Q3 2022 Midwest Holding Inc Earnings Call
Hello, everyone and welcome to Midwest, holding Q3, 2022 earnings calls we will begin shortly if you'd like to register your question ready for the Q&A session. Please press star followed by one on your telephone keypad now thank you.
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[music].
Ladies and gentlemen, and welcome to the Midwest holding Q3, 2022 earnings call. My name is Jordan and I'll be coordinating the call today I'd like to ask a question. During your presentation. You May do you say about question Star followed by one on your telephone keypad.
Oh, Hi, this is Tom Tom. Please go ahead.
Good morning, and welcome to the Midwest Holdings third quarter 2022 earnings call. This is Tom Buffalo head of business development and distributions Midwest. Joining me for today's presentation will be our CEO georgette, Nicholas as well as our president and CIO, Mike Minnick.
Yesterday evening Midwest issued our Q3 2022 earnings release announcing our financial results.
During today's call we will reference this announcement 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 Q3 2022 Form 10-Q, and 2021 Form 10-K, which has been filed with the Securities and Exchange Commission SEC Dot Gov.
Before we begin I want to remind you that matters from today's call will include forward looking statements relating 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 opinion as of the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur.
Forward looking statements are subject to various risks uncertainties and other factors that could cause our actual results to differ materially from those expected and described today.
In addition, we are subject to a number of risks that may significantly impact our business and financial results.
For a more detailed description of our risk factors. Once again. Please review our Q3 2022 Form 10-Q, and 2021 and 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.
Also like to remind you that during the call we'll discuss some non-GAAP measures in the dressing Midwest performance Youll.
You'll find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our Q3 2022 Form 10-Q.
And 'twenty one Form 10-K.
Now I'll turn the call over to Georgette Nicholas to share our results.
Thanks, Tom Welcome to Midwest Holdings third quarter 2022 earnings call. We appreciate you joining for an update on the company's progress.
Today I'll cover our strategic focus the results for the third quarter and the trends driving the business through the rest of the year.
We're very pleased with the strong results for the quarter, specifically around our increase in written premium and performance of the investment portfolio and the execution of another reinsurance transaction.
We're seeing the results of our focus and hard work on the core business of selling the annuity products and investing in reinsurance those liabilities to generate return.
For the third quarter of 2022, we achieved GAAP net income of $7 4 million.
Paired to a net loss of $3 1 million in last year's third quarter.
Driving this improvement with an increase in written premium of $255 5 million for the quarter supporting performance of the investment portfolio, which generated $12 9 million in revenue in the quarter compared with $6 2 million in the prior year third quarter.
This increase was offset by continuing decline in the market value of derivatives is this captured in your realized losses.
One with the mark to market gain on the embedded derivative related to the reinsurance contract.
We saw continued improvement in earned ceding Commission amortization and administration fees offset by a decline in service fee revenue.
Third quarter saw strong trends in annuity direct written premiums on a statutory accounting basis, which were $255 5 million for the third quarter of 2022 up 63, 8% compared to 156 million for the second quarter of 2022, which was up 59% compared to $98 one.
At first quarter of 2022 and up from $117 9 million in the third quarter of 2021.
We continue to see intense competition in the fixed annuity market around pricing or new competitors the.
The market is strong and we've remained in a competitive position and we're seeing positive results from our actions and improved sales momentum in both the second and third quarter now.
State expansion efforts remain a priority and are active with several applications in process.
We continue to work with the states to provide information and we'll update the market as they progress.
Our growth is strong given these market dynamics, even with a smaller state footprint. We continue to focus on new product development and our distribution partners to accelerate growth, making key investments in technology and people.
Ceded premium was $113 7 million in the third quarter of 2020 to 44, 5% compared with $60 1 million in the third quarter of last year or 51%.
The increase in the dollar amount of ceded premium was driven by the execution of another reinsurance arrangement effective September 30th.
The Seneca re protect itself from last quarter.
We continue to have strong interest from many reinsurance partners and continue to work through structures and processes with them.
Overall, we received $4 5 million in ceding commission fees during the quarter compared to $3 6 million in the third quarter of last year.
For GAAP purposes ceded commission is deferred and earned over the life of the policy.
As of September 30th 2022, it was $35 million on the balance sheet under deferred gain on coinsurance transaction, which will be recognized in revenue over time.
Our invested asset base continues to grow at $1 4 billion as of September 30th 2022 up from 976 million at year end 2021.
Overall, we're benefiting from core capabilities developed to source alternative assets in the areas of private credit commercial mortgages and structured products along with an increase in interest rates, which is producing overall portfolio yield was approximately five 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 the mark to market value of our options allowance.
Salaries and benefits were $3 8 million for the quarter down from $4 million in the prior year's third quarter.
We continue to realize expense efficiencies and improvement even as we added new employees and our insurance operations given the increase in new business.
Other operating expenses, excluding the gain on the mark to market of the options allowance were up from continuing to build foundational capabilities to support potential growth in the business along with costs that are variable with increased premiums written related to technology support distribution product design and premium taxes over.
Of all the growth in expenses was smaller in relation to the growth in new premium written as we continue to scale the business and accelerate growth.
Now turning to guidance for the end of 2022 based on our current view of the business in the market.
With the improved sales momentum we saw in the third quarter and the premium written so far in the fourth quarter will have a strong finish for the year.
We're very confident in the anticipated premiums written exceeding our previous range of $500 million to $600 million and we're updating our range now to be $700 million to $750 million for new premium written for the year.
Given the close of the additional reinsurance arrangement at the end of the third quarter and the current margins being generated on the retained business. We now anticipate feeding approximately 40% to 45% of new business overall for the year.
The ongoing goal will be to see on average approximately 70% to 90% of premium in a year to generate ceded commission fees and manage capital, but given the strong investment performance retaining more at this time drives additional value for the business.
Demand from our existing reinsurance partners is strong and we can grow our arrangements with them.
Partners in the pipeline to add additional capacity as we continue to scale the business.
We're also working to warehouse more premium and a reinsurance Seneca Reed for potential use in future reinsurance arrangement, which we've done before with other transactions.
Overall, we've made progress on managing costs and bringing them in line as we transition through the year.
Given the increase in premiums written expected for the year now and the impact that will have on premium taxes technology support and product fees. We now expect general and administrative expenses on a management basis, a non-GAAP measure to be within approximately 31% to $32 million for the full year 2022.
We positioned the company for further growth by focusing on distribution pricing and product investment management and reinsurance.
And we're advancing various investments in technology and foundational capabilities to strengthen the business overall.
We're benefiting from a strong annuity market, but we're growing and scaling above the market growth, even with our smaller state footprint.
Overall, the third quarter showed very positive trends and position us for a very strong finish for the year.
Our focus is on executing the key drivers of the business to provide consumers with the insurance products needed and to deliver strong results now and longer term for both policyholders and shareholders.
Well mid western designed to be a services oriented company generating recurring fee revenue with a business model supported by capital and reinsurance.
Our capital position, we've been able to retain more business. This year as we expect strong margin performance given market conditions.
This flexibility allows us to provide best in class products for our customers and strive for higher returns for our shareholders over time.
Our strategic focus remains on premiums written to capitalize on a growing market distinguishing ourselves in product indices in technology.
And investing in and leveraging modern technology to enhance processes that improve the efficiency and effectiveness as the agent and customer experience.
Creating and using reinsurance structures, including our captive reinsurer to mitigate risk and provide capital support and.
And finally, I'm, providing management services around investing assets and leveraging our core capabilities.
Support the administration of reinsurance vehicles.
Our focus and execution on key drivers are resulting in the growth of the business and its performance, which will continue to build value in the platform.
As we move forward our opportunity remains strong and the team at Midwest is committed to positioning the business for continued growth.
Now I'll open it up for questions.
Thank you if you'd like to ask your question. Please press star followed by one on your telephone keypad.
If you'd like to draw. Your question. Please press star followed by two when comparing to ask your questions. Please ensure you're on mute locally.
As a reminder, that star followed by one on your telephone keypad now.
We have a question from Macau Schmehl of JMP Cow. Your line is open. Please go ahead.
Yes.
Thank you good morning.
Hum.
I got a couple of questions.
And we'll start with.
The premium growth.
Obviously, my guys are very desirable product right now.
Can you maybe just talk about that for your product in terms of.
How you see that developing over the next few quarters.
Sure good morning, and thanks for joining us.
No I think again, given the market, we're certainly seeing more of a gravitation towards the micra product given where rates are and I think again, what's been happening with the volatility in the market. So I think we're seeing more of the Bellini.
Leaning towards that for us that's certainly a you know supports our model in the reinsurance a lot of our reinsurers like that product. So we feel good about how that's helping to achieve our overall growth I think on the fee side right, we certainly or looking at that product and understanding where some of the caps are in the market.
Quite competitive and it keeps moving so we continue to watch that and in the ball, but I think longer term are you know we want to get back to more of a kind of 70 525 mix of Oh My God I think you know ultimately we'll end the year more of a kind of a 60 40 split 60 40 C S.
So for US it's again, taking the opportunity that's in front of us and that supports the reinsurance nicely as well as a stable to retain some of the business to really kind of grow the margins that we're seeing are in the investment portfolio.
Alright fair enough.
And then.
I'm in my model here.
Got a couple of numbers questions. So the first so the next one would be regarding the benefit.
It was I just noticed that it was a it was a $1 3 million.
It's a benefits expense.
And I actually noticed that there was a little bit last quarter as well can you just explain what this is.
Yeah. So I think again, if you you'd look at that it kind of ebbs and flows quarter over quarter I think what you see running through there right as is.
I'm sorry.
You know it is again kind of the payouts for.
Death claims that we have so again that ebbs and flows on the market.
Okay.
Yeah, I mean, it was quite low initially.
Yeah.
Basically nothing in 2021 I think there was some figures in 2020.
No it's another.
Yes.
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So did these claims do you mean.
Is there any.
Is there any pattern to it or just.
Random right.
Yeah, it'll it'll ebb and flow again with some yeah.
Okay, Yeah, it's gonna be a little bit.
Random, but the over over time, we expect kind of a 2% yield benefits paid to over the life of the policy.
2% per annum, and we're running well below that but that's what was what our actuaries model.
But every February period every quarter.
2% of our AUM, yes.
Okay.
Got it okay I'll make a note of that.
Okay, and then and then moving into a U M.
Another numbers question that I know, there's a rigor.
Regarding the <unk>.
M C.
Are you kind of dropped.
Significantly this quarter is there any reason for that.
AUM and growing.
I believe it.
The reason why it dropped to like you know 118000 versus 400000 last quarter or over a million in the previous quarter.
Yeah, we had some acceleration of fees into the first half of shoes are we had some loans pay off that drove some of the performance fees are into the quarter. So.
Areas into the first half of the year. If you look kind of year over year. It's it's a consistent right Donald about 100000, and so we do think fourth quarter will go back to a more normal rate as we worry about Q2 about kind of that fluid. It wasn't it wasn't an acceleration.
In the first half of the year.
That's right and particularly Q1.
Q1 got it.
Right.
And then.
Regarding investment income I know, it's a fluid number.
With different components.
Are you able to share it with me.
The new money rates, you're getting anything that would be useful in terms of.
Projections.
Just I don't know if Mike you can add in but I think overall yeah go ahead.
Sure I mean, the new money rates have been very attractive and that's more volatile market.
Yeah, So where we are getting north of seven.
7%.
On all of our new money one thing that we are focusing on this quarter is we.
We're working on using our federal home loan Bank program.
So we got kicked in investing in some of the.
So boy assets.
At lower.
Lower yields in the 7%, but we're planning for a budget from the home loan bank and ultimately yoda.
A return to our to our investors of over 7%. So that's been a bit of more of our focus this quarter.
Got it yeah, I'm, a little familiar with that in terms of the.
Below that you can get all of the of the home loan programs.
Okay, I'll make a note of that and then.
And then lastly.
You touched on the expense so I have that.
Got it here, but.
In terms of the reinsurance partners.
Yep.
The last few quarters, we've talked about how there was a lot of warehousing.
Going on and.
And with this new partner.
That was just inked by the end of the quarter do you think it's going to it's going to help in a significant way or.
I mean, I think we have.
Yep.
Go ahead, Mike go ahead.
I'm sorry.
It's not going to be about 10% to 15% of our.
Our flow.
Quarter by quarter basis, although you're not necessarily going to take down the warehousing.
But I can assure you kind of look at 10% going forward.
Yeah, I think overall you know we've got yeah strong interests right in our reinsurance.
Activity right and structures, we're working with a number of parties and continue to see that pipeline to be strong I think you know we have the opportunity to grow with our existing partners along with this new arrangement that we added so.
Part of it is we like the business end and the returns right now and what we can earn from a net investment income so retaining.
Some of that business, given where our capital position is its certainly beneficial overall, so I think for us the combination of retaining it plus having the cells.
To warehouse and then do.
Something like we did with the a S. R. C. One a sell with orix right that that is an opportunity for us down the road.
To continue to manage capital.
Okay.
So I'm just okay. So last question.
And welcome.
And welcome to the reinsurance partners and the appetite for the.
Mike.
And your desire to go back to the fee.
Is it really just macro driven at this point in terms of that transition from my gut to see.
And then the.
The market dynamics changing.
Towards what you know.
Your long term goal is is that my.
Somewhat correct.
Yeah, I think what we're seeing is given.
Yeah, given the market dynamics right people are gravitating towards locking in shorter duration products right and so going more towards the Mega that's three and five year versus the fear of Windows, seven and 10, So I think yes.
Yeah, Yeah, okay.
Yeah.
I think I think I think that's very important especially.
If we're going to.
You know write a note here explaining what's going on because it's really just tough.
Top down macro driven.
You know it.
It's it's a little bit.
A little bit out of your control in terms of how you know how fast you can transition into this year almost.
You're having to wait for the market to two of them.
Yeah.
Yeah, No and I think in the short term then we're able to do something with the micro product and earn a strong return on that or yes, correct I agree.
It.
Is it really is is that the main reason for the book value dropping so significantly.
That's right I think again between that and also you know again some of the unrealized mark to market lots on the investment portfolio in particular, right you're kind of a fixed maturities your mortgage backed securities and your CLO. So it's it's market driven that we think will come back.
Is that kind of correct.
Yeah, let's see last quarter it wasn't that dramatic.
Yeah.
We're projecting significant mark to market last quarter. This quarter, there was definitely some mark to market, but it wasn't as big as you know Q2, and I know you know you're right.
No.
Okay.
With that cute swap.
Is it because that is correct.
Okay because of the swap that's correct.
If it doesn't get lost wedding.
So that's what was not in effect this quarter.
It was I think again the the.
Big decline that we saw in the derivatives with coming into Q2, we probably were a little bit over hedged also as we had some changes right and the product mix.
Mix. So there was a combination of of again the impact in second quarter being higher than what we saw in Q3 Q3 that it was still down but not as much as it was in Q2. So I think again, we took most of our impact in Q2.
Got it okay.
Great.
Alright, I have it all noted here in my in my in my notes in the model. So thank you so much for your time and answering my questions.
No. Thank you thanks for joining this morning.
All right have a great day, we'll be in touch.
You too take care.
Thank you as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad now.
At this stage. We currently have no further questions behind that kind of as a management team for any closing remarks.
We appreciate.
Great all of you joining this morning and your interest in Midwest and look forward to speaking with you again soon thank you.
Ladies and.
This concludes today's call you may now disconnect your lines.
Uh huh.
Yeah.
Okay.
Okay.
Yeah.
Yes.
Yeah.