumulator X averaging $77,000, and death benefit policies acquired averaging $9,000. With respect to the new policies written, American Life retains $40,000 of risk on any one life. As of December 31, 2017, approximately 36% of our gross outstanding life insurance policies in force are reinsured with third parties. Overall, ceded premium represents approximately $14.00 of premium per year for each $1,000 of gross life insurance in force. All accidental death benefits are reinsured.

Reserves

American Life establishes as liabilities actuarially computed reserves to meet the obligations on the policies it writes, in accordance with the insurance laws and the regulations of Nebraska, for statutory accounting and GAAP. Reserves, whether calculated under statutory accounting practices prescribed by various state insurance regulators or GAAP, do not represent an exact calculation of exposure, but instead represent our best estimates based on the relevant basis of accounting, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions. The various actuarial factors are determined from mortality tables and interest rates in effect when the policies are issued and are applied against policy in force amounts. The National Association of Insurance Commissioners (“NAIC”) has adopted reserve rules to be used for Statutory Accounting. As of January 31, 2017, 46 states adopted the revised model laws. The new method, referred to as Principle-Based Reserving (“PBR”) replaces the current formula approach on determining policy reserves to an approach that reflects the risk of highly complex products. American Life did not report life insurance reserves on a PBR basis at December 31, 2017 and is deferring to implement under the transitional rules stated in Section II of the Valuation Manual until January 1, 2020 for new policies written. We have not performed an analysis to determine the effect these new rules may have on us.

Competition

The life insurance industry is fiercely competitive. Many of the life insurance companies authorized to do business in states that we conduct business in are well-established companies with good reputations, offer a broader line of insurance products, have larger selling organizations, and possessing significantly greater financial resources than Midwest and American Life. American Life is not rated by industry analysts and likely will not be rated for the foreseeable future. This has a negative impact on the ability of American Life to compete with rated insurance companies.

There is also considerable competition among insurance companies in obtaining qualified sales agents, which might require American Life to pay higher commissions to attract such agents. We feel that we are uniquely positioned to serve our client base – primarily rural areas of the Midwest where competition from large companies is less intense due to geographic and economic constraints.

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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 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. Pacific Northwest is a dormant company with an insignificant amount of assets. There is no plan at this time to raise more capital or pursue forming a life insurance subsidiary. We own approximately 24.7%, or 850,000 shares, of Pacific Northwest common stock. Mark A. Oliver, the Chief Executive Officer and the Chairman of the Board of Directors of Midwest, is Treasurer and a member of the Board of Directors of Pacific Northwest and owns 100,000 shares of capital stock of Pacific Northwest. Todd C. Boeve, an officer of Midwest, is Secretary and a member of the Board of Directors of Pacific Northwest and owns 25,000 shares of capital stock of Pacific Northwest.

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. New Mexico Capital is a dormant company with an insignificant amount of assets. There is no plan at this time to raise more capital or pursue forming a life insurance subsidiary. Midwest owns 500,000 shares or approximately 11.5% of New Mexico Capital. Mark A. Oliver, the Chief Executive Officer and Chairman of the Board of Directors of Midwest, is Chief Executive Officer and Chairman of the Board of New Mexico Capital and owns 186,667 shares of its common stock or 4.3% of the outstanding common shares. Other of Midwest’s present and former officers and directors also own 381,667 shares of common stock of New Mexico Capital, or 9.0% of the outstanding shares.

Regulation

American Life is subject to the regulation and supervision of the insurance regulatory authorities of Nebraska, and other state insurance regulators where it is licensed to do business. Such regulation is primarily for the benefit of policyholders rather than shareholders. These regulators possess broad administrative powers, including the power to grant and revoke licenses to transact business, to approve the form of insurance contracts, to regulate capital requirements, to regulate the character of permitted investments, and to require deposits for the protection of investments. These insurance laws require the filing of a detailed annual report with the department of insurance in each state, as do other states’ laws. The business and financial accounts of American Life are subject to examination by the Nebraska Department of Insurance, as well as insurance departments of any other states in which we may do business.

As the holder of a controlling interest in American Life, we are also subject to regulation as an insurance holding company system under the insurance laws of the state of Nebraska. The provisions of these laws generally provide for restrictions on a change in control of the insurance holding company, requires the filing of certain reports with the relevant department of insurance, and limits the amount of dividends which may be received by the holding company.

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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, 2017, we had 20 full-time employees as well as approximately 79 insurance agents who operate as independent contractors.

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.

Our financial statements are presently unaudited and may be subject to material audit adjustments.

We have not been able to obtain and assimilate all information required to complete the required independent audit of our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth in Item 8 of this Report on Form 10-K are unaudited. As we undertake and complete the audit process, certain adjustments may be required to be made which may result in material changes to the financial position and results of operations presented in our unaudited financial statements included herein.

American Life may fail as a result of being inadequately capitalized.

American Life must have adequate capital and surplus capital, calculated in accordance with statutory accounting principles prescribed by state insurance regulatory authorities to meet regulatory requirements in Nebraska. American Life was granted a certificate of authority by the Nebraska Department of Insurance based on initial capital and surplus (based upon statutory accounting principles) of approximately $3.5. American Life had approximately $3.0 million of capital and surplus (based upon statutory accounting principles) at December 31, 2017. The Nebraska Department of Insurance may require additional amounts of capital and surplus to support the business of American Life going forward. The amount of capital and surplus ultimately required will be based on certain “risk-based capital” standards established by statute and regulation administered by the Nebraska Department of Insurance. The “risk-based capital” system establishes a framework for evaluating the adequacy of the minimum amount of capital and surplus, calculated in accordance with statutory accounting principles, necessary for an insurance company to support its overall business operations. It identifies insurers that may be inadequately capitalized by reviewing certain inherent risks of each 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 American Life fails to maintain required capital levels, in accordance with the “risk-based capital” system, its ability to conduct business would be compromised and our ability to expand our insurance business would be significantly reduced absent a prompt infusion of capital into American Life.

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 business that has incurred substantial losses to-date and expects to continue to incur substantial losses in the foreseeable future. No assurance 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 be given as to the 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 in the foreseeable future.

We commenced life insurance operations in 2009, and we expect to incur significant losses in the foreseeable future. American Life, as is common among unseasoned life insurance companies, has incurred significant losses since its inception because the costs of administration and the substantial nonrecurring costs of writing new life insurance. The costs of writing new business, which are deferred and amortized in accordance with our deferred acquisition policy, include first year commissions payable to insurance agents, medical and investigation expenses, and other expenses incidental to the issuance of new policies, together with the initial reserves required to be established for each policy. We have a significant accumulated deficit attributable primarily to our organization and capital raising efforts and to our expensive entry into the life insurance business.

Capital constraints prevented us from writing any significant amounts of new life insurance business in 2016 and 2017, which adversely affects our future prospects for profitability.

At present, we do not have sufficient capital and surplus in American Life for it to sell a significant amount of new life insurance products. Our new life insurance product sales were limited in 2016 and in 2017. As a result, our agency force has been depleted. We cannot assure that in the event we are able to alleviate our capital constraints, we will be successful in attracting or retaining agents who are successful in selling significant new insurance policies for American Life in a cost efficient manner. A continued lack of new insurance policy sales will have a negative long-term impact on our revenues, results of operations and financial viability.

Midwest is a holding company and has no ability to generate revenues other than payments from American Life, which are presently not adequate to fund the operations of Midwest.

Midwest is a holding company whose only operating subsidiary is American Life. Midwest depends on reimbursement of costs from American Life but has no other source of revenue from American Life, particularly at this time, since American Life has limited capital as well. These payments are not adequate to cover the costs of Midwest’s operations. Lack of available funds of Midwest could restrict its operations significantly and without additional capital, Midwest could be forced to curtail its operations even further. This would likely have an adverse effect on Midwest and its liquidity and financial results.

We intend to seek to raise additional equity capital which will likely dilute the ownership interests of our existing shareholders very substantially.

In order to fund the capital and surplus required for American Life and to grow assets and revenue to support our business plan, we intend to seek to raise additional capital, which we believe will sought to be raised through the issuance of additional shares of our voting common stock and/or preferred stock which would be convertible into voting common stock. If additional shares are issued, the ownership interests of existing shareholders will be diluted very substantially. We cannot assure you that we can obtain additional equity capital, or if any capital is raised, it will be on terms beneficial to our shareholders or to us. Unless we are able to successfully obtain significant additional equity capital, our ability to continue as a going concern will be in substantial jeopardy.

We have a limited operating history and amount of assets.

We have a limited operating history and have incurred substantial losses every year since we were organized. We continue to face all of the risks inherent in establishing an unseasoned business, including limited capital, uncertain product markets, lack of significant revenues, as well as fierce competition from better capitalized and more seasoned companies. We have no control over general economic conditions, competitors’ products or their pricing, customer demand and limited control over necessary costs of marketing and 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 very significant operating losses incurred to date and lack of capital to pursue significant expansion and policy sales. These risks and the lack of a seasoned operating history make it difficult to predict our future revenues or results of operations. This could cause the value of our voting common stock to decline or become worthless.

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We may not be able to execute an acquisition strategy with any degree of success, which could cause our business and future growth prospects to suffer.

We may continue to pursue acquisitions of insurance related companies. However, suitable acquisition candidates may not be available on terms and conditions that are economic to us, particularly with our limited capital resources. In pursuing acquisitions, we will compete with other companies, most of which have greater financial and other resources than us. Further, if we succeed in consummating acquisitions, our business, financial condition and results of operations may be negatively affected because:

Our insurance marketing efforts have not been successful.

American Life has marketed its insurance products through the services of licensed insurance agents. New agents are recruited through a staffing agency, referrals from shareholders, newspaper advertisements, and solicitation through use of on-line job sites. Most of these agents do not become successful life insurance agents. Our agency force has not been successful in generating significant insurance policy sales on cost efficient terms for us. Many of our agents have little or no prior insurance selling experience and, accordingly, this lack of experience has had a negative impact on the amount of premium volume we have written.

Also, insurance products have been marketed by us using a face-to-face, referral based marketing concept. Historically our insurance agents have used our shareholder base and their referrals as potential clients for our life insurance products. Our marketing efforts have not generally been successful when our agents conducted general public solicitation regarding insurance products.

The insurance industry is subject to numerous laws and regulations, and compliance costs and/or changes in the regulatory environment could adversely affect our business.

Our insurance operations are subject to government regulation in each of the states in which we conduct business. Such regulatory authority is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than shareholders. During the past several years, increased scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems. The NAIC and state insurance regulators reexamine existing laws and regulations on an ongoing basis, and focus on insurance company investments and solvency issues, risk-based capital guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. Future NAIC initiatives, and other regulatory changes, could have a material adverse impact on our insurance business. There can be no assurance that American Life will be able to satisfy the regulatory requirements of the Nebraska Department of Insurance or a similar department in any other state in which it may wish to transact business.

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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.

Impairment or negative performance of other financial institutions could adversely affect us

We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. The operations of U.S. and global financial services institutions are interconnected and a decline in the financial condition of one or more financial services institutions may expose us to credit losses or defaults, limit our access to liquidity or otherwise disrupt our business operations.

We operate in a highly competitive industry, and our business will suffer if we are unable to compete effectively.

The operating results of life insurance companies are subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies such as A.M. Best and other factors. The life insurance business is fiercely competitive. Our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain agents to market insurance products, our ability to develop competitive and profitable products and our ability to obtain acceptable ratings. In connection with the development and sale of products, American Life encounters competition from other insurance companies, most of whom have financial and human resources substantially greater than American Life’s, as well as competition from other investment alternatives available to potential policyholders. American Life is not rated, which has a negative impact on its ability to compete with rated insurance companies.

American Life competes with up to 800 other life insurance companies in the United States. Most life insurance companies have greater financial resources, longer business histories, and more diversified lines of insurance coverage than American Life. These larger companies also generally have large sales forces. We also face competition from direct mail and email sales campaigns.

We are highly dependent upon our Chief Executive Officer, and the loss this officer could materially and adversely affect our business.

Our ability to operate successfully is dependent primarily upon the efforts of Mark A. Oliver, our Chief Executive Officer and the Chief Executive Officer of American Life. The loss of the services of Mr. Oliver could have a material adverse effect on our ability to pursue our business and the business of American Life. The Company has an employment agreement with Mr. Oliver with a term ending in 2019.

Development of life insurance products involves the use of certain assumptions, and the inaccuracy of these assumptions could adversely affect profitability.

In our life insurance business, we must make certain assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of life insurance products. These assumptions are based on industry experience and are reviewed and revised regularly to reflect actual experience on a current basis. However, variation of actual experience from that assumed in developing such terms may affect a 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 rates and crediting rates. If we underestimate future policy benefits, we would incur additional expenses at the time we become aware of the inadequacy. As a result, our losses would increase and our ability to achieve profits would suffer.

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Fluctuations in interest rates could adversely affect our business.

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 American Life is required to pay under the contracts and the amounts American Life is able to earn on its investments intended to support its obligations under the contracts. Spread is a key component of revenues.

To the extent that interest rates credited are less than those generally available in the marketplace, policyholder lapses, policy loans and surrenders, and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to purchase products with perceived higher returns. This process may result in cash outflows requiring that American Life sell investments at a time when the prices of those investments are adversely affected by the increase in market interest rates, which may result in realized investment losses.

Increases in market interest rates may also negatively affect profitability. In periods of increasing interest rates, we may not be able to replace invested assets with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep interest sensitive products competitive. American Life therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts.

Our investments are subject to risks of default and reductions in market values.

We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities, bankruptcy filings and other events could reduce our investment income and realized investment gains or result in the recognition of investment losses and restrict our access to cash and investments. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in bonds included in our portfolio, financial market performance, general economic conditions, and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio and may adversely affect our results of operations.

Reinsurers with which we do business may not honor their obligations, leaving us liable for the reinsured coverage, and our reinsurers could increase their premium rates.

American Life cedes a substantial amount of its insurance to other insurance companies. However, it remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by the reinsurer. The cost of reinsurance is, in some cases, reflected in its premium rates. Under certain reinsurance agreements, the reinsurer may increase the rate it charges American Life for the reinsurance. However, if the cost of reinsurance were to increase with respect to policies for which American Life has guaranteed the rates, the costs to American Life could be adversely affected, which would in turn adversely affect our results of operations.

Changes in the tax laws could adversely affect our business.

Congress has from time to time considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. This and similar legislation, including a simplified “flat tax” income tax structure with an exemption from taxation for investment income, could adversely affect the sale of life insurance compared with other financial products if such legislation were to be enacted. There can be no assurance as to whether such legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on any annuity and life insurance products that we and our operating subsidiary develops.

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.

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We do not intend to declare cash dividends on shares of our common stock for the foreseeable future.

We have never paid a cash dividend on our voting common stock and we do not anticipate paying dividends for the foreseeable future. We intend to retain available funds to be used for operations. Future dividend policy will depend on earnings, capital requirements, financial condition and other relevant factors. Moreover, we are a holding company without independent operations and generate limited cash flow from our operations.

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

Our profitability would likely be reduced if our lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies. Policy sales costs are deferred and recognized over the life of a policy. Excess policy lapses, however, cause the immediate expensing or amortizing of deferred policy sales costs.

The insurance industry is highly regulated and our activities are restricted as a result. We spend substantial amounts of time and incur significant expenses in connection with complying with applicable regulations, and we are subject to the risk that more burdensome regulations could be imposed on us.

Compliance with insurance regulation by us is costly and time consuming. Insurance companies in the U.S. are subject to extensive regulation in the states where they do business. This regulation primarily protects policyholders rather than stockholders. The regulations require:

American Life is subject to this regulation in each state in the U.S. in which it is licensed to do business. This regulation involves significant costs and restricts operations. We cannot predict the form of any future regulatory initiatives.

In addition, as the owner of a life insurance subsidiary, Midwest is regulated by various state insurance regulatory agencies under the uniform insurance holding company act. Certain "extraordinary" intercorporate transfers of assets and dividend payments from American Life require prior approval by the applicable state insurance regulator. We also file detailed annual reports with the Nebraska Department of Insurance and all of the states in which we are licensed. The business and accounts of American Life are subject to examination by the Nebraska Department of Insurance, as well as inquiries including investigations of the various insurance regulatory authorities of the states in which American Life is licensed.

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Breaches of security or interference with our technology infrastructure could harm our business

Our business is reliant upon technology systems and networks to process, transmit and store information and to conduct many of our business activities and transactions. Maintaining the integrity of our systems and networks is critical to the success of our business operations and to the protection of our proprietary information and our clients' personal information. Any such breaches or interference that may in the future occur could have a material adverse impact on our business, financial condition or results of operations. Moreover, any unauthorized access to or the disclosure or loss of our proprietary information or our clients' personal information may result in legal claims, damage to reputation, the incurrence of costs to eliminate or mitigate further exposure, or other damage to our business. Despite measures taken to address and mitigate these risks, we cannot assure that our systems and networks will not be subject to breaches or interference. We maintain insurance for Data Breach covering the cost of any such breach.

There are a substantial number of shares of Midwest common stock eligible for future sale in the public market.

There were 22,860,701 shares of our voting common stock outstanding as of April 16, 2018. As of that date, nearly all outstanding shares may be sold without restriction. The potential sale of these shares, called market overhang, likely has a significant negative and depressive effect on the market price of our voting common stock, particularly given the lack of demand for our stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

We currently lease approximately 10,131 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 expired on May 31, 2017.

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

Our voting common stock began trading on the OTCQB as of mid-2016 where it trades under the ticker symbol: MDWT. Our shares do not actively trade. As of April 16, 2018, we had issued and outstanding 22,860,701 shares of our voting common. No other equity securities of the Company are outstanding.

The following table shows the high and low bid prices of our voting common stock as reported by the OTCQB. This reported information does not constitute an established trading market and does not necessarily reflect actual transactions. Any trading in our voting common stock has been volatile and sporadic.

Holders of Record

As of April 16, 2018, there were approximately 11,920 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 our Class B preferred shares was 7%, which commenced in 2015. Dividends of $30,544 and $43,120 were paid during 2017 and 2016, respectively. On June 15, 2017, the Class B preferred shares were converted to voting common shares by the Company. No further dividends are required to be paid.

Securities Authorized for Issuance under Equity Compensation Plans

We have not established any equity compensation plans or granted any equity awards under such plans. As a result, there are no securities authorized for issuance under such plans.

ITEM 6. SELECTED FINANCIAL DATA.

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

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We have not been able to obtain and assimilate all information required to complete the required independent audit of our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth in Item 8 of this Report are unaudited. As we undertake and complete the audit process, certain adjustments may be required which may result in material changes to our financial position, results of operations and the discussion and analysis presented below.

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.”

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. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We presently conduct our business through our sole life insurance subsidiary, American Life & Security Corp. (“American Life”). In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. For the years ended December 31, 2017 and 2016, we generated approximately $3.0 million and $3.5 million in premium revenue, respectively.

We have incurred losses since inception that resulted primarily from costs incurred while raising capital and establishing and operating American Life and other entities. We expect to continue to incur operating losses until American Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is a summary of our significant accounting policies and estimates. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from 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 in this Report.

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Valuation of Investments

Our principal investments are in fixed maturities. Fixed maturities, which are classified as available-for-sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). We utilize external independent third-party pricing services to determine the fair values on investment securities available-for-sale. We have processes, and controls in place to review prices received from service providers for reasonableness and unusual fluctuations in prices. In the event that a price is not available from a third-party pricing service, we pursue external pricing from brokers. Generally, we pursue and utilize only one broker quote per security. In doing so, we solicit only brokers which have previously demonstrated knowledge and experience of the subject security.

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.

Deferred Acquisition Costs

Incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to a life insurance contract acquisition transaction and would not have been incurred by us had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the life insurance premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

Value of Business Acquired

Value of business acquired (VOBA) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon 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.

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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.

Intangibles

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, 2017, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.

Reinsurance

In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. We generally strive to diversify our credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish our primary liability under the policies written.

Future Policy Benefits

We establish liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by using a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables. Such liabilities are reviewed quarterly by an independent consulting actuary.

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Income Taxes

Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. We have no uncertain tax positions that we believe are more-likely-than not that the benefit will not to be realized.

Recognition of Revenues

Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the consolidated statement of cash flows.

Amounts received under our multi-benefit policy form are allocated to the life insurance portion of the multi-benefit life insurance arrangement and the annuity portion based upon the signed policy.

New Accounting Standards

A discussion of new accounting standards is provided in Note 1 — Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Consolidated Results of Operations

Net Loss: The decrease in net loss in 2017 compared to 2016 was due to the one-time impairment of the goodwill of $1,129,824 in 2016, the loss of $420,720 on the revised valuation of Midwest’s equity method investment in First Wyoming mentioned below in 2016, the increase in investment income and realized gains, the decrease in interest credited and benefit reserves, and the decrease of approximately $1,000,000 in salaries and other operating expenses. These were offset by the bargain purchase gain on the revised valuation of the Midwest and First Wyoming merger of $1,326,526 in 2016. There were also higher death benefits and an increase in amortization of deferred acquisition costs in 2017.

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 2017 to 2016.

Premium revenue: Premium revenue decreased primarily due to the ceding of premiums to US Alliance and Optimum RE of $336,000. The decrease was also due to GAAP accounting for premiums from our Accumulator life insurance product (our primary product). We recognize 100% of the first year payments received for our Accumulator life insurance products as premiums earned when due. In subsequent years, 50% of the payments received on the Accumulator life insurance products are applied toward the traditional life insurance premium and the other 50% of the payments received are applied towards the annuity premium which is recognized as deposits to policyholder account balances and included in future insurance policy benefits rather than in revenues. These decreases were offset by an increase in production of $42,000.

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Investment income, net of expenses: The components of net investment income for 2017 and 2016 are as follows:

The increase in investment income was due primarily to the increased size of our bond portfolio. Management was more aggressive in investing excess cash during late 2016, resulting in larger invested assets and interest income in 2017. Effective September 30, 2017, American Life entered into a coinsurance agreement with US Alliance to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. This transaction resulted in American Life disposing of approximately $6,700,000 of bonds to finance the transaction. As a result, the fourth quarter of 2017 saw a slight decrease in interest income. Policy loan interest and miscellaneous investment income is included in the “Other” line item above.

Loss on equity method investment: The decrease in investment loss for equity method investments was due to the final valuation by a third party of Midwest’s investment in First Wyoming in 2016. The original investment in First Wyoming was $810,500. The preliminary valuation prepared for us by the third party was determined to be $642,150 which resulted in a loss of $168,350 for the year ended December 31, 2015. The final valuation by the third party valued First Wyoming at $221,430 resulting in the $420,720 loss for the year ended December 31, 2016. There was no loss on equity method investments for the year ended December 31, 2017.

Net realized gains (losses) on investments: The slight increase was due primarily to improved market conditions on sale of bonds offset by the sale of one bond for a loss of $32,000 and other smaller losses which were realized on the sale of bonds for the coinsurance transaction mentioned above.

Extinguishment of Hot Dot payable: The increase was due to the agreement between Midwest and Hot Dot to waive the repayment of any and all amounts otherwise payable.

Miscellaneous income: Miscellaneous income decreased due to our TPA fee income decline as we acquired a company in 2016 for which we were performing TPA services. We have three customers for which we perform these services currently. We do not expect such service to be a significant source of future revenue. Fees earned during the years ended December 31, 2017 and 2016 were $71,680 and $63,500, respectively.

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Expenses are summarized in the table below.

Death and other benefits: Death and other benefits increased due primarily the cash value of surrendered claims, increase in paid claims, and an increase in incurred but not reported and pending claims. Death benefits are expected to continue at current levels on our older block of business as a result of the age of the block. We maintain policy reserves to offset the effect of all claims. We expect overall death claims and other benefits to decrease as a result of the coinsurance agreement between American Life and US Alliance to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. American Life has a 94% retention rate for all policies which is above the industry average.

Interest credited: Interest credited decreased due to the coinsurance agreement between US Alliance and American life effective September 30, 2017 to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. The interest credit portion attributed to the coinsurance agreement was $59,000. Interest rates of the deposit-type contracts was reduced from 5.75% to 4.0% in the third quarter of 2017 which also attributed to the decrease. These decreases were offset by the increase in the deposit-type contract liability.

Increase in benefit reserves: The decrease in benefit reserves is primarily the result of the coinsurance agreement between US Alliance and American Life effective September 30, 2017. The fourth quarter reserve change of $51,000 for the Great Plains and First Wyoming blocks of business were recorded as an increase on the consolidated balance sheet in the “Amounts recoverable from reinsurers” line.

Amortization of deferred acquisition costs: The increase was due primarily to the increase in new business fees when the third party agreement between Midwest and American was terminated on February 28, 2017. Through the cost share agreement, the actual salaries of individuals directly responsible for the acquisition of new business are included in the new business fees. American Life also put on 46 new policies during 2017.

Salaries and benefits: The decrease was due to the reduction of personnel in 2017. We expect further salary and benefit reductions of approximately $220,000 in 2018 compared to 2017 and $200,000 in 2019 compared to 2018 due to former employees and cost cutting efforts at the end of 2017. The reductions were offset by a one-time recruiting fee and the increase in vacation accrual.

Goodwill impairment: During our goodwill analysis in 2016, we determined that we were required to impair the entire balance of $1,129,824.

Other operating expenses: Other operating expenses decreased significantly by one-time expenses of $380,000 in 2016 for write-off of investments and loans in unconsolidated subsidiaries, expenses related to Northstar and First Wyoming mergers and the redomestication and merger of our former life subsidiaries of $289,159, consulting fees associated with former employees, rent expenses of $120,000 due to termination of leases during 2017, decrease in travel due to capital raising efforts of $63,000, decrease in our VOBA amortization due to the coinsurance agreement between US Alliance and American Life where the VOBA associated with the Great Plains Life and First Wyoming Life was written off in the transaction. These decreases were offset by the Nebraska Department of Insurance exam fees of $140,000, the addition of the director’s and officer’s insurance policy of $79,000, and legal fees associated with the private placement memorandum for a new Series B stock offering. We expect to continue to see reductions in other operating expenses due to our cost cutting initiatives.

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Investments

Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities, with smaller holdings in equity securities, real estate held for investment, policy loans, and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.

Decreases in fixed maturity securities primarily resulted from the sale of bonds to fund the coinsurance transaction between American Life and US Alliance to cede 100% of the Great Plains Life’s and the First Wyoming Life’s blocks of business effective September 30, 2017.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2017 and 2016.

Reflecting the quality of securities maintained by us, 97.6% of all fixed maturity securities were investment grade as of December 31, 2017 and 2016. Due to the low interest rate environment, we have invested in bonds with “A” ratings at the time the investment was made.

Market Risks of Financial Instruments

We hold a diversified portfolio of investments that primarily includes cash, bonds, stocks, real estate, held for investment, and notes receivable. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.

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Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

Credit Risk

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through diversification of investments amongst many corporations and numerous industries. Additionally, our investment policy limits the size of holding in any particular issuer.

Liquidity and Capital Resources

At December 31, 2017, the Company had cash and cash equivalents totaling $951,527. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for at least twelve months when combined with the liquidity associated with our investment portfolio. However, most of the Company’s liquid assets are held in an insurance subsidiary and under existing insurance law, the subsidiary cannot make significant payments up to the parent company, which is the Company. Accordingly, unless the Company is able to raise substantial additional capital in the near term, its ability to continue as a going concern will be in jeopardy. Management has been seeking to raise additional capital in order to help fund the liquidity issues that the Company faces, but cannot assure that such additional capital will be raised in 2018. The Company has based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect.

The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. Our RBC at December 31, 2017 was 533.907%.

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance to transfer 100% of the risk related to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction was to provide statutory capital and surplus for American Life and has minimal effect on GAAP financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liability to the policyholders; the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $8,928,223 as of September 30, 2017. We transferred $9,629,623 of GAAP net adjusted reserves to US Alliance for cash of $7,078,223 which was net of a ceding allowance of $1,850,000 which is treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life will cede approximately $883,000 of annual GAAP revenues and $1,758,250 of statutory revenues. US Alliance assumes all responsibilities for incurred claims, surrenders and commission from the effective date.

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Our surplus notes of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes a repayment cannot be made without the prior approval of the Nebraska regulators and they have not approved any repayment to date.

Since inception, our operations have been financed primarily through the sale of voting common stock and preferred stock. Our operations have generated significant operating losses since we were incorporated in 2003. We expect to continue to incur losses for at least the foreseeable future.

Aside from raising capital, which has funded the vast majority of our operations, premium income, deposits to policyholder account balances, and investment income are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to meet future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.

Net cash used by operating activities was $8,555,530 for the year ended December 31, 2017, which was comprised primarily of the coinsurance transaction between American Life and US Alliance Life of $7,445,678 and net loss of $2,719,524; partially offset by an increase in policy liabilities of $2,289,872. Net cash provided by investing activities was $7,264,748. The primary source of cash was from sales of available-for-sale securities for the coinsurance agreement between American Life and US Alliance. Offsetting this source of cash was our purchases of investments in available-for-sale securities and the purchase of property and equipment. Net cash provided by financing activities was $1,580,764. The primary source of cash was net receipts on deposit-type contracts, offset by dividends paid to Class B Preferred Stock shareholders.

Management’s focus is on raising additional capital from outside investors. We cannot assure that additional capital will be raised, or if raised, on terms that will be economical to us. Unless we are able to successfully issue substantial additional equity capital, our ability to continue as a going concern will be in substantial jeopardy.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a smaller reporting company we are not required to provide the table of contractual obligations required pursuant to this Item.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

We have not been able to obtain and assimilate all information required to complete the required independent audit of our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth in this Item 8 are unaudited. As we undertake and complete the audit process, certain adjustments may be required to be made which may result in material changes to our financial position and results of operations presented below. When our audited financial statements are completed, they will be filed under an amendment to this Report on Form 10-K.

The unaudited consolidated financial statements are included as a part of this report beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

(a) Conclusions Regarding Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiary, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based upon an evaluation at the end of the period, the Chief Executive Officer and the Financial Reporting Manager concluded that disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the Exchange Act.

(b) Management’s Assessment on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). Management has conducted an assessment of our internal control over financial reporting at December 31, 2017 based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on our assessment under the criteria of this framework, Management concluded that our internal control over financial reporting was effective at December 31, 2017.

(c) Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

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PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Board Leadership Structure

Midwest does not have a formal policy regarding the separation of its Chairman and CEO (principal executive officer) positions. Our Board is responsible for the control and direction of the Company. The Board represents the Company's shareholders, and its primary purpose is to build long-term shareholder value. Mr. Oliver serves as Chairman of the Board and Chief Executive Officer of the Company. The Board believes that Mr. Oliver is best situated to serve as Chairman because he is the director most familiar with the Company's business and industry and is also the person most capable of effectively identifying strategic priorities and leading the discussion and execution of corporate strategy. In this combined role, Mr. Oliver is able to foster clear accountability and effective decision making. The Board believes that the combined role of Chairman and Chief Executive Officer strengthens the communication between the Board and management and provides a clear roadmap for shareholder communications. Further, as the individual with primary responsibility for managing day-to-day operations, Mr. Oliver is best positioned to chair regular Board meetings and ensure that key business issues and risks are brought to the attention of our Board and Audit Committee. We therefore believe that the creation of a lead independent director position is not necessary at this time.

Board's Role in Risk Oversight

The Board of Directors as a whole has responsibility for risk oversight. The oversight responsibility of the Board is enabled by management reporting processes that are designed to provide visibility to the Board about the identification, assessment and management of critical risks. This reporting is designed to focus on areas that include strategic, operational, financial and reporting, compensation, compliance and other risks. For example, the Board of Directors regularly receives reports regarding the investments and securities held by Midwest's insurance subsidiaries, as well as other reports regarding their insurance business.

Director Independence

Presently, we are not required to comply with the director independence requirements of any securities exchange. In determining whether our directors are independent, however, we intend to adhere to the rules of the NYSE MKT with respect to independent directors. The NYSE MKT listing standards define an "independent director" generally as a person, other than an executive officer or employee of a company, who does not have a relationship with the company that would interfere with the director's exercise of independent judgment.

The NYSE MKT listing requirements state that a majority of a company's board of directors must be independent. Our Board of Directors includes six independent directors, namely, Steve Conner, John Hompe, Scott Morrison, Jack Theeler, Firman Leung and Dana Stapleton. These six independent directors constitute a majority of the Board of Directors.

Audit Committee

Due to the size and structure of Midwest and its Board of Directors, the Board has not historically had a standing Audit Committee. The functions that would be performed by the Audit Committee have historically been performed by the entire Board of Directors. At a meeting on March 29, 2016, the Board established an Audit Committee and appointed John T. Hompe, Scott Morrison and Jack Theeler to serve on the Audit Committee.

Mr. Hompe was designated the Committee Chair and Financial Expert. The Board subsequently adopted an Audit Committee Charter that details the Audit Committee’s responsibilities to be as follows: (i) review recommendation of independent registered accountants concerning Midwest's accounting principles, internal controls and accounting procedures and practices; (ii) review the scope of the annual audit; (iii) approve or disapprove each professional service or type of service other than standard auditing services to be provided by the independent registered public accountants; and (iv) review and discuss with the independent registered public accountants the audited financial statements. The Committee met 4 times in 2017. Our Audit Committee charter is available on our website at www.midwestholding.com.

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Compensation Committee

Due to the size and structure of Midwest and its Board of Directors, the Board does not currently have a standing Compensation Committee. As a result, it does not have a Compensation Committee charter. The functions that would be performed by the Compensation Committee, including consideration of executive officer and director compensation, are performed by the entire Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

Executive officers, directors and “beneficial owners” of more than ten percent of Midwest’s voting common stock must file initial reports of ownership and changes in ownership with the SEC under Section l6(a) of the Exchange Act. SEC regulations require these reporting persons to furnish us with copies of all Forms 3, 4 and 5, and amendments thereto, that they file with the SEC. We believe that during 2017 and through the date of this filing, all of our officers, directors and greater than ten percent beneficial owners complied with all filing requirements of Section 16(a) of the Exchange Act.

Code of Ethics

Midwest has adopted a Code of Ethics that applies to our officers, directors and employees in accordance with applicable federal securities laws. A copy of the Code of Ethics was filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 2012. These documents may be reviewed by accessing Midwest’s public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will be provided to any shareholder without charge upon request. Midwest intends to disclose any amendments to or waivers of certain provisions of its Code of Ethics in a Current Report on Form 8-K.

Information Concerning Executive Officers and Director

Information concerning the names, ages, positions with Midwest, tenure as a director, and business experience of our executive officers and director nominees is set forth below. All executive officers are appointed annually by the Board of Directors.

STEVE CONNER: Mr. Conner served as a director of Rocky Mountain Capital Corp., a company whose successor was acquired by Midwest, from 2010 to 2015. He was appointed to the Board of First Wyoming in 2015 and served on that board until that company was acquired by Midwest in 2015. He served as a Consultant to Midwest PMS, Inc., an agricultural feed supplement manufacturer, from 1975 to 2016. Mr. Conner also serves on the Board of American Life.

JOHN T. HOMPE: Mr. Hompe is the Managing Partner and co-founder of J.P. Charter Oak Advisors LLC, a private investment firm focused on the financial services industry. Mr. Hompe has worked in the financial services sector for more than 30 years. He has held numerous board positions with insurance companies during his career. From 2003 through 2012, Mr. Hompe worked in investment banking and asset management (KBW Asset Management from 2011 through 2012 as a Managing Director and Keefe Bruyette & Woods, Inc. from 2003 to 2011 as Co-Head of Insurance and Asset Management Investment Banking). Mr. Hompe serves as an observer on the board of directors of International Planning Group, Ltd., an international life insurance broker, and Preparis Inc., a provider of business continuity services. From 2010 to 2012, he was an independent director of Island Capital, a Bermuda investment company. He also was a director and a member of the executive committee of Island's predecessor company, EIC Corporation Ltd., a Bermuda-domiciled insurance holding company, and Exporters Insurance Company, a New York-based trade credit insurer from 2005 to 2010. He was an outside director of North American Insurance Leaders, Inc. (NASDAQ: NAIL), a special purpose acquisition corporation focused on the insurance distribution sector in 2007. He also served as a director of FIHC, a Barbados-domiciled insurance holding company, and Facility Insurance Company, a Texas workers compensation company from 2001 to 2003. Mr. Hompe is also a Board Member of American Life

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MARK A. OLIVER: Mr. Oliver is currently the Chairman and Chief Executive Officer and a member of the Board of Directors of American Life. He has served as CEO since that company received its Certificate of Authority from the Nebraska Department of Insurance on September l, 2009. He was elected Chairman of American Life in March, 2017. Mr. Oliver also serves as Chief Executive Officer and Treasurer and as a member of the Board of Directors of Midwest. From 1984 until June 2007 Mr. Oliver was employed by Citizens, Inc., a life insurance holding company with principal offices in Austin, Texas, serving as its President and in various other executive capacities since 1997. He serves as a Director and Treasurer of Pacific Northwest. Additionally, he serves as Chairman and Chief Executive Officer of the Board of New Mexico Capital Corp. (“New Mexico Capital”).

FIRMAN LEUNG: Mr. Leung has over 30 years of experience in the financial services industry as an Investment and Capital Markets Banker in New York, London and Hong Kong. Since 2016, he has served as the Managing Principal of Columbus Circle Capital, LLC in New York and the Executive Managing Director of Investment Banking and Capital Markets at American Capital Partners, LLC, also in New York. From 2012 to 2015, he served as Managing Director, Investment Banking and Capital Markets at RCS Capital Corporation, New York. From 2002 to 2012, he was Managing Director, Capital Raising at Sandler O’ Neill & Partners, L.P., New York. Mr. Leung received his BS in Economics from The Wharton School at University of Pennsylvania and his MBA degree from The Amos Tuck School at Dartmouth College. He has also been a product speaker at the Las Vegas MoneyShow in the main forum: “Building a Durable Income Portfolio.” Mr. Leung is also a Board Member of American Life.

SCOTT MORRISON: Since 2006, Mr. Morrison has been Managing Partner of Oaks, Hartline & Daly law firm in Austin, Texas. Mr. Morrison is Texas board certified in estate planning and probate law. He practices law in the areas of estate administration and planning, probate and general business law. He has been named a "Texas Rising Star" by both Law and Politics Media, Inc. and Texas Monthly magazine. Mr. Morrison is also a Board Member of American Life.

JACK THEELER: Mr. Theeler is a partner in the Morgan Theeler law firm of Mitchell, South Dakota where he has been employed since 1971. He has a bachelor’s degree in accounting (1968) and a law degree (1971) from the University of South Dakota. In law school he was Editor in Chief of the South Dakota Law Review and graduated magna cum laude. He was the first Chairman of the South Dakota Lottery Commission, serving from 1986 to 1992. He is a member of American Bar Association, the State Bar of South Dakota, the Association of Defense Trial Attorneys, the South Dakota Defense Lawyers Association and an associate in the American Board of Trial Advocates. Mr. Theeler has served on numerous boards and commissions including Dakota Wesleyan University, Mitchell Area Development Corporation and the Mitchell YMCA. Mr. Theeler has been inducted into the University of South Dakota Sports Hall of Fame, the Mitchell Area Ducks Unlimited Hall of Fame, and his high school basketball team has been inducted into the South Dakota High School Basketball Hall of Fame. Jack and Nancy Theeler received the 2007 Community Service Award presented annually by the Mitchell Area Chamber of Commerce. A founding Board Member of Great Plains Financial Corp. and Great Plains Life Assurance, he is also a Board Member of American Life.

DANA STAPLETON: Mr. Stapleton has been a farmer/rancher in Sisseton, South Dakota for over the past 30 years. In 2001 he was named the South Dakota Farmer of the Year and the 2002 National Farmer of the Year. He was a founding Board Member of Great Plains Financial Corp. and Great Plains Life Assurance Co. He is also a Board Member of American Life.

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TODD BOEVE: Mr. Boeve is currently Vice President, COO and Corporate Secretary for Midwest and has worked for Midwest since January 2010. He was appointed to fill a vacancy on the Board in April. Mr. Boeve currently serves on the Board of Directors and is the Secretary of Pacific Northwest Capital and for New Mexico Capital. Additionally, he is the Secretary/Treasurer and a member of the Board of Big Sky Capital, a Montana Holding Co. He previously worked in the funeral industry for ten years as a licensed funeral director and was a PGA Golf Professional for nine years.

DEBRA HAVRANEK: Ms. Havranek is currently Vice President of Financial Reporting and has worked for Midwest since 2014. She has more than 20 years of experience in Corporate Reporting in the life insurance, banking, and consumer packaged goods industries.

JOEL MATHIS: Mr. Mathis is currently Senior Vice President of Investor Relations and has worked with Midwest since 2010. He has over 40 years of experience in Management and Consulting, a majority in the insurance industry. A Member of the Association of Insurance and Financial Analysts, National Investor Relations Institute, and the Public Relations Society of America.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid or accrued in the years indicated by Midwest to its Principal Executive Officer ("PEO"), Mark A. Oliver, Midwest's former PEO, Rick D. Meyer, and to certain other executive offices of Midwest. Our Board of Directors reviews senior officer compensation on an annual basis.

SUMMARY COMPENSATION TABLE ⁽¹⁾

⁽¹⁾ In 2015, 2016 and 2017 none of the names executive officers received stock awards, option awards, non-equity incentive plan compensation of non-qualified deferred compensations earnings as defined in Item 402 of Regulation S-K.

⁽²⁾ Automobile allowance and life insurance policy reimbursement.

⁽³⁾ Resigned October 1, 2015.

⁽⁴⁾ Elected Chairman on December 15, 2015.

⁽⁵⁾ Appointed to an Executive Officer position on December 15, 2015.

⁽⁶⁾ Appointed to an Executive Officer position on December 15, 2015. Appointed to Board April 2017.

⁽⁷⁾ Paid by Northstar Financial Corp. commensurate with merger with Midwest.

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Outstanding Equity Awards at Fiscal Year End

Midwest has not established any equity compensation plans or granted any equity awards under such plans to its named executive officers. As a result, none of its named executive officers had any unexercised options, unvested stock or equity incentive plan awards outstanding as of the end of its last completed fiscal year.

Employment Agreements

Midwest has an employment agreement with Mark A. Oliver, our Chairman and CEO/Treasurer. This agreement was effective on June 8, 2011 and was for a three-year term, subject to termination upon notice. The Board may extend the agreement for additional year(s). Our Board extended this agreement in December 2016 and that unless otherwise extended by the board the agreement will expire in June 2019. Pursuant to this agreement, Mr. Oliver is entitled to receive:

If Midwest terminates Mr. Oliver without "cause" as defined in the employment agreement, Midwest will be required to pay him his base salary and provide certain benefits for the duration of the remaining term of the employment agreement or six months, whichever is greater. This payment would be made in exchange for an agreement not to engage in certain competitive activities with Midwest during that period.

Director Compensation

Directors who are not employees received $1,000 for each meeting of the Board of Directors they attended in person and $350 per meeting they attend via telephone. Directors received an annual retainer of $5,000. Directors also are reimbursed for reasonable expenses related to their personal attendance at meetings. Our Board of Directors reviews director compensation on an annual basis.

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The following table sets forth the compensation paid or accrued by Midwest to its directors, other than directors who are also named executive officers, for the last completed fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information as of April 16, 2018, regarding the number and percentage of outstanding shares of voting common stock of Midwest beneficially owned by each person known by Midwest to beneficially own more than 5% of such stock, by each of its executive officers and director nominee, and by all of its directors and executive officers as a group.

*Less than one percent.

(1) Unless otherwise indicated, the business address of the persons named in the above table is care of Midwest Holding Inc., 2900 South 70th Street, Suite 400, Lincoln, NE 68506

Five percent shareholders:

None

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Midwest and certain of its directors and officers have current or past relationships and affiliations with businesses that operate, or once operated, in the life insurance industry and that have conducted public and private stock offerings in connection with their operations.

These past and present relationships with similar businesses could result in a potential conflict of interest should Midwest decide to offer life insurance products in any of the states in which these companies do business to the extent that a relationship with the other companies is on-going. In addition, a potential conflict of interest could arise if any of those companies chose to do business in Nebraska to the extent that a relationship with the other companies is on-going. For that reason, any decision relating to such business will be made by the disinterested members of the Board of Directors and any member of the Board having an interest in another company will recuse himself or herself from voting or discussing the matter.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The principal registered public accounting firm utilized by Midwest during 2016 and 2017 was RSM US LLP ("RSM", formerly "McGladrey"). RSM has served as our independent registered public accounting firm since December, 2009.

The aggregate fees billed by RSM to Midwest for the fiscal years ended December 31, 2017 and 2016 were as follows:

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PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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ITEM 16. Form 10-K Summary.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: April 16, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.

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MIDWEST HOLDING INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

Special Note

We have not been able to obtain and assimilate all information required to complete the required independent audit and our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth below are unaudited. As we undertake and complete the audit process, certain adjustments may be required to be made which may result in material changes to our financial position and results of operations presented below. When our audited financial statements are completed, they will be filed under an amendment to this Report on Form 10-K.

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Midwest Holding Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2017 and 2016

See Notes to Consolidated Financial Statements.

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Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017 and 2016

See Notes to Consolidated Financial Statements.

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Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

See Notes to Consolidated Financial Statements.

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Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

See Notes to Consolidated Financial Statements.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of operations: Midwest Holding Inc. (“Midwest” or “the Company”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of operating a financial services company. The Company is in the life insurance business and operates through its wholly owned subsidiary, American Life & Security Corp. (“American Life”). The Company has made several acquisitions of life insurance companies and related entities since 2008, all of which have been merged into the Company or into American Life.

Basis of presentation: The accompanying consolidated financial statements include the accounts of Midwest and/or our wholly owned subsidiary American Life. Hereafter, entities are collectively referred to as the “Company,” “we,” “our” or “us.”

Management evaluates the Company as one reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of life insurance products through American Life. The product offerings, the underwriting processes, and the marketing processes are similar. The Company’s product offerings consist of a multi-benefit life insurance policy that combines cash value life insurance with a tax deferred annuity and a single premium term life product. These product offerings are underwritten, marketed, and managed as a group of similar products on an overall portfolio basis.

These consolidated financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform to the current period’s presentation with no impact on results of operations or total stockholders’ equity.

Investments: All fixed maturities and a portion of the equity securities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in comprehensive loss.

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, the financial condition of the issuer, issuer credit ratings, and the intent and ability of the Company to hold the investment until the recovery of the cost.

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. No other-than-temporary impairments were recognized during the years ended December 31, 2017 or 2016.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

Included within the Company’s equity securities carried at cost and equity method investments are certain privately placed common stocks for some development stage holding companies organized for the purpose of forming life insurance subsidiaries. Our privately placed common stocks are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. These securities do not have a readily determinable fair value. The Company does not control these entities economically, and therefore does not consolidate these entities. The Company reports the earnings from privately placed common stocks accounted for under the equity method in net investment income.

Investment income consists of interest, dividends, gains and losses from equity method investments, and real estate income, which are recognized on an accrual basis and amortization of premiums and discounts.

Policy loans: Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. No valuation allowance is established for these policy loans as the amount of the loan is fully secured by the death benefit of the policy and cash surrender value.

Short-term investments: Short-term investments are stated at cost and consist of certificates of deposit. At December 31, 2017 and 2016 the Company did not have any short-term investments.

Real estate, held for investment: Real estate, held for investment is comprised of ten condominiums in Hawaii. Real estate is carried at depreciated cost. Depreciation on residential real estate is computed on a straight-line basis over 50 years.

Cash: The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At December 31, 2017 and 2016, the Company had no cash equivalents.

Deferred acquisition costs: Deferred acquisition costs consist of incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. The Company evaluates the types of acquisition costs it capitalizes. The Company capitalizes agent compensation and benefits and other expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminated the $437,620 of deferred acquisition costs (“DAC”) that were associated with the Great Plains Life block of business that was included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. The Company determined during its December 31, 2017 analysis that all deferred acquisition costs were recoverable.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

The following table provides information about deferred acquisition costs (“DAC”) for the years ended December 31, 2017 and 2016, respectively.

Value of business acquired: Value of business acquired (“VOBA”) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies.

Recoverability of VOBA is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminated the $1,085,811 of VOBA that was associated with the Great Plains Life and First Wyoming Life blocks of business that was included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. The Company determined during its December 31, 2017 and 2016 analysis that all VOBA was recoverable.

Other Intangible Assets: Intangibles represent the state licenses that were recorded when Old Reliance was acquired by the Company. Intangibles are tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.

The Company assesses the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

The Company compared the carrying value of its identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 2017 and 2016, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. During our goodwill analysis in 2016, we determined that we were required to impair the entire balance of $1,129,824. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.

Property and equipment: Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $65,092 and $103,623 for the years ended December 31, 2017 and 2016, respectively. The accumulated depreciation net of disposals totaled $894,014 and $961,864 as of December 31, 2017 and 2016, respectively.

Maintenance and repairs are expensed as incurred. Replacements and improvements which extend the useful life of the asset are capitalized. The net book value of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. The Company determined that no such events occurred that would indicate the carrying amounts may not be recoverable.

Reinsurance: In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of December 31, 2017 or 2016.

Benefit reserves: The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.

Policy claims: Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.

Deposit-type contracts: Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders, premium deposit funds and supplemental contracts without life contingencies.

Income taxes: The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2014. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized.

When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at December 31, 2017 and 2016.

Revenue recognition and related expenses: Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services and cost of insurance, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the consolidated statements of cash flows.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

Amounts received under our multi-benefit policy form are allocated to the life insurance portion of the multi-benefit life insurance arrangement and the annuity portion based upon the signed policy.

Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the life of the premiums produced. Traditional life insurance products are treated as long duration contracts, which generally remain in force for the lifetime of the insured.

Comprehensive loss: Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive loss includes unrealized gains and losses from marketable securities classified as available-for-sale, net of applicable taxes.

Common and preferred stock and earnings (loss) per share: The par value per common share is $0.001 with 120,000,000 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. At December 31, 2017 and 2016, the Company had 22,860,701 and 22,558,956 common shares issued and outstanding, respectively.

At December 31, 2016, the Company had 1,179 warrants outstanding. The warrants were exercisable through December 31, 2016 for 10 shares of voting common stock at an exercise price of $6.50 per share. No warrants were exercised during 2016 and are now expired.

The Class A preferred shares were non-cumulative, non-voting and convertible by the holder to voting common shares after May, 2015, at a rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). The par value per preferred share is $0.001 with 2,000,000 shares authorized. At December 31, 2017 the 74,159 Class A preferred shares outstanding were converted to 96,407 voting common shares by the Company.

The Class B preferred shares were non-cumulative, non-voting and convertible by the holder or the Company to voting common shares after May 1, 2017 at a rate of 2.0 common shares for each preferred share. The par value per preferred share was $0.001 with 1,000,000 shares authorized. The stated annual dividend rate on the Class B preferred shares was 7%. Dividends totaling $30,544 and $43,120 were paid as of June 30, 2017 and December 31, 2016, respectively. On June 15, 2017, the 102,669 outstanding Class B preferred shares were converted to 205,338 voting common shares by the Company.

Earnings (loss) per share attributable to the Company’s common stockholders were computed based on the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the years ended December 31, 2017 and 2016 were 22,860,701 and 21,625,878 shares, respectively.

Reclassification of certain prior period information: Reclassifications have been made on the Consolidated Statement of Comprehensive Income for the year ended December 31, 2016. These reclassifications do not impact the overall Net loss or Net loss per common share lines of the Consolidated Statement of Comprehensive Income for the year ended December 31, 2016.

New accounting standards: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326). Under the new guidance, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from an incurred loss to an expected credit loss. An allowance for the expected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an adjustment to the allowance can be made. The new standard becomes effective after December 15, 2019. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-1, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. The Company has determined that we currently have no equity securities that would be accounted for under ASU 2016-1 in 2018.

Note 2. Acquisitions and Divestitures

On March 15, 2016, Midwest acquired Northstar Financial Corporation (“Northstar”), an inactive Minnesota corporation, pursuant to an Agreement and Plan of Merger dated December 18, 2015. Pursuant to this merger, Midwest exchanged 1.27 shares of its voting common stock for each share of Northstar common stock, or approximately 4,553,000 shares. The merger of Northstar was recorded as an asset acquisition. The assets (primarily cash) and liabilities of Northstar were recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date.

On October 27, 2015, Midwest acquired 100% of all of the outstanding shares that it did not previously own of First Wyoming Capital Corporation (“First Wyoming”), a Wyoming corporation, pursuant to an Agreement and Plan of Merger dated July 31, 2015 under which First Wyoming became a wholly-owned subsidiary of Midwest. Pursuant to the Merger Agreement, Midwest issued approximately 4,767,400 shares to the former shareholders of First Wyoming other than Midwest. The fair value of the Midwest shares exchanged to acquire 100% of the remaining outstanding shares of First Wyoming that it did not previously own was estimated by applying the income approach to be $905,806, which is different from our preliminary estimate of $1,811,612 as disclosed in Note 2 to the Consolidated Financial Statements in our 2015 10-K. This fair value measurement was based on significant inputs that are not observable in the market. Key assumptions include projected total income growth of between 3% and 16%, expected long term growth of 3%, a discount rate of 16.0%, and a terminal value based on earnings and a capitalization rate of 13.0%. Subsequent to the closing, First Wyoming merged into Midwest and on September 1, 2016 First Wyoming Life, the life insurance subsidiary of First Wyoming, merged into American Life.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

The First Wyoming acquisition was accounted for under the acquisition method of accounting, which requires the consideration transferred and all assets and liabilities assumed to be recorded at fair value. Prior to the acquisition, Midwest held 22.1% of the outstanding shares of First Wyoming, which it had recorded in its financial statements under the equity method of accounting at a book value of $810,500 with a related accumulated other comprehensive loss of $30,410. The fair value of our previously held equity interest in First Wyoming was determined to be $221,430, resulting in a loss of $619,480 on the previously held equity interest. The preliminary fair value of our previously held equity interest in First Wyoming as disclosed in Note 2 to the Consolidated Financial Statements in our 2015 10-K was determined to be $642,150 resulting in a loss of $198,760, which was included in net investment income (loss) in the 2015 10-K consolidated statement of comprehensive income for the year ended December 31, 2015 and the remaining $420,720 was recognized in the period ended September 30, 2016 10-Q in loss on equity method investment on the consolidated statement of comprehensive income. The fair value of the previously held equity interest in First Wyoming was estimated by applying the income approach using significant inputs that are not observable in the market. Key assumptions include projected total income growth of between 3% and 13%, expected long term growth of 3%, a discount rate of 18.0%, a terminal value based on earnings and a capitalization rate of 13.0%, and adjustments due to lack of control that market participants would consider when estimating the fair value of the previously held equity interest in First Wyoming.

The following table summarizes the fair value of the consideration transferred and the preliminary fair value of First Wyoming assets acquired and liabilities assumed:

Recognized amounts of identifiable assets acquired and liabilities assumed:

All amounts related to the business combination are finalized and are no longer provisional. The transaction resulted in a bargain purchase gain of $2,231,104 and, of that amount, $904,578 was included in the bargain purchase gain for business acquisition line item in the consolidated statement of comprehensive income for the year ended December 31, 2015. The remaining $1,326,526 was included in the consolidated statement of comprehensive income for the period ended September 30, 2016. The bargain purchase gain was driven by the fact that as a standalone company, First Wyoming Life would have been required to significantly increase its administrative operations in Cheyenne, Wyoming, in the near future, the cost of which would be prohibitive to a small life insurance company such as First Wyoming Life.

Value of business acquired (“VOBA”) was being amortized on a straight-line basis over ten years which approximates the earnings pattern of the related policies. On September 30, 2017, American Life entered into a coinsurance agreement with US Alliance to cede 100% of the First Wyoming Life block of business. The VOBA associated with that block of business was written off at the date of the transaction.

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Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued (Unaudited)

On August 29, 2016, American Life sold its interest in its dormant subsidiary, Capital Reserve Life Insurance Company (“Capital Reserve”) to an unrelated third party for cash which approximated the statutory surplus of Capital Reserve, resulting in a net gain of approximately $26,000 including $50,000 cash above book value and unrealized gains on the fair market value of bonds becoming realized at the date of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain was included in the net realized gain (loss) on investments on the consolidated statement of comprehensive income.

Note 3. Investments

The amortized cost and estimated fair value of investments classified as available-for-sale as of December 31, 2017 and 2016 are as follows: