424B4 1 tm2034654-13_424b4.htm 424B4 tm2034654-13_424b4 - none - 30.8293088s
 Filed pursuant to Rule 424(b)(4)
 Registration No. 333-249828
PROSPECTUS
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1,000,000 Shares of Voting Common Stock
This is a public offering of voting common stock by Midwest Holding Inc. Prior to this offering, our shares were listed on the OTCQB but experienced very limited trading. The public offering price per share of our voting common stock is $70.00 per share.
Our voting common stock has been approved for listing on the Nasdaq Capital Market under the symbol “MDWT.”
We are a “smaller reporting company” under applicable Securities and Exchange Commission (“SEC”) rules. We have elected to take advantage of certain reduced public company disclosure and reporting requirements for this prospectus and future filings.
Per Share
Total
Public offering price $ 70.00 $ 70,000,000
Underwriting discounts and commissions(1) $ 4.55 $ 4,550,000
Proceeds to Midwest, before expenses $ 65.45 $ 65,450,000
(1)
See “Underwriting” for information regarding the compensation and certain expenses payable to the underwriters by us.
We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to an additional 150,000 shares of our voting common stock at the public offering price, less the underwriting discounts and commissions to cover over-allotments, if any.
Investing in our voting common stock involves a high degree of risk. Before buying any shares, you should read carefully the discussion of the material risks of investing in our voting common stock under the heading “Risk Factors” beginning on page 19 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares on or about December 21, 2020.
Sole Bookrunner
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Co-Manager
JMP Securities
The date of this prospectus is December 16, 2020.

 
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ABOUT THIS PROSPECTUS
You should rely only on the information contained or incorporated by reference in this prospectus and any free writing prospectuses that we authorize for use in connection with this offering. We have not, and the underwriters have not, authorized anyone to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell the securities in any jurisdiction where the offer or sale is not permitted or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. You should not assume that the information contained or incorporated by reference in this prospectus or any free writing prospectus that we authorize for use in connection with this offering is accurate or complete as of any date other than the dates of the applicable documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.
It is important for you to read and consider all of the information contained and incorporated by reference in this prospectus and in any free writing prospectus that we authorize for use in connection with this offering before making your investment decision to purchase shares of our voting common stock in this offering.
No action is being taken in any jurisdiction outside the United States to permit a public offering of shares of our voting common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any and all restrictions applicable to this offering and the distribution of this prospectus applicable to those jurisdictions.
All share and per share information relating to our voting common stock in this prospectus has been adjusted to reflect a 500 for one reverse stock split effective August 27, 2020.
Unless the context of this prospectus indicates otherwise, the terms “Midwest,” the “Company,” “we,” “us” or “our” refer to Midwest Holding and its consolidated subsidiaries. “American Life” refers to American Life and Security Corp., our principal operating subsidiary.
INDUSTRY AND OTHER DATA
Certain industry data and market data included in this prospectus were obtained from independent market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of management’s estimates presented herein are based upon management’s review of independent third-party surveys and industry publications prepared by a number of sources and other publicly available information. All of the market data used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications and surveys included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section in this prospectus titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
 
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WHERE YOU CAN OBTAIN MORE INFORMATION
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which means that we are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet website at http://www.sec.gov where you can access reports, proxy statements, information and registration statements, and other information regarding us that we file electronically with the SEC. In addition, we make available, without charge, through our website, www.midwestholding.com, electronic copies of various filings with the SEC, including copies of Annual Reports on Form 10-K. Information on our website should not be considered a part of this prospectus, and we do not intend to incorporate in this prospectus any information contained on our website.
INCORPORATION BY REFERENCE
The SEC allows us to “incorporate by reference” the information we file with it, which means that we can disclose important information to you by referring to those documents filed separately with the SEC. The information we incorporate by reference is an important part of this prospectus. We incorporate by reference the documents listed below, except to the extent that any information contained in those documents is deemed “furnished” in accordance with SEC rules. The documents we incorporate by reference, all of which we have previously filed with the SEC, include our:














Any statement contained in a document that is incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this prospectus or any free writing prospectus that we authorize for use in connection with this offering modifies or is contrary to that previous statement. Any statement so modified or superseded will not be deemed a part of this prospectus except as so modified or superseded.
You may access the documents incorporated by reference on our website at www.midwestholding.com, although our website shall not be deemed to be a part of this prospectus. You may also request a copy of any of these filings at no cost, by writing or telephoning us at the following address or telephone number:
Midwest Holding Inc.
2900 South 70th Street, Suite 400
Lincoln, Nebraska 68506
(402) 489-8266
 
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this prospectus constitute forward-looking statements. 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 our 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:

our business plan, particularly including our reinsurance strategy, may not prove to be successful;

our reliance on third-party insurance marketing organizations to market and sell our insurance products through a network of independent agents;

adverse changes in the ratings obtained from independent rating agencies;

failure to maintain adequate reinsurance;

our inability to expand our insurance operations outside the 20 states and District of Columbia in which we are currently licensed;

our insurance products may not achieve significant market acceptance;

we may continue to experience operating losses in the foreseeable future;

the possible loss or retirement of one or more of our key executive personnel;

intense competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors;

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;

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;

failure to obtain new customers, retain existing customers, or reductions in policies in force by existing customers;

higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures;

changes in our liquidity due to changes in asset and liability matching;

possible claims relating to sales practices for insurance products; and

lawsuits in the ordinary course of business.
See “Risk Factors” beginning on page 19 for further discussion of the material risks associated with our business and an investment in our voting common stock.
You should not place undue reliance on any forward-looking statement. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.
 
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PROSPECTUS SUMMARY
This summary highlights information appearing elsewhere in this prospectus or in documents incorporated by reference in this prospectus. This summary does not contain all of the information you should consider before investing in our voting common stock. You should read this entire prospectus and incorporated documents carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing at the end of this prospectus, before making any investment decision. In this prospectus, we make certain forward-looking statements, including expectations relating to our future performance. These expectations reflect our management’s view of our prospects and are subject to the risks described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our expectations for our future performance may change after the date of this prospectus and there is no guarantee that such expectations will prove to be accurate. Unless the context otherwise requires, we use the terms “Midwest Holding,” the “Company,” “we,” “us” and “our” in this prospectus to refer to Midwest Holding Inc.
Our Company
We are a rapidly-growing financial services company focused on providing technology-enabled and services-oriented solutions to distributors and reinsurers of annuity and life insurance products in North America. We utilize our technology platform and insurance company capabilities supported by reinsurance to develop and distribute what we believe to be competitive insurance products through third-party independent marketing organizations (“IMOs”). We seek to provide cost-effective and efficient policy administration services and asset management services as a comprehensive solution for reinsurers.
We believe that our differentiated business model, operating capabilities and scalable technology platform provides distributors and reinsurers with more flexible and lower-cost solutions than traditional insurance companies and associated service providers. We seek to create value through our ability to provide distributors and reinsurers with annuity and life product innovation, speed to market for new products, competitive rates and commissions, and streamlined customer and agent experience. We provide increased ease of use and serve customers and agents more efficiently and at lower costs than typical insurance companies. Our capital efficient model allows us to support increasing product sales volumes of distributors with capacity provided by third party reinsurers.
We provide an end-to-end solution to manage annuity and life insurance policies that includes a broad set of product development, distribution support, policy administration, and asset liability management services. Our technology platform enables us to efficiently develop, sell and administer a wide range of annuity and life products and we believe that it provides cost-effective product development, sales and administration as we scale our business through increased product sales. We also provide asset management services to third party insurers and reinsurers.
We currently emphasize the offering of annuity products, including multi-year guaranteed annuity (“MYGA”) and fixed indexed annuity (“FIA”) policies, through IMOs that offer annuity and life products, infrastructure and other services to independent insurance agents across the United States. We further provide IMOs our product development expertise, administrative capabilities and technology platform. We reinsure substantially all of our insurance policies with third party reinsurers and our captive reinsurance subsidiary, Seneca Reinsurance Company, LLC (“Seneca Re”). Our third party reinsurers include traditional reinsurers and capital markets reinsurers, which are third party investors seeking exposure to life and annuity reinsurance earnings who typically do not have reinsurance platforms or operations of their own.
We were formed in 2003 as a financial services company and began our insurance operations in 2009. In 2018, we underwent a change in control transaction with entities controlled by our Co-Chief Executive Officers, Michael Minnich and A. Michael Salem. Following this transaction, we began implementing our current strategic plan and business model.
We operate our business through three subsidiaries. American Life & Security Corp. (“American Life”) is a Nebraska-domiciled life insurance company, which is also commercially domiciled in Texas that is currently licensed to sell, underwrite, and market life insurance and annuity products in 20 states and the District of Columbia. During 2020, American Life was granted licenses in six states and the District of
 
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Columbia, including Ohio, Louisiana and Kansas and it has licensing applications pending in Oregon and Puerto Rico. American Life obtained a financial strength rating of B++ (“Good”) from A.M. Best Company (“A.M. Best”), a leading rating agency for insurance companies, in December 2018 that was affirmed in December 2020. A.M. Best also upgraded American Life’s long‑term issuer credit rating to bbb+ from bbb in December 2020. Seneca Re is a Vermont-domiciled sponsored captive reinsurance company that we established on March 12, 2020 for the purpose of reinsuring various types of risks on behalf of American Life and third party capital providers (including capital markets reinsurers) through special purpose reinsurance entities. 1505 Capital LLC (“1505 Capital”), a Delaware limited liability company of which we acquired majority ownership in 2019 and 100% ownership on June 15, 2020, provides financial and investment advisory and management services.
We seek to deliver long-term stockholder value by growing our premium volumes and generating fee-based revenue with attractive profit margins. We have grown substantially since we implemented our business model and began selling our first annuity policies in 2019. We generate fees and other revenue based on the gross written premium of the annuity policies we issue, reinsure and administer. For the year ended December 31, 2019, we generated $161.4 million of direct written premium on a statutory accounting practices (“SAP”) basis and as prescribed or permitted by the Nebraska Department of Insurance (the “NDOI”). For the nine months ended September 30, 2020, we generated $279.5 million of direct written premium on a SAP basis representing a 252% increase over the $79.5 million of direct written premium on a SAP basis that we generated for the nine months ended September 30, 2019. Information for the last twelve months (“LTM”) ended September 30, 2020 is also presented.
Annuity Direct Written Premium (SAP)
($ in millions)
2018
2019
YTD
9/30/19
YTD
9/30/20
LTM
9/30/20
Annuity Direct Written Premium
$ 0.0 $ 161.4 $ 79.5 $ 279.5 $ 361.4
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For the year ended December 31, 2019, we generated $3.4 million of revenue while incurring a $5.7 million net loss. For the same time period, we generated $7.1 million in Adjusted Revenue while incurring a $2.1 million Adjusted Net Loss.
For the nine months ended September 30, 2020, we generated $11.4 million of revenue, representing 278% growth over the $3.0 million of revenue that we generated for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, we generated a $0.5 million net loss compared to the $4.0 million net loss we generated for the nine months ended September 30, 2019. Adjusted Revenue increased 160% from $5.8 million for the nine months ended September 30, 2019 to $15.2 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we generated $3.3 million in Adjusted Net Income, an improvement over the nine months ended September 30, 2019, when we had an Adjusted Net Loss of $1.2 million.
Adjusted Revenue and Adjusted Net Income are Non-Generally Accepted Accounting Principles (“GAAP”) financial measures that we use to measure our operating performance. For a reconciliation of these Non-GAAP financial measures to our GAAP financial measures, please see “Selected Financial and Operating Data — Non-GAAP Financial Measures” in this prospectus.
 
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Our Business Model
In 2018, we launched our business plan to become a capital efficient, technology-enabled and services-oriented solutions provider to the annuity and life markets. We provide insurance distributors and reinsurers with an end-to-end solution to develop, issue and administer annuity products.
We utilize our insurance and ancillary services businesses to develop and issue annuities through IMOs. We reinsure substantially all of the financial risk associated with our policies to third party reinsurers, including traditional and capital markets reinsurers, and Seneca Re. We also have the flexibility to selectively retain assets and liabilities associated with our policies when we expect that doing so will provide an attractive return on our capital.
Through our ancillary services businesses we administer the policies we issue and offer asset management services to our reinsurance partners for a fee. Through Seneca Re, we also assist capital market investors in establishing and licensing new special purpose reinsurance entities. We believe our broad service offering provides a growing and valuable fee stream and expect that our policy administration and asset management fee income will increase as we grow our number of administered policies and the associated assets that we manage. In the future, we expect to have opportunities to increase our policy administration and asset management revenue by providing these services on a stand-alone basis to new customers.
We seek to create value for our distribution and reinsurance partners by facilitating product innovation, rapid speed to market for new products, competitively-priced products, streamlined customer and agent experience, and efficient technology-enabled operations. We generate fee income from reinsurers in the form of ceding commissions, policy administration fees and asset management fees. We typically receive upfront ceding commissions and expense reimbursements at the time the policies are reinsured and policy administration fees over the policy lifetimes. We also earn asset management fees on the assets we hold that support the obligations of many of our reinsurers.
Our reinsurance strategy helps alleviate our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us. In our insurance and reinsurance company subsidiaries we seek to maximize yield while minimizing the difference in duration between our investment assets and our liabilities and diversifying our investments across a broad range of, primarily, fixed income instruments.
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Our Products
Through American Life, we presently issue several MYGA and FIA products. American Life’s MYGA products are five-year single premium deferred individual annuity contracts, providing consumers with an attractive, low risk, predictable and tax-deferred investment option. American Life’s FIA products are long-term (10-year) annuity products with interest rates that are tied, in part, to published stock market indices chosen by customers. The FIA products are modified single premium annuity contracts designed for individuals seeking to benefit from potential market gains in a full principal protected format. American Life began selling its first MYGA and FIA products in 2019.
We expect to expand American Life’s product line and to introduce other insurance products into the market in the future. Depending on market demand, we expect to consider having American Life write a
 
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wide variety of insurance products, including fixed deferred, fixed indexed and other annuities, in addition to life and Medicare supplemental insurance products. Any new insurance products we create must be filed with and approved by appropriate state insurance regulatory authorities before being sold. American Life’s MYGA and FIA products were developed using the services of an independent qualified consulting actuary, and we expect that any new products will utilize similar services.
Our Ancillary Services
Policy Administration
We provide a cloud-based policy administration solution we call m.pas, which currently operates as a division of American Life, but later may be established as a separate entity within the Company. We built m.pas to provide a scalable policy administration solution for annuity and life products. Its policy administration platform is a flexible solution designed to aggregate and manage structured and unstructured data, providing operational efficiencies that lead to lower policy administration costs relative to traditional life and annuity carriers. Our technology-enabled solution also provides accelerated new product launch capabilities and our platform facilitates integration of liability management into traditional asset portfolio risk systems of our reinsurers. We are under contract with our annuity reinsurers to administer all policies ceded under our various reinsurance agreements. We believe this solution creates an opportunity to expand these services into a broader business as a third party administrator for other insurers as we expand our capabilities.
Asset Management
1505 Capital is an SEC-registered investment advisor offering comprehensive asset-liability management services to American Life, third party reinsurers and third party insurance clients. 1505 Capital provides its expertise, infrastructure and scale to develop and implement customized solutions for clients seeking to optimize portfolio yields, liquidity, maturity profile, risk and capital monitoring, and asset-liability management. 1505 Capital also focuses on originating and managing commercial mortgages and structured products.
We generally require reinsurers to secure their obligations to American Life in the from of assets deposited on American Life’s balance sheet (known as “funds withheld”) or via assets held in trust. Reinsurers may appoint 1505 Capital to manage these assets pursuant to guidelines adopted by us that are consistent with state investment statutes and reinsurance regulations. 1505 Capital had $420 million in assets under management as of September 30, 2020.
Our Partners
Distributors
We currently have selling agreements with eight IMOs that contract with numerous independent agents to sell our annuity policies. The IMOs recruit, train and support independent agents that sell annuities, life insurance and other financial products to consumers. As of October 30, 2020, approximately 657 independent agents of our IMOs had sold our annuity products in 2019 and 2020. We require independent agents that distribute our policies to complete our product and compliance training in anti-money laundering, annuity products and annuity suitability, and the annuity policies we offer. As of November 30, 2020, we had approximately 1,142 active agents.
We support our distribution partners by enabling them to introduce additional products, meet the needs of independent agents and consumers, implement flexible policy designs and bring new products to market quickly. Our technology capabilities allow for flexible product design with speed to market to meet the needs of independent agents and consumers. We may develop products exclusively with certain IMOs to provide specific products that have a perceived competitive advantage. We believe that if we are able to achieve an upgrade of American Life’s A.M. Best rating to A, it would increase the demand for our products distributed by our existing IMOs, and would attract additional distribution and reinsurance partners. We believe such an upgrade would provide us access to new institutional distribution channels, including small to mid-sized banks and broker-dealers.
 
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Reinsurers
Reinsurance is an integral part of our business plan. We market, underwrite and issue annuity products through American Life and then reinsure substantially all of those policies with third party reinsurers and Seneca Re. We partner with traditional reinsurers and reinsurers sponsored by capital market investors, including asset managers and institutional investors. We believe this strategy helps us preserve our capital while supporting sales growth because we have lower capital requirements when the policy liabilities are reinsured than when we retain all of the policy liabilities.
We typically reinsure our policies within three to six months of being issued through block reinsurance transactions. We expect that our ability to accumulate and reinsure larger portfolios of policies over time will increase the number of reinsurers who seek to reinsure our liabilities. Under these reinsurance agreements, there is a monthly or quarterly settlement of premiums, claims, surrenders, collateral and other administration fees.
Seneca Re was formed to operate as a sponsored captive insurance company for the purpose of reinsuring insurance policies through one or more single purpose entities, or “protected cells,” under Vermont insurance regulations. Seneca Re provides an efficient structure for capital markets investors to reinsure our policies through protected cells that it manages.
Our Technology
Our business model utilizes a modern, end-to-end, cloud based technology platform that we began implementing in 2018. Our technology platform enables us to develop, sell and administer a broad range of competitive annuity and other life products. We license key components of our technology from third party software providers, including product development, new business, distribution management and policy administration applications. We believe this allows us to provide market leading technology capabilities with limited capital investment and increased flexibility. In addition, we have added several core technology integrations to optimize the speed and efficiency of our interactions with IMOs, their agents and policyholders, including document management, electronic application capability, secure log-ins and an agent and policyholder portal. We believe our technology platform provides cost effective product development, sales and administration that enables us to control the growth of our operating and other expenses while expanding our operations and growing our sales volume. We expect to leverage our internal capabilities to continue to optimize our technology platform, including additional proprietary applications.
Our Market Opportunity
We participate in a large U.S. market that we expect to grow in part due to a number of demographic trends. As measured by annual premiums written, annuities are the largest product line in the life, annuity, and accident and health sector. Annuities play an important role in retirement planning by providing individuals with stable, tax-efficient sources of income. Annual annuity considerations, also referred to as premiums, accounted for $296 billion of annual premiums, or approximately 32% of the $934 billion of total annual life, annuity, and accident and health premiums in 2019. The most common annuities are fixed and variable and can be written on an individual or group basis. Our current products are fixed annuities written on an individual basis. We estimate that the total addressable U.S. market for fixed annuity products purchased by individuals is approximately $140 billion of annual premium. We estimate our current share of the individual fixed annuity market to be less than 0.5%.
An increasing portion of the U.S. population is of retirement age and is expected to increase the retirement income needs of retirees. The number of people of retirement age has increased significantly since 2010, driven by the aging of the “Baby Boomer” generation. The U.S. population over 65 years old is forecast to grow from 55 million in 2020 to an estimated 79 million in the next 20 years, according to the United Nations. By 2040, the portion of the U.S. population aged over 65 years old is expected to represent over 21% of the total population compared to under 17% in 2020.
 
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Source: United Nations World Population Prospects — 2019.
Annuities in the U.S. are distributed through a number of channels, most of which are independent from companies that issue annuities. Independent distribution channels serve as the primary and a growing source of annuity distribution. In 2019, approximately 76% of U.S. individual annuity sales occurred through independent distributors, including independent agents, broker-dealers, and banks, representing an increase from approximately 70% in 2015. Independent agents are the second largest distribution channel, behind independent broker-dealers, accounting for approximately 20% of U.S. individual annuity sales in 2019. IMOs provide independent agents with access to annuity products along with operational support services and functionality to support their distribution activities. The infrastructure and support services provided by IMOs to independent agents are critical to the success of independent agents and their ability to serve their customers and generate additional sales. Independent broker-dealers, full-service national broker-dealers and banks collectively accounted for 62% of U.S. individual annuity sales in 2019. These distribution channels typically only distribute annuities with an A.M. Best rating of A- or higher.
In recent years, capital markets investors have been actively seeking annuity and life insurance risk by investing in and acquiring insurance and reinsurance companies. Fixed annuities provide upfront premiums and stable, long-term payment obligations and are thus attractive sources of liability-funded assets for a variety of traditional and alternative asset managers and investors. There are significant regulatory and operational hurdles for capital providers looking to enter the annuity market. These hurdles are exacerbated by the limited legacy administrative capabilities, product development processes and technology systems, of traditional insurers and reinsurers. We provide asset managers and investors the ability to seamlessly access funding from annuity business through a variety of reinsurance entities that we can form quickly and operate efficiently with lower upfront and ongoing regulatory and operating costs.
Our Competitive Strengths
Differentiated Value Proposition
We provide insurance product development, policy administration and asset management services, enhanced by American Life’s A.M. Best financial strength rating and licenses to sell annuity products in 20 states and the District of Columbia. We believe that our focus on the needs of our product distributors, reinsurers and capital markets investors and the value-added services we offer them will enable us to develop deep and long-standing industry relationships. We have developed and implemented a technology platform and administrative services that we believe will expand our revenue opportunities, maintain low operating costs and increase customer value for our distribution partners, and allow us to provide high quality, efficient services to our various industry partners. We believe our business model and multi-service capabilities provide our reinsurance and capital provider participants with attractive capital deployment opportunities with us.
We believe our ongoing strategy to have American Life become licensed to sell insurance in additional states and seek a higher A.M. Best rating will further strengthen our value. Our increased capital resources as a result of this offering will also enable us to offer larger scale product and portfolio opportunities to our distribution and reinsurance partners.
 
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Several Revenue Sources
Our business model generates upfront ceding commissions and fee based revenue from recurring policy administration and asset management fees. We receive ceding commissions and expense reimbursement from reinsurers at the time we cede our primary insurance liabilities to them, providing meaningful cash flow. During the nine months ended September 30, 2020, we generated $8.2 million in upfront ceding commissions, recorded on our financial statements as deferred gains on reinsurance, most of which have not yet been recognized as revenue under GAAP. We also receive policy administration fees on policies that we issue and manage, and we receive asset management fees from most of our third party reinsurers relating to assets they deposit as collateral to cover claims on the policies they reinsure. These fees are typically received over the life of our annuity products, usually over five to ten years, thereby providing a stable revenue stream.
Efficient and Flexible Capital Structure
We have a capital efficient business model that utilizes our insurance and reinsurance affiliates to transfer assets and liabilities associated with our issued products to third party capital providers and our captive reinsurer via reinsurance agreements. This strategy reduces our regulatory capital and surplus requirements because policies that are reinsured require less capital and surplus reserves than policies retained by us, allowing us to scale our business because we do not have significant capital constraints. Our enhanced capital position following the completion of this offering will allow us to develop larger portfolios of policies that can then be reinsured.
Effective Use of Technology
We are well-positioned to capitalize on the accelerating trend of digital transformation across the insurance industry. We believe our modern, fully functional technology platform provides us a significant opportunity to penetrate large addressable markets now being served by traditional insurance providers whose product development cycles and product development costs are greater than ours. We use our technology to efficiently develop, underwrite, distribute and administer competitive annuity products through IMOs as well as an interactive and seamless customer and selling agent experience.
Scalable, Low-Cost Operations
We focus on maintaining low operating expenses and investing in technology enhanced processes that improve the efficiency and effectiveness of developing, distributing, issuing and managing our insurance products. We believe our low operating expenses allow us to develop attractively priced products that are desirable for our IMOs to market. We currently operate successfully on a small scale in a large addressable market, and have a predominantly fixed cost base and a relatively low employee headcount. Going forward, our technology platform and streamlined processes will enable us to be highly scalable and allow us to produce incremental premium volumes without significant additional investment in infrastructure and with low incremental fixed operating, including labor, costs.
Low-Risk, Profitable Business Model
We believe our business model enables us to operate with reduced risk while increasing our potential profitability because substantially all of the liabilities associated with policies we write are reinsured. As a result, we retain minimal financial risk other than the credit risk of our reinsurance providers, for whom we hold collateral to provide for policy claims or who have creditworthy ratings. American Life’s MYGA and FIA products have fixed, predictable costs with low volatility and surrender charges that discourage redemptions prior to maturity, and contain features to reward persistency.
We generate revenue through the ceding commissions and other fee income we receive from our reinsurance providers and the ancillary services we provide. Also, we incur minimal direct expenses associated with the ceding commissions we generate and we incur low incremental expenses on additional policy volumes we produce. As a result, we believe we will be able to convert a significant portion of incremental fee-based income from additional premium volume into operating income. Because we have a fully integrated technology platform, we also expect that we will be able to increase our operating margins as we continue to scale our business.
 
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Entrepreneurial, Highly Experienced and Aligned Management Team
Our highly experienced, entrepreneurial senior management team has extensive experience in insurance, technology, and investment management. Mike Minnich, our Co-Chief Executive Officer, has 25 years of experience in asset management, insurance company management, technology and risk management. Prior to joining Midwest, Mike served as Managing member of Rendezvous Capital LLC, a New York firm advising insurers on capital and investments. Previously, Mike was a Managing Director at Swiss Re, where he managed a multibillion-dollar investment portfolio. Michael Salem, our other Co-Chief Executive Officer, has over 16 years of experience in insurance investing, distribution and technology. Prior to joining Midwest, Michael co-founded Vanbridge LLC, a specialty insurance intermediary that was acquired in 2018 by EPIC Insurance Brokers and Consultants. Prior to Vanbridge, Michael was a founding portfolio manager at Arrowgrass Capital Partners, a multibillion-dollar hedge fund.
Messrs. Minnich and Salem, who will own approximately 16.6% of our outstanding voting common stock immediately following the completion of this offering, will continue to be meaningful owners of Midwest Holding and whose interests will remain closely aligned with our stockholders.
Our Growth Strategy
Expand Market Presence
We believe that our current product offerings will enable us to continue policy sales growth as we increase the number of states in which we become licensed to sell insurance. Our primary insurance company, American Life, is licensed to sell, underwrite, and market annuity and life insurance products in 20 states and the District of Columbia. American Life has been granted licenses in six states and D.C. during 2020, including Ohio, Louisiana and Kansas and has licensing applications pending in Oregon and Puerto Rico. Many of our IMOs distribute to insurance agents throughout the United States and we expect they will increase their sales volume as American Life enters new states. Because of our technology platform and capabilities we also expect to gain market share through flexible product offerings. We also expect to increase the total addressable market by joining with our IMOs to develop innovative products for customers who previously elected not to purchase annuities.
The states in which we currently operate represented over $103 billion in total annuity premiums during 2019, or 35% of total annuity premiums in the U.S. By comparison, we generated $361.4 million of total annuity premiums under SAP for the 12 months ended September 30, 2020. The states in which we are not currently active represented over $193 billion in total annuity premiums during 2019, or 65% of total annuity premiums in the U.S. We may also pursue the acquisition of one or more insurance companies that have active licenses in additional states or additional licenses in existing states.
Increase Product Offerings
American Life currently offers four annuity products, consisting of one MYGA and three FIAs. Our average time to launch new products has been between three and five months from starting development to market introduction. We believe our business model, coupled with our IMO relationships, allows us to compete effectively for insurance business due to our technology platform and small size, which enables us to respond to market opportunities by developing new products quickly.
We develop our 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 refine products rapidly and cost effectively where we perceive market demand and interest from IMOs, and have available reinsurance capacity.
Develop Additional Distribution and Reinsurance Relationships
We currently distribute annuity products through eight third party IMOs that offer products, infrastructure and other services to independent insurance agents across the U.S. We believe our capital efficient product development, prompt policy processing, operating flexibility and speed to market make us
 
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a desirable partner for insurance distributors. We expect to continue to grow by increasing volumes with our current IMOs and by establishing new IMO relationships.
We expect to leverage the relationships we have with reinsurers, capital markets investors and reinsurance intermediaries to develop new reinsurance relationships. In 2020, we established Seneca Re to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of risks on behalf of Midwest and third party capital providers through one or more protected cells. Also, in early 2020, we developed a strategic relationship with Crestline Assurance Holdings LLC and its affiliates (collectively, “Crestline”) to provide reinsurance capital and access to high-quality assets with attractive risk-adjusted returns. In April 2020, Seneca Re entered into its first flow quota share reinsurance agreement with American Life. We launched our first protected cell (“SRC1”) in May 2020 and a second protected cell (“SRC2”) funded by Crestline in July 2020.
Exploit Established Corporate Platform
We believe that we have the leadership and corporate culture, industry relationships, infrastructure and technology to achieve continued growth and improve operating margins with increased sales. We believe we have an efficient corporate platform to support a significant increase in our sales volume, an expansion of our distribution relationships, and the development of new annuity and other life insurance products without significant additional investment in infrastructure and with low incremental fixed operating costs. As a result, we believe we should be able to convert a significant portion of incremental fee income from additional sales volumes into operating income.
As we grow, we expect that we will benefit from increased scale and diversification of our business in seeking to optimize the terms of our reinsurance transactions.
Increase Revenue from Complementary Services
In addition to the ceding commissions we receive through our reinsurance strategy, we generate recurring fee income for providing policy administration and asset management services to third party reinsurers. We are contracted to administer all of our policies ceded under various reinsurance agreements. We also provide asset management services for most of our third party reinsurers. In 2019, we acquired a majority ownership of 1505 Capital to enhance our asset management capabilities and we purchased all of the remaining ownership of 1505 Capital effective June 15, 2020. We may develop or acquire additional asset management expertise and capabilities to provide expanded asset origination and sourcing to our reinsurance partners. We believe our complementary services provide a differentiated comprehensive solution to third party reinsurers that will allow us to develop new reinsurer relationships, including with capital markets investors.
Continue to Invest in Technology Capabilities
Our business strategy is centered upon our steadfast commitment to apply technology to improve and expand our business. We have developed a modern technology platform with a combination of proprietary and third party systems that enables us to efficiently develop, sell and administer a broad range of annuity and life insurance products. We expect to continue to develop our technology platform to expand the technology-enabled capabilities we offer to distributors and reinsurers.
History
We are a financial services holding company that was originally incorporated in Nebraska in October 2003. In September 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. In June 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 (the “Xenith Agreement”) with a then non-affiliated third party, Xenith Holdings LLC (“Xenith”). Xenith was a wholly controlled subsidiary of Vespoint LLC (“Vespoint”), which was also the manager of Xenith. Vespoint is owned and managed by investment funds controlled by Michael Minnich and A. Michael Salem. Pursuant to the Xenith Agreement, we issued Series C Preferred Stock and convertible senior secured notes to Xenith between June and December 2018. Of the funds received from Xenith, we contributed
 
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$20.5 million to American Life through capital contributions. Following the closing of the Xenith Agreement, we embarked on implementing our current business plan. At the closing of the Xenith Agreement, Messrs. Minnich and Salem were appointed as executive officers of American Life and later as the Company’s Executive Chairman and Chief Executive Officer, respectively, in 2019. They were appointed Co-Chief Executive Officers on November 16, 2020.
In June 2019, the Xenith Series C Preferred Stock and convertible senior secured notes were converted into 145,709 shares and 1,855,361 shares of our voting common stock, respectively. In August 2020, Xenith distributed all of its shares of our voting common stock to its members, including Vespoint. On November 10, 2020, Vespoint distributed all of its shares of our voting common stock to its members, which included entities owned and controlled by Messrs. Minnich and Salem.
In August 2020, we effected a 500 for one reverse stock split of our issued and outstanding shares of voting common stock and we reincorporated in Delaware.
Crestline Relationship
On April 24, 2020, we entered into a Securities Purchase Agreement with Crestline. Crestline is an institutional alternative investment management firm. Pursuant to the Securities Purchase Agreement, we issued 444,444 shares of our voting common stock to Crestline for aggregate proceeds of $10.0 million. Also, on April 24, 2020, we issued 231,655 shares of our voting common stock to various other investors in separate transactions for approximately $5.3 million. We contributed $5.0 million of the net proceeds to American Life and used $3.3 million of the proceeds to capitalize Seneca Re and its first protected cell. We also entered into a Stockholders Agreement along with Xenith and Vespoint that grants Crestline certain rights discussed in this prospectus under “Certain Relationships and Related Party Transactions.” Also, Douglas K. Bratton, a principal of Crestline, was appointed as a director of both our board of directors and the board of directors of American Life.
In addition, also effective April 24, 2020, American Life entered into a three-year master letter agreement and pursuant thereto, on July 27, 2020, Crestline, American Life and SRC2 entered into related reinsurance, trust and asset management agreements, whereby Crestline agreed to provide funding for quota share reinsurance for liabilities of MYGAs and FIAs issued by American Life and to manage assets held by SRC2 in connection therewith. Through September 30, 2020, American Life had ceded $80.3 million face amount of annuities to SRC2 (which was funded with $40 million in capital by Crestline). American Life received ceding fees under SAP of $3,837,996 and expense reimbursements under SAP of $7,247,966 in connection with these reinsurance transactions during the nine months ended September 30, 2020.
Employees
As of November 30, 2020, we had 41 full time employees.
 
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The Offering
Voting common stock offered by us
1,000,000 shares of voting common stock, par value $0.001 per share (or 1,150,000 shares if the underwriters exercise their over-allotment option in full).
Voting common stock outstanding after the offering
3,737,564 shares (or 3,887,564 shares if the underwriters exercise their over-allotment option in full).
Use of proceeds
We intend to use the net proceeds of this offering (i) to contribute capital to American Life to support additional growth, including possible product expansion; and (ii) for general corporate purposes, which may include acquisitions. See “Use of Proceeds.”
Dividends on voting common stock
We have not paid cash dividends on our voting common stock and do not plan to do so in the foreseeable future. See “Dividend Policy.”
Risk factors
An investment in our voting common stock involves a high degree of risk. You should carefully read and consider the risks discussed under the caption “Risk Factors” beginning on page 19 and all other information included and incorporated by reference in this prospectus before making a decision to invest in shares of our voting common stock in this offering.
Directed share program
At our request, the underwriters have reserved up to 5% of the shares of voting common stock offered hereby to offer, at the initial public offering price, to directors, officers, employees, business associates and related persons of the Company. The number of shares of voting common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. Except for any shares acquired by our directors and officers, shares purchased pursuant to the directed share program will not be subject to lock-up agreements with the underwriters. See “Underwriting — Directed Share Program.”
Nasdaq Capital Market Symbol
MDWT
The number of shares of our voting common stock to be outstanding after this offering is based on 2,737,564 shares outstanding as of November 30, 2020. Unless otherwise indicated, the number of outstanding shares of voting common stock presented in this prospectus excludes: 150,000 shares of our voting common stock issuable pursuant to the exercise of the underwriters’ over-allotment option; and 433,403 shares of our voting common stock that are available for future issuance under our 2019 Long-Term Equity Plan and our 2020 Long-Term Equity Plan.
Summary of Risks Associated with our Business
Our business is subject to risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus. These risks include, but are not limited to, the following:

Our reliance on third-party insurance marketing organizations to market and sell our insurance products could face difficulties that could adversely affect our results of operations and financial condition.
 
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Our reinsurance program was designed to enable us to write larger amounts of business while limiting our risk exposure and maximizing the use of our available regulatory capital. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. We remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by that reinsurer.

Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. The inability to obtain an upgrade to our financial strength rating from A.M. Best, or the possibility of a downgrade in our rating, may have a material adverse effect on our competitive position, the marketability of our product offerings.

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

Fluctuations in interest rates causing a reduction of investment income or increase in interest expense and the market value of interest-rate sensitive investments could adversely affect our business.

The insurance industry is highly regulated and our activities are restricted as a result. State insurance regulators are charged with protecting policyholders and have broad regulatory, supervisory and administrative powers over our business practices, including, among other things, the power to grant and revoke licenses to transact business, and the power to regulate and approve underwriting practices and rate changes, which may delay the implementation of premium rate changes or prevent us from making changes we believe are necessary to match rate to risk.

The domiciliary regulator of American Life, the NDOI, imposes risk-based capital requirements on us to ensure that insurance companies maintain appropriate levels of surplus to support our overall business operations and to protect customers against adverse developments. If the amount of our capital falls below this minimum, we may face restrictions with respect to soliciting new business and/or keeping existing business. Similar regulations will apply in other states in which American Life currently or may operate.

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.

The annuity and life 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. Our business will suffer if we are unable to compete effectively.

The ongoing events resulting from the outbreak of the COVID-19 pandemic, and the uncertainty regarding future similar events, could have an adverse impact on our financial condition and results of operations.

Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability.

Our new business plan, seeking to become a capital efficient, technology-enabled and service-oriented solutions provider to the annuity and life markets, may not be successful.

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

The impact on customers and vendors of sustained or significant deterioration in national or worldwide economic conditions could adversely affect our business.

We are exposed to significant financial and capital markets risk, including changes in interest rates, equity prices, market volatility, the performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates.
 
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Our business success depends, in part, on safe and effective information technology systems and on continuing to develop and implement improvements in our technology.
Risks Associated with this Offering

The market price and trading volume of our voting common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our voting common stock.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

There may be future issuances or resales of our voting common stock, including by our management, which may materially and adversely affect the market price of our voting common stock.

We do not expect to pay any cash dividends to stockholders.
 
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Summary Selected Financial and Operating Data
The following table sets forth summary selected consolidated financial data of the Company. The financial data as of and for the nine months ended September 30, 2020 and 2019 have been derived from our unaudited financial statements for the nine months ended September 30, 2020, which are included in this prospectus. The financial data as of December 31, 2019 and 2018 and for the years then ended have been derived from our audited financial statements for the years ended December 31, 2019 and 2018, which are also included in this prospectus. The summary consolidated financial information in the table below is not necessarily indicative of our expected future operating results. The following summary historical financial information should be read together with our “Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included this prospectus.
Selected Statements of Income:
Nine Months Ended
September 30,
Fiscal Year Ended
December 31,
2020
2019
2019
2018
(in thousands except per
share amounts)
(in thousands except per
share amounts)
Revenues:
Amount of deferred gain on reinsurance
$ 814 $ 2,466 $ 2,644 $ 118
Realized gains
7,829 9 354 48
Investment income
1,277 331 121 516
Other
1,494 214 281 194
Total revenues
11,414 3,020 3,400 876
Expenses:
Salaries and benefits
3,624 1,783 2,702 2,161
Other operational expenses
6,171 5,065 6,073 3,752
Total expenses
9,795 6,848 8,775 5,913
Pre-tax income (loss)
1,619 (3,828) (5,375) (5,037)
Income tax expense
(2,145) (115) (234)
Loss from discontinued operations
(29)
Net loss
$ (526) $ (3,943) $ (5,609) $ (5,066)
Net loss per common share
$ (0.22) $ (4.71) $ (4.99) $ (121.77)
Selected Balance Sheet Data:
September 30,
2020
December 31,
2019
(in thousands)
(in thousands)
Investments available for sale
$ 250,543 $ 117,242
Mortgage loans
61,465 13,810
Notes receivable
5,516
Other
22,620 7,550
Total investments
340,144 138,602
Cash and equivalents
136,432 43,716
Reinsurance recoverables
42,091 30,580
Other
17,982 7,018
Total assets
536,649 219,916
Benefit reserves
16,434 16,320
Deposit type contracts
455,429 171,169
Deferred gains on reinsurance
15,739 7,578
Other
23,969 10,690
Total liabilities
511,571 205,757
Total stockholders’ equity
$ 25,078 $ 14,159
 
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Other Financial and Operating Data:
SAP Premiums, Adjusted Revenue and Adjusted Net Income are Non-GAAP financial measures that we use to measure our operating performance. For a reconciliation of these Non-GAAP financial measures to our GAAP financial measures, please see “Selected Historical Consolidated Financial and Operating Data — Non-GAAP Financial Measures” in this prospectus.
SAP Premiums
Nine Months Ended
September 30,
Year Ended
December 31,
2020
2019
2019
Annuity Premiums (SAP)
Annuity direct written premiums
$ 279,537,158 $ 79,500,172 $ 161,364,568
Ceded premiums
(177,979,450) (75,439,664) (160,493,727)
Net premiums retained
$ 101,557,708 $ 4,060,508 $ 870,841
Adjusted Revenue
Nine Months Ended
September 30,
Year Ended
December 31,
2020
2019
2019
Total revenue – GAAP
$ 11,413,881 $ 3,020,384 $ 3,399,788
Adjustments:
Net realized (gains) losses on investments
(4,369,562)
Deferred coinsurance ceding commission
8,161,069 2,821,255 3,678,196
Adjusted revenue
$ 15,205,388 $ 5,841,639 $ 7,077,984
Adjusted Net (Loss) Income
Nine Months Ended
September 30,
Year Ended
December 31,
2020
2019
2019
Net loss attributable to Midwest Holding Inc. – GAAP
$ (526,123) $ (3,989,684) $ (5,733,658)
Adjustments:
Net realized gains on investments
(4,369,562)
Deferred coinsurance ceding commission
8,161,069 2,821,255 3,678,196
Total adjustments
3,791,507 2,821,255 3,678,196
Income tax (expense) benefit adjustment(1)
Adjusted net (loss) income
$ 3,265,384 $ (1,168,429) $ (2,055,462)
(1)
All adjustments above do not have any tax impact.
 
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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 model in which we do not have a significant amount of operating experience. The material risks of this 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 operations and financial condition. An investment in our voting common stock should be considered speculative.
Business Risks
Our plans to utilize IMOs could face several difficulties that could adversely affect our results of operations and financial condition.
Our business plan provides that we will create and sell annuity and other life insurance products through IMOs that 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 early phases 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 face a risk of non availability and increased cost of reinsurance.
Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. We can offer no guarantees that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as are currently available. If we are unable to maintain our current level of reinsurance or to purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would either have to accept an increase in our net exposures or reduce our insurance writings. A significant reinsurer’s insolvency or inability to make payments under the terms of a reinsurance treaty could subject us to credit risk with respect to our ability to recover amounts due from reinsurers. In addition, many reinsurers have included terrorism exclusions in their reinsurance agreements and reinsurance coverage from the federal government under the Terrorism Risk Insurance Act (“TRIA”) is also limited. To the extent that the underlying policies that we are issuing do not include terrorist exclusions, we may have to accept the added exposure or reduce our writings of such business unless we are able to obtain terrorism coverage in our ceded reinsurance coverages. Because of the risks set forth above, we may not be able to collect all amounts due to us from reinsurers, and reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.
Our strategy to reinsure substantially all of the annuity and insurance policies we write may not be successful.
As part of our business plan, American Life intends to cede most of its annuity and insurance policies to other 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 that 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 including any amounts of collateral we may require for them to provide to back up their potential obligations, 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 early 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.
 
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We may be unable to expand insurance operations to other states to any significant degree.
A significant part of our 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 20 states and the District of Columbia. In 2020 and subsequent years, we intend to seek to expand to additional states. We cannot assure you that these efforts will be successful, and 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 business plan may not be successful.
In mid 2018, we embarked upon our new business plan, seeking to become a capital efficient, technology-enabled and service-oriented solutions provider to the annuity and life markets. Our business plan provides that we will seek to utilize 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 financial strength rating and an A.M. Best bbb+ long-term issuer credit rating. American Life is seeking to become licensed to sell insurance in additional states. We cannot assure you that our business plan will achieve economic success and we anticipate implementation of our 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 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.
Our business success depends, in part, on effective information technology systems and on continuing to develop and implement improvements in our technology.
We depend in large part on technology systems for conducting our business, as well as for providing the data and analytics we utilize to manage our business, and thus our business success is dependent on maintaining the effectiveness of existing technology systems and on continuing to develop and enhance technology systems that support our business in a cost and resource efficient manner. System development projects may not deliver the benefits we expect, or may be replaced or become obsolete more quickly than expected, which could result in accelerated recognition of expenses. If we do not effectively and efficiently manage and upgrade our technology systems, or if the costs of doing so are higher than we expect, our ability to provide competitive services to new and existing customers in a cost effective manner and our ability to implement our business plan could be adversely impacted.
We have limited operating history under our business plan.
We have a limited operating history under our 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 we have 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 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.
Reinsurance subjects us to the credit risk of our counterparties and our reinsurers, which may have a material adverse effect on our operating results and financial condition.
We are exposed to many different industries, issuers and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutions. Many of these transactions expose us to credit risk in the event of default of the counterparty. In addition, with respect to secured transactions, our credit risk may be
 
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exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. We may have further exposure to these issuers in the form of holdings in unsecured debt instruments and derivative transactions of these issuers. There can be no guarantee that any such realized losses or impairments to the carrying value of these assets would not materially and adversely affect our results of operations and financial condition.
In addition to exposure to credit risks related to our investment portfolio, we are exposed to credit risks in several other areas of our business operations as discussed immediately above and credit risks in our operations related to reinsurance. The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Since we are primarily liable to an insured for the full amount of insurance coverage, our inability to collect a material recovery from a reinsurer could have a material adverse effect on our operating results and financial condition.
We operate in a highly competitive industry, and our business will suffer if we are unable to compete effectively.
The operating results of 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 financial strength ratings. In connection with the development and sale of products, American Life encounters competition from other insurance companies, most of whom offer annuity products and 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.
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 annuities and life insurance compared with other financial products if such legislation were to be enacted. In addition, 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 develop.
Under the Internal Revenue Code, income taxes payable by policyholders on investment earnings is deferred during the accumulation period of certain annuity and life insurance products. This favorable tax treatment may give certain 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 annuity and life insurance 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 that may materially adversely affect us.
Some of our investments are relatively illiquid.
We hold certain investments that may lack liquidity, such as certain fixed maturity securities (including collateralized loan obligations, bonds and mortgage loans). We do not have the present intent to sell, nor is
 
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it more likely than not that we will be required to sell, debt securities in an unrealized loss position. Investment losses, however, may be realized to the extent liquidity needs require the disposition of debt securities in unfavorable interest rate, liquidity or credit spread environments.
We have exposure to mortgage loans on real estate, which could cause declines in the value of our investment portfolio.
Securities and other capital markets products connected to mortgage lending may become less liquid. The value of our investments in mortgage loans may be negatively impacted by an unfavorable change in or increased uncertainty regarding delinquency rates, and refinancing opportunities. In addition, commercial mortgages are sensitive to the strength of the related underlying mortgage loans, the U.S. economy, and the supply and demand for commercial real estate. Deterioration in the performance of the residential and commercial mortgage sector, including as a result of the COVID-19 pandemic, could cause declines in the value of that portion of our investment portfolio. The carrying value of our mortgage loans on real estate as of September 30, 2020 was $61.5 million. See “Management’s Discussion of Financial Condition and Results of Operations.”
Changes in regulations regarding suitability of product sales and fiduciary/best interest standards may affect our operations and profitability.
Our annuity sales practices are subject to strict regulation. State insurance regulators are becoming more active in adopting and enforcing suitability standards with respect to sales of annuities. In addition, our insurance operations may be impacted by actions taken by the National Association of Insurance Commissioners, the U.S. standard setting and regulatory support organization created and governed by the chief insurance regulatory authorities of the 50 states, the District of Columbia and the five U.S. territories (the “NAIC”). If the NAIC adopts amendments to its model annuity suitability rule incorporating a best interest standard, it is probable that they will be adopted by multiple states. Some states have already enacted or proposed legislation to impose new or expanded fiduciary/best interest standards on broker dealers, investment advisors and/or insurance agents providing services to retail investors. Additionally, some state regulators have recently adopted or signaled they will be pursuing rule making in this space. For example, on August 1, 2018 the New York Department of Financial Services (“NY DFS”) adopted “best interest” amendments to its existing annuity suitability regulation and expanded its scope to include “in force” recommendations and life insurance policies. In June 2019, the SEC adopted Regulation Best Interest, which requires broker dealers to act in the best interest of “retail” customers when making a recommendation of any securities transaction or investment strategy involving securities. Several lawsuits have been filed challenging the regulation. Any material changes to the standards governing our sales practices, including applicable laws and regulations, could affect our business, results of operations and financial condition.
The inability to obtain an upgrade to our financial strength other ratings from A.M. Best, or the possibility of a downgrade in our ratings, may have a material adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results, financial condition and prospects.
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. American Life currently has an A.M. Best financial strength rating of B++ (Good) and long-term issuer credit rating of bbb+. A.M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. On an ongoing basis, rating agencies such as A.M. Best review the financial performance and condition of insurers and can downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital, a reduced confidence in management or a host of other considerations that may or may not be under the insurer’s control. All ratings
 
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are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on our competitiveness, the marketability of our product offerings and our ability to grow in the marketplace.
Our new insurance products and other products we may develop may not achieve market penetration.
As discussed elsewhere in this prospectus, our marketing strategy is 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 and therefore could have a negative effect on the price of our voting common stock.
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 employment agreements with Messrs. Minnich and Salem and an “at will” agreement with Mr. Oliver. We have limited “key man” life insurance on Messrs. Minnich and Salem.
Midwest is a holding company and has limited ability to generate meaningful revenues other than payments from its subsidiaries, primarily 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 1505 Capital and has no other significant source of revenue. Our change in control that occurred in 2018 with the infusion of capital from Xenith, discussed above, along with net proceeds of this offering 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. American Life is also restricted by state insurance laws as to fund transfers, by way of dividends or otherwise, to Midwest.
Our investment adviser subsidiary is subject to numerous laws and regulations with substantial compliance costs.
Our wholly owned investment adviser subsidiary, 1505 Capital LLC, 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 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 1505 Capital LLC. It is also subject to examination by the SEC. There can be no assurance that our investment adviser subsidiary will not be adversely affected by the results of any future examination.
We have experienced significant operating losses and may not be able to reverse them in the foreseeable future.
We commenced our business plan in mid-2018 and introduced our first annuity products in 2019. We made progress towards profitability on a GAAP basis in 2019 and 2020; however, there can be no assurance of future profitability. Because ceding commissions from reinsurance are amortized over the life of the policy, we expect several years of insurance policy sales growth will be necessary until we achieve sustained net income on a GAAP basis. There can be no assurance that our new business plan will lead to profitability.
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
 
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in Nebraska, the state of domicile of American Life. It had approximately $27 million of capital and surplus (based upon SAP) at September 30, 2020. Because we have embarked upon a business plan that seeks to write new insurance business and cede the risk to third party reinsurers, the NDOI 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 NDOI. 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.
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:

some of the acquired businesses may not achieve anticipated revenues, earnings or cash flows;

we may have to assume liabilities that were not disclosed or exceed estimates;

we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner;

acquisitions could disrupt our on-going business, distract our management and divert our financial and human resources;

we may experience difficulties operating in markets in which we have no or only limited direct experience; and

of the potential for loss of customers and key employees of any acquired company.
Risks Related to this Offering and Our Voting Common Stock
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 losses in the foreseeable future. No assurance can be given that any of the potential benefits envisioned by our business plan will prove to be available to our stockholders, nor can any assurance be given as to the financial return, if any, which may result from ownership of our voting common stock. The entire value of your shares of Midwest voting common stock may be lost.
The market price and trading volume of our voting common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
Trading and prices of our voting common stock may be highly volatile and could be subject to wide fluctuations. There are many factors that will impact our stock price and trading volume, including, but not limited to, the factors listed above under “Risks Related to Our Business.” In addition, the thin trading volume in our voting common stock may fluctuate and cause significant price variations to occur. The public offering price of our voting common stock will be determined by negotiation between us and the underwriters based on a number of factors and may not be indicative of prices that will prevail in the open market following completion of this offering. If the market price of our voting common stock declines
 
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significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our voting common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our voting common stock include:

quarterly variations in our operating results;

operating results that vary from the expectations of securities analysts and investors;

change in valuations;

changes in the industries in which we operate;

announcements by us or companies in our industries of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments, plans, prospects, service offerings or operating results;

additions or departures of key personnel;

future sales of our securities;

developments in the financial markets and worldwide or regional economies;

announcements of innovations or new products, solutions or services by us or our competitors;

significant sales of our voting common stock or other securities in the open market;

variations in interest rates;

changes in accounting principles; and

other unforeseen events.
Stock markets in the United States have experienced significant price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as the global COVID-19 pandemic and the associated economic and market disruption, acts of terrorism, war, prolonged economic uncertainty, a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our voting common stock.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our voting common stock.
Our shares of voting common stock will be listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our voting common stock. Such a delisting would likely have a negative effect on the price of our voting common stock, and would impair your ability to sell our voting common stock when you wish to do so. In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our voting common stock to become listed again, stabilize the market price or improve the liquidity of our voting common stock, prevent our voting common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
As a smaller reporting company, we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations and financial prospects.
Currently, we are a “smaller reporting company,” which generally means that our outstanding common stock held by non-affiliates had a market value of less than $250 million as of the last business day of our second fiscal quarter. As a “smaller reporting company,” we are able to provide simplified executive compensation disclosures in our filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in our filings with the SEC, including being required to provide only two years of audited financial
 
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statements in annual reports. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects.
Furthermore, a material weakness in internal controls may remain undetected for a longer period because of our extended exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act.
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
Purchasers of our voting common stock in this offering will experience immediate dilution in the net tangible book value of the voting common stock purchased in this offering because the price per share of voting common stock in this offering is substantially higher than the net tangible book value per share of our voting common stock outstanding immediately after this offering. Our net tangible book value as of September 30, 2020, was approximately $24.4 million, or $8.97 per share of our voting common stock. If you purchase shares of voting common stock in this offering, you will suffer immediate and substantial dilution of $46.09 per share with respect to the net tangible book value of the voting common stock. See “Dilution” in this prospectus for a detailed discussion of the dilution you will incur if you purchase shares in this offering.
There may be future issuances or resales of our voting common stock which may materially and adversely affect the market price of our voting common stock.
Except as described under “Underwriting,” and subject to any required state insurance regulatory approvals, we are not restricted from issuing additional shares of our voting common stock in the future, including securities convertible into, or exchangeable or exercisable for, shares of our voting common stock. Our issuance of additional shares of voting common stock in the future will dilute the ownership interests of our then existing stockholders.
The sale of a substantial number of shares of our voting common stock or securities convertible into, or exchangeable or exercisable for, shares of our voting common stock, whether directly by us in this offering or future offerings or by our existing stockholders in the secondary market, the perception that such issuances or resales could occur or the availability for future issuances or resale of shares of our voting common stock or securities convertible into, or exchangeable or exercisable for, shares of our voting common stock could materially and adversely affect the market price of our voting common stock and our ability to raise capital through future offerings of equity or equity-related securities on attractive terms or at all.
In addition, our board of directors is authorized to designate and issue preferred stock without further stockholder approval, and we may issue other equity and equity-related securities that are senior to our voting common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios, and to comply with any future changes in regulatory standards.
The market price of our voting common stock could be negatively affected by sales of substantial amounts of our voting common stock in the public markets.
The sale of substantial amounts of our voting common stock at any particular time could cause the trading price of our voting common stock to decline significantly. If our existing stockholders sell substantial amounts of our voting common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our voting common stock.
We and each of our executive officers, directors and significant stockholders have agreed with the underwriters, subject to certain exceptions, for a period of 180 days after the date of this prospectus, not to directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any voting common stock or any securities convertible into or exercisable or exchangeable for voting common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of voting common stock, or cause a registration statement covering any voting common stock to be filed, without the prior written consent of the representative. See “Underwriting.”
 
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Following this offering, substantially all the voting common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) and shares subject to the lock-up agreement described above. Certain of our existing stockholders holding approximately 39.2% of our outstanding shares of voting common stock immediately prior to this offering have both demand and piggyback registration rights pursuant to which, subject to the lock up requirements discussed above, we have agreed to register with the SEC their shares of voting common stock for resale.
The market price of our voting common stock may decline significantly when the restrictions on resale by our affiliates lapse, or certain of our affiliates exercise their registration rights. A decline in the price of our voting common stock might impede our ability to raise capital through the issuance of additional voting common stock or other equity securities.
Our executive officers and directors own a substantial number of shares of our voting common stock. This will enable them to significantly influence the vote on all matters submitted to a vote of our stockholders.
As of November 30, 2020, our executive officers and directors beneficially owned 1,130,126 shares of our voting common stock (excluding options to purchase 169,538 shares of our voting common stock not exercisable within 60 days), representing approximately 41.3% of the outstanding shares of our voting common stock. Upon completion of this offering (assuming the underwriters do not exercise their over-allotment option), the shares of our voting common stock beneficially owned by executive officers and directors will represent, in the aggregate, 30.3% of the outstanding shares of our voting common stock.
Accordingly, our executive officers and directors, through their beneficial ownership of our voting common stock, will be able to significantly influence the vote on all matters submitted to a vote of our stockholders, including the election of directors, amendments to our certificate of incorporation or bylaws, mergers or other business combination transactions and certain sales of assets outside the usual and regular course of business. The interests of our executive officers and directors may not coincide with the interests of our other stockholders, and they could take actions that advance their own interests to the detriment of our other stockholders.
We may invest or spend the proceeds from this offering in ways with which you may not agree and in ways that may not earn a profit.
We intend to use the net proceeds of this offering (i) to contribute capital to American Life to support growth, including product expansion; and (ii) for general corporate purposes, which may include acquisitions. However, we will retain broad discretion over the use of the proceeds from this offering and may use them for purposes other than those contemplated at the time of this offering. You may not agree with the ways we decide to use these proceeds, and our use of the proceeds may not yield any profits or increase stockholder value. See “Use of Proceeds.”
The indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against them.
Our certificate of incorporation and Delaware law provide for broad indemnification of our directors, officers and employees. We have also entered into indemnification agreements with each of our directors. Our indemnification obligations could result in us incurring substantial expenditures to cover the costs of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing an action against our directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors or officers even though such actions, if successful, might otherwise benefit us and our stockholders.
We do not expect to pay any cash dividends to stockholders.
To date, we have never declared or paid any cash dividends to our stockholders and do not expect to do so for the foreseeable future. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our
 
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operations, cash flows and financial conditions, operating and capital requirements, and other factors as the board of directors considers relevant. In addition, our ability to pay cash dividends depends, in part, upon on the ability of American Life to pay cash dividends to us. American Life, as an insurance subsidiary is subject to significant regulatory restrictions limiting its ability to declare and pay cash dividends.
If securities or industry analysts do not publish research or reports about our business, or if they issue adverse or misleading opinions regarding us, our voting common stock price and trading value could decline.
The trading market for our voting common stock will be influenced by research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model or our voting common stock performance, or if our target operating results fail to meet the expectations of analysts, our voting common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price of trading volume to decline.
Anti-takeover provisions and the regulations to which we may be subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to our stockholders.
We are a holding company incorporated in Delaware. Anti-takeover provisions in Delaware law and our certificate of incorporation and bylaws, as well as regulatory approvals required under state insurance laws, could make it more difficult for a third party to acquire control of us and may prevent stockholders from receiving a premium for their shares of voting common stock. Our certificate of incorporation provides that our board of directors may issue up to 2,000,000 shares of preferred stock, in one or more series, without stockholder approval and with such terms, preferences, rights and privileges as the board of directors may deem appropriate. These provisions, the control of our executive officers and directors over the election of our directors, and other factors may hinder or prevent a change in control, even if the change in control would be beneficial to, or sought by, our stockholders. See “Description of Our Securities  —  Certain Provisions Having Potential Anti-Takeover Effects.”
Seven individuals currently serve on our board of directors, which is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, a class of directors is to be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. As a result, a portion of our board of directors will be elected each year. Our certificate of incorporation authorizes our board of directors to fix the number of directors from time to time by a resolution of the majority of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control. Between stockholder meetings, directors may be removed by our stockholders only for cause, and the board of directors may appoint new directors to fill the vacancies. These provisions may prevent a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the resulting vacancies with its own nominees. Consequently, the existence of these provisions may have the effect of deterring hostile takeovers, which could depress the market price of our voting common stock.
General Risks
The ongoing events resulting from the outbreak of the COVID-19 pandemic, and the uncertainty regarding future similar events, could have an adverse impact on our financial condition, results of operations, cash flows, liquidity and prospects.
We continue to closely monitor developments related to the coronavirus (COVID-19) pandemic to assess any potential adverse impact on our business. Due to the evolving and highly uncertain nature of this event, it currently is not possible provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations, financial condition or liquidity. Management implemented the Company’s business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. Operations continued as
 
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normal despite a sharp increase in sales during the period. We continue to monitor the Centers for Disease Control and Prevention and Nebraska guidelines regarding employee safety.
If the COVID-19 pandemic and associated economic slowdown continues it could adversely impact our future results of operations, financial condition, cash flows, liquidity and prospects in a number of ways, including:

Our investment portfolio (and, specifically, the valuations of investment assets we hold) could be materially, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets. Our investments in mortgages and asset-backed securities could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed by governmental authorities. Further, extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical investment practices in dealing with more orderly markets;

Potential impacts on our operations due to efforts to mitigate the pandemic, including government mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures, which could result in an adverse impact on our ability to conduct our business, including our ability to sell policies, and adjust certain claims;

While we have implemented risk management and contingency plans and have taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic, and such measures may not adequately predict the impact on our business.

We also outsource certain critical business activities to third parties such as our IMOs. As a result, we rely upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While we monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside our control. If one or more of the third parties on whom we rely for critical business activities experience operational difficulties or failures as a result of the impacts from the spread of COVID-19, it may have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows; and

Potential impacts of COVID-19 on reinsurers and the cost and availability of reinsurance.
Additionally, there is risk that the current efforts underway by governmental and non-governmental organizations to combat the spread and severity of COVID-19 and related public health issues may not be effective or may be prolonged. Finally, we cannot predict how legal and regulatory responses to concerns about COVID-19 and related public health issues, will impact our business. The continued spread of COVID-19 has led to disruption and volatility in the global capital markets which could increase our funding costs and limit our access to the capital markets. Accordingly, we may in the future have difficulty accessing capital on attractive terms, or at all, which could have a material adverse effect on our business, results of operations, financial condition and liquidity.
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 annuity and life insurance 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. An event that affects one or more of our customers could 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.
Claims loss reserves may be inadequate.
We maintain loss reserves to cover estimated liabilities for unpaid losses and loss expenses, including legal and other fees, as well as other claims and settlement costs for reported and unreported claims incurred
 
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as of the end of each accounting period. Loss reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on the assessment of facts and circumstances then known, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, economic inflation, social inflation, judicial and litigation trends and legislative changes. Many of these items are not directly quantifiable in advance. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.
Reserve estimates are continually refined as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events, including for example the uncertainties relating to the COVID-19 pandemic. Accordingly, the ultimate settlement of losses may be significantly greater or less than the loss and loss expense reserves as of the date of the balance sheet. If our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination with a corresponding decrease in our profitability. If the increase in loss reserves is large enough, we could incur a net loss and a net reduction of our capital.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and access the capital required to operate our business.
In the insurance industry, liquidity refers to the ability of an insurance company to generate adequate amounts of cash from its normal operations, including from its investment portfolio, in order to meet its financial commitments, which are principally obligations under the insurance policies it has written.
The capital and credit markets have been experiencing significant volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional capital to pay our operating expenses, or increase the amount of insurance that we seek to underwrite, or otherwise grow our business, our ability to obtain such capital may be limited and the cost of any such capital may be significant. In addition, the availability of additional financing will depend on a variety of factors, including capital and credit market conditions, the availability of credit generally and specifically to the financial services industries, market liquidity, our creditworthiness, as well as the possibility that customers or capital providers could develop a negative perception of our long or short-term financial prospects if we incur large investment losses or if our level of business activity decreases. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and we may not be able to successfully obtain additional financing on favorable terms, or at all. As such, we may be forced to issue securities with terms and conditions that may be unfavorable to us, to accept an unattractive cost of capital or to sell certain assets, any of which could decrease our profitability and significantly reduce our financial flexibility. If a combination of these factors occurs, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on terms favorable to us.
Potential changes to the manner in which the London Inter-bank Offered Rate (“LIBOR”) is determined and the potential for the replacement or discontinuation of LIBOR as a benchmark interest rate may affect our cost of capital and net investment income.
LIBOR is an interest rate benchmark which underpins hundreds of trillions of dollars of financial contracts around the world. It is available in five currencies and a range of tenors. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel LIBOR panel banks to submit LIBOR quotes after 2021. It remains unclear if, how, and in what form, LIBOR may continue to exist after that date. The U.S. Federal Reserve (“Federal Reserve”), based on the recommendations of the New York Federal Reserve’s Alternative Reference Rate Committee (constituted of major derivative market participants and their regulators), has begun publishing a Secured Overnight Funding Rate (“SOFR”) which is intended to replace U.S. dollar LIBOR, and SOFR-based investment products that have been issued in
 
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the U.S. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. Markets are slowly developing in response to these new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which we have exposure or the activities in our business will vary depending on a variety of factors. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on floating rate securities we hold, and any other assets, liabilities, models, assumptions, and the cost of capital, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these instruments may be adversely affected.
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 are concerned primarily with the protection of policyholders rather than shareholders. These state insurance regulatory authorities have broad administrative power dealing with all aspects of the insurance business, including, among other areas, regulation of the advertising and marketing of insurance, privacy of policyholders, acquisitions of regulated insurance entities, payment of dividends, reinsurance, the form and content of insurance policies (including pricing), operating and agent licenses, regulation of premium rates, premium tax increases, rating and underwriting restrictions and limitations, asset and reserve valuation requirements, enterprise risk management, surplus requirements, the type or amount of investments, accounting standards, Risk-Based Capital (“RBC”) requirements, statutory reserve and capital requirements, assessments by guaranty associations, affiliate transactions and unfair trade and claims practice.
In addition, our insurance operations may be impacted by actions taken by the NAIC. A primary mandate of the NAIC is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC also provides standardized insurance industry accounting and reporting guidance through the NAIC Accounting Manual. However, model insurance laws and regulations are only effective when adopted by the states, and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the NAIC Accounting Manual or modifications by the various state insurance departments may affect the statutory capital and surplus of American Life. See “Regulation” for further discussion.
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 NDOI or a similar department in any other state in which it transacts 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 reinsurer 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 are seeking and could adversely affect our 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 these 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.
Development of annuity and life insurance products involves the use of certain assumptions, and the inaccuracy of these assumptions could adversely affect profitability.
In our annuity and life insurance business, we must make certain assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of annuity and life insurance products.
 
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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 will 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 annuity contracts and life insurance policies 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 surrender of existing annuity contracts.
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. In addition to their domiciliary states, insurance companies in the U.S. are subject to extensive regulation in the states where they are licensed to do business. This regulatory regime primarily seeks to protect an insurance company’s policyholders rather than its shareholders. Among other items, these regulations require:

prior approval of acquisitions of insurance companies;

certain solvency standards;

licensing of insurers and their agents;

investment limitations;

deposits of securities for the benefit of policyholders;

approval of policy forms and premium rates;

periodic examinations; and

reserves for unearned premiums, losses and other matters.
American Life is subject to these regulations regulation in each state in the U.S. in which it is licensed to do business and compliance with such regulations involves significant costs and restricts operations. We cannot predict the form of any future regulatory initiatives.
 
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In addition, as the owner of a life insurance subsidiary, Midwest is itself regulated by the NDOI and, to a lesser extent, by the various state insurance regulatory authorities of those U.S. jurisdictions where American Life is licensed. All U.S. states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding company system to register with the insurance regulatory authority of the insurance company’s state of domicile (in the case of American Life, Nebraska and also commercially domiciled in Texas) and to furnish annually financial and other information concerning the operations of companies within the holding company system that materially affect the operations, management or financial condition of the insurers within such system (generally referred to as “insurance holding company acts”). Under such laws, among other requirements, transactions between Midwest and its regulated insurance subsidiaries and affiliates must be fair and reasonable and, if material or of a specified category, they require prior notice and approval or non-disapproval by the state of domicile of each insurance company that is party to the transaction. In addition, under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in its state.
In addition, American Life generally may not pay dividends without giving prior notice thereof to the NDOI and the Texas Department of Insurance and generally may not pay extraordinary dividends without obtaining the prior approval or non-disapproval of such regulators. Generally, the laws and regulations of most jurisdictions prohibit an insurer from, without regulatory approval, paying an “extraordinary” dividend, which is generally defined as any dividend paid from other than earned surplus or exceeding certain thresholds specified in the applicable state insurance laws of the various states.
As a component of its ongoing efforts to remain compliant with the U.S. insurance regulatory regime, we file detailed annual reports with respect to American Life with the NDOI and all of the states in which American Life is licensed. Also, the business and accounts of American Life are subject to examination by the NDOI, as well as inquiries including investigations of the various insurance regulatory authorities of the states in which American Life is licensed.
We are subject to extensive regulation.
As stated above, we are subject to extensive state regulatory oversight in the jurisdictions in which we do business, as well as federal oversight with respect to certain portions of our business. Changes in state regulations, or in the interpretation or application of existing state laws or regulations, may adversely impact our pricing, capital requirements, reserve adequacy or exposure to litigation and could increase the costs of our regulatory compliance.
Changes are often implemented by state regulators in order to benefit policyholders to the detriment of insurers. State insurance regulators and the NAIC continually reexamine existing laws and regulations and may impose changes in the future that put further regulatory burdens on us and, thus, could have an adverse effect on our results of operations and financial condition.
In addition, state insurance laws, rather than federal bankruptcy laws, govern the liquidation or restructuring of insurance companies. Virtually all states in which we operate require that we bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies via participation in state guaranty associations. In addition, in various states, we must participate in mandatory arrangements to provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase that coverage from private insurers. A few states also require us to purchase reinsurance from mandatory reinsurance funds, which can create a credit risk for insurers if such funds are not adequately funded by the state. Also, in some cases, the existence of a reinsurance fund could adversely affect the prices that we can charge for our policies. The effect of these and similar arrangements could reduce our profitability in any given period and/or limit our ability to grow our business. Finally, any changes to these programs or the inability of the programs or associations to make payments to insureds for losses could have a material adverse effect on our results of operations and financial condition.
From time to time, increased scrutiny has been placed upon the U.S. insurance regulatory framework, and a number of state legislatures have considered or enacted legislative measures that alter, and in many cases increase, state authority to regulate insurance and reinsurance companies. In addition to legislative
 
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initiatives of this type, the NAIC and insurance regulators are regularly involved in a process of reexamining existing laws and regulations and their application to insurance and reinsurance companies.
This state regulatory oversight and various proposals at the federal level could in the future adversely affect our ability to sustain adequate returns in certain lines of business. We cannot predict the effect that any proposed or future legislation or change in the interpretation or application of existing laws or regulations may have on our financial condition or results of operations.
A failure to comply with rules and regulations in a jurisdiction could lead to disciplinary action, the imposition of fines or the revocation of the license, permission or authorization necessary to conduct our businesses in that jurisdiction, all of which could have a material adverse effect on the continued conduct of business in a particular jurisdiction.
The impact on customers and vendors of sustained or significant deterioration in economic conditions could adversely affect our business.
We are exposed to risks associated with the potential financial instability of our customers, many of whom may be adversely affected by volatile conditions in the financial markets or an economic slowdown. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges currently or potentially affecting the economy of the U.S. and other parts of the world, customers may experience serious cash flow problems and other financial difficulties. In addition, events in the U.S. or foreign markets, such as the outbreak of the COVID-19 pandemic and the United Kingdom’s exit from the EU, may continue to impact the global economy and capital markets. The impact of such events is difficult to predict. Protectionist trade policy actions, such as tariffs and quotas could adversely affect our investment results, as an increase in the scope and size of tariffs could disrupt global supply chains and increase inflationary pressures which may have an adverse effect on economic activity. As a result, customers and potential customers may modify, delay, or cancel plans to purchase our products. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, premiums and other amounts that are owed to us. Any liability of current or potential customers to pay us for our products may adversely affect our earnings and cash flow.
A general economic slowdown could potentially adversely affect us in the form of consumer behavior, particularly through decreased demand for our products. In addition, we are susceptible to risks associated with the potential financial instability of the vendors on which we rely to provide services or to whom we delegate certain functions. The same conditions that may affect our customers also could adversely affect our vendors, causing them to significantly and quickly increase their prices or reduce their output. Our business depends on our ability to perform, in an efficient and uninterrupted fashion, our necessary business functions, and any interruption in the services provided by third parties could also adversely affect us.
Defaults on commercial mortgage loans and volatility in performance may adversely affect our results of operations and financial condition.
A decline in the commercial real estate market within the U.S. resulting from changes in interest rates, real estate market conditions or an economic downturn, including as a result of the COVID-19 pandemic, may have a negative impact on the value of our commercial mortgage loan portfolio. Negative developments across a certain property type or the occurrence of a negative event within a geographic region may have a significant negative impact, based on concentration within that property type or geographic region. Our operations and financial condition may be adversely affected from an increase in borrower defaults within our commercial mortgage loan portfolio. See “Management’s Discussion of Financial Condition and Results of Operations.”
The determination of the amount of allowances and impairments taken on our investments are judgmental and could materially impact our results of operations or financial position.
Our determination of the amount of allowances and impairments varies by investment type and is based on our periodic evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information
 
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becomes available. We update our evaluations regularly and make changes in allowances and impairments in operations. Market volatility, including as a result of the COVID-19 pandemic, can make it more difficult to value our securities if trading in such securities becomes less frequent. In addition, a forced sale by holders of large amounts of a security, whether due to insolvency, liquidity or other issues with respect to such holders, could result in declines in the price of a security. There can be no guarantee that we have accurately assessed the level of impairments taken and allowances reflected in the financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Impairments result in charges to earnings in the period taken, and historical trends may not be indicative of future impairments or allowances.
A breach of information security or other unauthorized data access could have an adverse impact on our business and reputation.
In the ordinary course of business, we collect, process, transmit, and store large quantities of personally identifiable information, customer financial and health information, and proprietary business information (collectively referred to herein as “Sensitive Information”). The secure processing, storage, maintenance, and transmission of Sensitive Information are vital to our operations and business strategies. Although we undertake substantial efforts to reasonably protect Sensitive Information, including internal processes and technological defenses that are preventative, and other commercially reasonable controls designed to provide multiple layers of security and detection, Sensitive Information maintained by us may be vulnerable to attacks by computer hackers, to physical theft by other third party criminals, or to other compromise due to employee error or malfeasance. Attacks may include both sophisticated cyber attacks perpetrated by organized crime groups, “hactivists,” or state sponsored groups, as well as non technical attacks ranging from sophisticated social engineering to simple extortion or threats, which can lead to unauthorized access or disclosure, disruption or further attacks. Such events may expose us to civil and criminal liability, regulatory action, harm our reputation among customers, deter people from purchasing our products, cause system interruptions, require significant technical, legal and other remediation expenses, and otherwise have an adverse impact on our business. Third parties to whom we outsource certain functions are also subject to the risks outlined above, and if such a third party suffers a breach of information security involving our Sensitive Information, the breach may result in substantial costs and other negative consequences, including a material adverse effect on our business, financial condition, results of operations and liquidity. We offer no guarantees that we will be able to implement information security measures to prevent all breaches of information security.
Employee error, misconduct, or excessive risks may be difficult to detect and prevent and could adversely affect us.
Persons who conduct our business, including executive officers and other members of management, other employees and our IMOs and their sales agents, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining what assets to purchase for investment and when to sell them, deciding which business opportunities to pursue, and other decisions. Losses may result from, among other things, excessive risk, fraud, errors, failure to document transactions properly, failure to obtain proper internal authorization, or failure to comply with regulatory requirements. Although we employ controls and procedures designed to monitor business decisions and prevent us from taking excessive risks, it is not always possible to deter or prevent employee misconduct or errors in judgment, and the precautions that we take to prevent and detect this activity may not be effective in all cases. The impact of those losses and excessive risks could harm our reputation and have a material adverse effect on our financial condition and business operations.
We face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti money laundering statutes and regulations.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “PATRIOT Act”) substantially broadened the scope of United States anti money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and
 
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expanding the extra territorial jurisdiction of the United States, and by expanding the categories of financial institutions to which such laws and regulations apply to include some categories of insurance companies. Certain financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high risk clients and implement a written client identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions without notifying the affected clients. Regulatory authorities routinely examine financial institutions to ensure that they have policies and procedures reasonably designed to comply with applicable requirements and for compliance with the policies and procedures and these substantive obligations. Failure of a financial institution to maintain and implement adequate programs, including policies and procedures, to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. We and our subsidiaries are subject to anti money laundering statutes and certain regulations, and our compliance obligations under these rules result in increased costs and allocation of internal resources.
Litigation or regulatory actions could have a material adverse impact on us.
Current and future litigation or regulatory investigations and actions in the ordinary course of operating our business, including class action lawsuits, may negatively affect us by resulting in the payment of substantial awards or settlements, increasing legal and compliance costs, requiring us to change certain aspects of our business operations, diverting management attention from other business issues, harming our reputation with customers or making it more difficult to retain current customers and to recruit and retain employees or agents.
Guarantees within certain of our products may adversely affect our financial condition or results of operations.
We offer guarantees which can include a return of no less than the total deposits made on the contract less any customer withdrawals, total deposits made on the contract less any customer withdrawals plus a minimum return, or the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees can also include benefits payable in the event of death, upon annuitization, upon periodic withdrawal or at specified dates during the accumulation period.
Periods of significant and sustained downturns in equity markets, increased equity volatility, and/or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction of our potential profitability. We use risk management techniques including product design, asset liability management, reinsurance and hedge strategies to manage the risk associated with liability exposures and the volatility of net income associated with these liabilities.
We remain ultimately liable for the specific guaranteed benefits and are subject to the risk that reinsurers or derivative counterparties are unable or unwilling to pay. In addition, we are subject to the risk that hedging and other risk management procedures prove ineffective, or the estimates and assumptions made in connection with their use fail to reflect or correspond to the actual liability exposure, or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. We are also subject to the risk that the cost of hedging these guaranteed minimum benefits may materially increase. These risks, individually or collectively, may have a material adverse effect on our financial condition or results of operations.
We regularly analyze the overall risk position at the enterprise level and decide how much risk to retain (that is, to hold capital) and how much risk to transfer off the balance sheet. This decision considers the cost of transferring risk, the concentration of the risk, and our tolerance for volatility. Residual risk for which we hold capital may lead to volatility including GAAP earnings volatility. We cannot assure you that our hedging strategy will successfully mitigate any risks we may hedge.
 
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Deviations from assumptions regarding future persistency, mortality, morbidity, and interest rates used in calculating reserve amounts could have a material adverse impact on our results of operations or financial condition.
Our profitability depends significantly upon the extent to which the actual experience is consistent with the assumptions we use in setting prices for our products and establishing liabilities for future policy benefits and claims. Such amounts are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. The process of calculating reserve amounts for a life insurance company involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality (the likelihood of death or the likelihood of survival), morbidity (likelihood of sickness or disability) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts).
Pricing of our annuity products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within our annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of our annuity products being higher than current account values, in light of poor equity market performance or extended periods of low interest rates, as well as other factors. Persistency could be adversely affected generally by developments affecting client perceptions of us, including perceptions arising from adverse publicity. Many of our products also provide our customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value.
Some of our products and services are complex and are sold through IMOs and their agents, and a failure of the IMOs and their agents to properly explain our products and services or their misrepresentation in connection therewith could have an adverse effect on our business, results of operations and financial condition.
Some of our products are complex and are sold through IMOs and their agents. In particular, we are reliant on our IMOs and their agents primarily in our distribution channel to describe and explain our products to potential customers. The intentional or unintentional misrepresentation of our products and services in advertising materials or other external communications, or inappropriate activities by the IMOs or their agents, could adversely affect our business reputation and prospects, as well as lead to potential regulatory actions or litigation.
 
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USE OF PROCEEDS
We anticipate that the net proceeds to us from the sale of our voting common stock in this offering will be approximately $64.5 million, after deducting offering expenses and the underwriting discounts and commissions (or approximately $74.3 million, if the underwriters exercise their over-allotment option in full).
We intend to use the net proceeds of this offering as follows:

to contribute capital to American Life to support additional growth, including possible product expansion; and

for general corporate purposes, which may include acquisitions of insurance companies with state licenses of interest to us.
Before we apply any of the proceeds for any uses, they likely will be temporarily invested in short-term investment securities. The precise amounts and timing of the application of proceeds has yet to be determined by our management.
DETERMINATION OF OFFERING PRICE
Our voting common stock is currently listed on the OTCQB Marketplace under the symbol “MDWT’’ but has experienced very limited trading. On August 27, 2020, we completed a 500 for one reverse stock split and there has been minimal trading of our voting common stock since that date. Our voting common stock has been approved for listing on the Nasdaq Capital Market under the symbol “MDWT.” The prices of our voting common stock as previously reported on the OTCQB may not be indicative of market prices of our voting common stock on Nasdaq and there can be no assurance that a trading market will develop for our shares of voting common stock on the Nasdaq Capital Market.
The underwriters have agreed to make a market in our voting common stock, but they can discontinue making a market at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our voting common stock will develop or, if developed, that the market will continue.
The public offering price of the shares offered by this prospectus has been determined by negotiation between us and the underwriters. Among the factors considered in determining the public offering price of the shares were:

our history and our prospects;

the industry in which we operate;

our past and present operating results;

the previous experience of our executive officers;

the general condition of the securities markets at the time of this offering; and

our historic quoted prices on the OTCQB.
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. Upon the commencement of trading, the price of our shares will be subject to change as a result of market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.
 
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DIVIDEND POLICY
Holders of our voting common stock are entitled to cash dividends when, as and if declared by our board of directors out of funds legally available therefor. We have never paid cash dividends on our voting common stock. Future dividend policy will be subject to the discretion of our board of directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that future cash dividends of any kind will be paid to holders of our voting common stock.
Our ability to pay cash dividends depends, in part, upon on the ability of American Life to pay cash dividends to us. American Life, as an insurance subsidiary is subject to significant regulatory restrictions limiting its ability to declare and pay cash dividends. These restrictions are related to surplus and net investment income.
 
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CAPITALIZATION
The following table sets forth our consolidated capitalization as of September 30, 2020, as follows:
(i)
on an actual basis, and
(ii)
on an as-adjusted basis to reflect the sale of shares of voting common stock at a public offering price of $70.00 per share for total net proceeds of approximately $64.5 million.
This information should be read together with our consolidated financial statements and other financial information set forth in this prospectus, and the information under “Management’s Discussion of Financial Condition and Results of Operations.”
Actual at
September 30, 2020
(unaudited)
As Adjusted at
September 30, 2020
(unaudited)
Long term debt
$ $    —
Stockholders’ equity
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding
Voting common stock, $0.001 par value; 20,000,000 shares
authorized; 2,718,967 shares issued before the offering (3,718,967
shares pro forma)(1); 2,000,000 non-voting common stock
authorized; no non-voting common shares outstanding
2,719 3,719
Additional paid in capital
69,114,515 133,638,515
Treasury stock
(175,333) (175,333)
Accumulated deficit
(41,607,833) (41,607,833)
Accumulated other comprehensive loss
(2,255,905) (2,255,905)
Total stockholders’ equity
25,078,163 89,603,163
Total capitalization
$ 25,078,163 $ 89,603,163
(1)
Assumes that the underwriters’ over-allotment option has not been exercised.
 
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DILUTION
If you purchase our voting common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share and the net tangible book value per share of our voting common stock immediately after this offering. Net tangible book value per share is determined by dividing the number of shares of voting common stock outstanding as of September 30, 2020, into our total tangible assets less total liabilities.
Our net tangible book value as of September 30, 2020 was approximately $24.4 million, or $8.97 per share, based on 2,718,967 shares of our voting common stock outstanding as of that date.
After giving effect to the sale of 1,000,000 shares of voting common stock by us at the public offering price of $70.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of September 30, 2020 would have been $88.9 million, or $23.91 per share. This represents an immediate increase in net tangible book value of $14.94 per share to existing stockholders and immediate dilution of $46.09 per share to investors in this offering, as illustrated by the following table:
Public offering price per share
$ 70.00
Net tangible book value per share as of September 30, 2020
$ 8.97
Increase in net tangible book value per share attributable to investors participating in this offering
$ 14.94
As adjusted net tangible book value per share after giving effect to this offering
$ 23.91
Dilution per share to investors in this offering
$ 46.09
If the underwriters exercise in full their option to purchase up to 150,000 additional shares from us at the public offering price of $70.00 per share the as adjusted net tangible book value per share after this offering would be $25.52 per share, the increase in net tangible book value per share to existing stockholders would be $1.61 per share, and the increase in dilution to new investors purchasing shares in this offering would be $1.61 per share.
The number of shares of voting common stock to be outstanding immediately after this offering is based on 3,718,967 shares deemed outstanding as of September 30, 2020 and excludes a total of 264,013 shares of voting common stock issuable upon exercise of stock options of which options on 47,317 shares were outstanding as of September 30, 2020, with an exercise price of $25.00 per share, options on 216,696 shares granted after September 30, 2020 with an exercise price of $41.25 per share and restricted stock awards granted after September 30, 2020 of 18,597 shares. All options and awards were granted under our equity incentive plans.
To the extent that additional shares are issued pursuant to the foregoing plans, investors purchasing our voting common stock in this offering will experience further dilution. In addition, we may offer other securities in other offerings based upon market conditions or strategic considerations. To the extent we issue such securities, you may experience further dilution.
 
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SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial data of Midwest Holding Inc. The financial data as of and for the nine months ended September 30, 2020 and 2019 have been derived from our unaudited financial statements for the nine months ended September 30, 2020, which are included in this prospectus. The financial data as of December 31, 2019 and 2018 and for the years then ended have been derived from our audited financial statements for the years ended December 31, 2019 and 2018, which are included in this prospectus. The summary consolidated financial information in the table below are not necessarily indicative of our expected future operating results. The following summary historical financial information should be read together with “Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus.
Selected Statements of Income
Nine Months Ended
September 30,
Fiscal Year Ended
December 31,
2020
2019
2019
2018
(in thousands except per
share amounts)
(unaudited)
(in thousands except per
share amounts)
Revenues:
Amount of deferred gain on reinsurance
$ 814 $ 2,466 $ 2,644 $ 118
Realized gains
7,829 9 354 48
Investment income
1,277 331 121 516
Other
1,494 214 281 194
Total revenues
11,414 3,020 3,400 876
Expenses:
Salaries and benefits
3,624 1,783 2,702 2,161
Other operational expenses
6,171 5,065 6,073 3,752
Total expenses
9,795 6,848 8,775 5,913
Pre-tax income (loss)
1,619 (3,828) (5,375) (5,037)
Income tax expense
(2,145) (115) (234)
Loss from discontinued operations
(29)
Net loss
$ (526) $ (3,943) $ (5,609) $ (5,066)
Net loss per common share
$ (0.22) $ (4.71) $ (4.99) $ (121.77)
Balance Sheet Data
September 30,
2020
December 31,
2019
December 31,
2018
(in thousands)
(in thousands)
(in thousands)
(unaudited)
Assets:
Investments available for sale
$ 250,543 $ 117,242 $ 17,384
Mortgage loans
61,465 13,810
Notes receivable
5,516
Other
22,620 7,550 44
Total investments
340,144 138,602 17,428
Cash and equivalents
136,432 43,716 2,833
Reinsurance recoverables
42,091 30,580 23,101
Other
17,982 7,018 40,557
Total assets
536,649 219,916 66,491
 
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September 30,
2020
December 31,
2019
December 31,
2018
(in thousands)
(in thousands)
(in thousands)
(unaudited)
Liabilities:
Benefit reserves
16,434 16,320 16,013
Deposit type contracts
455,429 171,169 7,235
Deferred gains on reinsurance
15,739 7,578 3,900
Other
23,969 10,690 41,980
Total liabilities
511,571 205,757 69,128
Stockholders’ equity:
Preferred stock
1,500
Common stock
3 2
Additional paid-in capital
69,114 54,494 33,029
Treasury Stock
(175)
Accumulated deficit
(41,608) (41,082) (35,348)
Accumulated other comprehensive (loss) income
(2,256) 620 (1,818)
Noncontrolling interest
125
Total stockholders’ equity
$ 25,078 $ 14,159 $ (4,137)
Non-GAAP Financial Measures
We discuss below certain non-GAAP financial measures that our management uses, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things:

monitor and evaluate the performance of our business operations and financial performance;

facilitate internal comparisons of the historical operating performance of our business operations;

review and assess the operating performance of our management team;

analyze and evaluate financial and strategic planning decisions regarding future operations; and

plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
Non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, our operating performance measures as prescribed by GAAP.
Annuity Premiums
Annuity premiums, also referred to as sales or direct written premiums, do not correspond to revenues under GAAP, but are relevant metrics to understand our business performance. Under statutory accounting practices, or “SAP”, our annuity premiums received are treated as premium revenue. Our premium metrics include all sums paid into an individual annuity in a given period. We typically transfer all or a substantial portion of the premium and policy obligations to reinsurers. Ceded premium represents the premium we transfer to reinsurers in a given period. Retained premium represents the portion of premium received a given period that was not ceded to reinsurers and will either be reinsured in a subsequent period or retained by us. We retain premiums prior to transferring them to reinsurers to facilitate block and other reinsurance transactions involving portfolios of annuity premiums.
The following table sets forth premiums received under SAP. We did not receive any, annuity premiums in 2018. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue is accounted under GAAP as deposit-type liabilities on our balance sheet and is not recognized in our income statement.
 
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Nine Months Ended
September 30,
Year Ended
December 31,
2020
2019
2019
(unaudited)
Annuity Premiums (SAP)
Annuity Direct written premiums
279,537,158 79,500,172 $ 161,364,568
Ceded written premiums
(177,979,450) (75,439,664) (160,493,727)
Net written premiums retained
$ 101,557,708 $ 4,060,508 $ 870,841
Adjusted Revenue
Our adjusted revenue represents the revenue we receive and retain taking into account the reinsurance transactions we complete. We define adjusted revenue as revenue including the impact of reinsurance transactions completed during the relevant period and excluding the total return on the asset portfolios that are owned by reinsurers but held by us, which in the table below is the net realized (gains) losses on investments. We hold these assets primarily to reduce potential credit risk of the reinsurers. Under our agreements with reinsurers, the assets backing the reinsurance agreements are typically maintained by us as collateral but the assets and the total return on the asset portfolios are received by the reinsurers. We receive ceding commissions from reinsurers based on ceded premium in a given period, the products reinsured and the terms of the reinsurance agreements. The revenue we receive from ceding commissions is recognized and earned immediately under SAP upon the completion of a reinsurance transaction in which we have ceded premiums to reinsurers. There is no collectability risk as the commissions are paid to us in full in cash when the policies are written and there are no further expenses associated with the collected premiums. The adjustment for deferred coinsurance ceding commission is a line item entry derived directly from our GAAP consolidated statements of cash flows in our Consolidated Financial Statements in this prospectus. Our management uses adjusted revenue as an internal measure of our underlying business performance and it provides useful insights into our results of operations.
Under GAAP, ceding commissions are deferred on our balance sheet as a deferred gain on coinsurance transactions and are subsequently amortized through amortization of deferred gain on reinsurance on the income statement over the period of the policy contracts.
The following table sets forth a reconciliation of total revenue to adjusted revenue for the years ended December 31, 2019 and the nine months ended September 30, 2019 and 2020. We did not receive any annuity premiums in 2018:
Nine Months Ended
September 30,
Year Ended
December 31,
2020
2019
2019
(unaudited)
Total revenue – GAAP
$ 11,413,881 $ 3,020,384 $ 3,399,788
Adjustments:
Net realized gains on investments
(4,369,562)
Deferred coinsurance ceding commission
8,161,069 2,821,255 3,678,196
Adjusted revenue
$ 15,205,388 $ 5,841,639 $ 7,077,984
Adjusted net income (loss)
Adjusted net income (loss) represents the impact of revenue we receive and retain taking into account the reinsurance transactions we complete. Under these provisions with third party reinsurers, the assets backing the treaties are maintained by American Life as collateral and are carried on the balance sheet for American Life, but the assets are owned by the third party reinsurer; thus, the total return on the asset portfolio belongs to the third party reinsurers. Under GAAP this is considered an embedded derivative but is not designated as a hedge. We make an income statement adjustment for net realized (gains) losses on
 
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investments related to the embedded derivative. The net realized (gains) losses on investments related to the embedded derivative is included in GAAP net loss but is reversed dollar for dollar in the calculation of GAAP other comprehensive income (loss) through a reclassification adjustment for net realized losses (gains) on investments. We define adjusted net (loss) income as net (loss) income including the impact of reinsurance transactions completed during the period and excluding the total return on the asset portfolios that are owned by reinsurers and held by us. These items have no direct expense and the tax effect of these adjustments is already included in our tax basis, which is similar to our Adjusted Net Income. Our management uses adjusted net (loss) income as an internal measure of our underlying business performance and because it provides useful insights into our results of operations.
The following table sets forth a reconciliation of net loss to adjusted net income (loss) for the years ended December 31, 2019 and the nine months ended September 30, 2019 and 2020. We did not receive annuity premiums in 2018:
Nine Months Ended
September 30,
Year Ended
December 31,
2019
2020
2019
(unaudited)
Net loss attributable to Midwest Holding Inc. – GAAP
$ (526,123) $ (3,989,684) $ (5,733,658)
Adjustments:
Net realized gains on investments
(4,369,562)
Deferred coinsurance ceding commission
8,161,069 2,821,255 3,678,196
Total adjustments
3,791,507 2,821,255 3,678,196
Income tax (expense) benefit adjustment(1)
Adjusted net income (loss)
$ 3,265,384 $ (1,168,429) $ (2,055,462)
(1)
There was no tax effect on the Total adjustments.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included in this prospectus. However, these forward-looking statements involve many risks and uncertainties including those referred to herein. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, such as those set forth in this prospectus under “Risk Factors”. We are under no duty to update any of the forward-looking statements after the date of this registration statement to conform these statements to actual results.
Overview
We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We operate our business primarily through three subsidiaries, American Life, 1505 Capital, that provides investment advisory and related asset management services, and Seneca Re. American Life is licensed to sell, underwrite, and market life insurance and annuity products in 20 states and the District of Columbia and has pending applications in additional states. We also provide insurance company administrative services through a division known as “m.pas” that was formed in 2019.
On June 28, 2018 we underwent a change in control as a result of the closing of the Xenith Agreement. 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 and 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.
At the closing of the Xenith Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock to Xenith for $1,500,000, which was subsequently converted on June 18, 2019 into 145,709 shares of our voting common stock at approximately $10.29 per share. In addition, pursuant to the Xenith Agreement, Xenith loaned us $19,100,000 which was converted on June 18, 2019 into 1,855,361 shares of voting common stock at approximately $10.29 per share. All interest on the loans from Xenith through June 18, 2019, was waived and was accounted for as a capital contribution to us. Of the funds received from Xenith, we contributed $20,500,000 to American Life. On August 10, 2020, our shares owned of record and beneficially by Xenith were distributed to its members, including Vespoint. On November 10, 2020, Vespoint distributed all of its shares of our voting common stock to its members, which included entities owned by Messrs. Minnich and Salem. See “Security Ownership” elsewhere in this prospectus.
After closing of the Xenith Agreement, we began implementation of a new business plan with the purpose of leveraging technology and reinsurance to distribute insurance products through IMOs as described elsewhere in this prospectus.
American Life’s sales force continues to grow, with eight third party IMOs presently offering our products. American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2020. A. M. Best also upgraded American Life's long-term issuer credit rating to bbb+ from bbb in December 2020.
Beginning in mid 2019, American Life began ceding portions of its MYGA and FIA annuity business to third party insurance companies and Seneca Re that we refer to in this prospectus as “quota shares.” For detailed information see “Note 10 — Reinsurance” to our Consolidated Financial Statements included in this prospectus.
Effective March 12, 2020, we formed Seneca Re for the purpose of reinsuring various types of risks through one or more single purpose entitles, or “protected cells.” On March 30, 2020, Seneca Re received its certificate of authority to transact business as a captive insurance company. On May 12, 2020, we contributed $3.0 million to Seneca Re for a 100% ownership interest. Seneca Re had two protected cells, cell 2020-01 (“SRC1”) and cell 2020-02 (“SRC2”) as of September 30, 2020. We have contributed a total of $7.5 million through September 30, 2020 to capitalize SRC1, which is consolidated in our financial statements.
Effective on April 24, 2020, we raised capital of $5.227 million from various third party investors and issued 231,655 shares of voting common stock at $22.50 per share. Also, on April 24, 2020, we signed a
 
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securities purchase agreement with Crestline for additional capital of $10.0 million and issued 444,444 shares of our voting common stock to Crestline at $22.50 per share.
On April 24, 2020, American Life entered into a three-year master letter agreement and related reinsurance, trust and asset management agreement with Seneca Re and Crestline regarding a flow of annuity reinsurance and related asset management, whereby Crestline agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its MYGA and quota share percentage of 40% of American Life’s FIA products. Crestline contributed $40.0 million of assets to capitalize SRC2. Through September 30, 2020, American Life had ceded $80.3 million face amount of annuities to SRC2 (which was funded with $40 million in capital by Crestline). American Life received ceding commissions under SAP of $3,837,996 and expense reimbursements under SAP of $7,247,966 in connection with these reinsurance transactions during the nine months ended September 30, 2020. Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline Re SP1 (“Crestline SP1”), a segregated portfolio company of Crestline Re SPC, under which the above described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1.
COVID-19
We continue to closely monitor developments related to the COVID-19 pandemic to assess any potential adverse impact on our business. Due to the evolving and highly uncertain nature of this event, it currently is not possible to provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations, financial condition or liquidity. Management implemented the Company’s business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. Operations continued as normal despite a sharp increase in sales during the period. We continue to monitor the Center for Disease Control and Prevention and State of Nebraska guidelines regarding employee safety.
Our management will continue to monitor our investments and cash flows to evaluate the impact as this pandemic evolves. See “Risk Factors.”
Unrealized Losses; Embedded Derivatives
American Life has agreements with three third party reinsurers that have funds withheld (“FW”) coinsurance provisions under which the assets related to the reinsured business are maintained by American Life as collateral; however, ownership of the assets and the total return on the asset portfolios belong to the third party reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in “Note 7 — Derivative Instruments” to our Consolidated Financial Statements. As a result of price decreases in 2020, assets carried as investments on American Life’s financial statements for the third party reinsurers contained unrealized losses of approximately $4.4 million as of September 30, 2020. The terms of the contracts with the third party reinsurers provide that unrealized losses on the portfolios accrue to the third party reinsurers. We account for these unrealized losses by recording equivalent realized gains on our income statement. Accordingly, the unrealized losses on the assets held by American Life on behalf of the third party reinsurers were offset by recording an embedded derivative gain of $4.4 million. If prices of investments recover, the unrealized losses of the third party reinsurers may be reduced; therefore, the associated embedded derivative gain recognized by us in the first nine months of 2020, would be reduced accordingly.
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
 
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results of operations and financial position. For further discussion of our accounting policies and estimates see “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” to our 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. We have a significant amount of investments on our balance sheets that are held as collateral for our reinsurers.
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 with the advice of 1505 Capital, which was established in 2018 to provide financial and investment advisory and management services to clients and related investment, trading and financial activities, including American Life. Trades are cleared through a common broker after competitive prices are solicited.
Our investment portfolio 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 including assets we hold as collateral for reinsurance entitles. 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.
We frequently review the investment portfolio for declines in the fair value. Our process for identifying declines in the fair value of investments that are other-than-temporary involves consideration of several factors. These factors included (a) the time or 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 or geographic area, (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.
 
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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 September 30, 2020, 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
We expect to reinsure most of the risks associated with our issued annuities. Our reinsurers may be domestic, foreign or capital markets investors seeking to assume U.S. insurance business. It must be understood that in most reinsurance transactions, American Life will remain exposed to the credit risk of reinsurers, or the risk that one or more reinsurers may become insolvent or otherwise unable or unwilling to pay for policyholder claims. We plan to mitigate the credit risk relating to reinsurers by generally either requiring that the reinsurer post substantial collateral or make other financial commitments to secure the reinsured risks. Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral, and other administration fees.
In a typical reinsurance transaction, we receive a ceding commission and reimbursement of certain expenses at the time liabilities are reinsured, plus ongoing fees for the administration of the business ceded. Our reinsurers are typically not “accredited” or qualified as reinsurers under Nebraska law. In order to receive credit for reinsurance for transactions with these reinsurers and to reduce potential credit risk, we hold collateral from the reinsurer on a funds withheld basis 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. In many cases, our investment advisor subsidiary, 1505 Capital, is appointed to manage these assets and we receive additional ongoing asset management fees.
Future Policy Benefits
We establish liabilities for amounts payable under our policies, including annuities. Generally, amounts are payable over an extended period of time. Under GAAP, our annuities are treated as deposit liabilities, where we use account value in lieu of future policy reserves. Our FIA reserves are calculated by an independent consulting actuary. We currently do not offer traditional life insurance products.
Income Taxes
Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the applicable 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 tax 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
Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Annuity premiums are shown as a financing activity in the consolidated statement of cash flows. Revenues from these contracts are comprised of fees earned for administrative and policyholder services, which are recognized over the period of the annuity
 
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contracts and included in other revenue. Through our reinsurance contracts, revenues are earned through ceding commissions, which are capitalized, and our independent consulting actuary determines the amounts to be recognized as income over the period of the annuity contracts. Deferred coinsurance ceding commissions are shown as an operating activity in the consolidated statement of cash flows. Revenues from asset management services are recognized as earned.
Derivative Instruments
Derivatives are used to hedge the risks experienced in our ongoing operations, such as equity, interest rate and cash flow risks, or for other risk management purposes, which primarily involve managing liability risks associated with our FIA product and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the consolidated balance sheets.
To qualify for hedge accounting, at the inception of the hedging relationship, we would formally document our designation of the hedge as a cash flow or fair value hedge and our risk management objective and strategy for undertaking the hedging transaction. In this documentation, we identify how the hedging instrument is expected to hedge the designated risks related to the hedged item, the method that would be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which would be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship.
In the late 2019, we began investing in options to hedge our interest rate risks on our FIA product. Options typically do not qualify for hedge accounting; therefore, we chose not to use hedge accounting for our options that we currently have. We value our derivatives at fair market value with the offset being recorded on our income statement as a realized gain or (loss).
Additionally, reinsurance agreements written on a funds withheld basis contain embedded derivatives on our FIA product. Gains or (losses) associated with the performance of assets maintained in the relevant deposit and funds withheld accounts are reflected as realized gains or (losses) in the income statement.
New Accounting Standards
A discussion of certain new accounting standards is provided in “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in this prospectus.
Consolidated Results of Operations — Years Ended December 31, 2019 and 2018
Revenues
The following summarizes the sources of our revenue for the periods indicated:
Year ended December 31,
2019
2018
Premiums
$ (152) $ 135,387
Investment income, net of expenses
120,581 515,888
Net realized gains on investments
353,602 47,824
Amortization of deferred gain on reinsurance
2,643,801 117,871
Other revenue
281,956 58,842
$ 3,399,788 $ 875,812
Premium revenue:   Premium revenue decreased primarily due to the assumption by another insurer of our remaining ordinary life business 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
 
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generated a meaningful volume of new business; however, these products are defined as investment contracts and GAAP requires that the premium be deferred as deposit-type liabilities on our balance sheet. American Life expects to introduce new products in 2020 primarily in the annuity business. The table below shows premium issued under statutory accounting practices (“SAP”) on our two annuity products:
MYGA
Premium(1)
FIA
Premium(1)(2)
First quarter 2019
$ 8,292,617 $
Second quarter 2019
29,946,263
Third quarter 2019
41,261,292
Fourth quarter 2019
66,247,565 15,616,831
Total issued for 2019
$ 145,747,737 $ 15,616,831
(1)
Under SAP, the MYGA and FIA premiums are treated as premium revenue. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue that is recognized under SAP is accounted for under GAAP as deposit-type liabilities on our balance sheet and is not recognized in our income statement.
(2)
We began selling the FIA product in November 2019.
Investment income, net of expenses:   The components of net investment income for 2019 and 2018 were as follows:
Year ended December 31,
2019
2018
Fixed maturities
$ 292,453 $ 789,949
Other
38,397 44,614
Gross investment income
330,850 834,563
Less investment expenses
(210,269) (318,675)
Investment income, net of expenses
$ 120,581 $ 515,888
In 2018, before we implemented our new business plan, we had a larger direct investment portfolio where the investment income was retained by us and accordingly, we had significantly higher investment income in 2018 compared to 2019. The decrease in 2019 was also due to the fact that the investment income earned on the bonds purchased with the proceeds of our MYGA and FIA products from inception through December 31, 2019 was paid to our reinsurers as required by our reinsurance agreements. The decrease in investment expenses was primarily related to the interest expense incurred on the sale of certain real estate in 2018 that did not occur in 2019. The investment expense in 2019 related to interest expense on the deferred ceding commissions that were calculated by our consulting actuary.
Net realized gains on investments:   In 2019 we sold certain bonds and realized gains of $619,584. In early 2018 we sold bonds at a loss in order to maintain operating capital. Our unrealized losses in our investment portfolio were $1,842,919 at December 31, 2018.
Amortization of deferred gain on reinsurance:   The increase was due to the assumption of 79% of indemnity coinsurance policies ceded in 2018 being converted to assumptive reinsurance where we no longer had any legal obligation relating to the policies assumed. American Life recognized as income 79% of the remaining deferred ceding commission. This increase also included $171,659 in revenues from amortization related to the new deferred ceding commissions earned from reinsurance transactions with third party reinsurers entered into during 2019 related to our annuity business.
Other revenue:   Other revenue increased due to the consolidation of 1505 Capital into Midwest as of April 2, 2019. This increase in asset management fees was offset by a decrease in third party administration fees. We had only one customer for whom we performed these services during 2019 and the related fees earned during the years ended December 31, 2019 and 2018 were $48,300 and $89,240, respectively.
 
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Expenses
Our expenses for the periods indicated are summarized in the table below:
Year ended December 31,
2019
2018
Interest credited
$ 6,584 $ 47,936
Death and other benefits
34,436 93,646
Increase (decrease) in benefit reserves
34,500 (27,121)
Salaries and benefits
2,701,314 2,160,853
Other operating expenses
5,997,955 3,637,748
$ 8,774,789 $ 5,913,062
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 life insurance business assumed from an unaffiliated entity that was assumed on July 31, 2018.
Death and other benefits:   Death benefits decreased due to the assumption of a block of life insurance 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 assumption of certain life insurance 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 classified as a liability on our balance sheet under GAAP.
Salaries and benefits:   The increase for 2019 was due to the addition of two new executive officers as well as staff increases to meet the needs of our expanded business. Management expects salaries and benefits to increase in 2020 to service our growth initiatives.
Other operating expenses:   Other operating expenses increased in 2019 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 accrued for interest for 2018. Also included in the Xenith notes payable was $161,000 of deferred legal costs associated with the Xenith Agreement in 2018, which was expensed when the notes were converted into voting common stock. Xenith forgave the payment of the interest accrued upon the conversion of the notes payable; as a result, the interest payable was required to be recognized under GAAP. Legal fees and license fees increased approximately $229,000 in 2019 as a result of the state expansion initiatives, the settlement of the sale of real estate, and fees associated with negotiations with reinsurers. The consolidation of 1505 Capital resulted in an increase of expenses of $382,000. We have 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 17,900 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 net loss from continuing operations increased in 2019 to $5,733,658 from $5,065,534 in 2018 primarily due to increases in salaries and benefits and the decrease in investment income caused by the transfer of assets on business ceded to reinsurers. These were offset by the recognition of $2,410,054 of deferred ceding commission as income due to 79% of the indemnity coinsurance being converted to assumptive, the additional amortization of deferred gains related to certain reinsurance transactions, an increase in our other revenue due to the consolidation of 1505 Capital, the decrease in our interest credited due to certain reinsurance transactions and an increase in our realized gains on investments.
 
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Investments
Most investments on our balance sheets are held on behalf of our reinsurers as collateral under our reinsurance agreements. As a result, our investment allocations are largely a function of our collective reinsurer investment allocations. While the reinsurers own the investment risk on these assets, we typically restrict their investment allocations via control over the selection of the asset manager as well as asset restrictions set forth in investment guidelines. Additionally, in many of our reinsurance agreements, our affiliate investment manager, 1505 Capital, is selected as the asset manager.
The investment guidelines will typically include U.S. government bonds, corporate bonds, commercial mortgages, asset backed securities, municipal bonds, and collateral loans. The duration of our investments is 5 to 10 years in line with that of our liabilities. We do allow non-U.S. dollar denominated investments where the foreign exchange risk is hedged back to U.S. dollars.
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. Most of the investments as of December 31, 2019 are held as collateral for our reinsurers.
December 31, 2019
December 31, 2018
Carrying
Value
Percent
of Total
Carrying
Value
Percent
of Total
Fixed maturity securities:
U.S. government obligations
$ 2,081,224 1.1% $ 1,995,951 9.9%
Mortgage-backed securities
798,608 0.4 1,004,051 5.0
Asset-backed securities
95,247,824 52.2
States and political subdivisions – general obligation
249,282 0.1 263,184 1.3
States and political subdivisions – special revenue
25,291 25,173 0.1
Corporate
18,839,632 10.4 14,095,824 69.5
Total fixed maturity securities
117,241,861 64.2 17,384,183 85.8
Mortgage loans on real estate, held for investment
13,810,041 7.6
Derivatives
575,294 0.3
Investment escrow
3,899,986 2.1
Other invested assets
2,468,947 1.4
Preferred stock
500,000 0.3
Cash and cash equivalents
43,716,205 24.0 2,832,567 14.0
Policy loans
106,014 0.1 43,843 0.2
$ 182,318,348 100.0% $ 20,260,593 100.0%
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.
December 31, 2019
December 31, 2018
Carrying
Value
Percent
Carrying
Value
Percent
AAA and U.S. Government
$ 2,885,004 2.5% $ 3,045,768 17.5%
AA
6,658,274 5.7 1,721,450 9.9
A
23,812,502 20.3 4,221,297 24.3
BBB
79,996,081 68.2 8,261,450 47.5
Total investment grade
113,351,861 96.7 17,249,965 99.2
BB and other
3,890,000 3.3 134,218 0.8
Total
$ 117,241,861 100.0% $ 17,384,183 100.0%
 
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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.
Consolidated Results of Operations — Nine Months Ended September 30, 2020 and 2019
Revenue
The following summarizes the sources of our revenue for the periods indicated:
Nine months ended September 30,
2020
2019
(unaudited)
Insurance premiums
$ 24 $ (152)
Investment income, net of expenses
1,277,337 330,910
Net realized gains on investments(1)
7,829,105 9,315
Amortization of deferred gain on reinsurance
814,163 2,465,678
Other revenue
1,493,252 214,633
$ 11,413,881 $ 3,020,384
(1)
See “Net realized gains on investments” below.
Premium revenue:   Premium revenue was flat for the nine months ended September 30, 2020 compared to the same period in 2019. The introduction of our MYGA and FIA products discussed above generated meaningful annuity policy sales; however, under GAAP, these products are considered investment contracts and GAAP requires that premiums be deferred and classified as deposit-type liabilities on our balance sheet. We expect that premium income under GAAP from our annuity products will not be a significant source of revenue.
The table below shows premiums collected under SAP relating to our annuity products (unaudited):
Nine months ended September 30,
2020
2019
MYGA
Premium(1)
FIA
Premium(1)(2)
MYGA
Premium(1)
First quarter
$ 31,565,506 $ 16,249,504 $ 8,292,617
Second quarter
27,400,367 72,270,636 29,946,263
Third quarter
27,537,077 104,514,068 41,261,292
Total issued as of September 30, 2020 and 2019
$ 86,502,950 $ 193,034,208 $ 79,500,172
(1)
Under SAP, the MYGA and FIA premiums are treated as revenue. Under GAAP these products are defined as deposit-type contracts; therefore, the premiums are accounted under GAAP as deposit-type liabilities on our balance sheet and are not recognized in our income statement.
(2)
We began selling the MYGA product in January 2019 and the FIA product in November 2019.
 
54

 
Investment income, net of expenses:   The components of our net investment income are as follows:
Nine months ended September 30,
2020
2019
(unaudited)
Fixed maturities
$ 1,364,414 $ 342,104
Mortgage loans
80,749 78,466
Other
62,942 6,973
Gross investment income
1,508,105 427,543
Less: investment expense
(230,768) (96,633)
Investment income, net of expenses
$ 1,277,337 $ 330,910
The increase in investment income for the first nine months of 2020 over the same period in 2019 was due to the investment income earned on the bonds purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period. Our investment portfolio grew to $340,143,952 as of September 30, 2020 compared to $138,602,143 as of December 31, 2019, as a result proceeds from our MYGA and FIA product sales. American Life ceded $178.0 million of premiums to reinsurers and transferred approximately $5.3 million of its investment income as required by the terms of the reinsurance agreements.
Net realized gains on investments:   The net realized gains on investments for the nine months ended September 30, 2020 was $7,829,105 and included $4,369,562 and $2,023,748 of gains from an embedded derivative and other derivative instruments. Excluding these derivative gains, net realized gains on investments were $1,436,796. The increase in net realized gains on investments was primarily a result of favorable trading activity.
The embedded derivative is a total return swap related to the coinsurance agreements with our reinsurers. American Life has treaties with several reinsurers that have funds withheld coinsurance provisions, under which the assets backing the treaties are maintained by American Life as collateral but the assets and total return on the asset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in “Note 5 — Derivative Instruments” to our Consolidated Financial Statements.
Amortization of deferred gain on reinsurance:   The decrease was due to the indemnity coinsurance converted by a third party reinsurer to assumptive reinsurance of approximately to $277,000 and approximately $2.2 million for the nine months ended September 30, 2020 and 2019, respectively. Under assumptive reinsurance we no longer have a legal obligation for policies subject to such agreement that became assumptive with the reinsurer. This decrease was offset by the amortization of the ceding commission deferred from the reinsurance agreements with other reinsurers which were not in effect in 2019.
Other revenue:   Other revenue increased by approximately $1.3 million due to the consolidation of 1505 Capital, increased fee income for services provided to our third party reinsurers and service fees earned by providing other administrative services to clients.
Expenses
Expenses are summarized in the table below.
Nine months ended September 30,
2020
2019
(unaudited)
Interest credited
$ 463,826 $ 42,895
Benefits
(5,904) 1,872
Increase in benefit reserves
34,500
Amortization of deferred acquisition costs
376,179 88,503
Salaries and benefits
3,623,605 1,782,708
Other operating expenses
5,337,188 4,898,134
$ 9,794,894 $ 6,848,612
 
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Interest credited:   The increase for the nine months ended September 30, 2020, compared to the same period in 2019 was due to American Life reinsuring a smaller portion of the annuity contracts sold during the current period in the same period.
Benefits:   Benefits decreased due to the reduction of the amount of our accrual during 2020 related to the escheatment of aged death claims. This pertains to legacy life business that was not ceded.
Amortization of deferred acquisition costs:   The increase was due to the deferred acquisition costs (“DAC”) related to the sale of American Life’s MYGA and FIA products that were not ceded to third party reinsurers during the period.
Salaries and benefits:   The increase was due to the addition of personnel to service our new business growth. We are hiring more in-house expertise to service our growth initiatives.
Other operating expenses:   Other operating expenses increased approximately $439,000 compared to prior year to support the growth of our Company. The increase was primarily due to the $500,000 valuation allowance as a result of preferred stock impairment; approximately a $487,000 increase in audit and actuarial fees for professional fees related to 2020 year-end auditing; stock related expenses due to a capital raise in April 2020 and implementation of the reverse stock split of approximately $296,000; operational information technology increase of approximately $153,000 to support the expansion of our infrastructure; 1505 Capital incurred expenses of approximately $122,000 related to management fees to sub-managers and computer equipment; consulting fees of approximately $96,000 related to the formation of Seneca Re; and investments expenses related to derivative purchases of approximately $82,000. These increases were primarily offset by approximately $1,000,000 of Xenith note interest expense in 2019 which did not occur in 2020 as the outstanding notes were converted to outstanding shares in June of 2019; a decrease of approximately $216,000 in the mark to market value of the options paid by the reinsurers to purchase derivatives; and a decrease in our travel of approximately $83,000 resulting from the COVID-19 pandemic.
Investments
Most investments on our balance sheet are held on behalf of our reinsurers. We hold these investments as collateral under our reinsurance agreements. As a result, our investment allocations are largely a function of our reinsurer’s collective investment allocations. While the reinsurers own the investment risk on these assets, we typically restrict their investment allocations via influence over the selection of the asset manager as well as asset restrictions set out in applicable investment guidelines. Additionally, in many of our reinsurance agreements, our affiliate investment manager, 1505 Capital, is selected as the asset manager.
The investment guidelines typically include U.S. government bonds, corporate bonds, commercial mortgages, asset backed securities, municipal bonds, and collateralized loans. The duration of these investments is 5 to 10 years in line with that of the associated liabilities. We permit non-U.S. dollar denominated investments where the foreign exchange risk is hedged back to U.S. dollars. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2020 and December 31, 2019.
September 30, 2020
December 31, 2019
Carrying
Value
Percent
of Total
Carrying
Value
Percent
of Total
(unaudited)
Fixed maturity securities:
U.S. government obligations
$ 2,105,022 0.4% $ 2,081,224 1.1%
Mortgage-backed securities
378,136 0.1 798,608 0.4
Asset-backed securities
202,442,051 42.4 95,247,824 52.2
States and political subdivisions – general obligation
248,748 0.1 249,282 0.1
States and political subdivisions – special revenue
6,190,179 1.3 25,291
Trust preferred
2,162,959 0.5
Corporate
37,015,855 7.8 18,839,632 10.4
 
56

 
September 30, 2020
December 31, 2019
Carrying
Value
Percent
of Total
Carrying
Value
Percent
of Total
(unaudited)
Total fixed maturity securities
250,542,950 52.6 117,241,861 64.2
Mortgage loans on real estate, held for investment
61,464,515 12.9 13,810,041 7.6
Derivatives
7,664,006 1.6 575,294 0.3
Other invested assets
14,808,870 3.1 2,468,947 1.4
Preferred stock
500,000 0.3
Investment escrow
3,899,986 2.1
Notes receivable
5,516,302 1.2
Cash and cash equivalents
136,431,785 28.6 43,716,205 24.0
Policy Loans
147,309 106,014 0.1
$ 476,575,737 100.0% $ 182,318,348 100.0%
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2020 and December 31, 2019.
September 30, 2020
December 31, 2019
Carrying
Value
Percent
Carrying
Value
Percent