MIDWEST HOLDING INC. - Annual Report: 2019 (Form 10-K)

 

 

 

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:

 

Title of each class:Trading Symbol(s):

Voting Common Stock, $0.001 par valueMDWT

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405c 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,” “smaller reporting company,” and “emerging growth 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 $1,281,854 calculated by reference to the average of the bid and ask price of such common stock on June 30, 2019.

As of March 12, 2020, there were 1,023,408,553 shares of voting common stock, par value $0.001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

 

MIDWEST HOLDING INC.

FORM 10‑K

TABLE OF CONTENTS

 

 

 

 

PART I.

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 good faith 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.

Factors that may cause the Company’s actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include among others, the following possibilities:  (i) our new business plan particularly including our reinsurance strategy may not prove to be successful; (ii) our reliance on third party insurance marketing organizations to market and sell our insurance products through a network of independent agents; (iii) our inability to expand our insurance operations outside the 15 states in which we are currently licensed; (iv) our insurance products may not achieve significant market acceptance; (v) we may continue to experience operating losses in the foreseeable future; (vi) the possible loss or retirement of one or more of our key executive personnel; (vii) intense competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (viii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (ix) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (x) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (xi) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vii) loss or retirement of key executives or employees; (xiii) changes in the Company’s liquidity due to changes in asset and liability matching; (xiv) adverse changes in the ratings obtained by independent rating agencies; (xv) failure to maintain adequate reinsurance; (xvi) possible claims relating to sales practices for insurance products; and (xvii) lawsuits in the ordinary course of business. See “Risk Factors” below in “Item 1. Business” for further discussion of the significant risks associated with our business and an investment in our common stock.

 

ITEM 1. BUSINESS.

General

Midwest Holding Inc. (“Midwest,” the “Company,” “we,” or “us”) was formed in Nebraska in 2003 as a financial services holding company. We have two subsidiaries that we operate our business through; 1) American Life & Security Corp. (“American Life”), is a Nebraska-domiciled life insurance company with executive offices at 2900 South 70th Street, Suite 400, Lincoln, Nebraska 68506, phone number (402) 489‑8266, and 2) 1505 Capital LLC (“1505 Capital”),  a Delaware limited liability company, that provides financial and investment advisory and management services with an office at 100 Wall Street, 11th Floor, New York, NY 10038.

As of December 31, 2019, statutory capital and surplus of American Life was approximately $19.5 million and it was rated “B++” (“Good”) by A.M. Best.

Development of Business in 2019

Our fiscal years ending December 31, 2019 and 2018 were transformative for us through a recapitalization and new business plan.

Change in Control in 2018 and Adoption of New Business Plan

Change in Control

On June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC,

a Delaware limited liability company (“Xenith”). Xenith is a wholly controlled subsidiary of Vespoint LLC, a Delaware limited liability company (“Vespoint”), which is also the manager of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by Michael Minnich and A. Michael Salem, who are Co-Chief Executive Officers of Vespoint.

The terms and conditions of the Agreement are described in our Current Report on Form 8‑K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2018. The Agreement was filed as an exhibit to the referenced Current Report on Form 8‑K.

At the closing of the Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock (“Series C Preferred Stock”) to Xenith for $1,500,000, which was ranked senior to our voting common stock on liquidation with a preference of $1.00 per share. Annual dividends of 8% of the Series C Preferred Stock liquidation preference were payable by us. Prior to conversion on June 18, 2019, and at any time after June 28, 2025, Xenith could have required us to redeem the Series C Preferred Stock at the liquidation preference (plus accrued dividends) or fair market value, whichever was greater. The Preferred Stock voted along with the voting common stock on an “as converted” basis. Also, holders of Preferred Stock voting as a separate Series were entitled to elect five of the Company’s eight members of its Board of Directors. On June 18, 2019, all of the Series C Preferred Stock shares were converted, at Xenith’s election, into 72,854,474 shares of our voting common stock at approximately $0.02 per share. All accrued dividends were waived.

Also, at closing of the Agreement, 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 loan was converted by Xenith into an aggregate 29,141,790 voting common shares on June 18, 2019.

 

Management Additions. At the closing of the Agreement, Xenith appointed three members to American Life’s five-person board of directors including Messrs. Minnich and Salem, who were subsequently appointed as the Chairman and Chief Executive Officer, respectively, of American Life. Messrs. Minnich and Salem are control persons of Xenith. Information with regard to Messrs. Minnich and Salem is set forth in Item 10 – Directors, Executive Officers and Corporate Governance.

Also, upon closing of the Agreement, American Life entered into employment agreements with Messrs. Salem and Minnich and we entered into an amended and restated employment agreement with our President, Mark A. Oliver.

Increased Capitalization. In connection with the Agreement, an amendment to increase the number of shares of our capital stock was approved by our shareholders at our annual meeting of shareholders held on November 13, 2018. The total number of shares of capital stock of all classes of which we have authority to issue is now 2,000,000,000, consisting of 1,970,000,000 shares of voting common stock, 20,000,000 shares of non-voting common stock, and 10,000,000 shares of preferred stock.

New Business Plan

Following the closing of the Agreement, we embarked on implementing our new business plan to leverage technology to create, sell and administer competitive life and annuity products through  independent marketing organizations (“IMO”) while reinsuring substantially all of the insurance policies we write with third-party reinsurers.

The Business Plan. We are currently implementing our plan to become a leading, technology-enabled, services-oriented, life and annuity insurance company, with complementary policy administration and asset management services. Our primary objective is to leverage the product-development and policy administration-capabilities and the “B++” (“Good”) A.M. Best rating of American Life to create and sell life and annuity products through IMOs while reinsuring substantially all of the insurance policies we write with third-party reinsurers. This strategy is commonly referred to as “fronting.” The IMOs we have under contract offer life and annuity products, infrastructure and other services to independent insurance agents. A key component of our plan is to reinsure substantially all of the policies we write with third-party reinsurers, who assume the financial risk of our insurance and annuity policies. In a typical reinsurance transaction, we earn up front ceding commissions from the reinsurer and policy administration fees. In some cases, we earn asset management fees from reinsurers for managing assets they set aside to meet their reinsurance obligations. Our reinsurance strategy helps alleviate American Life’s regulatory capital and surplus requirements because policies that are reinsured by third parties require less capital and surplus reserves than policies retained by us. See “Reinsurance” below for further discussion. We are currently selling a multi-year guaranteed annuity (“MYGA”) and a fixed index annuity (“FIA”) product through three IMOs.

We are seeking to create value through our ability to compete in the areas of:

 

Technology. We have developed a modern technology platform that enables us to develop, sell and administer a broad range of life and annuity products. Functional implementation of the platform began in early 2019. We license key components of our technology from third-party software providers, including product development, new business, distribution management and policy administration modules that are hosted in the Amazon Web Services cloud. In addition, several core technology integrations were added, including document management, electronic application capability, secure log-ins and an agent and policyholder portal. Management believes this technology should result in cost effective product development, sales and administration as we scale up through increased product sales and management also believes it will also provide us with the ability to expand third party administrative services. We continue to refine the functionality of our technology on an ongoing basis.

2020 Plan. Our business objectives for 2020 are to develop additional insurance products in close consultation with our independent consulting actuary and IMOs that we believe have an in-depth understanding of the demands of the marketplace. Our goal is to create and adjust products quickly and cost effectively where we perceive (i) market demand, (ii) interest from IMOs and (iii) available reinsurance capacity. We may offer products exclusively through certain IMOs to develop specific products, giving the products a competitive advantage.

Reinsurance of our Legacy Insurance Business. In conjunction with implementing our new business plan, in late 2018 American Life closed a reinsurance agreement with Unified Life Insurance Company, an unaffiliated Texas insurance company. Terms of this agreement are described in our Current Report on Form 8‑K, filed with the SEC on November 16, 2018. In the transaction, American Life received net proceeds of $3.5 million and the reinsurer assumed substantially all of American Life’s existing life insurance and annuity policies. As of December 31, 2019, approximately 79% of the business had been converted from “coinsurance” to “assumption”, thereby relieving American Life from any contingent liabilities on that portion of the ceded policies. See “Reinsurance” below for further discussion.

Life and Annuity Insurance

Insurance Policies

We presently offer two products: the “American Classic,” a multi-year guaranteed annuity and the “American Select,” a fixed indexed annuity. We expect to expand our annuity product line and introduce other insurance products into the market in 2020, and thereafter in order to meet anticipated market demand. Any new insurance products we create must be filed with and approved by appropriate state insurance regulatory authorities before being sold.

Our MYGA product is a five-year single premium deferred individual annuity contract. The guaranteed minimum cash surrender value is 87.5% of the single premium, less any partial withdrawal amounts, and accumulated at the nonforfeiture interest rate of 1.0% annually. A market value adjustment (“MVA”) is applied to the contract value and/or partial withdrawal amounts during any surrender charge period and is based on changes in the MVA index rate. The MYGA currently includes an Enhanced Interest Credit Rider, an Enhanced Liquidity Rider, a Surrender Charge Waiver Rider, and an Enhanced Death Benefit Rider. American Life began selling this MYGA product in the first quarter of 2019 and plans to continue selling the MYGA product in 2020 and subsequent years.

Our FIA product is a long-term annuity product with an interest rate that is tied, in part, to a published stock market index. The FIA is a modified single premium with a minimum premium amount of $20,000. The guaranteed minimum cash surrender value is 87.5% of the single premium, less any partial withdrawal amounts, and accumulated at the nonforfeiture interest rate of 1.0% annually. A MVA is applied to the contract value and/or partial withdrawal amounts during any surrender charge period and is based on changes in the MVA index rate. The FIA product currently includes an Enhanced Liquidity Rider and an Enhanced Interest Credit Rider.  American Life began selling the FIA product in November of 2019 and plans to continue selling it in 2020 and subsequent years.

In conjunction with our MYGA product launch, we executed selling agreements with three national IMOs that contract with numerous independent agents. These organizations are responsible for recruiting and training independent agents, although American Life also requires each agent to complete general courses in anti-money laundering, annuity products and annuity suitability, along with a specific training class on our annuity products.

Our MYGA and FIA products were developed using the services of an independent qualified consulting actuary, Milliman, and we expect that any new products will utilize similar services. In addition to product development, Milliman serves as valuation actuary to American Life and also oversees its compliance and regulatory filings with various insurance regulatory authorities.

The table below outlines American Life’s MYGA and FIA premiums earned by quarter during 2019 on statutory accounting principles basis:

Depending on market demand, over time we expect to consider writing a wide variety of insurance products, including fixed deferred, fixed indexed and other annuities, in addition to life and Medicare supplemental insurance products. Using our technology based product development model, we believe we can generate new product sales quicker and with a relatively small capital outlay compared to traditional insurance carriers.

Reinsurance.

As indicated above, reinsurance is an integral part of our new business plan.  We expect to reinsure substantially all of our new insurance policies with a variety of third party reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees.  Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral and other administration fees. We believe this will help preserve American Life’s capital while supporting its growth because American Life has lower capital requirements when its business is reinsured due to lower overall financial exposure versus retaining the insurance policy business itself.

There are two main categories of reinsurance transactions: 1) “indemnity,” where we cede a portion of our risk but retain the legal responsibility to our policyholders should our reinsurers not meet their financial obligations; and 2) “assumption,” where we transfer the risk and legal responsibilities to the reinsurers.  The reinsurers are required to acquire the appropriate regulatory and policyholder approvals to convert indemnity policies to assumption policies.

Our reinsurers may be domestic or foreign capital markets investors or traditional reinsurance companies seeking to assume U.S. insurance business. We plan to mitigate the credit risk relating to reinsurers generally by requiring other financial commitments from the reinsurers to secure the reinsured risks (such as posting substantial collateral). It should be noted that under indemnity reinsurance agreements American Life remains exposed to the credit risk of its reinsurers. If one or more reinsurers becomes insolvent or is otherwise unable or unwilling to pay claims under the terms of the applicable reinsurance agreement, American Life retains legal responsibility to pay policyholder claims, which, in such event would likely materially and adversely affect the capital and surplus of American Life.

Some reinsurers are not and may not be “accredited” or qualified as reinsurers under Nebraska Law. In order to enter into reinsurance agreements with such reinsurers and to reduce potential credit risk, American Life may hold a deposit or withhold funds from the reinsurer or require the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business it assumes. The reinsurer may also appoint an investment manager for such funds, which is some cases may be our investment adviser subsidiary, 1505 Capital, to manage these assets pursuant to guidelines adopted by us that are consistent with state investment statutes and reinsurance regulations.

American Life currently has five reinsurance agreements in effect and has earned ceding commissions on four out of those agreements in the last two years.  See Note 10 to the consolidated financial statements in this report for further information on each of our reinsurance agreements. 

The table below shows the ceding commissions earned on the four most recent reinsurances transaction where American Life is earning ceding commissions on a statutory accounting principles basis:

 

 

The table below shows the ceding commissions earned on each reinsurance transaction on a GAAP accounting basis:

Under statutory accounting principles, the ceding commission on the US Alliance Life and Security Company  (“US Alliance”) and the Unified Life Insurance Company (“Unified”) reinsurance transactions were accounted for as additions to surplus that will be amortized into income over the estimated life of the transferred blocks of business. The GAAP treatment for the ceding commission was to defer it to the balance sheet and amortize it over the expected life of the closed blocks of business. The US Alliance reinsurance agreement was an indemnity contract and the Unified reinsurance agreement is assumptive through policyholder approval on a policy-by-policy basis.  As of December 31, 2019, 79% of the business under the Unified agreement had been converted from the indemnity to assumed category.

The Ironbound Reinsurance Company Limited “(Ironbound”) and the SDA Annuity & Life Re (“SDA”) reinsurance agreements relate to our MYGA and FIA products. Under statutory accounting principles the ceding commissions under these agreements are earned and immediately recognized in the income statement of American Life. 

Under GAAP, however, the ceding commissions received are not earned immediately but are recorded as a deferred liability and recognized as revenue over the estimated lives of the reinsured policies.  Under GAAP, the ceding commission received for the US Alliance and Unified transactions first reduced deferred acquisition costs (“DAC”) and the value of business acquired (“VOBA”) on the related blocks of business, and the remainder was recorded as a liability to be recognized as revenue over the estimated lives of the contracts.  The allowance earned on the Ironbound and the SDA contracts first reduced the effect of the capitalization of new business expense deferred and the remainder was classified as a liability similar to the ceding commission earned and is being recognized as revenue over the same period that American Life established to amortize the DAC balance.

Underwriting and Suitability.

Our current annuity products have limited mortality and morbidity risk compared to traditional life insurance products, therefore, our focus is based on applicability and suitability of annuity products for the client. We have worked with Milliman, MVP Advisors and Regulatory Insurance Advisors, LLC to develop appropriate suitability guidelines to evaluate the: (i) purpose for a client’s selection of a product, (ii)  financial resources of the client/owner, (iii)  age of the client, (iv) effect on liquidity of a client, (v)  duration of the

product and (vi)  overall fit for the client. This information is captured through a questionnaire completed with a policy application that undergoes review at the IMOs and at American Life’s home office. Final determinations regarding suitability are made by American Life’s home office staff.

Competition.

The life and annuity insurance industry is highly competitive. Many of the life insurance companies authorized to do business in states where we conduct business are well-established companies with good reputations that offer broader lines of insurance products, have larger selling organizations, and possess significantly greater financial and human resources than Midwest and American Life.

Although we face significant competition on a product-by-product basis, we believe our business model, coupled with our relationships with IMOs, allows us to compete for insurance business due to our use of technology and small size, which we believe enables us to be nimble and adapt rapidly to changing insurance market conditions. Further, American Life received a rating of B++ from A.M. Best in 2019 and 2018, which we believe is a prerequisite to attract IMOs to offer our insurance products.

Geographic Distribution.

American Life is licensed to sell, underwrite, and market life insurance and annuity products in 15 states and is actively seeking to expand its licenses in additional states.

Accounting.

Our operating results in this report are reported in accordance with GAAP for stock life insurance companies, although American Life also prepares financial statements – and primarily manages its business – in accordance with statutory principles as adopted in its state of domicile, Nebraska. Statutory accounting has many significant differences compared to GAAP. For example, the incremental ceding commissions earned by American Life through reinsurance of new business, which are amortized under GAAP, are deemed to be earned immediately under statutory accounting principles.

Investments.

The type and amount of investments that 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.

American Life has a long-term investment policy aimed at protecting capital and earning risk adjusted returns while insuring compliance with Nebraska’s insurance investment laws. Our investments are managed by 1505 Capital, who has many years of asset management experience.

On April 2, 2019, we purchased a 51% ownership in 1505 Capital, a Delaware limited liability company, which was established in 2018 to provide investment advisory and management services to primarily U.S. insurance clients. 1505 Capital has been engaged as the investment advisor for American Life, Ironbound and SDA through investment management agreements that contain investment guidelines.  Such agreements have been approved by insurance regulatory authorities as required.

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 good faith estimates based on the relevant basis of accounting, generally involving actuarial projections, of what we expect claims will be based on mortality, longevity and lapse 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 new reserve rules to be used for statutory accounting. As of May 3, 2019, 50 jurisdictions 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, 2019, 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 believe that PBR should not impact us until we introduce traditional life insurance products to our line of business.

Regulation.

American Life is subject to the regulation, supervision, and examination of the insurance regulatory authorities of Nebraska, and other state insurance regulators where it is licensed to do business. This regulation is primarily for the benefit of policyholders rather than shareholders. The insurance regulators possess broad administrative powers, including the power to grant and revoke licenses to transact business, approve the form of insurance contracts, regulate capital requirements, regulate the character of permitted investments, and require deposits for the protection of investments. Applicable insurance laws require the filing of a detailed annual report with the department of insurance in each state American Life is licensed to do business.

As the holder of a controlling interest in American Life, Midwest is also subject to regulation as an insurance holding company system under the insurance laws of the state of Nebraska, which generally provide for restrictions on a change in control of the insurance holding company, require the filing of certain reports with the Nebraska Department of Insurance, and limit the amount of dividends which may be received by us from American Life.

Financial Reform.

Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) reshapes U.S. financial regulations by creating new regulators, regulating new markets and firms, and providing enhanced enforcement powers to regulators. Virtually all major areas of the Dodd-Frank Act are subject to regulatory interpretation and implementation rules requiring rulemaking. We do not believe that the provisions of the Dodd-Frank Act or the regulations promulgated thereunder have a material adverse impact on our consolidated financial results or financial condition.

Tax Reform.

U.S. tax legislation, Tax Cuts and Jobs Act (“New Tax Act”), was enacted on December 22, 2017. The New Tax Act made fundamental changes to the U.S. Internal Revenue Code that impacted the Company. The primary impact on our 2018 financial results was associated with the effect of reducing the U.S. statutory tax rate from 35% to 21% which required us to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. Other provisions of the New Tax Act that will impact us, include, but are not limited to: 1) provisions reducing the dividends received deduction; 2) eliminating the corporate alternative minimum tax (“AMT”); 3) changing the rules regarding use of net operating losses; and 4) changing the way in which tax reserves will be measured. To date this Act has not had a material adverse effect on us.

Employees

As of December 31, 2019 we had 24 full-time employees. Our insurance sales are made through independent agents selling through third-party IMOs.

Third-Party Services

As a small part of our business over the past several years we have provided third party administrative services (“TPA”) to insurance providers. As part of our new business plan we expect to seek to expand this area of our business through leveraging our technology infrastructure and expertise in seeking to provide specialty administration services to other insurers. In 2019 we provided limited TPA services to one unaffiliated customer.

Available Information

Our principal executive offices are located at 2900 South 70th Street, Suite 400, Lincoln, Nebraska 68506. Our telephone number is (402) 489‑8266. Information filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on operation of the Public Reference Room may be obtained by calling the SEC at

1‑800‑SEC‑0330 (1‑800‑732‑0330). The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

Recent Developments

We continue to closely monitor developments related to the coronavirus (COVID-19) outbreak to assess any potential impact on our business. We currently do not anticipate that this outbreak will have a material impact on our results of operations, financial condition or liquidity; however, due to the evolving and highly uncertain nature of this event, it currently is not possible to provide an estimate of potential insurance or reinsurance exposure or the indirect effects the outbreak may have on our results of operations, financial condition or liquidity.

 

 

ITEM 1A. RISK FACTORS.

We face many significant risks in the operation of our business and may face significant unforeseen risks as well. It should be noted that in the second half of 2018 we embarked upon a new business plan and therefore we face all of the risks of doing business with a new model in which we do not have a significant amount of operating experience. The material risks of this new business plan are set forth below, but there may be additional risks that we do not anticipate, which could materially adversely affect our results of operation and financial condition. An investment in our voting common stock should be considered speculative.

Business Risks

Catastrophes May Adversely Impact Liabilities for Policyholder Claims and Reinsurance Availability

Claims resulting from catastrophic events could harm our financial results, profitability, and financial condition. Catastrophic events could impact our life and annuity business by significantly impacting our assumptions as to mortality, morbidity and other rates, as well as product sales. Catastrophic events may also reduce economic activity in affected areas, which could harm our prospects for new business.

Major public health issues, such as a pandemic (e.g. the novel coronavirus COVID-19) or other event that causes a large number of illnesses or deaths, could harm our insurance operations and have a major impact on the global economy and financial markets. Governmental and non-governmental organizations may not effectively combat the spread and severity of such a pandemic, increasing their harm to our insureds. An event that affects one or more of our customers could increase our mortality or morbidity claims and cause unanticipated financial strain on our insureds as well as increase the cost of reinsurance to us and decrease the availability of reinsurance, which could in turn harm our business, results of operations or financial condition.

Our strategy to reinsure substantially all of the insurance and annuity policies we write may not be successful.

As part of our new business plan, American Life intends to cede most of its insurance and annuity policies to other unaffiliated insurance companies through reinsurance agreements. However, American Life will remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by the reinsurer. The failure of any one of American Life’s reinsurers would have a material adverse economic effect on American Life and the value of our voting common stock would likely decline significantly as well. Thus, it is critical for us that we adequately assess the financial strength of our reinsurers on an ongoing basis. If we fail to adequately assess payment risk relating to our reinsurers, we could be faced with severe economic consequences in the event any reinsurer does not meet its financial obligations to the policyholders of policies that we cede to the reinsurer. Also, we expect that in the first years of our new business plan’s implementation we will have a concentrated group of reinsurers, which will heighten the risks we face should any reinsurer not meet its obligations to insureds who purchase insurance products from us. In addition, under certain reinsurance agreements, a reinsurer may reduce the ceding commission it pays American Life for reinsurance. If the ceding commissions from reinsurance were to decrease with respect to policies for which American Life has guaranteed the revenue, American Life could be adversely affected, which would in turn adversely affect our results of operations and financial condition.

Our new business plan may not be successful.

As indicated above in this Item 1, in mid‑2018 we embarked upon our new business plan, seeking to become a leading, technology-enabled, services-oriented insurance company. Our business plan provides that we will seek to leverage American Life and its technology, product-development and administration capabilities to distribute insurance products through third party marketing organizations. As part of this plan, American Life has obtained a “B++” (“Good”) A.M. Best Rating and will seek to become licensed to sell insurance in additional states in 2020. We cannot assure you that our new business plan will achieve economic success and we anticipate implementation of our new business plan will take place over several years. If our results do not achieve economic success, the value of an investment in our voting common stock will deteriorate substantially. Some of these material risks include market non-acceptance of our new products, non-acceptance of our products by our independent third party marketing organizations (“IMOs”), shortcomings or failures in our technology or encountering other problems that we may not be able to overcome and unforeseen difficulties obtaining financially capable reinsurance providers with respect to our products.

We have limited operating history under our new business plan.

We have a limited operating history under our new business plan. We face all of the risks inherent in establishing an unseasoned business, including limited capital, uncertain product markets, possible lack of market acceptance of new insurance products and corresponding lack of significant revenues, as well as fierce competition from better capitalized and more seasoned companies with respect to any insurance products we may seek to distribute. We have no control over general economic conditions, competitors’ products or their pricing, customer demand and limited control over necessary costs of marketing in seeking to build and expand our new business. There can be no assurance that our proposed insurance activities will be economically successful or result in any significant revenues to the extent that we achieve profits and, the likelihood of any success must be considered in light of our lack of operating history under our new business plan and our limited capital. The lack of a seasoned operating history makes it difficult to predict our future revenues or results of operations.

Our plans to utilize IMOs could face several difficulties that could adversely affect our results of operations and financial condition.

Our new business plan provides that we will create and sell life and annuity products through IMOs who will provide the sales agents and infrastructure in order to sell our products. This strategy entails several significant risks, including the possibility that our IMOs will not be able to successfully sell our products or will not devote sufficient time and attention to sell our products. It should be noted that we will have no control over any IMOs and therefore any sales success regarding our products will be substantially dependent upon the efforts of those organizations and their sales agents. Also, we expect to utilize a small number of IMOs in the implementation of our business plan, thereby having concentrated channels of product distribution. If any one of our IMOs does not perform within our expectations, our results of operation will likely be materially adversely affected and our financial condition will suffer.

We may be unable to expand insurance operations to other states to any significant degree.

A significant part of our new business plan is expanding the ability of American Life to sell insurance in substantially more states. At present, American Life is licensed to sell insurance in 15 states. In 2020 and subsequent years, we intend to seek to expand to additional states. We cannot assure you that these efforts will be successful, to the extent they are not, our ability to achieve product scale and significant sales will be significantly adversely affected. Our results of operations and future prospects will in turn be adversely affected.

Our new insurance products and other products we may develop may not achieve market penetration.

As discussed elsewhere in this report, we are embarking on a new marketing strategy initially focused on the sale of MYGA and FIA products through IMOs. These products may not achieve market acceptance or penetration to any meaningful degree, and any significant sales of these products cannot be assured, nor can we assure that any other insurance products we attempt to sell will achieve any degree of marketing success. We are seeking to streamline the costs of developing and placing insurance products into the marketplace to be sold by IMOs. We may encounter unexpected development costs or lack of IMO acceptance of our products, in which case our financial results would be disappointing.

We have experienced significant operating losses and may not be able to reverse them in the foreseeable future.

We commenced our new business plan in mid‑2018 and introduced our first annuity products in 2019 which are being marketed by three IMOs. We made progress towards profitability on a GAAP basis in 2019; however, there can be no assurance of future profitability. Because ceding commissions from reinsurance are amortized over their life, we expect several years of insurance policy sales growth will be necessary until we achieve net income. There can be no assurance that our new business plan will lead to profitability.

We are highly dependent upon Mike Minnich, A. Michael Salem and Mark A. Oliver, and the loss of any of these officers could materially and adversely affect our business.

Our ability to operate successfully is dependent primarily upon the efforts of Mike Minnich, A. Michael Salem, and Mark A. Oliver, executive officers of American Life. The loss of the services of any of these individuals could have a material adverse effect on our ability to pursue our business and the business of American Life. We have “at will” employment agreements with all three of these individuals. We have limited “key man” life insurance on Messrs. Mike Minnich and A. Michael Salem.

American Life may encounter regulatory difficulties or 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, the state of domicile of American Life. It had approximately $19.5 million of capital and surplus (based upon statutory accounting principles) at December 31, 2019. Because we have embarked upon a new business plan that seeks to write new insurance business and cede the risk to third party reinsurers, 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 of American Life 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.

Midwest is a holding company and has no ability to generate revenues other than payments from American Life.

Midwest is a holding company whose principal operating subsidiary is American Life. Midwest depends primarily on reimbursement of costs from American Life and has no other significant source of revenue except American Life. Our change in control that occurred in 2018 with the infusion of capital from Xenith discussed above may not provide adequate long-term financing to support our contemplated expansion of American Life’s business or any continued reimbursements to Midwest. If there is not a substantial expansion of American Life’s business, it may not be able to provide funds to Midwest to enable Midwest to meet its obligations.

The insurance industry is subject to numerous laws and regulations, and compliance costs and/or changes in the regulatory environment that 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 which have broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and which are concerned primarily with the protection of policyholders rather than shareholders. 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. It should be noted that a significant component of our new business plan is to reinsure substantially all of our new insurance business. It should be assumed that state regulators will monitor carefully the financial strength of any third party reinsurance company and in certain instances may require that sufficient funds be reserved by us in order to

alleviate risks associated with reinsurers being unable to meet their financial commitments in the case of claims on insurance policies with a reinsurer. This oversight may result in our operations being less economically successful than we anticipate and could adversely affect the result of operations and therefore the value of your investment in Midwest.

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.

Our investment adviser subsidiary is subject to numerous laws and regulations with substantial compliance costs.

Our majority owned investment adviser subsidiary, 1505 Capital, is subject to substantial regulation. It is registered with the SEC as an investment adviser and is required to file detailed reports with the SEC concerning its business. It is also subject to the Investment Advisers Act of 1940 as well as other state securities laws regarding the conduct of its business. Compliance with these regulations is time consuming and is a burden on the operations of the subsidiary. It is also subject to examination by the SEC. There can be no assurance that the investment adviser subsidiary will not be adversely affected by the results of any examination.

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 insurance business is intensely competitive. Our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain IMOs to market our 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 competes with up to 775 other life insurance companies in the United States. Most of these 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 marketers.

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

In our life and annuity business, we must make certain assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of life and annuity 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. Unforeseen events like epidemics or pandemics could arise and have an adverse effect on our assumptions as to morbidity and mortality. 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.

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 products expose 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 net 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 annuity 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.

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 and annuities compared with other financial products if such legislation were to be enacted. Plus, we could be unable to attract reinsurance capital. 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, American Life and its industry as a whole would be adversely affected with respect to their ability to sell products. 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 materially adversely affect us.

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 shareholders. 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.

Security breaches or interference with our technology infrastructure could harm our business.

Our new business plan is highly dependent upon technology systems and networks to conduct our business. Maintaining the integrity of our technology is critical to the success of our business operations, including product development, insurance policy sales, oversight, financial reporting and analysis and to the protection of our proprietary information and our clients’ personal information. Any failures by our technology or future security breaches or interference to our technology systems that may occur in the future could have a material adverse impact on our business. 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 breaches seeking to cover the cost of any such breach, but such insurance may not be adequate to cover all liabilities resulting from data breaches.

We may execute an acquisition strategy, which could cause our business and future growth prospects to suffer.

We may at some time pursue acquisitions of insurance related companies. If we were to pursue acquisitions, we would compete with other companies, most of which have greater financial and other resources than us. Further, if we were to succeed in consummating acquisitions, our business, financial condition and results of operations may be negatively affected because:

 

Company Stock Ownership Risks

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, speculative 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 new 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.

The Xenith Transaction has resulted in a change of control and stock ownership.

Xenith controls our Company and other shareholders have little ability to effect the Company’s decision making. Xenith owns over 98% of our issued and outstanding shares of voting common stock, and other shareholders own only 2% of our voting common stock. As a result, any possible appreciation in the value of our voting common stock will accrue only to the extent of 2% to our pre-Xenith shareholders.

We do not intend to declare cash dividends on shares of our voting common stock.

We have never paid a cash dividend on our voting common stock and we do not anticipate paying cash dividends. We intend to retain available funds to be used for operations. Moreover, we are a holding company without independent operations and generate limited cash flow from our operations. You should not expect that we will pay cash dividends on our voting common 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.

 

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 adversely affect our financial position or results of operations.

 

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

 

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 was listed on the OTCQB as of mid‑2016 under the ticker symbol: MDWT. Our shares do not actively trade. As of March 12, 2020, we had issued and outstanding 1,023,408,553 shares of our voting common stock.

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 limited, volatile and sporadic.

 

 

Holders of Record

As of March 1, 2020, there were approximately 10,000 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.

Securities Authorized for Issuance under Equity Compensation Plans

The table below sets forth certain information regarding options granted to our employees, including officers, under our stock incentive plan.

 

 

 

ITEM 6. SELECTED FINANCIAL DATA.

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

 

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

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 (the “Securities Act”), 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 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, many 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 “Item 1A. Risk Factors” above.

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 statements are based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We have two subsidiaries that we operate our business through: 1) American Life, a Nebraska-domiciled life insurance company and 2) 1505 Capital, a Delaware limited liability company in which we own a 51% interest and which provides investment advisory and related asset management services. 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.

On June 28, 2018 we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). Xenith is a wholly controlled subsidiary of Vespoint LLC, a Delaware limited liability company (“Vespoint”), which is also the manager of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by Michael Minnich and A. Michael Salem, who are Co-Chief Executive Officers of Vespoint and executive officers and directors of Midwest and American Life.

The terms and conditions of the Agreement are described in our Current Report on Form 8‑K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2018. The Agreement was filed as an exhibit to the referenced Current Report on Form 8‑K.

At the closing of the Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock (“Series C Preferred Stock”) to Xenith for $1,500,000, which was ranked senior to our voting common stock on liquidation with a preference of $1.00 per share. Annual dividends of 8% of the Series C Preferred Stock liquidation preference were payable by us. Prior to conversion on June 18, 2019, and at any time after June 28, 2025, Xenith could have required us to redeem the Series C Preferred Stock at the liquidation preference (plus accrued dividends) or fair market value, whichever was greater. The Preferred Stock voted along with the voting common stock on an “as converted” basis. Also, holders of Preferred Stock voting as a separate Series were entitled to elect five of the Company’s eight members of its Board of Directors. On June 18, 2019, all of the Series C Preferred Stock shares were converted, at Xenith’s election, into 72,854,474 shares of our voting common stock at approximately $0.02 per share. All accrued dividends were waived.

Also, at closing of the Agreement, 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 loan was converted by Xenith into an aggregate 29,141,790 voting common shares on June 18, 2019.

The Agreement further provided that Xenith could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election could also to be converted into voting common stock at the price of $0.02 per share. Xenith loaned an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000. The additional loans were converted, at Xenith’s election, into 898,538,525 shares of our voting common stock on June 18, 2019. All interest on the notes through June 18, 2019, was waived and was accounted for as a capital contribution to Midwest.

The table below summarize the foregoing conversion of preferred stock and loans:

Of the funds received from Xenith, we contributed $20,500,000 to American Life through capital contributions. See Note 3. – Change in Control in the Notes to Consolidated Financial Statements in this report.

Following the closing of the Agreement, we began implementation of a new business plan whose primary purpose is to leverage technology and reinsurance to distribute competitive insurance products through third-party marketing organizations.

The Business Plan.

In 2018, subsequent to the change in control described above, we embarked upon our new business plan to become a leading, capital efficient, technology-enabled, services-oriented life and annuity fronting insurance company. Our objective is to leverage American Life, and our ancillary services business, to create and sell life and annuity products through third party independent marketing organizations using third-party reinsurance as the primary form of capital to support our growth and to bear the financial risk associated with out insurance products. Our targeted third party field marketing organizations offer products, infrastructure and other services to independent insurance agents across the United States. Although we may retain some business, we expect third-party reinsurers to ultimately assume substantially all of the insurance risk on our business through reinsurance agreements. In connection with these arrangements we will earn ceding fees from the reinsurers. We currently offer multi-year guaranteed annuity (“MYGA”) and fixed index annuity (“FIA”) through three independent marketing organizations.

Our operating goals are to create value through our ability to compete in the areas of:

 

Technology: As an integral part of our new business plan, American Life implemented and integrated a modern technology platform designed to facilitate our business activities. American Life contracted with a third-party software company to license a new policy administration system known as “FAST,” an end-to-end product development, new business, distribution, management and policy administration platform that utilizes state-of-the-art technology that American Life hosts in the Amazon Web Services cloud. Functional implementation was completed in November 2018, and testing completed in January 2019. In addition, several core technology integrations were added, including document management, electronic application capability, secure log-ins and an agent and policyholder portal. Management believes this new technology should enhance cost effective product sales and development and policy administration as we scale up, as well as provide American Life with the ability to seek to expand its third party administrative services (which were a minor part of our legacy business) in the future.

American Life is licensed to sell, underwrite, and market life insurance and annuity products in 15 states and is seeking to expand its licenses in additional states in 2020.

Balance Sheet with Converted Preferred Stock and Notes

Below is a table showing the effect on stockholders’ equity if all the preferred convertible shares and convertible notes were converted as of year ended December 31, 2018. Conversions of the preferred stock and notes occurred on June 18, 2019 and are therefore reflected in the balance sheet as of December 31, 2019 included in Item 8 of this report.

 

 

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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.

Valuation of Investments

The type and amount of investments that 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.

American Life has a long-term investment policy aimed at protecting capital and earning attractive risk adjusted returns while maintaining compliance with Nebraska’s insurance investment laws. Our investments are managed by our senior management team, who have many years of asset management experience. Trades are cleared through a common broker after competitive prices are solicited.

On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment, trading and financial activities. 1505 Capital has been engaged as the financial advisor for American Life, Ironbound and SDA.

Our investment portfolio has expanded in 2019 to include a broader class of fixed maturities (including collateralized loan obligations, corporate, asset-backed and mortgage-backed securities), mortgage loans, derivatives and other investments. 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 accumulated other comprehensive income (loss). Mortgage loans are carried and book value which is also used for their fair value in the consolidated balance sheets.  Derivatives are carried at fair market value with the realized gains or losses recorded in realized gains (losses) on the comprehensive income statement. 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.

The Company frequently reviews its investment portfolio for declines in the fair value.  The Company’s process for identifying declines in the fair value of investments that are other-than-temporary involves consideration of several facts. These factors included (i) the timer period and extent to which the fair value has been less than the amortized cost basis, b) adverse conditions specifically related to the security, industry of geographic are, c) the historical and implied volatility of the fair value of the security, d) payment structure of the security, e) failure of issuer of the security to make interest payments, f) changes to the rating of the security, and g) possible recoveries or additional declines in the fair value after the balance sheet date.

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to a 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.

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.

Our indefinite-lived intangible assets consist of American Life’s state licenses. We compared the carrying value to the current costs of obtaining licenses in those states. As of December 31, 2019, the sum of the fair value of those licenses 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

Generally, when it is cost effective, we expect to reinsure most of the risks associated with our assets and liabilities. Our reinsurers may be domestic, foreign or capital markets investors seeking to assume U.S. insurance business. We plan to mitigate the credit risk relating to reinsurers generally by either selecting well capitalized, highly rated authorized reinsurers or requiring that the reinsurer post substantial collateral or make other financial commitments to secure the reinsured risks. It should be noted that American Life will remain exposed to the credit risk of reinsurers, or the risk that one or more reinsurers becomes insolvent or otherwise unable or unwilling to pay policyholder claims.

In a typical reinsurance transaction, we will receive a ceding commission plus an ongoing fee for the administration of the business. In some cases, our reinsurers may not be “accredited” or qualified as reinsurers under Nebraska Law and in order to permit transactions with reinsurers and to reduce potential credit risk, we may hold a deposit or withhold funds from the reinsurer or require the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business it assumes. In some cases, the reinsurer may appoint an investment manager to manage these assets pursuant to guidelines approved by us that are consistent with state investment statutes and regulations relating to reinsurance. We expect there would be a monthly or quarterly settlement of premiums, claims, surrenders and collateral.

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. We currently do not have traditional life insurance products.  We have deposit-type liabilities on our annuities products where we are using the account value of those annuities. Our fixed indexed annuities are calculated by an independent consulting actuary and includes the embedded derivatives in our GAAP reserves.

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 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. Through our reinsurance grants, revenues are earned through ceding commissions which are capitalized and our independent consulting actuary determines the amounts to be recognized in income over the period of the annuity contracts.

New Accounting Standards

A discussion of certain 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

The following should be read in connection with our Consolidated Financial Statements and Notes thereto under Item 8 of this report.

On June 28, 2018, Midwest closed on the Agreement with Xenith as discussed above. Following the closing, we embarked upon a new business plan that includes leveraging technology to distribute insurance products through IMOs.

We also reinsured our existing legacy block of insurance business through a reinsurance agreement with a third party reinsurer in exchange for a ceding commission of $3.5 million as described below (the “Legacy Reinsurance”). In addition, American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2019. We purchased and installed comprehensive new technology during the fourth quarter of 2018 and we began selling our first MYGA product in late January 2019 through the IMOs.

American Life closed the Legacy Reinsurance agreement on December 10, 2018 with a third party insurance company to cede 100% of the remaining legacy block of business, with the transaction being effective July 1, 2018. See Note 3 Assets and Liabilities Held for Sale in the Notes to Consolidated Financial Statements below. Due to the assumptive nature of this agreement, this transaction qualified to be reported as Discontinued Operations under ASC 2014‑08 Presentation of Financial Statements (Topic 205); therefore, our 2018 income statement reflects net income from continuing operations and income from discontinued operations. The discussion below reflects continuing operations changes year over year.  See Note 10. Reinsurance to our Consolidated Financial Statements for further discussion.

American Life began selling its first MYGA and FIA products during 2019 that resulted in gross premiums of $145,747,737 and $15,616,831, respectively, for the year ended December 31, 2019 on a statutory basis. For GAAP, such premiums are considered deposits and are not shown as premium income.

On July 25, 2019, American Life closed a reinsurance agreement with a third party insurance company to cede 95% of the MYGA business, with the transaction being effective from inception of the sales of the MYGA product.  This transaction eliminates 95% of the interest credited on the MYGA deposit-type contracts. See Note 10. Reinsurance to our Consolidated Financial Statements for further discussion.

On November 7, 2019 American Life closed a second reinsurance agreement with a third party insurance company to cede the remaining 5% of the MYGA product and 95% of the FIA product to a third party reinsurer through December 31, 2019, at which time the FIA product steps down to 30% ceded as of January 1, 2020.  See Note 10. Reinsurance to our Consolidated Financial Statements for further discussion.

 

 

Revenues:

The following summarizes the sources of our revenue for the periods indicated:

 

Premium revenue: Premium revenue decreased primarily due to the premium in 2018 that was related to an assumed block of business which was commutated in July 2018. In 2019 the premium included above was a refund of premium that we had included in 2018. The introduction of our MYGA and FIA products discussed above generated a meaningful volume of premiums; however, these products are considered investment contracts and GAAP requires that the premium be deferred to deposit-type liabilities on our balance sheet.  American Life is expecting to introduce new products in 2020 primarily in the annuity business.  We expect that premium income from both the FIA and MYGA products will not be a significant source of revenue until American Life develops new life insurance products in the future and achieves significant additional product sales. The table below shows premium issued under statutory accounting on our two annuity products:

 

Investment income, net of expenses: The components of net investment income for 2019 and 2018 were as follows:

 

 

The decrease was due to ceding the investment income earned on the bonds purchased with the sales of our MYGA and FIA products from inception through December 31, 2019 as required by our coinsurance agreements. Our investment portfolio grew substantially in 2019 due to the increased sales of the MYGA and FIA products which American Life used to purchase investments with higher rates of return.  The decrease in investment expenses was primarily related to the interest expense on the sale of certain real estate in 2018. The investment expense in 2019 related to the interest expense on the deferred ceding commissions which were calculated by our consulting actuary.

Net realized gains on investments: The net realized gains increased primarily due to not having to sell bonds to cover operating expenses in 2019 compared to 2018 when market conditions were poor prior to the Xenith infusion of capital. Also, the Federal Reserve Bank decreased interest rates which resulted in improvement in bond prices in 2019. Our unrealized losses were $1,818,014 at December 31, 2018. In 2019 we had $619,584 of realized gains. Management determined in the fourth quarter of 2019 to sell bonds that were in gain positions.  We do not believe we will need to sell investments at a loss in the future.

Amortization of deferred gain on reinsurance: The increase was due to 79% of indemnity coinsurance policies ceded to Unified in 2018 being converted to assumptive reinsurance where we no longer have a legal obligation for those policies. American Life released into income 79% of the remaining deferred ceding commission. This increase included $171,659 income from amortization related to the new deferred ceding commissions earned from the reinsurance transactions with the third party reinsurers entered into during 2019.

Miscellaneous income: Miscellaneous income increased due to the consolidation of 1505 Capital, our investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by a decrease in TPA fees. We had only one customer for whom we performed these services during 2019. TPA fees earned during the year ended December 31, 2019 and 2018 were $48,300 and $89,240, respectively.

Expenses

Our expenses are summarized in the table below for the periods indicated:

 

Interest credited: The decrease was due to the 5% retention on the sale of the new FIA product during the year of 2019 that was classified as deposit-type funds. The interest credited in 2018 related to a block of business assumed from an unaffiliated entity that was commutated on July 31, 2018.

Death and other benefits Death benefits decreased due the commutation of a block of business as of July 31, 2018. The benefits incurred in 2019 were for policies that were not included with our July 1, 2018 reinsurance transaction.

Increase in benefit reserves: The change in benefit reserves was a result of the commutation of certain business as of July 31, 2018. The additional reserves in 2019 were attributed to several policies that were not included in the reinsurance transaction in 2018. The MYGA product does not carry reserves as the premium was reclassified as a liability on the balance sheet on a GAAP basis.

Salaries and benefits: The increase was due to the addition of remuneration for two executive officers as a result of the Xenith transaction as discussed below in Note 3. Change in Control to our Consolidated Financial Statements as well as staff increases to meet the needs of our expanded business. 

Management expects salaries and benefits to increase modestly in 2020 to service our growth initiatives.

Other operating expenses: Other operating expenses increased primarily due to approximately $1,300,000 of expenses incurred for consultants, continuing technology and software development, and portal and web design. We incurred approximately $845,536 of interest on the Xenith notes payable that included approximately $131,000 for 2018 that was not previously included. Also included in the Xenith notes payable was $161,000 of deferred legal costs associated with the transaction in 2018 which was written off when the notes were converted. Xenith forgave the payment of the interest accrued upon the conversion of the notes payable; as a result the interest payable was treated as an additional capital contribution but the interest was required to be recognized for GAAP. Legal fees and license fees increased approximately $229,000 as a result of the state expansion initiatives, the settlement of the sale of real estate, and fees associated with negotiations with reinsurers. These legal fees were offset by legal costs related to the acquisition of Midwest by Xenith that occurred in 2018 that did not recur in 2019. The consolidation of 1505 Capital resulted in an increase of expenses of $382,000. The Company has established a long-term incentive plan described in Note 12. Long-Term Incentive Plan to our Consolidated

Financial Statements.  In July 2019, the Board of Directors approved options to purchase granting 8,950,000 shares of stock to our employees. The consideration recognized as expense for those options was approximately $68,000. The above increases were offset by consulting fees that were incurred in 2018 that did not occur in 2019 of approximately $148,000 and the expenses attributed to the commutation of an assumption agreement of approximately $154,000. Management expects to  incur additional product development and system related costs in 2020.

Net Loss: The change in net loss for continuing operations increased primarily due by increases in our salaries and benefits, the decrease in investment income caused by the transfer of assets on business ceded to Ironbound and SDA  These were offset by the release of $2,410,054 of deferred ceding commission into income due to 79% indemnity coinsurance being converted to assumptive by Unified, the additional amortization of deferred gains related to the Ironbound and SDA transactions, an increase in our miscellaneous income due to the consolidation of 1505 Capital, the decrease in our interest credited due to the Ironbound and SDA transaction, and an increase in our realized gains. 

 

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade asset-backed securities, and debt securities, and mortgages, The Company has modified its investment strategy to purchase larger position securities with increased yields. The duration of our new investments will be less than ten years for the majority of those investments. 1505 Capital provides investment and related asset management services to the Company under an Investment Management Agreement approved by the Nebraska Department of Insurance in 2019. 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 December 31, 2019 and 2018.

 

Increases in fixed maturity securities primarily resulted from the sale of our new MYGA and FIA products during 2019:

 

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2019 and 2018.

 

 

Reflecting the quality of securities maintained by us, 96.7% and 99.2% of all fixed maturity securities were investment grade as of December 31, 2019 and 2018, respectively.

We expect that our MYGA and FIA products sales will increase investable assets in future periods.

Market Risks of Financial Instruments

We hold a diversified portfolio of investments that primarily includes cash, asset-backed securities, bonds, stocks, mortgage loans, 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, mortgage-backed securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, equity risk, and liquidity 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 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 our holdings in any particular issuer.

Liquidity and Capital Resources

At December 31, 2019, the Company had cash and cash equivalents totaling $43,716,205.  We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital transaction expenditures for the foreseeable future.

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. As of December 31, 2019 and 2018, the RBC ratio was 840% and 5,480%, respectively.

Effective July 1, 2018, American Life completed the 2018 Legacy Reinsurance transaction discussed above. We paid no commissions or brokerage fees relating to this transaction. While the third party reinsurer assumed certain liabilities and obligations, we are not relieved of our legal liability to the policyholders until all the policies are transferred from “indemnity” to “assumptive.” Therefore, the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets under Assets and Liabilities Held for Sale. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to the third party reinsurer for cash of $14,320,817, which was net of a ceding allowance of $3,500,000 plus the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. The third party reinsurer assumed all responsibilities for incurred claims, surrenders and commission from the effective date. As of December 31, 2019, 79% of the reinsured block of business was converted from indemnity to assumptive reinsurance.

Surplus notes American Life had issued of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. American Life reached an agreement with the holder of the notes in late 2018 to retire the surplus notes in full, including any accrued interest, through the transfer of 10 condominiums in Hawaii owned by American Life. This transaction received regulatory approval in December 2018. The book value at December 31, 2018 of the surplus notes was $876,400 and the book value of the 10 condominiums in Hawaii was $493,648 with an estimated market value of $830,000. We recognized a gain of $382,752 on the settlement of the transaction.

Net cash used for operating activities was $2,457,176 for December 31, 2019, which was comprised primarily by an increase in policy liabilities of $2,963,219 primarily due to the increase in deposit-type contracts ceded to reinsurers, an increase in our other assets and liabilities due to a payable for securities of $4,745,339 and an increase in deferred coinsurance ceding commission due to the Ironbound and SDA transaction of $3,678,196 , partially offset by the amounts recoverable from reinsurers of $7,478,880 and accrued investment income of $1,310,492. Net cash used for investing activities was $117,890,852. The primary source of cash used was from our purchase of investments from sales of the MYGA and FIA products of $139,139,215. Offsetting this use of cash was our sale of investments in available-for-sale securities of $21,858,018. Net cash provided by financing activities was $161,231,666. The primary source of cash was net receipts on the MYGA and FIA products.

Impact of Inflation

Management believes that inflation has not had a material effect on the Company’s consolidated results of operations, except insofar as inflation may affect interest rates.

An increase in inflation could affect our business in several ways.  During inflationary periods, the value of our fixed income investments falls which could increase realized and unrealized losses.  Inflation also increases expenses for labor, potentially putting pressure on profitability if such increases cannot be passed through our product prices.  Prolonged inflation could constrain overall economic activity, inhibit revenue growth and reduce the number of investment opportunities.

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

 

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

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

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company’s audited 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.

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), 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 December 31, 2019. Based on this evaluation, our principal executive 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 and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Material Weakness Previously Identified

Refer to Item 9A of Part II of our 2017 Form 10‑K/A and Item 4 of our September 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) established an enterprise risk management program, (iii) monitored and engaged an auditing advisor to assist with complex transactions, and (iv) retained consultants to verify and strengthen controls. The Company’s management determined these weaknesses were remediated as of June 30, 2019.

 

ITEM 9B. OTHER INFORMATION.

None.

 

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 Executive Chairman (principal executive office) and CEO 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. Minnich serves as Executive Chairman of the Board and Mr. Salem as Chief Executive Officer of the Company. The Board believes that these individuals are best situated to serve as Chairman  and CEO, respectively, because they are the individuals most familiar with the Company's business Plan and of effectively identifying strategic priorities and leading the discussion and execution of corporate strategy.

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 subsidiary, as well as other reports regarding its insurance business. The Company has an active Enterprise Risk Management Committee that reports to the Board and focuses on risk identification and remediation.

 

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 New York Stock Exchange Market (“NYSE MKT”) America with respect to independent directors. The NYSE MKT American 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 American 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, Sachin Goel, 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

 

At a meeting on March 29, 2016, the Board established an Audit Committee and appointed three independent directors, John T. Hompe, Scott Morrison and Jack Theeler to serve as members. These directors currently serve as Audit Committee members.

 

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 as follows: (i) review all recommendation of our independent registered public 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 our annual audited financial statements. The Committee met five times in 2019. Our Audit Committee charter is available on our website at www.midwestholding.com.

 

Compensation Committee

 

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