Midwest Holding Inc. (NASDAQ:MDWT) Q2 2022 Earnings Conference Call August 16, 2022 8:30 AM ET
Company Participants
Tom Bumbolow – Head of Business Development & Distribution
Georgette Nicholas – Chief Executive Officer
Conference Call Participants
John Barnidge – Piper Sandler
Operator
Hello, everyone, and thank you for joining the Midwest Holding Inc. Reports Second Quarter 2022 Results. My name is Darius and I’ll be moderating your call today. [Operator Instructions]
I’ll now have the pleasure of handing over to your host, Tom Bumbolow. Please go ahead, Tom. You may start.
Tom Bumbolow
Good afternoon and welcome to Midwest Holding’s second quarter 2022 earnings call. This is Tom Bumbolow, Head of Business Development and Distribution here at Midwest. Joining me for today’s presentation will be our CEO, Georgette Nicholas.
Yesterday evening, Midwest issued our Q2 2022 earnings release announcing our financial results. During today’s call, we will reference this announcement, a copy of which may be found on the Investor Relations page of our website at ir.midwestholding.com.
While this call will reflect items discussed within that document, for more comprehensive information about our financial performance, we also encourage you to read through our Q1 2022 Form 10-Q and 2021 Form 10-K, which have been filed with the Securities and Exchange Commission at sec.gov.
Before we begin, I want to remind you that matters from today’s call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions. These forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise that information as a result of new developments that may occur.
Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our Q2 2022 Form 10-Q and 2021 Form 10-K where you will see a discussion of factors that could cause the company’s actual results to differ materially from our forward-looking statements. A replay of this conference call will be available on our website under the Investor Relations section.
I would also like to remind you that during the call, we’ll discuss some non-GAAP measures in addressing Midwest’s performance. You will find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our Q2 2022 Form 10-Q and 2021 Form 10-K.
Now, I’ll turn the call over to Georgette Nicholas to share our results.
Georgette Nicholas
Thanks, Tom. Welcome to Midwest Holding’s second quarter 2022 earnings call. We appreciate you joining for an update on the company’s progress. Today, I’ll cover our strategic focus, the financial results for the second quarter and the trends driving the business forward.
We are actively working to position the company for further growth by focusing on distribution, pricing and products, investment management and reinsurance. We’re investing in technology and foundational capabilities to strengthen the business overall.
We’re benefiting from the strong performance of our investment portfolio, as the portfolio and our capabilities to source attractive yielding assets growth. Overall, the second quarter showed very positive trends and positioned us for a strong start to the third quarter. Our growth opportunities remain strong, as investments are earning higher yields from increasing rates and credit spreads are moving given market volatility.
Consumers are seeking out annuities for stable returns. Our focus is on executing the key drivers of the business to provide consumers with the insurance products needed and deliver strong results now and longer term for them and shareholders. Midwest is designed to be a services-oriented company, generating recurring fee revenue with a business model supported by capital and reinsurance that allows us to provide best-in-class products for our customers and strive for higher returns for our shareholders over time.
Strategically, we continue to work on capitalizing on a growing market by distinguishing ourselves in products, indices and technology to invest in and leverage modern technology, to enhance processes that improve the efficiency and effectiveness of the agent and customer experience, to create and use reinsurance structures, including our captive reinsurer to mitigate risk and provide capital support. And finally, to provide management services around investing assets and reinsurance structures and to leverage core capabilities to support the administration of those vehicles.
Turning to results for the second quarter of 2022. We achieved GAAP net income of $9.3 million, compared to a net loss of $5 million in last year’s second quarter. Driving this improvement was performance of the investment portfolio, which generated $10.5 million in revenue in the quarter compared with $3.2 million in the prior year second quarter. This increase was offset by a continuing decline in the market value of derivatives, which is captured in realized losses and drove slight overall negative revenue for the quarter. We saw continued improvement in earned seating commission amortization and service fee revenue.
Second quarter saw a strong trend in annuity direct written premiums on a statutory accounting basis, which were $156 million for the second quarter of 2022, up 59% compared to $98.1 million at first quarter of 2022 and up from $125.9 million in the second quarter of 2021, a year-over-year growth rate of 24%. We continue to see intense competition in the fixed annuity market around pricing and new competitors. We’ve been taking actions to maintain a competitive position and are benefiting from the actions that we took at the start of the year and are seeing strong premium written trends as we move into the third quarter. State expansion efforts remain the priority. We have several active applications in process, and we’ll update the market as they progress.
Ceded premium was $59.9 million in the second quarter of 2022 or 38.4% compared with $40.1 million in the first quarter of 2022 or 40.9%. We continue to have interest from reinsurance partners and to work through structures and processes with them. We did form another cell in our Vermont captive at the end of the quarter. Overall, we received $3.2 million in ceding commission fees during the second quarter of 2022, compared to $4.9 million in the second quarter of 2021. For GAAP purposes, ceded commission is deferred and earned over the life of the policy. As of June 30, 2022, there was $32 million on the balance sheet under deferred gain on coinsurance transactions, which will be recognized in revenue over time.
Our invested asset base continues to grow at $1.2 billion as of June 30, 2022, up from $976 million at year-end. Overall, we are benefiting from core capabilities, develop to source alternative assets in the areas of private credit, commercial mortgages and structured products, which is producing an overall portfolio yield of approximately 5.5%.
Overall, GAAP reported expenses were helped by negative interest credited due to the fall in the value of the options embedded in our liabilities and the increase in mark-to-market value of the options allowance. Salaries and benefits and other operating expenses, excluding the option mark, saw a small improvement as we continue to build the business and work on technology initiatives.
Salaries and benefits were $4.3 million for the quarter, down 4% compared to $4.5 million in the prior year second quarter. As we grow, managing expenses continues to be an area of focus and we’re making progress to bring costs further in line as the year progresses.
Now turning to guidance for 2022 based on our current view of the business and the market. With the positive trends we saw in the second quarter and the premium written at the start of the third quarter, along with the backlog in process, we’re confident in the anticipated premiums written being in the range of $500 million to $600 million for the year.
While our goal continues to be to exceed on average, approximately 70% to 90% of premium in the year, we’re currently running at approximately 40%. Timing of closing additional reinsurance deals can be delayed due to various factors and will vary quarter-to-quarter as new agreements are reached. Demand from our existing reinsurance partners is strong, and we have capacity in place to cover anticipated written premium through them with the potential to grow along with potential reinsurance transactions in the pipeline. We’re also working to warehouse more premium in our reinsurer Seneca Re for potential to use in the future reinsurance arrangements.
We are making progress towards bringing general and administrative expenses on a management basis, a non-GAAP measure within approximately $27 million to $28 million for the full year 2022. The continued performance of the business, actions being taken, and the potential for growth to continue to build value in the platform. And as we move forward, our opportunity is strong, and the team at Midwest is committed to positioning the business for continued growth.
Now I’ll open it up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from John Barnidge from Piper Sandler. John, you may begin.
John Barnidge
Thank you very much, and good morning. With MYGA is going to be 60% of sales in 2022, how should we be thinking about a blended ceding commission rate for the second half of the year?
Georgette Nicholas
Yeah. Good morning John. I think, again, as we see kind of more of the production coming through MYGA, given some of the movement in rates, investors and consumers kind of trending towards that product. On average, we get somewhere between 2.5% to 3.5% commission versus 5% on FIA. We do think, again, that that will potentially put some pressure on the downward trend on the feeding commission in the third quarter and the fourth. We’re running right now at about 5.25% ceding commission. So again, it depends a little bit on the product that we write and the reinsurance arrangements that we get in place. I think overall, though, we feel very confident that we’re holding our premium or ceded commission up as we look at, again, the reinsurance transactions that we’re looking at.
John Barnidge
Okay. Great. And a follow-up to that. I know the hope is to do 70% to 90% reinsurance as relationships expand. But if no new relationships are added, does the level of premiums that were reinsured off in the first half of the year, seem like a reasonable run rate barring that?
Georgette Nicholas
Yes. I think if we didn’t do anything different, right, that’s not an unreasonable rate. I think we feel like we have the opportunity to grow a couple of our existing relationships where there’s capacity and they’re relatively new. So we think there’s opportunity there as well as we do think that there’s opportunity to close a transaction or two in the back half of the year as we look at the pipeline of interest and reinsurers that we have in place and some of the work that we’ve been doing.
So, I think, we’re we feel very confident that to write the $500 million to $600 million, we’ve got capacity in place to hold that. If not, we also have capital in place to retain it, which has a positive impact in the sense of you see that in the investment income as we hold and retain more right, we’re benefiting from that.
John Barnidge
Great. Thank you very much. Best luck for the quarter ahead.
Georgette Nicholas
Thanks, John.
Operator
[Operator Instructions] It appears we have no questions at this moment. So I’m going to hand back to the management team for any final remarks.
Georgette Nicholas
Thanks. We appreciate all of you joining today and your interest in Midwest and look forward to talking to you over the next few weeks. Take care. Have a great day.
Operator
This concludes today’s call. Thank you for joining. You may now disconnect your lines.
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