Midwest Holding Inc (MDWT) 2021 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Midwest Holding Inc. Q1 2021. My name is Katie, and I'll be coordinating your call today. (Operator Instructions)

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

Good afternoon, and welcome to Midwest Holding's first-quarter 2021 earnings call. This is Tom Bumbolow, Head of Business Development here at Midwest. Joining me for today's presentation will be our co-CEOs and Founders, Michael Salem and Mike Minnich, as well as our Chief Financial Officer, Debra Havranek.

Yesterday evening, Midwest issued our Q1 2021 earnings release announcing our financial results. During today's call, we will reference this letter, a copy of which can 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 more comprehensive information about our financial performance, we also encourage you to read through our Form 10-Q, which has been filed with the Securities and Exchange Commission.

Before we begin, I want to remind you that matters discussed on today's call will include forward-looking statements related to our operating performance, financial goals, 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 Form 10-K, where you will see a discussion of factors that could cause the company's actual results to differ materially from these 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 will discuss some non-GAAP measures in discussing Midwest's performance. You can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and 10-Q.

Lastly, we are pleased to announce that Mike and Michael have been selected as speakers for Piper Sandler's Virtual Midwest Life Insurance Tour on Thursday, May 20. Their discussion will begin at 9:30 AM Central Time, led by senior research analyst John Barnidge. Please reach out to John Barnidge or a member of the Piper Sandler team if you're interested in attending.

With that, I'll turn the call over to Michael Salem. Michael?

Thanks, Tom, and good afternoon, everyone. I'm pleased to join you today to report on the solid progress we are making at Midwest. We continue to execute on our business plan and remain uniquely positioned to capitalize on the life and annuity supply chain. The opportunity in our space is significant. Our business model has been validated by the industry.

But while incumbents and large financial institutions struggle to adapt due to their size and complexity, we are executing. Midwest was, in fact, built for this opportunity, built from scratch to manufacture and distribute individual life and annuity products on behalf of third-party asset managers and investors. The difficulty and complexity of our industry creates a natural moat around our success. We have an extremely unique and talented team that is dedicated to our vision, and it is our ability to execute that will ultimately separate us from the pack.

Our goal is to build a platform capable of generating significant long-term earnings power. We are not here to build a very good small company. Our opportunity is to build a transformational company. And in order to do that, we must build an incredible infrastructure, including investment in technology, distribution, asset management, and operations, and we must manage our capital and our growth. We are pleased with our progress in the quarter in pursuit of this long-term mission.

First of all, our premium volumes remained strong with $123.7 million in written annuity premium, representing 159% growth from $47.8 million in the first quarter of last year, with management revenues growing 126% during the quarter to $6.4 million from $2.8 million in the first quarter of 2020. We are also making strong progress in building a leading technology and operations platform, not only allowing us to efficiently scale, but also providing us incredible third-party revenue opportunity.

In our reinsurance program, we have significantly expanded our distribution capabilities for our products, positioning us for scalable access to capital for years to come. But our transition to larger, more strategic sources of reinsurance capital takes time. We have an extremely valuable product, and we will be deliberate in our relationships. We are confident in our ability to execute on our long-term reinsurance strategy.

We have also built the beginnings of a solid asset management platform, attracting top talent to lead our efforts, including 1505's CEO, Eric Del Monaco; Head Trader, Elliot Sperber; and Head of Credit, Brad Schneider. Admittedly, our investment income was below our target for the quarter, as we have been slow to invest the proceeds from our December public offering. As we continue to develop reinsurance and asset management relationships, we expect this to correct.

Finally, managing our Investor Relations and financial presentation as a new public company has been a work in progress. We still have more work to do, but we are moving in the right direction.

The last thing I'll say before I hand this over to Mike is that we have an extremely talented and committed management team. We are well aligned, we are focused, and we are poised to deliver results for our stakeholders. And as we continue to execute as we have, we truly have an opportunity to become a leading life and annuity platform.

Mike?

Thanks, Michael. We're building an incredible company. Our long-term approach has given us sustainable advantages, allowing us to invest in our growth. As such, we will continue to capitalize on our unique opportunities in distribution, product development, asset management, and reinsurance services.

Beginning with distribution, we see value in our limited distribution model across additional distribution channels where our current partners are not strongly represented, such as independent banks, broker dealers, and RIAs.

In the product area, we continue to differentiate through simplification. Our ability to manufacture new products that are simple, competitive, and easy to integrate onto our distribution partners' infrastructure is a key competitive advantage of our technology platform.

As Michael mentioned, we have made strategic hires in asset management. Combining access to insurance liabilities and asset management capabilities has been a common theme over the past many years. We believe our asset-light twist on this theme is a long-term winner, and we expect to see more firms following our lead to the extent that they can.

In addition to these new hires, we are investing in our infrastructure to support the long-term scalability in asset management. These investments, in turn, will benefit our reinsurance business as well.

Regarding reinsurance, our expanding reinsurance product suite allows institutional investors multiple ways to access insurance company liabilities. Our partners receive all the benefits of the insurance liabilities without tackling distribution and policy administration among other competitive moats in the insurance industry.

We have turned our insurance company into an intermediary that provides insurance as a service to our institutional clients. This innovation is symbiotic for us and our partners. We gain the capacity to originate more annuities without being burdened with the capital strain and investment risk, while our partners gain access to in-demand policy liabilities.

Regarding our reinsurance pipeline, we have a number of letters of intent signed, and hope to announce the details of these reinsurance partnerships in the future. The breadth of these partnerships is in part due to the platform's flexibility to offer an entire suite of reinsurance solutions, ranging from sidecar investments, joint ventures, IMAs, all the way to secured funding-backed agreements.

Last week, we announced that American Life became a member of the Federal Home Loan Bank. Through this membership, American Life can access competitive liquidity lines, as well as an attractive funding source for qualifying mortgage loans.

In addition to the senior members of our asset management team, we are excited to announce the nomination of two exceptionally talented individuals to our Board of Directors, Nancy Callahan and Diane Davis.

Nancy has over 25 years of experience in technology, financial services and insurance. She is currently the Global Vice President for Strategy and Growth of SAP Services, having held previous leadership positions at AIG and Reuters.

Diane has over three years (sic - 20 years) of experience in life insurance as an actuary, business head and CEO at multiple insurance companies, including Kemper, Zurich, and Farmers Insurance. We look forward to the invaluable insights both will provide, and welcome them to Midwest, if elected to serve as directors at the upcoming meeting of stockholders.

So with that, I'll turn it over to Deb, our CFO.

Thanks, Mike, and good afternoon, everyone. I am pleased with the continued progress made during the quarter and the financial position of our company.

In the first quarter of 2021, management revenue was $6.4 million, up 126% from the first quarter of 2020. And on a management earnings power basis, our revenue for the quarter was $10 million, up 274% from the first quarter of 2020.

Management operating income loss available to common shareholders in the quarter decreased to a loss of $0.4 million or $3.1 million income on a management earnings power basis, compared to income of $0.5 million or $0.6 million income on a management earnings power basis in the first quarter of 2020.

Going forward, we will be sharing our management earnings power P&L, which we use to measure the true earnings power of the business, taking into account the timing of reinsurance transactions as well as G&A that we attribute to investment in future growth of the business.

In this quarter, due to our excess cash balances, we're also adjusting our investment income based on our target ROA. As Mike and Michael mentioned, we continue to see an opportunity to invest in growth across the entire platform.

For the first quarter of 2021, G&A expenses, excluding stock-based compensation and the mark to market of the derivative option allowance, totaled $5.3 million compared to $2.1 million in the first quarter of 2020. We approximate 15% of G&A this quarter to be directly related to activities connected to investment in the future growth of the business.

As we continue to settle into our new role as a publicly listed company, we are focused on increasing our exposure in the market and strengthening our communication and presentation of our business to investors.

An example of the level of detail we are committed to providing can be found in our GAAP interest credited line. This line contains a lot of technical accounting noise and does little to help investors understand our financial performance. So we're now backing that number out, along with the derivatives we used to hedge, and adding a management interest credited line to our expenses. We will continue to improve our financial presentation and explanation as we move forward.

With that, we will now open the line for questions.

(Operator Instructions) Matt Carletti, JMP.

Hey, thanks, good morning. I was hoping we could maybe start with just the top-line production and talk a little about the mix in the quarter. Obviously, MYGAs slowed down a bit and then FIAs grew nicely. Can you talk a little bit about the competitive environment and what might have driven the decisions you made there?

Sure. Thanks, Matt. The MYGA market certainly has been a bit more competitive in the quarter. So I think that you're seeing a little bit of a reduction as we're not really chasing that market at the moment. And FIAs have generally been more attractive to us because we can differentiate ourselves in terms of the product design, as well as the service that we're able to provide.

In terms of like the general overall production, there is a bit of seasonality in the first quarter just from -- way over from the holiday season back in December that we would expect to see a slight slowdown. But with respect to the general mix, it's really just in response to what we're seeing our competitors doing.

Okay. And has (multiple speakers) anything changed in --? Go ahead. Sorry.

Yes. I just want to add something quickly, Matt. This is Michael. We are seeing an opportunity in expanding our distribution in the MYGA product, and so that's something I think that we can -- because of our position, our ability to enter new channels quickly and easily, I think there is an opportunity for us to do that.

I would also add that the MYGA product, really, it's something that when there is an opportunity and we have good reinsurance capacity, that's something that we can grow in pretty easily. And so we don't expect that to be as [consistent] producer necessarily quarter to quarter, and a little bit more sensitive to the competitive environment.

Okay, perfect. And this is a perfect lead-in to my next question just in terms of -- you've been given a seal for overall volume. I mean, yeah, Mike, I appreciate your comments on a good pipeline of reinsurance partners building. But how much, I guess, of the volume that was produced in the quarter did you hold back, maybe based on market environment versus like the fact that you're warehousing a lot now and waiting for kind of to get those partnerships finalized before producing a lot more?

Yeah. Sure. I think that's fair. As we build reinsurance capacity -- and that's part of the unique nature of our business -- and finalize some of the really quite scalable relationships that we're working on, that allows us then to strengthen the pricing and be more competitive. And that's the virtuous circle and value proposition of our business. So I do think there's some attribution to that.

And when we speak to the reinsurance market and our reinsurance partners, they are really focused on how much bigger we can get. And so I think that should play out nicely as we move forward and continue to execute the business plan.

Yeah. I mean, on that point, because maybe concern's the wrong word, but when we think about top-line production, is it almost on the other side in terms of we should be thinking more about how quickly you can ramp to feed their desires when these partnerships are signed?

And does that -- or do you expect that to have any impact on either the pace of state expansion or your partnerships on the front end? How should we think about the appetite from those reinsurance partners for the liabilities and your ability to fulfill that to their expectations?

Yeah. I think that's really the circle that we're playing. And as we build capacity, they have confidence that we've demonstrated that we can grow the business. And I think it's very well positioned.

Mike, is there anything you want to add?

Yeah. No. I think, really, what I wanted to add is that we're making those efforts now to expand -- state expansion, distribution, et cetera, so that it's going to be really set up when that capacity is ready to be taken up. So we're making all the efforts in the background for the future growth.

Great. And then one more question, if I could. Michael, you commented a little bit in your opening comments about the build of talent at 1505. Can you give us just a little more color on the -- what is your long-term vision for the asset management piece of your business? What are you trying to build?

Right. So to start with the synergies, obviously, I think, it's been demonstrated between insurance and asset management. And so we have extremely high synergies with our business with the alternative asset management community, and that is an extremely large marketplace.

But what we see our value, where we're building infrastructure, is really to partner with asset management. And so what we've done is to bring in very senior asset management, risk management, credit, trading professionals to help us manage those relationships and bring those relationships to the business. But it is not to build true asset management infrastructure, because when we look at the value chain, those partnerships and what's out there right now is just extremely valuable, and we can access it on a partnership basis, which is very attractive to us.

Great. Thank you very much for the color. Best of luck.

Thank you, Matt.

John Barnidge, Piper Sandler.

Thank you very much. And maybe sticking with 1505 and the question Matt had, do you anticipate it will grow beyond just premiums retained? Or how should we be thinking about the growth of that AUM?

Yeah. So yeah, it is going to grow beyond premiums retained. So with respect to our reinsurance product, there is really two types of products that we offer. One is out to asset managers, who will be bringing their own assets [and/or] asset management; and the second is really with respect to third-party capital that is not going to be bringing their asset management.

So it's really -- with respect to that second group, we'll be driving the growth of the 1505 Capital AUM. As I think you're aware, about three-quarters of our reinsurance partners to date are using the 1505 asset management, and we have a number of those reinsurance agreements in the pipeline where 1505 will be the asset manager.

(multiple speakers) I think, John, over the long term, we expect -- yeah, over the long term, John, we expect about 50/50 split is, I think, what our expectation would be if we were to say it today in terms of retaining the asset management with passive third-party capital versus our asset management product.

Okay. That's very helpful. Thanks. Clearly, there was a bit of a cash drag in the quarter. Can you talk about your outlook or timeline on maybe exiting that cash drag? And maybe within that, how the FHLB of Topeka can help with that, and help on funding and product construction?

Right. Yes. So with respect to the cash drag, we do expect to put that cash to work, if not here in the second quarter, be winding that up in the third quarter.

Regarding the Home Loan Bank, it is going to be a source of liquidity for us and will actually enable us to run at almost zero cash balances, because we will be able to have securities pledged to the Home Loan Bank and draw down on liquidity as needed. This is a new program for us so that we have not had gotten all that mechanics locked down, but that is certainly in the works.

Additionally, I think you're alluding to -- is there a product mix that can be offered out to our reinsurers based on the Home Loan Bank access? That is something that we are exploring. And we do believe that we should be able to offer that financing to be financed by third-party capital providers.

Yeah. And John, the other thing I just wanted to add on top of Mike, the reinsurance relationships that we're building with third-party asset managers are also providing us really unique and opportunistic flows of assets.

And so the synergies that we have on the asset management side of our business that we've discussed in the ways that we can partner with, really, who we believe are the best asset managers out there, both grow our ability to invest for our own balance sheet, our third-party investing reinsurance clients, and then also our reinsurance pipeline funnel. So we're really finding the different ways we can interact and partner with asset managers to be a very strong component of the opportunity.

Okay. That's really helpful. Maybe dovetailing on that, I mean, it seems like with the -- and maybe it's just timing, but with that FHLB admission for Topeka, that competitive liquidity lines, that you feel some comfort level with new distribution on MYGA. So can you talk about -- is that like IMOs, new states, something possibly bigger?

Yeah. So I would say it's really some of the other distribution lines outside of the IMO. So as you're aware, the limited distribution strategy has been very successful for us in the IMO channel. We are looking to take that same strategy into some of the other channels, such as the broker dealers, the banks, and the RIA. We are making significant headway in breaking into some of those channels, and we do feel -- specifically for the MYGA product, which is a very simple product -- I think it sells well through those types of channels -- that our future MYGA growth will probably be there.

Okay. No, that's helpful. And then maybe on the reinsurance self-structuring, it was a little lower in the first quarter. Is it reasonable to think that as we look through the year that there'll be somewhat of a hockey stick, as these new reinsurance asset management relationships are opening up such that it still probably does hit that 90% target that you guys have?

Yes. The 90% target is still our expectation for 2021. And it's exactly as you described. We would expect that these reinsurance agreements would be taking our Q1 and Q2 production and/or even anything that was left over from 2020 potentially, such that we may have reinsurance in a particular quarter that is higher than our production.

And that's one of the reasons why we are giving a little bit more guidance or thought process on what our quarterly earnings power is, so that you can see like -- it's kind of based on our production of premium. But depending on the timing of the reinsurance, that profitability is going to show up in our earnings differently.

Okay. So 90% seems what you're thinking for reinsurance. Does $600 million in sales also seem about what you're also still thinking about as well?

Yes. No changing in that projection.

Okay. That's fantastic. And maybe my last question -- I'll let others ask. But can you talk about your total addressable market today that you think you're hitting, and where you see that being over, say, the next three years?

Sure. So a couple of different addressable markets that we look at as a company, obviously, there is individual agents. We also have just the individual annuity market and then the life and health market. So that's on the liability side. Those are where we're kind of really running at very, very low market shares. Of those markets, I think maybe we're at 17 basis points of the individual annuity market. And so, because of that, we don't focus as much around the overall growth of the market.

But that being said, the tailwind -- demographic tailwinds, some of the things that could come through around tax -- the products that we're writing, really, really are very strong products for financial planning and individual investors. And so we really like the overall market as well, even though what really is going to drive our growth is our increase from the 17 basis points of total market share.

And then beyond that, we also look at our reinsurance products and that's the form of an alternative asset product. And in that market is even bigger -- and that market's kind of in the trillions. And we also think that alternative investments is an area that really should grow in the individual investor and financial planning market. When look at individual investors and retail investors, we think that they're very underweight alternatives, and there is an opportunity there.

So overall, the markets that we're in are massive, and our opportunity is really to build the best business plan that combines both insurance and alternative asset management, which we think we're doing.

Thanks for the answers.

No, thank you, John.

(Operator Instructions) John Barnidge, Piper Sandler.

Thanks. Well, maybe one more on the pricing dynamics that you're seeing on ceding commissions -- directionality where you see it has actually held up well. And then maybe does that differ between fixed index and MYGAs at all? Thank you.

Yeah. I can take that, John. So we see our margins being very stable on our reinsurance products. The MYGA is a bit shorter duration, and we also have a three-year MYGA now. So you could -- in the shorter duration product, we get paid a little bit less relative to the FIA. So there is some movement around there.

But generally, when we look at our margins, as well as other companies who have replicated some of our reinsurance structures, they're all right on top of each other, and it seems very, very stable. So I think that's what we're seeing there.

Mike, is there anything you wanted to add?

No, nothing to add.

Okay. We have no further questions. So I will hand it back to our speaker team.

Thank you. Well, we appreciate the questions and the investor support, and look forward to connecting with anybody that would like to have a one-on-one conversation with us. Thank you very much.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.