Midwest Holding Inc (MDWT) 2021 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Midwest Holding's fourth-quarter and full-year 2021 earnings call. My name is Lauren, and I'll be coordinating your call today. (Operator Instructions)

I will now hand you over to our host, Tom Bumbolow, to begin. Tom, please go ahead.

Good afternoon, and welcome to Midwest Holding's fourth-quarter and full-year 2021 earnings call. This is Tom Bumbolow, Head of Business Development and Distribution here at Midwest. Joining me for today's presentation will be our CEO, Georgette Nicholas; as well as our Chief Financial Officer, Eric Berg, whose appointment as CFO of the company was announced earlier today.

Yesterday evening, Midwest issued its Q4 and full-year 2021 earnings release announcing our financial results. During today's call, we will reference this announcement, a copy of which may be found on the Investor Relations page of our website at ir.midwestholding.com. While this call will reflect items discussed within that document, for a more comprehensive information about our financial performance, we also encourage you to read through our 2021 Form 10-K, which has been filed with the Securities and Exchange Commission.

Before we begin, I want to remind you that matters from today's call will include forward-looking statements related to our operating performance, financial goals, and business outlook, which are based on management's current beliefs and assumptions. These forward-looking statements reflect our opinions as of the date of this call. And we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today.

In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our 2021 Form 10-K, where you will see a discussion of factors that could cause the company's actual results to differ materially from the statements.

A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we'll discuss some non-GAAP measures in addressing Midwest's performance. You could find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our 2021 Form 10-K.

Now, I'll turn the call over to Georgette Nicholas to share our results.

Thanks, Tom. Welcome to Midwest's fourth-quarter and full-year 2021 earnings call. We appreciate you joining for an update on the company's progress. And today, I'll cover the financial results for the fourth quarter and the full year, then discuss market and business trends, our strategic focus, and the steps we are taking to carry out our strategy and grow the business.

As we reflect on 2021, Midwest had a challenging year with various changes and headwinds encountered in the execution of its strategy. The year showed growth and key accomplishments but also the challenge of growing a new business in a dynamic market and establishing a foundation to build upon. We are taking steps and focusing our efforts on the key drivers of the business to position ourselves to rebuild during 2022.

Results for the fourth quarter of 2021 showed a reported GAAP net loss of $7 million, down from $11.9 million net loss recorded in the prior-year quarter. Driving this improvement was an increase in total revenue, which reached $16 million in the quarter compared to negative total revenue of $831,000 recorded in the prior-year fourth quarter.

For the full-year 2021, Midwest had a GAAP net loss of $16.6 million compared to $12.4 million in the prior year. Revenue increased to $30.1 million this year, up from $10.6 million in the prior year driven by an increase in investment income and realized gains along with service fee revenues. This was offset by an increase in total expenses of $41.9 million, up from $21.4 million in the prior year.

The increase is from interest credited given the growth in premium year over year and an increase in salaries and benefits and other operating expenses to support the business. These additional costs were incurred to attract employees, for legal and consulting to support transactions and investment structures, along with state expansion and technology initiatives.

General and administrative expenses on a management basis, a non-GAAP measure, was $24.6 million for the year, up from $12.9 million in the prior year. Overall, annuity direct written premium on a statutory accounting basis for the year was $471.6 million, up from $415.6 million or a 13.5% increase. The growth year over year reflects the strong first half of 2021, while the back half of the year encountered a challenging sales environment.

Premiums written were $104.2 million in the fourth quarter of 2021 compared with $136.1 million in the year-earlier quarter, and down from $117.9 million in the third quarter of 2021. We're experiencing intense competition in the market for annuities with aggressive pricing. We've been reviewing pricing along with our reinsurer appetite to ensure we continue to grow the business while managing risk and profitability. State expansion efforts have taken more time than anticipated as states would like to see a more meaningful financial footprint.

We are working to file in more states, responding and providing increased information to regulators, and discussing how the model ensures policyholders are protected given the capital held and supported by the use of the insurance. This will take time, but it is a strong focus and priority for the year.

Ceded premium or that portion of our new business we passed to non-consolidated reinsures was $43.8 million in 2021's fourth quarter or 42.1% compared with $50.1 million or 36.8% in the fourth quarter of last year. For the full-year 2021, we ceded 50.3% of premiums compared to 54.9% in 2020.

Another consideration in looking at ceded premium is the amount that goes to our captive reinsurer, Seneca Re, where we warehouse premium cells until a reinsurer is put in place. As part of the sale to ORIX, 70% of the SRC1 or approximately $130 million of premium was economically sold or reinsured but is not reflected in our GAAP financials due to our continued consolidation of SRC1. If we include the premium economically ceded to ORIX through SRC1 for which statutory capital credit is received, the ceded premium for 2021 was 77.9% versus 54.9% in 2020.

Overall, we received $13.4 million in ceding commission fees during 2021 compared to $12.5 million in 2020. For GAAP purposes, ceded commission is deferred and earned over the life of the policies. As of December 31, 2021, there was $28.6 million on the balance sheet and the deferred gain on coinsurance transactions, which will be recognized in revenue over time.

Our invested asset base grew significantly to $976 million at the end of the year, up from $518 million at the end of 2020. Overall, we've benefited from core capabilities developed to source alternative assets in the areas of private credit, commercial mortgages, and structured products. Also, our strong and unique partnerships with asset managers allows us to source high-quality assets with attractive deals.

We provide non-GAAP measures collectively referred to as management metrics and have updated those in our earnings release in 10-K. And while these measures are not a substitute for our GAAP results, we believe that when used in conjunction with our GAAP results, the management metrics can help further understand the progress of the business.

During 2021, we achieved several important accomplishments. We introduced a new multi-year guaranteed annuity product for registered investment advisors; added two new index choices in our FIA products: one, a multi-asset index from Goldman Sachs, the other an S&P 500 ESG index. We added two new independent marketing organizations to distribution and partnered with various institutional asset managers to provide alternative asset sourcing.

We also launched a new wholly owned Seneca Reinsurance sale to assume a portion of our 2021 retained business. And we added two new third-party reinsurance partners for a total of six now.

As we start 2022, we're building on those accomplishments and bringing our focus and activity to the key drivers of the business. Our opportunity remains strong. And our strategy is: to capitalize on the growing market by distinguishing ourselves and providing annuity products to Americans who are saving for retirement; to create and use reinsurance structures including our captive reinsurer to mitigate risk and provide capital for which demand and interest is strong from our partners; and to provide management services around investing assets for those reinsurance structures and leveraging core capabilities to support the administration of those vehicles, all of which generates fee revenue.

The results at Midwest as a capital-light business model that we believe should produce higher returns for our shareholders over time compared to the traditional insurance company model of selling new policies and holding them on balance sheet. We're providing guidance for 2022 around key metrics based on the current view of the market and the potential impact on Midwest, which could be modified if those conditions change.

While Midwest can be impacted by the market and movement in interest rates affecting the pricing and cost of annuity products, we believe we can manage this along with potential volatility. The recent and expected further increase in interest rates could be beneficial to our investment portfolio. But we're also mindful of the increase in volatility over recent months and the impact that could have on the hedging of equity market exposure on our FIA products. We have our program in place to mitigate this risk and continue to evaluate it.

For annuity premiums written, we saw a slow start in the first quarter of 2022, similar to our experience in the fourth quarter of last year. We had approximately $83 million of premium written through today for the first quarter. We've taken pricing action on both our FIA and MYGA products in the quarter and continue to monitor our competitiveness in the market.

We've also increased our focus on marketing, reestablishing, and expanding our relationships on the distribution side through various channels and reallocating or adding resources relating to this initiative. We're starting to see some encouraging trends at the end of first quarter of 2022.

We've also prioritized expanding our state footprint as quickly as possible to become licensed in states where a significant number of retirees reside and where our IMOs are located. We're filing, responding, and providing increased information to regulators and discussing how the model ensures that policyholders are protected given the capital held and supported by using reinsurance structures.

Given these dynamics, we anticipate premiums written to be in the range of $500 million to $600 million for 2022. We still expect the mix and product sales to be consistent with 2021. All of this will be influenced by state expansion and the impact of efforts with distribution partners.

Based on potential premium growth, we currently have capacity in place to cover the capital needs of writing the new business through existing reinsurers that have the potential to grow along with potential transactions in the pipeline and anticipated to close in the year. The goal is to cede on average approximately 70% to 90% of premium in the year and generate ceded commission fees from them.

As we grow, managing expenses continues to be an area of focus. We saw an increase in 2021 as we accelerate some costs to develop potential opportunities along with adding employees, advancing technology initiatives, and continuing to build the foundation of Midwest.

We have and continue to take steps to restructure the organization, monitor costs closely, and invest in the areas that drive growth. We anticipate general and administrative expenses on a management basis and non-GAAP measure to be approximately $27 million to $28 million for the full-year 2022.

As we move forward, I'm encouraged by the trends we're seeing around premium written state expansion and the ability to manage costs. The focus of the team is on the key drivers of growth in the business: premium, state expansion, reinsurance and investment management, and building the operational foundation.

Our opportunity is strong. And the team at Midwest is committed to positioning the business for further growth over time. I look forward to providing updates as we progress.

And with that, I'll open it up for questions.

Thank you. (Operator Instructions) John Barnidge, Piper Sandler.

Thank you. At the six reinsurance partnerships you have now, what's the target for reinsurance relationships exiting '22?

Yeah. Thanks, John. I think, again, what we're looking at is a combination of growing the existing partners that we have in place. Some of them have been there for a period of time and have reached capacity. Others might have an opportunity to continue to grow.

So I think as we look forward, it's really about, again, the growth of the premium and the combination of products, what the appetite is on those reinsurers and potentially growing them. I think as we said in the earnings release, that we do have capacity for 2022 in place to cover what we anticipate writing between our existing reinsurers and a couple of transactions are in the pipeline that we'd expect to close during the year. And so as we move into next year, it certainly will, again, be based off of some of the growth projections that we have and achieved this year.

Great. And then another question. Based on the guide on ceded premium, sales volume, and G&A, you've got a good sense of the profitability metrics. Can you maybe walk us through how you see the earnings walk from an operating management view perspective as the year progresses? Because I know a lot of it is dependent on premium CDs in any given quarter.

Yeah. I think, John, as we think about the start of the year, first quarter is experiencing a slow start compared on the premium on the top line. As we see a lot of the experience in fourth quarter, that trends continued into the first.

We've taken some action around pricing in the first quarter, and we're starting to see some shoots of that as we close out the first quarter. So we do think that the first half of the year will be slower than the back. Certainly, part of it is state expansion also. We're working hard to really focus and grow our footprint, spending a lot of time ensuring that we're getting the right information to regulators and to start filing in new states coming off of the year-end results.

I think that then leads into how we think about ceding the premium. Again, I think our goal is to see between 70% and 90%. I think we feel very confident on the 70%. I think the in between gives us flexibility to use Seneca Re, which is our captive reinsurer as a warehouse vehicle to grow cells and grow books that we can then turn around and sell to reinsurer in particular on the size.

So I think what we're seeing is, again, the demand on the reinsurance side is strong. We've got a nice pipeline. We've developed a number of relationships internally to grow existing ones. But also, there's a number of partners that are interested in participating.

And so I think for us, it's about ensuring that, again, we're at the right mix of appetite and then the asset quality that we want to take and put into the reinsurers. So I think, again, that reinsurer that, again as you noted, we don't always see the impact of that on the financials from a GAAP perspective, certainly gives us some flexibility around that ceding commission. So I think that ends up then impacting how we think about the revenue stream of ceded premium or ceding commission premium that we -- or ceding commission that we receive off of the premiums in the earnings.

I think, again, one thing to remember is we have $28.5 million sitting on the balance sheet, right, that will start to earn into revenue from premium that we've already ceded from a GAAP perspective, from a management perspective, like that. Any premium off of that ceded -- any commission off of that would go into revenue. So again, a pretty good revenue stream.

If you think about Seneca Re and that captive reinsurance, the cell that we sold to ORIX would have probably generated about $10 million to $12 million in ceded commission. So that, again, from a management perspective, would have been added to income.

So as we think about that, we think that there's, again, a good path. It then comes from a revenue perspective. And I think you saw that in the quarter-over-quarter and year-over-year results. That then becomes about managing our expenses.

And I think that we're very focused on making sure that the expense base is invested in what can grow the business, in particular around distribution, making sure that we're getting the right support around marketing; that we're being a strong partner with our distribution partners and providing information and support from a product and a pricing perspective, that we're being innovative around that as we move through the year. And then that we're also then building our foundation.

So that expense base is important for us to continue to manage. We did incur costs this year around transactions and some of the investment structures that we did and state expansion in some of our technology initiatives that will continue. But we do need to manage them to make sure that we're investing in the areas of business that drive growth.

Thank you. My last question; I will re-queue. What's your timeline for state expansion in either as of year-end or as of the call? How many new states have seen the applications filed? Thank you.

Yeah. So I think state expansion is one of those things that's taken a little bit longer than we would have anticipated. And partly, we started out with two states, where it's probably quite significant requests in addition to what you normally file across the NAIC. And so we've started there and have made progress in those states.

We don't have any final results from there, but we've been spending quite a bit of time providing additional information, answering a lot of questions. I think what we're seeing is that a lot of it is looking at our historical footprint from a financial perspective which is developing. Again, we've only got a few years. So a lot of focus on projections and the assumptions behind that.

I think there's also a lot of discussion, and you've seen it in the market around the use of a model like ours, that is capital light and uses reinsurance and not necessarily traditional reinsurance, right, that structures with asset managers backing those. And so what does that mean and ensuring, right, that there's an understanding of the quality of those assets in those structures and how we monitor and navigate that.

So spending a lot of time talking to regulators and answering questions around that. So I think we're filed in a few states, and we're getting ready to file in a number of states as we come off of full-year earnings results and update all of our projections for that.

Thank you.

(Operator Instructions) Okay. We currently have no further questions in the queue. So I'll now hand back over to Georgette for any closing remarks.

So thank you everyone for joining us. We're happy to follow up and take any other questions or comments on calls with you and look forward to speaking with you. Thank you for joining us.

This concludes today's call. Thank you for joining. You may now disconnect your lines.