Q1 2021 Midwest Holding Inc Earnings Call
Yeah.
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Ladies and gentlemen, welcome Judy Midwest Holdings incorporated Q1, 2021, my name is Katie and I'll be coordinating your call today.
And I'll ask a question Jeremy and the presentation you may decide it by pressing star followed by one or no telephone keypad.
I'll now hand, you a ritual highest on bundling to begin from please go ahead.
Good afternoon, and welcome to the Midwest Holdings first quarter 2021 earnings call.
This is Tom Bumble on kind of business development here at Midwest joining.
Joining me for today's presentation will be our co Ceos and founders, Michael Salem, and Mike minute as well as our Chief Financial Officer Deborah ironic.
Yesterday evening Midwest issued our Q1 and 2021 earnings release announcing our financial results.
During today's call we will reference this letter a copy of which can be found on the investor Relations page of our website at IR Dot Midwest holding dot com.
While this call will reflect items discussed within that document for more comprehensive information about our financial performance. We also encourage you to read through our form 10-Q, which has been filed with the Securities and Exchange Commission.
Before we begin I want to remind you that matters discussed on today's call will include forward looking statements related to our operating performance financial goals business outlook, which are based on management's current beliefs and assumptions. These forward looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result.
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 and.
In addition, we are subject to a number of risks that may significantly impact our business and financial results.
For a more detailed description of our risk factors. Once again. Please review our form 10-K, where you will see you discussed and the factors that could cause the company's actual results to differ materially from these statements.
A replay of this conference call will be available on our website under the Investor Relations section.
I would also like to remind you that during the call we will discuss some non-GAAP measures and discussing Midwest performance.
You can find the reconciliation of those historical measures to the nearest comparable GAAP measures and our earnings release and 10-Q.
Lastly, we are pleased to announce that Mike and Michael have been selected as speakers from Piper Sandler virtual and Midwest Life Insurance tour on Thursday may 20th.
They are discussion will begin at 930, a M central time led by senior research analyst John Barnidge.
Please reach out to John Barnidge, or a member of the Piper Sandler team and if you're interested in attending.
With that I'll turn the call over to Michael <unk> Michael.
Thanks, Tom and good afternoon, everyone I'm pleased to join you today to report on the solid progress we are making at Midwest. We continue to execute on our business plan and remain uniquely positioned to capitalize on the life and annuity supply chain.
The opportunity and our space is significant.
Our business model has been validated by the industry.
But while incumbents and large financial institutions struggled to adapt due to their size and complexity we are executing.
Midwest was in fact built for this opportunity built from scratch to manufacture and distribute individual life and annuity products on behalf of third party asset managers and investors.
And the difficulty and complexity of our industry creates a natural moat around our success.
We have and extremely unique and talented team that is dedicated to our vision.
And it is our ability to execute that will ultimately separate us from the pack.
Our goal is to build a platform capable of generating significant long term earnings power.
We are not here to build a very good small company our opportunity is to build a transformational company.
And in order to do that we must build and incredible infrastructure, including investment and technology distribution and asset management and operations and we must manage our capital and our growth.
We are pleased with our progress and the quarter and pursuit of this long term issue.
First of all our premium volumes remained strong with $123 7 million and written annuity premium representing 159% growth from $47 8 million and the first quarter of last year.
Management revenues growing 126% during the quarter to $6 4 million from $2 8 million and the first quarter of 2020.
We're also making strong progress and building, a leading technology and operations platform.
Not only allowing us to efficiently scale, but also providing us incredible third party revenue opportunity.
And our reinsurance program, we have significantly expanded our distribution capabilities for our product.
Positioning us for scalable access to capital for years to come.
But our transition to larger more strategic sources of reinsurance capital takes time.
We have and extremely valuable product and we will be deliberate and our relationships.
We are confident and our ability to execute on our long term reinsurance strategy.
We have also built the beginnings of a solid asset management platform.
Attracting top talent to lead our efforts, including <unk> CEO, Eric Delmonico head trader, Elliott's Ferber and head of credit Brad Snyder and.
Immediately our investment income was below our target for the quarter and we have been slow to invest the proceeds from our December public offering as.
As we continue to develop reinsurance and asset management relationships, we expect this to correct.
Finally, managing our Investor relations and financial presentation, and a new public company has been a work in progress we still have more work to do but we are moving and the right direction.
The last thing I'll say before I hand, this over to Mike is that we have and extremely talented and committed management team.
We are well aligned we are focused and we are poised to deliver results for our stakeholders.
And as we continue to execute as we have.
We truly have an opportunity to become a leading life and annuity platform.
Mike.
Thanks, Michael.
We're building an incredible company.
Our long term approach has given us sustainable advantages, allowing us to invest and our growth.
As such we will continue to capitalize on our unique opportunities and distribution product development asset management and reinsurance services.
Beginning with distribution and we see value and our limited distribution model across additional distribution channels.
And our current partners are not as strongly represented.
Such as independent banks broker dealers and <unk>.
And the product area, we continued to differentiate through simplification.
Our ability to manufacture new products that are simple and competitive and easy to integrate onto our distribution partners infrastructure is a key competitive advantage of our technology platform.
As Michael mentioned, we have made strategic hires and asset management, combining access to insurance liabilities and asset management capabilities has been a common theme over the past many years.
We believe our asset light twist on this theme is the long term winner and we expect to see more farms following our lead to the extent that they can.
In addition to these new hires we are investing and our infrastructure to support the long term scalability and asset management.
And these investments and churn will benefit our reinsurance business as well.
Regarding reinsurance are expanding reinsurance product suite allows institutional investors multiple ways to access insurance company and liabilities our partners receive all the benefit of the insurance liabilities without tackling distribution and policy administration, among other competitive moats and the insurance industry.
We have turned our insurance company into an intermediary that provides insurance as a service to our institutional clients.
This innovation and symbiotic for us and our partners.
We gained and capacity to originate more annuities without being burdened with the capital strain and investment risk.
While our partners gain access to and demand policy liabilities.
Regarding our reinsurance pipeline, we have a number of letters of intent signed and hope to announce the details of these reinsurance partnerships and the future.
Through these partnerships is in part due to the platform's flexibility to offer an entire suite of reinsurance solutions.
And from Sidecar investments joint ventures.
And all the way to secured funding back to agreements.
Last week, we announced and American life became a member of the federal home loan Bank.
Through this membership American life can access competitive and liquidity lines as well as an attractive funding source for qualifying mortgage loans.
In addition to the senior members of our asset management team. We are excited to announce the nomination and two exceptionally talented individuals to our board of directors.
And the Callaghan and Dianne Davis.
Nancy has over 25 years of experience and technology financial services and insurance. She is currently the global Vice President for strategy and growth of SAP services.
Previous leadership positions at AIG and writers.
Diane has over 30 years of experience and life insurance as an actuary business head and CEO at multiple insurance companies, including Kemper Zurich and farmers insurance, we look forward to the invaluable insights both will provide and welcome them to the Midwest and elected to serve as directors of the upcoming meeting of stockholders.
And with that I'll turn it over to Deb <unk> our CFO.
Thanks, Mike and good afternoon, everyone I am pleased with the continued progress made during the quarter and the financial position of our company and the <unk>.
First quarter of 2021 management revenue was $6 4 million.
126% from the first quarter of 2020.
And on and management earnings power basis, our revenue for the quarter was $10 million.
274% from the first quarter of 2020.
Management operating income loss available to common shareholders during the quarter decreased to a loss of <unk> 4 million or $3 1 million income on a management earnings power basis.
Compared to income of <unk> 5 million or $6 million income on our management earnings power basis, and the first quarter of 2020.
Going forward, we will be sharing our management earnings power P&L, which we used to measure the true earnings power of the business taking into account the timing of reinsurance transactions and so.
Well SG&A that we attribute to investment and future growth of the business.
And this quarter due to our excess cash balances.
Also adjusting our investment income based on our OE.
And.
As Mike and Michael mentioned, we continue just see and opportunity to invest and growth across the entire platform.
Quarter of 2021, G&A expenses, excluding stock based compensation and mark to market of the tranches option allowance total $5 3 million compared to $1 million and first quarter of 2020.
And the approximate 15% of G&A this quarter to be directly related to activities connected to investment and the future growth of the business.
We continue to settle into a new role as a publicly listed company.
We're focused on increasing our exposure and the market and strengthening our communication and presentation of our business to investors.
And an example of the level of detail and we're committed to providing can be found in our GAAP interest cut and it like.
This line contains a lot of technical accounting noise and dust little to help investors understand our financial performance.
And so we're now back in that number out along with the derivatives, we used to hedge and adding and management interest credited mine tour expenses.
And we will continue to improve our financial presentation and explanation as we move forward.
With that we will now open the line for questions.
Ladies and gentlemen, if you'd like to ask a question. Please press star followed by one on the other tenants.
Thank you Pat now.
Have you changed your mind, Please press star followed by <unk>.
And when I'm comparing to ask a question. Please ensure your phone is on leachate lately.
Our first question comes from Matt commodity from JMP, Matt. Your line is now open.
Hey, Thanks, good morning.
Hope and.
We could maybe start with just the top line production and talk a little about.
The mix and the quarter.
Obviously my day.
Mike does go down a bit and and fees grew nicely.
Can you talk a little bit about kind of the competitive environment and what might have driven the decisions we made there.
Sure. Thanks, Scott.
Yes, Mike and Mark and it certainly has been a bit more competitive and.
And the quarter, so I think that youre seeing a little bit of reduction as we're not really chasing that market at the moment.
And.
And you will see.
He has generally been.
More attractive to us because we can differentiate ourselves in terms of the product design and.
As well as the service that we're able to provide.
In terms of like debt the general.
Overall production.
There is a bit of seasonality and the first quarter just from way over from the holiday season and <expletive>.
Remember that we would expect to see a slight slowdown.
With respect to the general mix, it's really just kind of.
And response to what we're seeing our competitive strength.
Okay.
And he's done it.
Yes.
And something quickly Matt This is Michael.
We are seeing an opportunity and expanding our distribution in the module product.
And and so thats something I think debt.
And because of our position and our ability to.
Enter.
New channels quickly and easily I think there is opportunity for us to do that but I would also add that the module product.
It really is something that when there is an opportunity and we have good reinsurance capacity, that's something that we can grow in pretty easily and.
And so we don't expect that to be as you kind of COVID-19.
Just and producer necessarily quarter to quarter, and a little bit more sensitive to the competitive environment.
Okay perfect.
Moving on my next question just in terms of.
And he can give you the feel for overall volume.
Mike I appreciate your comment on.
Kind of a big pipeline of reinsurance partners building.
How much I guess on the volume that was produced and the quarter was did you hold back maybe based on market.
Market environment versus like is the fact that youre warehousing, a lot now and kind of waiting for kind of and get those partnerships finalize and before producing a lot more.
Okay.
Yeah sure I think Thats fair as we build reinsurance capacity and that's part of the unique nature of our of our business and.
Finalize some of the really quite scalable relationship that we're working on that allows US then to strengthen the pricing and.
And being more competitive and that's the virtuous circle and value proposition of our business. So I do think theres some attributions bat.
And when we speak to the reinsurance market and our reinsurance partners.
And they are really focused on how much bigger we can debt.
And so I think that should play out nicely as we move as we move forward and continue to execute the business plan.
On that point is the maybe concerns the wrong word, but when we think about kind of top line production is it almost the other side in terms of.
We should be thinking more about.
How quickly you can ramp to kind of.
Feed their desires when these.
Yes.
And.
Partnership they are signed and.
Does that or do you expect that that kind of any impact on.
And the pace of state expansion or partnerships on the front and how should we think about.
Kind of the appetite from those reinsurance partners for the liabilities and your ability to kind of fulfill that to their expectations.
Yes, I think that's really.
That's the circle.
And that would play and as we build capacity they have confidence that we and we've demonstrated that we can grow the business and.
I think it's very very well positioned are you hearing and you wanted to add.
Yeah.
Yes, no I think.
Really what I wanted to add debt, we are making those efforts now to expand state expansion distribution et cetera, so that it's going to be really setup.
When that capacity is ready to be taken up so we're making all the efforts kind of in the background.
For the future growth.
Great and then one more question if I could.
Michael.
Commented a little bit of your other comment about kind of the.
The build of talent at 55 can.
Can you give us a little more color on kind of debt.
And what is your long term vision for the asset management piece of your business.
What are you trying to build.
Right yes.
So.
We'll start with the synergies obviously I think had been demonstrated between insurance and asset management and so we have extremely high synergies.
With our business with the alternative asset management community and that is an extremely large marketplace, but what we see our value and where we're kind of building infrastructure.
It's really to partner with asset management and so what we've done is to bring in.
Are you seeing your asset management risk management credit trading professionals to help us manage those relationships and bring those relationships to the business.
But it is not to build true asset management infrastructure, because when we look at the value chain.
These partnerships and what what's out there right now is extremely valuable and we can access it on a partnership basis, which is very attractive to us.
Okay, great. Thank you very much for the color best of luck.
Thank you Matt.
Our next question comes from John Barnidge from Piper Sandler John Please go ahead.
Thank you very much and maybe sticking with the <unk> five and the <unk>.
And Matt do you anticipate it will grow beyond just premiums retained or how should we be thinking about the growth of net AUM.
Yes so.
Yes. It is going to go grow beyond premiums retained so with respect to our reinsurance products. There is there's really two types of products that we offer.
One is out to asset managers, who will be bringing their own assets and our asset management.
And the second is really with respect to third party capital.
<unk> is not going to be bringing it up and asset management.
So it's really with respect to that second group will.
And we'll be driving the growth of the <unk> five capital AUM.
And I think Youre aware about three.
Three quarters of our reinsurance partners to date are using the <unk> app.
Debt management, and we have a number of.
Those reinsurance agreements in the pipeline, where pitino fireball.
The asset manager.
So I don't think alarm.
Yes over the long term, John and we expect.
Hi.
50, 50 kind of split is I think what our expectation would be if we were to say it today in terms of retaining the asset management with passive third party capital versus our asset management product.
Okay.
And that's very helpful on.
Thanks Cliff.
Clearly there was a bit of a cash drag on the quarter can you talk about.
Your outlook or timeline on maybe exiting that cash drag.
And maybe within that how the <unk> of Topeka.
Can help with that and help on funding and product construction.
Right, yes, so with respect to the cash drag we do expect to.
But put that cash to work.
If not here and the second quarter.
Winding it up and the third quarter.
Regarding the home loan bank.
It is going to be a source of liquidity for us and we will actually enable us to run at almost zero cash balances.
Because we will be able to have.
Securities pledged to the home loan bank and drawdown on liquidity as needed.
This is a new program for us so that we have not had gotten all of that and mechanics locked down but that is certainly something in the works.
Additionally.
Okay.
You're kind of alluding to is there a product mix that can be offered out to our reinsurers based on the home loan bank.
Access.
That is something that we are exploring and we do we do believe that there.
We should be able to offer that to you.
Yes.
<unk>.
That financing to be financed by third party capital providers.
Yeah, and John the other thing I, just wanted to kind of add on top of Mike.
On the reinsurance relationships that we're building with third party asset managers.
And are also providing us really unique and opportunistic flow of assets and so the synergies that we have on the asset management side of our business that we've discussed and the ways that we can partner with really.
Who we believe are the best assets asset managers out there.
Both grow our ability to invest for our own balance sheet or third party.
Investing reinsurance clients and then also our reinsurance pipeline and funnel. So we're really kind of finding.
And the different ways, we can interact and partner with asset managers to be a very strong component of the opportunity.
Okay.
And maybe dovetailing on that I mean.
It seems like with the and maybe it's just timing, but <unk> emission from its peak.
Net.
Competitive liquidity lines that you feel some comfort level with new distribution on my guys. So can you talk about is that like Imo's, new states something possibly bigger.
Yes so.
I would say, it's really some of the other distribution.
Lines outside of the IMO so.
As Youre aware the limited distribution strategy has been very successful for us and the iron low channel.
We are looking to take that same strategy into some of the other channels such as broker dealers the bank and the RIAA.
We are making significant.
Headway in breaking into some of those channels and.
We do feel yes, specifically for the <unk> product, which is a very simple product I think it sells well through those types of channels.
Our our future Maiga growth will probably be there.
Okay No that's helpful on.
And then maybe on the reinsurance on structuring.
A little lower and the first quarter is it reasonable to think that as we look through the year that there'll be somewhat of a.
Hockey stick.
As these new reinsurance asset management relationships are opening up that debt still probably does hit that 90% target that you guys have.
Yes, the 90% target is still our expectation for 2021.
And.
It's exactly as you described.
We would expect that these reinsurance agreements would be taking our Q1 and Q2.
Production and or even anything that was left over from.
2020, potentially such that.
We may have reinsurance on a particular quarter that is higher than our production.
And that's that's one of the reasons why.
We are.
Giving giving us a little bit more guidance or thought process on.
On what our quarterly earnings power is on.
And so that you can see like it's kind of based on our production of premium, but depending on the timing of the reinsurance.
Profitability or it's going to show up and are.
Earnings differently.
Okay, so 90% CS.
What you think and for reinsurance to $600 million and sales also seem about what Youre also still thinking about as well.
Yes, no changing and that projection.
Okay.
Fantastic and maybe my last question and I'll, let others ask but can you talk about your total addressable market. The day that you think youre, hitting and where you see that being over say the next three years.
Sure.
No.
A couple of different addressable market debt that we look at as a company obviously the kind of individual agents.
We also have just the individual annuity market and then the life life and health market. So that that's on the liability side and low.
And though you are we kind of really running at very very low low market shares.
Of those markets I think maybe we're at 17 basis points and the individual annuity market.
And so because of that we don't focus as much around the overall growth and the growth of the market, but that being said the tailwind and demographic tailwind for other things that could come through around tax.
Products that were writing we really are very strong.
Products for financial planning and individual investors and so.
We really like the overall market as well, even though what.
It really is going to drive our growth as our as our increased from 17 basis points of total market share.
And then beyond that we also looked at our <unk>.
Reinsurance products and.
And that's the form of and alternative asset products and.
And that market is even bigger and that market kind of in the trillions.
And so.
And we also think the alternative investments is an area that really should grow in the individual investor and financial plan and market and we look at individual investors and retail investors, we assume that theyre very underweight alternatives.
And there is an opportunity there so overall.
Other markets that we're in are massive and.
Our opportunity is really to build.
The business plan that combines both insurance and alternative asset management, which we think we are doing.
Thanks for the answers.
Thank you John.
And as a reminder to ask any further questions. Please press star followed by one on a tenant thank you Pat now.
Thank you. So we have another question again from jump on itch from Piper Sandler. Please go ahead.
Thanks.
And maybe one more on the.
And the pricing dynamics that youre seeing on ceding commissions.
Directionality of where you see and it's actually held up well and then.
And maybe does that differ between fixed index and my visit all thank you.
Yes.
I can take that John so we.
And we see yes, we see our margins.
Kind of being being very stable on our reinsurance products.
<unk> is a bit shorter duration and and we also have a three year model you know so you could.
And the shorter duration product, we get paid a little bit less relative to the fee and so now there is some movement around there.
Generally when we looked at our margins as well as other companies who have reps.
Replicated some of our reinsurance structures, they're all kind of right on right on top of each other and.
And it seems very very stable so I think.
<unk>.
But what we're seeing there Mike is there anything you wanted to add.
No nothing nothing to that.
Yeah.
Thank you we have nice other questions.
And at <unk>.
Thank you well, we appreciate and we appreciate the question.
And the Investor support and look forward to connecting with anybody that would like to have a one on one conversation with us. Thank you very much.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
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