MIDWEST HOLDING INC. - Quarter Report: 2018 September (Form 10-Q)

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

For the quarterly period ended September 30, 2018

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

Former name, former address and former fiscal year, if changed since last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark 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 ☒

As of November 1, 2018, there were 22,873,764 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Midwest Holding Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

See Notes to Consolidated Financial Statements.

3

Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

See Notes to Consolidated Financial Statements.

4

Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

See Notes to Consolidated Financial Statements.

5

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

Nature of operations: Midwest Holding Inc. (“Midwest” or “the Company”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of becoming 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 2009, all of which have been merged into the Company or into American Life.

Future expansion plans for the Company following the transaction described in Note 2 below between Midwest and Xenith Holdings LLC, are to leverage technology to distribute insurance products through independent marketing organizations.

In order to allow management to focus on this plan, American Life expects to reinsure 100% of its legacy business to a third party via a coinsurance agreement see Note 12. Subsequent Events, for further discussion. Additionally, effective July 31, 2018 the Company entered into an agreement to commute an assumptive reinsurance agreement with Security National Life Insurance Company that had been entered into several years ago. The commutation closed on September 28, 2018.

Basis of presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions from the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017 (“2017 Form 10-K/A”), should be read in connection with these interim unaudited consolidated financial statements.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the nine month period ended September 30, 2018, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018. All material inter-company accounts and transactions have been eliminated in consolidation.

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

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

6

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

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 nine months ended September 30, 2018 or 2017.

Investment income consists of interest, dividends, and real estate income, which are recognized on an accrual basis and amortization of premiums and discounts.

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

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 September 30, 2018 and December 31, 2017, the Company had no cash equivalents.

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

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined that no events occurred in the nine months ended September 30, 2018 that suggest a review should be undertaken.

The following table provides information about deferred acquisition costs for the periods ended September 30, 2018 and December 31, 2017, respectively.

7

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

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

Recoverability of value of business acquired is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined that no events occurred in the nine months ended September 30, 2018 that suggest a review should be undertaken.

Property and equipment: Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $12,524 and $16,740 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense totaled $37,758 and $50,387 for the nine months ended September 30, 2018 and 2017, respectively. Accumulated depreciation net of disposals totaled $931,772 and $894,014 as of September 30, 2018 and December 31, 2017, respectively.

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

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. Management has determined that no such events occurred in the nine months ended September 30, 2018 that would indicate the carrying amounts may not be recoverable.

Reinsurance: In the normal course of business, the Company seeks to limit any single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the 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 September 30, 2018 or December 31, 2017.

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.

8

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

Notes payable: Notes payable consist of amounts loaned to the Company on June 28, 2018 as part of the closing of the transaction between Xenith and the Company. The loans were made under two notes of $500,000 and $100,000, respectively. The notes are convertible, at Xenith’s election, into approximately 24,300,000 and 4,900,000, respectively, shares of Midwest’s voting common stock which equates to approximately $0.02 per share (see Note 2).

Income taxes: The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2010. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at September 30, 2018 or December 31, 2017.

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

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

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

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

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

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 September 30, 2018 and December 31, 2017, the Company had 22,873,764 voting common shares issued and outstanding, respectively.

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 1.476 common shares for each preferred share (subject to customary anti-dilution adjustments). The par value per preferred share was $0.001 with 2,000,000 shares authorized. At December 31, 2017 the 74,159 Class A preferred shares outstanding were converted by the Company into 109,470 voting common shares.

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 were paid as of September 30, 2017. On September 15, 2017, the 102,669 outstanding Class B preferred shares were converted by the Company into 205,338 voting common shares.

9

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

Each Class C preferred share is convertible by the holder at any time after the original Series C issue date into approximately 48.57 shares of fully paid and non-assessable voting common shares. The Class C preferred shares vote along with common shares on an as-converted basis. The par value per preferred share is $0.001 with 1,500,000 shares authorized and outstanding as of September 30, 2018. Each preferred share has a liquidation preference of $1.00 per share. The stated annual dividend rate on the Class C preferred shares is 8% which began accruing on June 28, 2018. See Note 2 Change in Control, for further information.

Loss per share attributable to the Company’s common stockholders was computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the three months ended September 30, 2018 and 2017 were 22,873,716 and 22,764,294 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2018 and 2017 were 22,873,764 and 22,763,160 shares, respectively.

New accounting standards: In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-12, Financial Services-Insurance (Topic 944). This update 1) improves the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, 2) simplifies and improves the accounting for certain market-based options or guarantees associated with deposit contracts, 3) simplifies the amortization of deferred acquisition costs, and 4) improves the effectiveness of the required disclosures. This ASU becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. We are currently evaluating the impact of this pending new standard on our consolidated financial statements.

On February 14, 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued. The Company has evaluated the impact of this update and has determined that this does not impact us currently due to not recording unrealized losses or gains net of tax. The Company has incurred net operating losses since inception so we do not record deferred tax assets or deferred tax liabilities due to establishing a valuation allowance.

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 this pending new standard on our consolidated financial statements.

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

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which assists in determining whether a transaction should be accounted for as an acquisition or disposal of assets or as a business. This ASU is effective for annual and interim periods beginning in 2018 and is required to be adopted using a prospective approach, with early adoption permitted for transactions not previously reported in issued financial statements. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, however, the Company will apply the provisions of ASU 2017-01 to future acquisitions.

10

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

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). This amendment defers the effective date of the previously issued ASU 2014-09 until the interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. In addition, the FASB has issued four related ASU’s on principal versus agent guidance (ASU 2016-08), identifying performance obligations and the licensing implementation guidance (ASU 2016-10), a revision of certain SEC Staff Observer comments (ASU 2016-11) and implementation guidance (ASU 2016-12). The guidance permits two methods of transition upon adoption; full retrospective and modified retrospective. The Company will utilize the modified retrospective method upon adoption of ASU 2014-09 on January 1, 2018. Under the modified retrospective method, revenues and other disclosures for pre-2017 periods would be provided in the notes to the consolidated financial statements as previously reported under the current revenue standard. Insurance contracts, lease contracts and investments are not within the scope of ASU 2014-09; therefore, this standard would not apply to the majority of our consolidated revenues. For the Company’s miscellaneous income, which is within the scope of this guidance, the Company reviewed its service fee income revenue streams and compared its historical accounting policies and practices to the new standard. The Company believes its historical revenue recognition was materially consistent with the way we recognized service fee income as of September 30, 2018.

Note 2. Change in Control

On May 9, 2018, the Company entered into a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”).

The terms and conditions of the Agreement were described in Midwest’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2018. All conditions to consummation of the Agreement, including approval of the transactions contemplated therein by the State of Nebraska Department of Insurance, were subsequently met and a closing was held pursuant to the Agreement on June 28, 2018 (the “Closing”).

At Closing, Xenith loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with cash interest of 4% per annum payable quarterly and accrued interest of another 4% per annum payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. The first $500,000 note is convertible, at Xenith’s election, into approximately 24,300,000 shares of Midwest’s voting common stock (“Common Stock”) which equates to approximately $0.02 per share. The remaining $100,000 note will also be convertible at the same rate if Midwest has adequate authorized Common Stock available which will require an amendment to its Articles of Incorporation under a proxy statement that was filed with the SEC.

The notes are secured under a Security Agreement which is collateralized by all of the issued and outstanding shares of Midwest’s wholly owned insurance subsidiary, American Life. Xenith has the right to foreclose on the collateral if Midwest commits an event of default under the notes. Defaults include Midwest’s failure to pay interest or principal on the notes when due, failure to observe any material provision of the Agreement, misrepresentations under the Agreement or bankruptcy or insolvency proceedings involving Midwest.

Also at the Closing, Midwest sold 1,500,000 shares of newly created Class C Preferred Stock to Xenith for $1,500,000. The Class C Preferred Stock is convertible, at Xenith’s election, into approximately 72,900,000 shares of Midwest’s Common Stock at $0.02 per share. The Company is proposing to increase its authorized voting common shares to 1,970,000,000.

11

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

To summarize the above for purposes of illustration assuming the Notes and shares of Preferred Stock are converted in the Company’s voting common stock:

The Agreement further provides that Xenith, in its sole discretion, may loan up to an additional $22,900,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) will also be convertible into Midwest’s Common Stock at the rate of $0.02 per share. Xenith is not obligated to make any or all of these proposed future loans.

The conversion of Subsequent Loans assumes that Midwest’s Articles of Incorporation are appropriately amended. This amendment will require approval of Midwest’s shareholders as indicated above.

To summarize the additional subsequent loans for purposes of illustration assuming the Notes and shares of Preferred Stock are converted into the Company’s voting common stock:

The Loan and Preferred Stock proceeds were contributed to Midwest’s insurance subsidiary, American Life, to be held by it and used for general business purposes (except for up to $100,000 which may be used by Midwest to cover a portion of its expenses in entering into and complying with its obligations under the Agreement). Xenith is not obligated to make any or all of these proposed future loans.

Terms of Class C Preferred Stock

12

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

Articles of Amendment

The Agreement, as amended, requires that the Company’s shareholders consider and act upon an amendment to its amended and restated articles of incorporation to increase its authorized shares of voting common stock to 1,970,000,000 shares, $0.001 par value. This increase would be needed if the Lender were to convert its $500,000 Note and shares of Preferred Stock in the Company’s voting common stock and then elects to convert its $100,000 Note and Notes related to any Subsequent Loans into shares of the Company’s voting common stock and for future corporate purposes.

On June 28, 2018, upon the closing of the transaction with Xenith Holdings LLC mentioned above, American Life, Midwest’s principal operating subsidiary entered into employment agreements with two officers of Xenith.

Note 3. Investments

The cost or amortized cost and estimated fair value of investments classified as available-for-sale as of September 30, 2018 and December 31, 2017 are as follows:

13

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

The Company has two securities that individually exceed 10% of the total of the state and political subdivisions categories as of September 30, 2018. The amortized cost, fair value, credit ratings, and description of each security is as follows:

The following table summarizes, for all securities in an unrealized loss position at September 30, 2018 and December 31, 2017, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.

Based on our review of the securities in an unrealized loss position at September 30, 2018 and December 31, 2017, no other-than-temporary impairments were deemed necessary. Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2018, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

14

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

The amortized cost and estimated fair value of fixed maturities at September 30, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2018 and December 31, 2017, these required deposits had a total amortized cost of $3,164,956 and $3,287,932 and fair values of $2,940,607 and 3,167,727, respectively.

The components of net investment income for the three and nine months ended September 30, 2018 and 2017 are as follows:

Proceeds for the three months ended September 30, 2018 and 2017 from sales of investments classified as available-for-sale were $2,977,954 and $12,199,152, respectively. Gross gains of $3,062 and $77,394 and gross losses of $91,567 and $85,406 were realized on those sales during the three months ended September 30, 2018 and 2017, respectively. Proceeds for the nine months ended September 30, 2018 and 2017 from sales of investments classified as available-for-sale were $9,313,456 and $27,580,877, respectively. Gross gains of $27,972 and $172,941 and gross losses of $318,351 and $127,261 were realized on those sales during the nine months ended September 30, 2018 and 2017, respectively.

Note 4. Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

15

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

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended September 30, 2018, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.

Cash: The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value. Policy loans are categorized as Level 3 in the fair value hierarchy.

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. These liabilities are categorized as Level 3 in the fair value hierarchy.

Surplus notes: The fair value for surplus notes was calculated using a discounted cash flow approach. Cash flows were projected utilizing scheduled repayments and discounted to the valuation date using market rates currently available for debt with similar remaining maturities. These notes were structured such that all interest is paid at maturity. American Life reached an agreement with the holder of the notes upon the completion of the transaction between Midwest and Xenith that the surplus notes in the tables below would be settled by netting the face value of the notes against certain real estate held by American Life. The interest accrued will not need to be paid at time of settlement as it has been forgiven. It is expected that the settlement will be completed following approval by insurance regulatory authorities.

Notes payable: The notes payable are carried at book value and the fair value approximates book value plus accrued interest. The notes payable accrue interest at 8% of the book value and pay out 4% in cash and 4% in paid in kind (“PIK”) which adds interest to the outstanding principal.

16

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

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

There were no transfers of financial instruments between any levels during the nine months ended September 30, 2018 or during the year ended December 31, 2017.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of September 30, 2018 and December 31, 2017, respectively:

17

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

Note 5. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2018 and December 31, 2017 are as follows:

At September 30, 2018 and December 31, 2017, the Company recorded a valuation allowance of $1,553,830 and $6,240,919, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

On June 28, 2018 the Company closed the transaction with Xenith as disclosed in Note 2 above. As a result of that transaction, a change in control occurred which required us to apply Section 382 limitations to the amount of its income in future years that can be offset by historic losses. Our loss carryforwards were reduced by $5,735,023 as a result of the application of the 382 limitation as shown below.

Loss carryforwards for tax purposes as of September 30, 2018, have expiration dates that range from 2024 through 2036.

18

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

There was no income tax expense for the three and nine months ended September 30, 2018 and 2017. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% in 2018 and 34% in 2017 to pretax income, as a result of the following:

Note 6. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017 is as follows:

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer along with the A.M. Best credit rating as of September 30, 2018:

19

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

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance Life 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 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. American Life had more than one offer to assume this business. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations for incurred claims, surrenders and commissions. 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. We transferred $9,569,175 of GAAP net adjusted reserves as of September 30, 2017 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.

The ceding commission of $1,850,000 first reduced DAC of $437,620 and VOBA of $1,085,811 which had been held on our books from the Great Plains Life and First Wyoming Life acquisitions. The remaining $967,521 was reflected as a deferred gain, which is being recognized into income over the expected duration of the Great Plains Life and First Wyoming Life blocks of business. Amortization expense for the three and nine months ended September 30, 2018 was $12,094 and $36,282, respectively. Accumulated amortization totaled $48,376 and $12,094 as of September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to Sagicor were $12,031,911 and $12,320,695, respectively. At September, 2018 and December 31, 2017, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to US Alliance was $10,797,824 and $10,072,530, respectively. American Life remains contingently liable on the ceded reinsurance should Sagicor or US Alliance be unable to meet their obligations.

The use of reinsurance does not relieve American Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, a separate contingency reserve may be established. At September 30, 2018 and December 31, 2017, no contingency reserve was established.

On June 20, 2010, American Life coinsured a block of life insurance business from Security National Life Insurance (“SNL”). The purchase price for this block of business was approximately $375,000 which was set up as an intangible asset to be amortized over ten years. American Life and SNL reached an agreement to commute this coinsured block of life business effective July 31, 2018. American Life recorded a GAAP loss of $154,780 due to the difference between the GAAP and statutory reserves and the write-off of the remaining VOBA. Net adjusted reserves transferred back to SNL totaled $2,543,898 on a GAAP basis.

20

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

Note 7. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for the quarter ended September 30, 2018 and the year ended December 31, 2017:

Under the terms of American Life’s commutation agreement with Security National Life effective July 31, 2018, American Life removed the deposit-type contract obligations it had assumed in 2009, as shown in the table above. The remaining deposits, withdrawals and interest credited represent those for American Life’s direct business.

Note 8. Commitments and Contingencies

Legal Proceedings: We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

Regulatory Matters: State regulatory bodies and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning the Company’s compliance with laws in relation to, but not limited to, insurance and securities matters. The Company cooperates in these inquiries.

Office Lease: The Company leases office space in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires on January 31, 2024. The Company executed an amendment to its lease for an additional 2,876 square feet of office space on October 23, 2015, which expired on May 31, 2017. Rent expense for the three months ended September 30, 2018 and 2017 was $47,683 and $55,968, respectively. Rent expense for the nine months ended September 30, 2018 and 2017 was $142,827 and $173,103, respectively. Future minimum lease payments for the remainder of 2018 and the subsequent years are as follows:

21

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

Note 9. Statutory Net Income and Surplus

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Nebraska Department of Insurance. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. American Life’s statutory net loss for the nine months ending September 30, 2018 and 2017 was $3,107,135 and $1,435,973, respectively. Capital and surplus of American Life as of September 30, 2018 and December 31, 2017 were $1,630,419 and $2,966,031, respectively. The decrease in capital and surplus of American Life was primarily due to the expenses incurred to obtain new software and related technology to distribute products through marketing organizations and the costs incurred to develop a new multi-year guaranteed annuity (“MYGA”) product for American Life. These were offset by the capital contribution from Midwest of $2,000,000 as a result of the transaction between Midwest and Xenith, the expenses incurred to obtain new software and related technology to distribute products through marketing organizations and the costs incurred to develop the new MYGA product that American Life anticipates offering in the future.

Note 10. Surplus Notes

The following provides a summary of the Company’s surplus notes along with issue dates, maturity dates, face amounts, and interest rates as of September 30, 2018:

The Company reached an agreement with David Elmore following the closing of the transaction with Xenith and subject to approval by the Nebraska Department of Insurance, that the surplus notes will be retired in full, including any accrued interest, through the transfer of 10 condominiums in Hawaii owned by American Life. As of September 30, 2018, the book value of the condominiums was $496,658 with an appraised value of $640,000.

Note 11. Third Party Administration

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to non-affiliated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended September 30, 2018 and 2017 were $24,600 and $16,500, respectively. Fees earned during the nine months ended September 30, 2018 and 2017 were $71,940 and $49,500, respectively.

Note 12. Subsequent Events

All of the effects of subsequent events that provide additional evidence about conditions that existed at September 30, 2018, including the estimates inherent in the process of preparing consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated financial statements but arose after, but before the consolidated financial statements were available to be issued. In some cases, non-recognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.

On October 10, 2018, Midwest borrowed an additional $1,000,000 from Xenith which was contributed to American Life as part of the subsequent additional loans as mentioned in Note 2 in Item 1 above.

American Life has pending regulatory approval to cede 100% of its legacy business to a third party. Pursuant to the terms of a proposed reinsurance treaty, this transaction will be an indemnity coinsurance transaction to transition the legacy business to assumptive reinsurance as various states grant approval. The transaction will be effective as of July 1, 2018 with settlement of net reserves of $19,339,393 in exchange for a $3.1 million deferred gain which will be amortized over the remaining life of the policies. This transaction is expected to occur before the end of 2018. Upon closing, American Life will settle $14.0 million of cash for the net reserves and approximately $1.1 million of premiums received offset by approximately $198,000 of claims incurred from July 1, 2018 through September 30, 2018.

22

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of September 30, 2018, compared with December 31, 2017, and the results of operations for the three and nine months ended September 30, 2018, compared with the corresponding periods in 2017 of Midwest Holding Inc. and its consolidated subsidiary. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part 1 – Item 1. Financial Statements” our Form 10-K/A for the year ended December 31, 2017 (“2017 Form 10-K/A”), including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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," set forth in our 2017 Form 10-K/A.

All such forward-looking statements speak only as of the date of this Form 10-Q. 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 the 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.

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 and other insurance and annuity products that provide premiums that are sufficient to cover our operating expenses.

On May 9, 2018, we entered into a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”).

The terms and conditions of the Agreement were described in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on July 3, 2018. All conditions to consummation of the Agreement, including approval of the transactions contemplated therein by the State of Nebraska Department of Insurance, were subsequently met and a closing was held pursuant to the Agreement on June 28, 2018 (the “Closing”). See Note 2 in Item 1 above for more details.

23

American Life has retained Milliman as a consulting actuary to develop a new multi-year guaranteed annuity (“MYGA”) product and is in discussions with an independent marketing organization (“IMO”) to begin selling the new product in the 14 states in which American Life is currently licensed. The MYGA product is expected to be American Life’s first in the IMO market; however, management expects to follow with additional annuity and life products as opportunities may arise in the future. The Company has also engaged a consultant to work with management to expand the Company’s state licensure footprint across the United States and is seeking to obtain rating from A.M. Best. This effort is expected to begin in the first quarter of 2019.

Critical Accounting Policies and Estimates

The Management’s Discussion and Analysis section included in our 2017 Form 10-K/A contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the “Critical Accounting Policies and Estimates” discussed in our 2017 Form 10-K/A.

Consolidated Results of Operations – Three Months Ended September 30, 2018

The following discussion compares the results of the three months ended September 30, 2018 with the three months ended September 30, 2017. Unless the context indicates otherwise, the 2018 results are stated first followed by 2017 results.

Net Loss: The increase in net loss was primarily due to the increase in operating expenses incurred for the licensure and implementation of the new software and technology to support the new MYGA product expected to be sold by American Life, an increase in salaries and wages resulting from the Agreement with Xenith, the increase in reserves, decrease in premium revenue and the increase in realized losses discussed below.

Revenues are primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below.

Premium revenue: Premium revenue decreased primarily due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business effective September 30, 2017 with approximately $275,000 of quarterly premiums. This combined with our decision to eliminate new life insurance policy sales in 2017 and for the first nine months of 2018 in order to preserve the regulatory capital and surplus of American Life, decreased our premium income significantly. The net effect was evident in the third quarter of 2018 and we expect it will be evident throughout the remainder of 2018. We expect to have very limited production of new insurance business for the remainder of 2018.

Investment income, net of expenses: The components of net investment income were as follows:

24

The decrease in investment income was due primarily to the sale of bonds for $6.9 million in the third quarter of 2017 to fund the coinsurance transaction between American Life and US Alliance as disclosed above in Note 6. Policy loan interest and miscellaneous investment income is included in the “Other” line item above.

Net realized (losses) gains on investments: The increase in losses on bonds was primarily driven by the Federal Reserve raising its interest rates during the last half of 2017 and the nine months of 2018 which lowered our market value compared to the book value of our portfolio at the time the bonds were sold. American Life sold bonds to settle the commutation of the SNL reinsurance assumption transaction as mentioned in Note 6 in Item 1 above. This sale accounted for approximately half of the losses incurred.

Miscellaneous income: Miscellaneous income increased slightly due to our Third Party Administration (“TPA”) activities and our deposit-type contract fees. TPA fees earned during the three months ended September 30, 2018 and 2017 were $24,600 and $16,500, respectively.

Expenses are summarized in the table below.

Death and other benefits: Death benefits decreased due to reduced claims and surrenders. Claim expenses on our acquired block of business are largely offset by a release in policy reserves.

Interest credited: The decrease in our interest credited was due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business of approximately $55,000 of quarterly interest.

Increase in benefit reserves: The change in benefit reserves was primarily due to the commutation of the SNL reinsurance transaction as of July 31, 2018.

Amortization of deferred acquisition costs: The increase was primarily due the lower amortization recognized in 2017 as a result of fewer surrenders related to acquired blocks of business.

Salaries and benefits: The increase was due to the addition of wages for two officers as a result of the Xenith transaction as discussed above. These increases were offset by the personnel reduction as a result of management’s cost-cutting initiatives.

Other operating expenses: Other operating expenses increased primarily due to approximately $664,000 of expenses incurred to obtain new software and related technology to distribute products through third party marketing organizations and the costs incurred to develop a new MYGA product that American Life expects to be offering in the first quarter of 2019 after receipt of a rating by A.M. Best. Our auditing fees and legal fees increased $264,000 and $33,000, respectively, due to the delay in starting our year-end audit and the review of our March 31, 2018 and June 30, 2018 10-Qs by our independent accountants until the three months ending September 30, 2018. These fees for audit services were recorded in the third quarter of 2018, rather than the second quarter, as was the case in 2017. We realized a loss on the commutation of the SNL assumptive reinsurance transaction of $154,000 due to the difference between statutory and GAAP reserves plus the write-off of the remaining VOBA related to the SNL assumptive transaction. American Life paid a fee of $56,000 to A.M. Best to start the process of obtaining an A. M. Best rating. These increases were offset by the termination of a general consulting fee in 2017 of $39,000 and various smaller decreases in expenses.

25

Consolidated Results of Operations – Nine Months Ended September 30, 2018

The following discussion compares the results of the nine months ended September 30, 2018 with the nine months ended September 30, 2017. Unless the context indicates otherwise, the 2018 results are stated first followed by 2017 results.

Net Loss: The increase in net loss was primarily due to the increase in operating expenses incurred for the development and implementation of the new software and related technology to support the new MYGA product expected to be sold by American Life, the increase in salaries and wages, the increase in reserves, decrease in premium revenue, decrease in investment income, and the increase in realized losses.

Revenues were primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below.

Premium revenue: Premium revenue decreased primarily due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business effective September 30, 2017 with approximately $885,000 of premiums. This combined with our decision to eliminate new life insurance policy sales in 2017 and the first nine months of 2018 in order to preserve the regulatory capital and surplus of American Life, decreased our premium income significantly. The net effect was evident in the nine months of 2018 and we expect minimal new insurance premiums throughout the remainder of 2018.

Investment income, net of expenses: The components of net investment income are as follows:

The decrease in investment income was due primarily to the sale of bonds for $6.9 million in the third quarter of 2017 to fund the coinsurance transaction between American Life and US Alliance as indicated above. Policy loan interest and miscellaneous investment income is included in the “Other” line item.

Net realized (losses) gains on investments: The increase in losses on bonds was primarily driven by the Federal Reserve raising its interest rates during the last half of 2017 and the nine months of 2018 which lowered our market value compared to the book value of our portfolio at the time the bonds were sold. During September 2018, American Life sold bonds to settle the commutation the SNL transaction as indicated above.

Miscellaneous income: Miscellaneous income increased slightly due to our Third Party Administration (“TPA”) activities and our deposit-type contract fees. The TPA fees earned during the nine months ended September 30, 2018 and 2017 were $71,940 and $49,500, respectively.

26

Expenses are summarized in the table below.

Death and other benefits: Death benefits decreased due to a decrease in our paid and pending claims. We expect death benefits to continue at current levels due to the age of a block of business we acquired several years ago. Claims experience on our current underwritten block has been minimal. We maintain policy reserves to offset the effect of all claims. Claim expenses on our acquired block of business were largely offset by a release in policy reserves. We expect claims and surrenders to decrease due to the commutation of the SNL transaction indicated above.

Interest credited: The decrease in our interest credited was due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business of nine months of interest of approximately $193,000. The remaining decrease was due to management’s decision to decrease interest rates from 5.75% down to 4.00% in the last half of 2017.

Increase in benefit reserves: The change in benefit reserves was primarily due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business of approximately $248,000 of reserves incurred in 2017 and the commutation of the SNL assumptive reinsurance transaction effective July 31, 2018.

Amortization of deferred acquisition costs: The decrease was primarily due to the coinsurance transaction between American Life and US Alliance that ceded 100% of the Great Plains and First Wyoming’s blocks of business. At the effective date of September 30, 2017, the deferred acquisition costs associated with the Great Plains business was written off against the ceding commission received. See Note 6 in Item 1 above. The decrease was also due to management’s decision to forgo production of new business in 2017 and 2018 to preserve capital and surplus. This resulted in lower deferred acquisition costs.

Salaries and benefits: The increase was due to the addition of wages for two officers as a result of the Xenith transaction as discussed above. These increases were offset by the personnel reduction as a result of management’s cost-cutting initiatives.

Other operating expenses: Other operating expenses increased primarily due to approximately $688,000 expenses incurred to obtain new software and related technology to seek to distribute products through third party marketing organizations and the costs incurred to develop a new MYGA product that American Life expects to be offering in the future. Our legal fees and related costs increased $184,000 due primarily to the services provided to close the Xenith transaction and preparation of proxy materials for the meeting of shareholders required under the Agreement. We realized a loss on the commutation of the SNL assumptive reinsurance transaction of $154,000 due to the difference between statutory and GAAP reserves plus the write-off of the remaining VOBA related to the SNL transaction. American Life paid a fee of $56,000 to A. M. Best to start the process of obtaining an A. M. Best rating.

These increases were offset by the Nebraska Department of Insurance Exam fees incurred in 2017 of $140,000, the amortization of VOBA of $135,000 in 2017 due to the write-off of Great Plains and First Wyoming’s VOBA as a result of the coinsurance transaction between American Life and US Alliance as discussed in Note 6 in Item 1 above, costs associated with preparation of the 2018 proxy due to the delay in auditing and reviewing, by our independent accountants, our 2017 10-K and the 10-Qs for the March 31, 2018 and June 30, 2018 quarters of approximately $75,000.

27

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, real estate held for investment, and policy loans. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2018 and December 31, 2017.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2018 and December 31, 2017.

Reflecting the quality of securities maintained by the Company, 100.0% and 97.6% of all fixed maturity securities were investment grade as of September 30, 2018 and December 31, 2017, respectively. Due to the low interest rate environment, the Company has invested in bonds with “A” or “BBB” ratings.

Market Risks of Financial Instruments

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

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an 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 our 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.

28

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 September 30, 2018, the Company had cash and cash equivalents totaling $555,443. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures through September 30, 2019 with the recently completed capital infusion and growth that is anticipated as a result of the transaction with Xenith discussed above.

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 533.91%.

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 for incurred claims, surrenders and commission from the effective date. 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. We transferred $9,569,175 of GAAP net adjusted reserves as of September 30, 2017 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.

Our surplus notes for $300,000 and $250,000 matured on August 1, 2017 and September 1, 2017, respectively. The Company reached an agreement with the holder of the notes that, subject to approval by the Nebraska Department of Insurance, the surplus notes will be retired in full, including any accrued interest, through the transfer to the holder the 10 condominiums in Hawaii owned by American Life. The retirement of the surplus notes and the transfer of the ten condominiums is expected to occur before the end of 2018 following approval of insurance regulatory authorities. No interest payments on the surplus notes were made in the nine months ended September 30, 2018, or during the year ended December 31, 2017.

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.

29

Net cash used by operating activities was $4,718,434 for the nine months ended September 30, 2018, which was comprised primarily of the net loss of $3,641,803 and the commutation of the SNL assumption reinsurance of $2,543,898 partially offset by an increase in policy liabilities of $992,003. Net cash provided by investing activities was $1,933,072. The primary source of cash was from sales of available for sale securities. Offsetting this source of cash was our purchases of investments in available-for-sale securities. Net cash provided by financing activities was $2,389,278. The primary source of cash was the transaction between Midwest and Xenith providing additional cash of $2,100,000 and the net receipts on deposit-type contracts.

Management’s focus has been on raising additional capital or seeking other funding from outside investors. On May 9, 2018, the Company entered into a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”).

The terms and conditions of the Agreement were described in Midwest’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on July 3, 2018. All conditions to consummation of the Agreement, including approval of the transactions contemplated therein by the State of Nebraska Department of Insurance, were subsequently met and a closing was held pursuant to the Agreement on June 28, 2018. For additional details, see Note 2 of Part I of this report and the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018.

Impact of Inflation

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

As a “smaller reporting company” the Company is not required to provide the table of contractual obligations required pursuant to this Item.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company,” the Company is not required to provide disclosure pursuant to this Item.

ITEM 4. 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.

Management, (with the participation of our principal executive officer/principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2018. Based on this evaluation, our principal executive officer/principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer/principal financial officer to allow timely decisions regarding required disclosure.

30

Material Weakness Previously Identified

Refer to Item 9A of Part II of our 2017 Form 10-K/A and Item 4 of our June 30, 2018 Form 10-Q/A Amendment No. 2 for detail about previously identified material weaknesses in the Company’s internal control over financial reporting over timeliness of obtaining and assimilating all information and a complex and non-routine transaction. The Company has implemented the following remediation steps to address this material weakness: (i) meeting with our auditing firm on a timely schedule, (ii) establishing an enterprise risk management program, and (iii) monitoring and engaging an auditing advisor to assist with complex transactions. The Company’s management is continuing to evaluate the remediation of these material weaknesses as of September 30, 2018.

PART II – OTHER INFORMATION

ITEM 1. 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 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017 in response to Item 1A of Part I of such Form 10-K/A other than the risks described below.

We are seeking to implement a new, transformative business strategy that will primarily entail selling annuity life insurance products through independent marketing organizations, and in connection therewith, reinsuring all of our existing life insurance business. We face all of the risks of entry into a new line of business and focusing on it and we may encounter unforeseen risks, delays and limited market acceptance of our proposed entry into annuity products.

In connection with our transaction with Xenith Holdings LLC completed on May 9, 2018, we have begun to implement a transformative business strategy that will change our business. By 2019, our life insurance business is expected to be solely related to annuity product sales through independent marketing organizations. We have retained an outside consulting actuary to develop a new multi-year guaranteed annuity (“MYGA”) product and we are in discussions with an independent marketing organization to sell the new product in the 14 states where our insurance subsidiary is currently licensed to sell insurance. Our life insurance subsidiary is also seeking to obtain a rating from A. M. Best, as well as seeking to become licensed to sell insurance in additional states. The new MYGA product will be our first product using an independent marketing organization.

In connection with our new business strategy, our life insurance subsidiary is seeking to reinsure 100% of its existing life insurance business to a third party via a coinsurance agreement. We are in discussions with a non-affiliated insurance company regarding such possible coinsurance and are seeking to complete a transaction as soon as practicable, which will be subject to insurance regulatory approval. We cannot assure that such a transaction will occur. Also, effective July 31, 2018, we entered into an agreement to commute an assumptive reinsurance agreement with an unaffiliated life insurance company, resulting in a loss on the transaction of $155,000. We will effectively no longer have any of our legacy book of insurance business as a result of these transactions.

There can be no assurance that our new corporate strategy will succeed or that entry into the annuity business using independent marketing organizations will be successful or that we will be able to implement or achieve market entry on a timely, cost-effective basis. We may encounter unforeseen risks, delays and limited market acceptance for our proposed new annuity product(s). In addition, we cannot assure that we will be able to reinsure our existing life insurance business on an economic basis, if at all. Accordingly, we may incur significant cash outflows and losses in connection with these activities. If we reinsure our life insurance business, our revenues immediately will decrease substantially and we do not have any assurance of meaningful future revenues as the result of our proposed new business strategy, our new annuity product, or our new method of sales and marketing. Our financial condition could suffer significantly and our results of operations would be materially adversely affected if the transformation of our business is unsuccessful.

31

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

32

ITEM 6. EXHIBITS.