Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2023
For the quarter ended September 30, 2023
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-39812

Midwest Holding Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-0362426
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

2900 S. 70^th Street, Suite 400, Lincoln, NE		68506
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (402) 817-5701

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:Trading Symbol(s):Name of Each Exchange on Which Registered

Voting Common Stock, $0.001 par valueMDWTThe NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405c of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviewed financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the shares of the registrant’s common stock held by non-affiliates as of ~~July~~October 31, 2023 was $9998.70 million calculated by reference to the average of the bid and ask price of such voting common stock on ~~July~~October 31, 2023.

As of ~~August~~November 1113, 2023, there were 3,744,645 shares of voting common stock, par value $0.001 per share, issued and outstanding.

Table of Contents

MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION



Item No.	Item Caption	Page
Item 1.	Financial Statements	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Income (Loss)	4

	Consolidated Statements of Stockholders’ Equity	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

Item 4.	Controls and Procedures	64

PART II – OTHER INFORMATION



Item No.	Item Caption	Page
Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults Upon Senior Securities	64

Item 4.	Mine Safety Disclosures	64

Item 5.	Other Information	64

Item 6.	Exhibits	64

	Signatures	68

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Midwest Holding Inc. and Subsidiaries

Consolidated Balance Sheets

~~June~~September 30, 2023 and December 31, 2022


	~~June~~September 30, 2023		December 31, 2022
(In thousands, except share information)	(Unaudited)
Assets
Fixed maturities, available for sale, at fair value(amortized cost: $1,609,005 in 2023, and $1,269,735 in 2022.Allowance for credit losses of $8,916 in 2023.) (See Note 3)	$	1,538,912	$	1,214,635
Fixed maturities, available for sale, at fair value(amortized cost: $1,717,921 in 2023, and $1,269,735 in 2022.Allowance for credit losses of $8,917 in 2023.) (See Note 3)	$	1,643,832	$	1,214,635
Mortgage loans on real estate, held for investment (Allowance for credit losses of $1,493 in 2023.)		352,908		227,047
Mortgage loans on real estate, held for investment (Allowance for credit losses of $1,577 in 2023.)		421,232		227,047
Derivative instruments (See Note 4)		3626,~~861~~559		15,934
Equity securities, at fair value (cost: $5,592 in 2023 and $5,592 in 2022)		5,~~144~~112		5,111
Other invested assets (Allowance for credit losses of $1,343 in 2023.)		107,902		112,431
Other invested assets (Allowance for credit losses of $1,600 in 2023.)		126,777		112,431
Preferred stock		33,~~805~~926		31,415
Deposits and notes receivable		1110,~~012~~774		8,359
Policy loans		5583		25
Total investments		2,~~086~~268,~~599~~295		1,614,957
Cash and cash equivalents		~~194~~197,~~275~~804		191,414
Deferred acquisition costs, net		5769,~~604~~470		43,433
Premiums receivable		~~372~~63		362
Accrued investment income		3544,~~050~~694		25,165
Reinsurance recoverables (See Note 8)		3927,~~899~~870		20,190
Property and equipment, net		1,~~811~~721		1,897
Receivable for securities sold		~~441~~-		10,518
Other assets		1114,~~990~~335		12,495
Total assets	$	2,~~428~~624,~~041~~252	$	1,920,431
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	1211,~~646~~532	$	12,945
Deposit-type contracts (See Note 6)		2,~~218~~453,~~725~~282		1,743,348
Other policy-holder funds		64,~~474~~530		4,105
Notes payable (See Note 7)		25,000		25,000
Deferred gain on coinsurance transactions		4344,~~214~~140		38,063
Payable for securities purchased		4427,~~656~~029		8,872
Other liabilities		4836,~~026~~786		53,721
Total liabilities		2,~~398~~602,~~741~~299		1,886,054
Stockholders’ Equity:
Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of June 30, 2023 or December 31, 2022		—		—
Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of September 30, 2023 or December 31, 2022		—		—
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,744,645 shares issued and outstanding as of June 30, 2023, and 3,727,976 as of December 31, 2022, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding June 30, 2023 and December 31, 2022, respectively		4		4
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,744,645 shares issued and outstanding as of September 30, 2023, and 3,727,976 as of December 31, 2022, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding September 30, 2023 and December 31, 2022, respectively		4		4
Additional paid-in capital		~~139~~138,~~085~~122		138,482
Treasury stock		(175)		(175)
Accumulated deficit		(67,~~746~~361)		(63,019)
Accumulated other comprehensive loss		(5766,~~433~~886)		(51,386)
Total Midwest Holding Inc.'s stockholders' equity		133,~~735~~704		23,906
Noncontrolling interests		1518,~~565~~249		10,471
Total stockholders' equity		2921,~~300~~953		34,377
Total liabilities and stockholders' equity	$	2,~~428~~624,~~041~~252	$	1,920,431

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

~~June~~September 30, 2023 and 2022

(Unaudited)


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands, except per share data)	2023		2022		2023		2022
Revenues
Investment income, net of expenses	$	2420,~~248~~796		1012,~~541~~938	$	4364,~~441~~237	$	1629,~~783~~721
Net realized gain (loss) on investments		2,087		(12,636)		18,373		(18,810)
Net realized (loss) gain on investments		(8,946)		4,135		9,427		(14,676)
Amortization of deferred gain on reinsurance transactions		1,~~498~~392		1,~~043~~239		34,~~071~~463		23,~~012~~251
Policy administration fees		~~480~~874		~~514~~536		1,~~119~~992		~~862~~1,398
Service fee revenue, net of expenses		~~631~~2,298		~~416~~118		13,~~285~~582		1,~~514~~632
Other revenue		~~122~~5		—33		~~228~~235		~~100~~132
Total revenue		2916,~~066~~419		~~(122)~~18,999		6783,~~517~~936		221,~~461~~458
Expenses
Interest credited		122,~~590~~524		(5,~~496)~~682		2022,~~279~~803		(126,~~170~~489)
Benefits		~~1,206~~(526)		~~994~~1,351		21,~~163~~638		~~994~~2,345
Amortization of deferred acquisition costs		12,~~914~~215		1,~~052~~193		35,~~617~~832		13,~~902~~095
Salaries and benefits		53,~~817~~805		43,~~298~~751		1115,~~320~~124		812,~~615~~366
Other operating expenses		~~5,002~~956		(2,~~240)~~317		1819,~~915~~869		(41,~~060~~744)
Total expenses		268,~~529~~974		(114,~~392)~~294		5665,~~294~~266		(49,~~719)~~573
Net income before income tax expense		27,~~537~~445		14,~~270~~705		1118,~~223~~670		711,~~180~~885
Income tax (expense) benefit (See Note 9)		(2,969)		2,125		(5,876)		(2,597)
Income tax expense (See Note 9)		(4,606)		(1,250)		(10,482)		(3,848)
Net (loss) income after income tax expense		(432)		3,395		5,347		4,583
Net income after income tax expense		2,839		3,455		8,188		8,037
Less: Income (loss) attributable to noncontrolling interest		32,~~451~~454		(53,~~871~~976)		57,~~400~~856		(48,~~869~~846)
Net (loss) income attributable to Midwest Holding Inc.		(3,883)		9,266		(53)		9,452
Net income attributable to Midwest Holding Inc.		385		7,431		332		16,883
Comprehensive loss:
Unrealized gains (losses) on investments arising during the three months ended June 2023 and 2022, net of offsets, net of tax (($0.9) million and $2.0 million, respectively); Unrealized gains (losses) on investments arising during the six months ended June 2023 and 2022, net of offsets, net of tax ($1.3 million and $4.7 million, respectively)		4,322		(19,666)		(6,230)		(29,369)
Unrealized losses on investments arising during the three months ended September 2023 and 2022, net of offsets, net of tax ($2.1 million and $5.4 million, respectively); Unrealized losses on investments arising during the nine months ended September 2023 and 2022, net of offsets, net of tax ($3.4 million and $10.4 million, respectively)		(9,937)		(26,114)		(16,167)		(55,483)
Less: Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the three months ended June 2023 and 2022 (net of tax less than $(0.1) million and $(2.4) million respectively);Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the six months ended June 2023 and 2022 (net of tax less than $(0.1) million and $(5.0) million respectively)		173		1,369		183		858
Less: Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the three months ended September 2023 and 2022 (net of tax less than $(0.1) million and $(19.9) million respectively);Reclassification adjustment for net realized gains (losses) on investments, net of offsets during the nine months ended September 2023 and 2022 (net of tax $(0.2) million and $(24.9) million respectively)		484		(952)		667		(94)
Other comprehensive income (loss)		4,495		(18,296)		(6,047)		(28,511)
Other comprehensive loss		(9,453)		(27,066)		(15,500)		(55,577)
Comprehensive income (loss):	$	612	$	(9,030)	$	(6,100)	$	(19,059)
Comprehensive loss:	$	(9,068)	$	(19,635)	$	(15,168)	$	(38,694)

Impairment
Total other-than-temporary impairment		-		~~534~~346		-		~~534~~880
Net other-than-temporary impairment loss recognized in net income	$	-		~~534~~346	$	-		~~534~~880

Income per common share
Basic	$	(10.~~04)~~10	$	21.4899	$	(0.~~01)~~09	$	24.5352
Diluted	$	(10.~~04)~~10	$	21.4796	$	(0.~~01)~~09	$	24.5245

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

~~June~~September 30, 2023 and 2022

(Unaudited)



	Three months ended ~~June~~September 30, 2023 and 2022
					Additional
	Treasury		Common		Paid-In		Accumulated				Noncontrolling		Total
(In thousands)	Stock		Stock		Capital		Deficit		AOCI*		Interest		Equity
Balance at March 31, 2022	$	(175)	$	4	$	138,483	$	(69,973)	$	(7,581)	$	18,432	$	79,190
Balance at June 30, 2022	$	(175)	$	4	$	138,838	$	(60,707)	$	(25,877)	$	12,413	$	64,496
Net income		-		-		-		97,~~266~~431		-		-		97,~~266~~431
Employee stock options		-		-		~~355~~(672)		-		-		-		~~355~~(672)
Unrealized losses on investments, net of taxes		-		-		-		-		(1827,~~296~~066)		-		(1827,~~296~~066)
Noncontrolling interest		-		-		-		-		-		(64,~~019~~319)		(64,~~019~~319)
Balance, June 30, 2022	$	(175)	$	4	$	138,838	$	(60,707)	$	(25,877)	$	12,413	$	64,496
Balance, September 30, 2022	$	(175)	$	4	$	138,166	$	(53,276)	$	(52,943)	$	8,094	$	39,870

Balance at March 31, 2023	$	(175)	$	4	$	138,789	$	(63,863)	$	(61,928)	$	12,023	$	24,850
Balance at June 30, 2023	$	(175)	$	4	$	139,085	$	(67,746)	$	(57,433)	$	15,565	$	29,300
Net loss		-		-		-		(3,883)		-		-		(3,883)
Net income		-		-		-		385		-		-		385
Employee stock options		-		-		~~296~~88		-		-		-		~~296~~88
Unrealized gains on investments, net of taxes		-		-		-		-		4(9,~~495~~453)		-		4(9,~~495~~453)
Dividends paid		-		-		(1,051)		-		-		-		(1,051)
Cumulative effect of change in accounting estimate		-		-		-		-		-		-		-
Noncontrolling interest		-		-		-		-		-		32,~~542~~684		32,~~542~~684
Balance, June 30, 2023	$	(175)	$	4	$	139,085	$	(67,746)	$	(57,433)	$	15,565	$	29,300
Balance, September 30, 2023	$	(175)	$	4	$	138,122	$	(67,361)	$	(66,886)	$	18,249	$	21,953


	~~Six~~Nine months ended ~~June~~September 30, 2023 and 2022
					Additional
	Treasury		Common		Paid-In		Accumulated				Noncontrolling		Total
(In thousands)	Stock		Stock		Capital		Deficit		AOCI*		Interest		Equity
Balance at December 31, 2021	$	(175)	$	4	$	138,452	$	(70,159)	$	2,634	$	15,000	$	85,756
Net income		-		-		-		916,~~452~~883		-		-		916,~~452~~883
Employee stock options		-		-		~~386~~(286)		-		-		-		~~386~~(286)
Unrealized losses on investments, net of taxes		-		-		-		-		(2855,~~511~~577)		-		(2855,~~511~~577)
Noncontrolling interest		-		-		-		-		-		(26,~~587~~906)		(26,~~587~~906)
Balance, June 30, 2022	$	(175)	$	4	$	138,838	$	(60,707)	$	(25,877)	$	12,413	$	64,496
Balance, September 30, 2022	$	(175)	$	4	$	138,166	$	(53,276)	$	(52,943)	$	8,094	$	39,870

Balance at December 31, 2022	$	(175)	$	4	$	138,482	$	(63,019)	$	(51,386)	$	10,471	$	34,377
Net loss		-		-		-		(53)		-		-		(53)
Net income		-		-		-		332		-		-		332
Employee stock options		-		-		~~603~~691		-		-		-		~~603~~691
Unrealized losses on investments, net of taxes		-		-		-		-		(615,~~047~~500)		-		(615,~~047~~500)
Dividends paid		-		-		(1,051)		-		-		-		(1,051)
Cumulative effect of change in accounting estimate		-		-		-		(4,674)		-		-		(4,674)
Noncontrolling interest		-		-		-		-		-		57,~~094~~778		57,~~094~~778
Balance, June 30, 2023	$	(175)	$	4	$	139,085	$	(67,746)	$	(57,433)	$	15,565	$	29,300
Balance, September 30, 2023	$	(175)	$	4	$	138,122	$	(67,361)	$	(66,886)	$	18,249	$	21,953

* Accumulated other comprehensive income (loss)

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries

Consolidated Statements of Cash Flows

~~June~~September 30, 2023 and ~~2022~~

~~(Unaudited)~~2022


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022
Cash flows from operating activities:
(Loss) income attributable to Midwest Holding Inc.	$	(53)	$	9,452
Income attributable to Midwest Holding Inc.	$	332	$	16,883
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments		(1216,~~468~~055)		(36,~~834~~982)
Depreciation and amortization		~~189~~281		~~143~~229
Stock options		~~603~~691		~~386~~(287)
Amortization of deferred acquisition costs		45,~~779~~832		13,~~902~~095
Deferred acquisition costs capitalized		(1932,~~356~~425)		(1018,~~635~~285)
Net realized (loss) gain on investments		(185,~~310~~950)		1814,~~810~~676
Allowance for Credit Losses		4,751		-
Deferred gain on coinsurance transactions		56,~~151~~077		36,~~614~~875
Changes in operating assets and liabilities:
Reinsurance recoverable		(153,~~284~~679)		1833,~~383~~698
Interest and dividends due and accrued		(919,~~886~~530)		(410,~~674~~292)
Premiums receivable		~~(10)~~299		(610)
Deposit-type liabilities		7992,~~646~~184		(2717,~~795~~245)
Policy liabilities		~~2,069~~(989)		2,~~933~~740
Receivable and payable for securities		4528,~~861~~673		1622,~~955~~100
Other assets and liabilities		(521,~~317~~186)		917,~~893~~697
Net cash provided by operating activities		6239,~~365~~306		3564,~~527~~892
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases		(~~378~~576,~~752~~960)		(~~418~~692,~~011~~348)
Proceeds from sale or maturity		58147,~~471~~965		~~187~~296,~~670~~179
Mortgage loans on real estate, held for investment
Purchases		(~~200~~306,~~367~~010)		(5575,~~431~~985)
Proceeds from sale		73110,~~112~~785		4658,~~853~~033
Derivatives
Purchases		(~~140~~22,~~521~~249)		(1122,~~421~~981)
Proceeds from sale		~~132~~12,~~672~~730		3,232
Equity securities
Purchases		(331)		-
Proceeds from sale		-		1112,~~009~~772
Other invested assets
Purchases		(~~727~~88,825)		(4448,~~257~~302)
Proceeds from sale		-69,639		3,334
Purchase of restricted common stock		(1,~~665~~700)		-(1)
Preferred stock
Purchases		(2,~~389~~511)		(32,~~474~~893)
Proceeds from sale		-		-
Net change in policy loans		(58)		66
Net change in policy loans		(30)		65
Net purchases of property and equipment		(102)		(1,830)
Net purchases of property and equipment		(100)		(1,573)
Net cash used in investing activities		(657,297)		(470,724)
Net cash (used in) investing activities		(460,329)		(282,004)
Cash flows from financing activities:
Net transfer to noncontrolling interest		57,~~094~~682		(26,~~587~~906)
Receipts on deposit-type contracts		457,782		254,145
Dividends Paid		(1,051)		-
Withdrawals on deposit-type contracts		(62,051)		(18,130)
Receipts on deposit-type contracts		716,540		509,660
Net cash provided by financing activities		400,825		233,428
Withdrawals on deposit-type contracts		(98,790)		(30,271)
Net increase (decrease) in cash and cash equivalents		2,861		(13,049)
Net cash provided by financing activities		624,381		472,483
Net increase in cash and cash equivalents		6,390		66,651
Cash and cash equivalents:
Beginning		191,414		142,013
Ending	$	~~194~~197,~~275~~804	$	~~128~~208,~~964~~664

Supplementary information
Cash paid for taxes	$	89,~~200~~682	$	2,870

See Notes to Consolidated Financial Statements.

MIDWEST HOLDING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of operating a financial services company. The Company redomesticated from the State of Nebraska to the State of Delaware on August 27, 2020. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiaries, American Life & Security Corp. (“American Life”), and 1505 Capital LLC (“1505 Capital”) as well as through its sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).

American Life is a Nebraska-domiciled life insurance company, that was licensed to sell, underwrite, and market life insurance and annuity products in 25 states and the District of Columbia as of ~~June~~September 30, 2023.

Effective March 12, 2020, Seneca Re, a Vermont limited liability company, was formed by Midwest to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of risks of its participants through one or more protected cells and to conduct any other business or activity that is permitted for sponsored captive insurance companies under Vermont insurance regulations. On March 30, 2020, Seneca Re received its Certificate of Authority to transact the business of a captive insurance company. On May 12, 2020, Midwest contributed $0.3 million to Seneca Re for a 100% ownership interest. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of ~~June~~September 30, 2023, Seneca Re has three incorporated cells, including Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Incorporated Cell, LLC 2021-03 (“SRC3”), which are consolidated in our financial statements. Additionally, Seneca Incorporated Cell, LLC 2022-04 (“SRC4”) was established on September 30, 2022; however, management has determined that the entity does not qualify for consolidation into our financial statements.

Midwest initially owned a 100% interest in SRC1; however, on December 30, 2021 Midwest closed the sale of approximately 70% of SRC1 to a subsidiary of ORIX Corporation USA (“ORIX USA”) for $15.0 million. Under the terms of the agreement, Midwest now holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, is the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital.

On July 27, 2020, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2020-02 (“SRC2”)). SRC2 was capitalized by Crestline Management, L.P. (“Crestline”), an affiliate of Crestline Assurance Holdings LLC, a significant shareholder of Midwest. The Reinsurance Agreement, which was effective as of April 24, 2020, was entered into pursuant to a Master Letter Agreement (the “Master Agreement”) also dated and effective as of April 24, 2020, by and among American Life, Seneca Re and Crestline. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and multi-year guaranteed annuity products. Concurrently with the Reinsurance Agreement:

●

American Life and SRC2 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and

●

American Life and SRC2 entered into a trust agreement whereby SRC2 maintains for American Life’s benefit a trust account that supports the reinsured business.

Under the Master Agreement, Crestline agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its multi-year guaranteed annuities (“MYGA”) and a quota share percentage of 40% of the liabilities of American Life arising from its fixed indexed annuity (“FIA”) products. 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 SP1, a segregated portfolio company of Crestline Re SPC, under which the above -described Reinsurance Agreement, as well as the trust and related asset management agreements, were novated and replaced with substantially similar agreements entered into by American Life and Crestline SP1. The Reinsurance Agreement was most recently amended effective in April 2023 to allow Crestline to provide reinsurance funding for a quota share percentage of 20% of the liabilities of American Life arising from its three-year ~~multi-year guaranteed annuities (“~~MYGAs”), a quota share percentage of 10% of its five-year MYGAs, and a quota share percentage of 0% of the liabilities of American Life arising from its FIAs. The amended agreement limited the total amounts to be reinsured atto $550 million.

In addition, pursuant to the Master Agreement, the parties thereto have agreed to enter into one or more separate agreements whereby, among other things and subject to certain conditions, American Life will agree to reinsure additional new business production to one or more reinsurers formed and/or capitalized by Crestline, Midwest or an appropriate affiliate will be compensated for providing

administrative services to certain advisory clients of Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline.

On June 26, 2021, the Nebraska Department of Insurance (“NDOI”) issued its non-disapproval of the Modified Coinsurance Agreement (“Modco AEG Agreement”) of American Life with American Republic Insurance Company (“AEG”), an Iowa -domiciled reinsurance company. The agreement was executed on June 29, 2021. Under the Modco AEG Agreement, American Life initially ceded to AEG (and subsequently renewed), on a modified coinsurance basis, a 20% quota share of certain liabilities with respect to its ~~MYGA~~five-5year MYGA business and an initial 20% quota share of certain liabilities with respect to its FIA products. American Life has established a Modco Deposit Account to hold the assets for the Modco AEG Agreement. Effective February 28, 2023, AEG elected not to extend its commitment period for reinsuring liabilities under its Modco AEG Agreement; as a result, AEG’s current quota share with respect to both MYGA and FIA policies is 0%. The Modco AEG Agreement remains in place, and AEG remains responsible for previously ceded liabilities.

As of November 10, 2021, Midwest formed and purchased 100% of the common stock of an intermediary holding company which immediately purchased 100% of SRC3 Class A and B membership interests. Also dated as of November 10, 2021 but effective as of July 1, 2021, American Life and SRC3 entered into a Funds Withheld and Modified Coinsurance Agreement, whereby SRC3 agreed to provide reinsurance funding for an ongoing quota share percentage of 45% of the liabilities of American Life arising from its MYGA products and a quota share percentage of 45% of the liabilities of American Life arising from its FIA products. The agreement with SRC3 has been amended, most recently in the fourth quarter of 2022, to provide one-time reinsurance funding for a quota share of $10.0 million of the liabilities of American Life arising from its 10-year FIA products.

As of ~~November~~September 1030, ~~2021~~2022, ~~Midwest~~American ~~purchased~~Life ~~100%~~entered ofinto ~~the~~a ~~common~~reinsurance ~~stock~~agreement of(the an“Reinsurance ~~intermediary~~Agreement”) ~~holding~~with ~~company~~a ~~which~~new ~~immediately~~protected ~~purchased~~cell ~~100%~~formed ofby ~~SRC3~~Seneca ~~Class~~Re A(Seneca ~~and~~Incorporated BCell, ~~membership~~LLC ~~interests~~2022-04 (“SRC4”)). ~~Also~~SRC4 ~~dated~~was ascapitalized ofby ~~November~~loans 10from Embrace Software, ~~2021~~Inc. ~~but~~and Tillman Networks LLC. The Reinsurance Agreement was effective as of July 1, ~~2021~~2022, by and between American Life and ~~SRC3~~SRC4. ~~entered~~The ~~into~~Reinsurance aAgreement ~~Funds~~supports ~~Withheld~~American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and ~~Modified~~multi-year ~~Coinsurance~~guaranteed annuity products. Under the Reinsurance Agreement, ~~whereby,~~SRC4 ~~SRC3~~initially agreed to provide reinsurance funding for ana ~~ongoing~~ quota share percentage of 45% of the liabilities of American Life arising from its five-year MYGA products and a quota share percentage of 4510% of the liabilities of American Life arising from its ~~FIA~~three-year MYGA products. ~~The~~American ~~agreement~~Life ~~with~~has ~~SRC3~~established ~~has~~a ~~been~~Modco ~~amended~~Deposit Account, ~~most~~a ~~recently~~Funds inWithheld ~~the~~custody ~~fourth~~account, ~~quarter~~and ofa ~~2022,~~Trust Account pursuant to ~~provide~~the ~~one-time~~Reinsurance ~~reinsurance~~Agreement. ~~funding~~The ~~for~~initial asettlement ~~quota~~included ~~share~~net premium of $1021.04 million and net reserves of $21.5 million for the ~~liabilities~~Modco ofDeposit Account. Also on September 30, 2022, American Life ~~arising~~entered ~~from~~into ~~its~~an ~~10-year~~Investment ~~FIA~~Management ~~products~~Agreement (“IMA”) with CoVenture Management, LLC (“CoVenture”) naming CoVenture as the manager of certain assets held by American Life on behalf of SRC4.

As of September 30, 2022, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2022-04 (“SRC4”)). SRC4 was capitalized by loans from Embrace Software, Inc. and Tillman Networks LLC. The Reinsurance Agreement was effective as of July 1, 2022, by and between American Life and SRC4. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and multi-year guaranteed annuity products. Under the Reinsurance Agreement, SRC4 initially agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA-5 products and a quota share percentage of 10% of the liabilities of American Life arising from its MYGA-3 products. American Life has established a Modco Deposit Account, a Funds Withheld custody account, and a Trust Account pursuant to the Reinsurance Agreement. The initial settlement included net premium of $21.4 million and net reserves of $21.5 million for the Modco Deposit Account. Also on September 30, 2022, American Life entered into an Investment Management Agreement (“IMA”) with CoVenture Management, LLC (“CoVenture”) naming CoVenture as the manager of certain assets held by American Life on behalf of SRC4.

Management evaluates the Company as one reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of annuity products through American Life, and then reinsuring such products with third-party reinsurers, and since May 13, 2020, with Seneca Re protected cells. American Life’s legacy product offerings consisted of a multi-benefit life insurance policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product. American Life presently offers six annuity products: two MYGAs, two FIAs, and two bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products.

Basis of Presentation

These consolidated financial statements for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 have been prepared in conformity 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 results of operations and financial position. All intercompany accounts and transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform to the current period’s presentation with no impact on results of operations or total stockholders’ equity.

Credit Loss Impairments for Fixed Maturities and Other Invested Assets

The Company adopted new current expected credit loss guidance on January 1, 2023 impacting the Company’s investment portfolio. For fixed maturities, the difference between amortized cost, net of credit loss allowance, (amortized cost, net) and fair value is reported as a component of accumulated other comprehensive income (“AOCI”) on the consolidated balance sheet and is not reflected in the operating results of any period until reclassified to net income upon consummation of a transaction with an unrelated third party or when a credit loss allowance is recorded. The Company has a comprehensive portfolio monitoring process to evaluate all our fixed maturities ~~on a quarterly basis that may require a credit loss allowance. These reviews, in conjunction with the Company’s investment managers’~~

on a quarterly basis that may require a credit loss allowance. These reviews, in conjunction with the Company’s investment managers’ reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer; (2) the Company’s intent to sell a fixed maturity or whether it is more likely than not that the Company will be required to sell a fixed maturity before the anticipated recovery in value; (3) the market leadership of the issuer; (4) the debt ratings of the issuer; and (5) the cash flows and liquidity of the issuer or the underlying cash flows, as required for our investment models, are all considered in the impairment assessment.

If the Company has not made the decision to sell and it is not more likely than not that the Company will be required to sell before the anticipated recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity. The Company estimates the anticipated recovery value based on the best estimate of future cash flows considering past events, current conditions and reasonable and supportable forecasts. The estimated future cash flows are discounted at the fixed maturity’s current effective rate and are compared to the amortized cost basis of the fixed maturity. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the fixed maturity. All reasonably available information relevant to the collectability of the fixed maturity are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the fixed maturity, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, origination vintage year, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third-party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, ~~financial condition of the insurer,~~ and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate the anticipated recovery value if the Company determines that the fixed maturity is dependent on the liquidation of collateral for ultimate settlement.

If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis, a credit loss allowance is recorded as a net investment loss for the shortfall in expected cash flows; however, the amortized cost basis, net of the credit loss allowance, may not be lower than the fair value of the fixed maturity. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed maturity does not have sufficient cash flows or other information to estimate a recovery value for the fixed maturity, the Company may conclude that the entire decline in fair value is deemed to be credit -related and the loss is recognized as a net investment loss.

When a fixed maturity is sold or otherwise disposed of or the fixed maturity is deemed uncollectible and written-off, the Company reverses amounts previously recognized in the credit loss allowance through net investment gains (losses). Recoveries after write-offs are recognized when received. The Company does not measure a credit loss allowance on accrued interest receivable as accrued interest receivable is written off to net investment income in a timely manner when there are concerns regarding collectability.

Fixed Maturities

All fixed maturities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value, net of allowances for expected credit losses, as of the financial statement date. Premiums and discounts on fixed maturity debt instruments are amortized using the scientific-yield method over the term of the instruments. Realized gains and losses on fixed maturities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in accumulated other comprehensive (loss) income.

Investment income consists of interest, dividends, gains and losses from investments, and real estate income, which are recognized on an accrual basis along with the amortization of premiums and discounts.

Certain available-for-sale investments are maintained as collateral under Funds Withheld (“FW”) and Modified Coinsurance (“Modco”) agreements but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. American Life has treaties with several third-party reinsurers that have FW and Modco provisions. In a Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In aan FW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers to reduce the potential credit risk. The unrealized gains/losses on those investments are passed through to the third-party reinsurers as either a realized gain or loss on the Consolidated Statements of Comprehensive Loss.

Mortgage Loans on Real Estate

Mortgage loans on real estate, held for investment are carried at unpaid principal balances, net of allowance for expected credit losses. Interest income is recognized in net investment income at the contract interest rate when earned. A mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances for impairments on mortgage loans are established based upon losses expected by management to be realized in connection with future dispositions or settlements of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation

allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate and disposition of collateral. These evaluations are revised as conditions change and added information becomes available. As of ~~June~~September 30, 2023, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million, and ~~one~~another asset with an impairment for the full value of $0.6 million. At December 31, 2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

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 indexed annuity products 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, the Company must 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 would 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 would be formally assessed at inception and periodically throughout the life of the designated hedging relationship.

During the last quarter of 2020, the Company began investing in futures to hedge the fluctuations in various aspects of our business. The formal documentation and hedge effectiveness was not completed at the date we entered into those futures contracts; therefore, they do not qualify for hedge accounting. The ~~futures~~ change in fair market values of these futures were recorded on our Consolidated Statements of Comprehensive Loss as realized gains or (losses).

Additionally, reinsurance agreements written on aan FW or Modco basis contain embedded derivatives on our annuity products. Gains or (losses) associated with the performance of assets maintained in the modified coinsurance deposit and funds withheld custody accounts are reflected as realized (losses) or gains in the Consolidated Statements of Comprehensive Loss.

Equity Securities

Equity securities at ~~June~~September 30, 2023, consisted of exchange traded funds (“ETFs”). The ETFs are carried at fair value with the change in fair value recorded through realized gains and losses in the Consolidated Statements of Comprehensive Loss. As of ~~June~~September 30, 2023, and December 31, 2022 we held $5.1 million of ETFs.

Preferred Stock

The company holds investments in preferred stock of $33.89 million as of ~~June~~September 30, 2023 and $31.4 million as of December 31, 2022, of which $10.0 million was redeemable at both dates. Changes in the fair value of preferred stock are recorded through unrealized gains and losses in net investment income in the Consolidated Statements of Comprehensive Loss.

In 2020 American Life entered into a series of transactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”), acquiring preferred equity and warrants, and later created a special purpose vehicle, Ascona Asset Holding LLC (“AAH”), to hold the preferred equity and warrants, and ~~later~~also created Ascona Collinwood HoldCo LLC (“ACH”) to be the sole member of AAH. American Life and Crestline Re SP1 own 74% and 26%, respectively, of ACH. American Life is carrying the preferred equity and warrants at a market value in USD of $12.23 million as of ~~June~~September 30, 2023 and $10.5 million of December 31, 2022. For the three months ended ~~June~~September 30, 2023, $ (0.57) million of investment income related to ACH was recognized, and $ (0.12) million was attributed to the noncontrolling interest held by Crestline Re SP1. For the three months ended ~~June~~September 30, 2022, $0.2 million of investment income was recognized, and less than $0.1 million was attributed to Crestline Re SP1. For the ~~six~~nine months ended ~~June~~September 30, 2023 $2.81 million of investment income related to ACH was recognized, and $0.76 million was attributed to the noncontrolling interest held by Crestline Re SP1. For the ~~six~~nine months ended ~~June~~September 30, 2022, $1.8 million of investment income was recognized, and $0.5 million was attributed to Crestline Re SP1.

Other Invested Assets

Other invested assets consists of approximately $~~107~~126.98 million of various investments. Of this total, approximately $97113.7 million are primarily collateral loans, and $1013.21 million of private credit and equipment leases. The collateral loans, private credit and equipment leases are carried at fair market value, net of allowance for expected credit losses. Also, we had an initial investment of $19.0 million investment in a private fund between American Life and an unaffiliated entity, PF Collinwood Holdings, LLC (“PFC”), with American Life owning 100% of the entity effective January 2021. The fair value of the PFC investment as of ~~June~~September 30, 2023, was $11.2 million and as of December 31, 2022, $13.7 million, respectively, with any change in fair market value recorded in unrealized gains and losses in equity on the balance sheet. On February 2, 2022, we established a special purpose vehicle, Python Asset Holding LLC, with American Life owning 100% of the entity with an initial investment of $7.4 million. As of ~~June~~September 30, 2023, our investment in Python was carried at the net asset value (“NAV”) plus approximately $0.7 million of investment income.

Deposits and notes receivable

Investment escrow

The Company held in escrow $1.63 million and $0.8 million as of ~~June~~September 30, 2023 and December 31, 2022, respectively. The cash held at year end was used to ~~purchased~~purchase mortgages in ~~July~~October and January 2023, respectively.

Federal Home Loan Bank stock

American Life initially purchased Federal Home Loan Bank of Topeka (“FHLB”) common stock on May 5, 2021. This investment was made to solidify our membership with FHLB Topeka. The carrying value of FHLB stock approximates fair value since the Company can redeem the stock with FHLB at cost. As a member of the FHLB, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity securities.

Membership allows access to various funding arrangements to provide a source of additional liquidity. As of ~~June~~September 30, 2023, the Company had pledged assets with a market value of $~~187~~233.25 million to FHLB to allow a borrowing capacity of $~~170~~212.30 million and $121.1 million pledged as of December 31, 2022 to allow a borrowing capacity of $109.8 million. As of ~~June~~September 30, 2023 we had $6668.0 million of outstanding funding arrangements, and $29.0 million outstanding as of December 31, 2022.

Notes Receivable

The Company held notes receivable carried at fair value of $6.45 million and $6.3 million as of ~~June~~September 30, 2023 and December 31, 2022, respectively, between American Life and a related party. The note receivable has an annual interest rate of 5% which is paid in kind (“PIK”) interest per annum that increases the outstanding note balance. This note was rated BBB+ by a nationally recognized statistical rating organization. This note matures on June 18, 2050. See Note 16 – Related Party – Chelsea for details regarding this note.

Policy Loans

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. No valuation allowance is established for these policy loans as the amount of the loan is fully secured by the death benefit of the policy and cash surrender value.

Cash and Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents.

Deferred Acquisition Costs

Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to third-party reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred. These costs are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. The Company evaluates the types of acquisition costs it capitalizes. The Company capitalizes agent compensation and benefits and other expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.

The following table represents a roll forward of DAC, net of reinsurance:


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Beginning balance	$	43,433	$	24,530
Additions		1932,~~356~~425		23,857
Amortization		(34,~~938~~369)		(3,905)
Interest		(~~841~~1,463)		(883)
Impact of unrealized investment losses		(~~406~~556)		(166)
Ending balance	$	5769,~~604~~470	$	43,433

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which in management’s judgment require an immediate review. The Company performed a recoverability analysis during the ~~second~~third quarter of 2023 and determined that all DAC balances were recoverable as of ~~June~~September 30, 2023 and December 31, 2022.

Premiums Receivable

Premiums receivable consists of premiums earned on our legacy insurance business which have been earned but have not yet been collected. Amounts are receivable from our legacy business partners and were less than $0.41 million and $0.4 million at ~~June~~September 30, 2023 and December 31, 2022 respectively.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over three to seven years and computer software and equipment is generally depreciated over 3three years. Depreciation expense totaled $0.1 million and $0.1 million for the three months ended ~~June~~September 30, 2023 and 2022, respectively. Depreciation expense totaled $0.23 million and $0.1 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively. The accumulated depreciation, net of disposals, totaled $1.67 million and $1.4 million as of ~~June~~September 30, 2023 and December 31, 2022, respectively.

Maintenance and repairs are expensed as incurred. Replacements and improvements which extend the useful life of the asset are capitalized. The net book value of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. The Company determined that no such events occurred in the periods covered by the Consolidated Financial Statements that would indicate the carrying amounts may not be recoverable.

Reinsurance

We seek to reinsure a significant portion of our new annuity policies with a variety of reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral, and other administration fees. We believe this will help preserve American Life’s capital while supporting its growth because American Life will have lower capital requirements when its business is reinsured due to lower overall financial exposure versus retaining the insurance policy business itself. See Note 8 below for further discussion of our reinsurance activities.

There are two main categories of reinsurance transactions: 1) “indemnity,” where we cede a portion of our risk but retain the legal responsibility to our policyholders should our reinsurers not meet their financial obligations; and 2) “assumption,” where we transfer the risk and legal responsibilities to the reinsurers. The reinsurers are required to acquire the appropriate regulatory and policyholder approvals to convert indemnity policies to assumption policies.

Our reinsurers may be domestic or foreign capital markets investors or traditional reinsurance companies seeking to assume U.S. insurance business. We plan to mitigate the credit risk relating to reinsurers generally by requiring other financial commitments from the reinsurers to secure the reinsured risks (such as posting substantial collateral). It should be noted that under indemnity reinsurance agreements American Life remains exposed to the credit risk of its reinsurers. If one or more reinsurers become insolvent or are otherwise unable or unwilling to pay claims under the terms of the applicable reinsurance agreement, American Life retains legal responsibility to pay policyholder claims, which in such event would likely materially and adversely affect the capital and surplus of American Life.

Midwest formed Seneca Re in early 2020, followed by Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) and Seneca Incorporated Cell, LLC 2021-03 (“SRC3”) which are consolidated in these financial statements. Midwest sold approximately 70% ownership of SRC1 to an ORIX Corporation USA subsidiary on December 30, 2021, and retained 30% ownership. Midwest maintains control over SRC1 and we continue to consolidate SRC1, in these financial statements. Additionally, Seneca Re has established Seneca Incorporated Cell, LLC 2022-04; however, management has determined that Midwest does not control the entity and thus it is not consolidated into these financial statements. American Life entered into a novation agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”) and Crestline Re SPC, for and on behalf of Crestline Re SP1, 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 Re SP1.

Some reinsurers are not and may not be “accredited” or qualified as reinsurers under Nebraska law and regulations. In order to enter into reinsurance agreements with such reinsurers and to reduce potential credit risk, American Life holds a deposit or withholds funds from the reinsurer and/or requires the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business it assumes. The reinsurer may also appoint an investment manager for such funds, which in some cases may be our investment adviser subsidiary, 1505 Capital, to manage these assets pursuant to guidelines adopted by us that are consistent with Nebraska investment statutes and reinsurance regulations.

American Life currently has treaties with several third-party reinsurers and one related party reinsurer. In a Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In aan FW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers, to reduce the potential credit risk. Under those provisions with third-party reinsurers, the assets backing the treaties are maintained by American Life as investments but the assets and total returns or losses on the investments are owned by the reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in Comprehensive Loss and Note 4 below.

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized gains and (losses) as of ~~June~~September 30, 2023 and December 31, 2022. The terms of the contracts with the third-party reinsurers provide that changes in the unrealized gains and (losses) on the portfolios accrue to the third-party reinsurers. To recognize changes in the third-party unrealized gains and (losses), American Life records the year-to-date change as an offsetting realized (loss) or gain in Net Realized (Loss) Gain on Investments on the Consolidated Statements of Comprehensive Loss and in amounts recoverable from third-party reinsurers on the Consolidated Balance Sheets. For further discussion see Note 4 below.

Benefit Reserves

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.

Policy Claims

Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.

Deposit-type Contracts

Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders, premium deposit funds and supplemental contracts without life contingencies.

Deposit-type contracts also include balances outstanding under funding agreements with the Federal Home Loan Bank of Topeka (“FHLB”). The funding agreements are carried at cost. Amounts received and repaid under FHLB funding agreements are classified as financing activities in the Company's Consolidated Statements of Cash Flows.

In 2021, the Company became a member of FHLB, which provides access to collateralized borrowings and other FHLB products. Any borrowing from FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 4.5% of the borrowing. In 2022, the Board authorized a maximum amount equal to 5% of net aggregate admitted retained assets of American Life for FHLB advances and funding agreements combined. In 2023 and 2022, American Life received advances of $3739.0 million and $29.0 million respectively, from FHLB under funding agreements and made no repayments on FHLB funding agreements. Outstanding advances under FHLB funding agreements are reported as part of deposit-type contracts in the Consolidated Balance Sheets and totaled $6668.0 million as of ~~June~~September 30, 2023, and $29.0 million as of December 31, 2022. Interest on the funding agreements accrues at their effective interest rates.

As of ~~June~~September 30, 2023, scheduled maturity dates for outstanding FHLB funding agreements were as follows:


(Dollar amounts in thousands)	Interest
Maturity Date	Rate		Amount
March 1, 2024		5.10540%	$	16,000
January 22, 2025		5.47690%		13,000
January 22, 2025		5.17655%		2,000
August 16, 2025		5.48955%		8,000
September 1, 2027		5.40885%		4,000
September 15, 2027		5.20965%		8,000
October 1, 2027		5.41895%		9,000
December 1, 2027		5.63875%		6,000
			$	66,000
December 1, 2027		5.860%		2,000
			$	68,000

Note Payable

On November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30.0 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is November 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of our assets. The balance of the revolving credit was $25.0 million at ~~June~~September 30, 2023, and December 31, 2022, with $5.0 million unutilized credit.

Deferred Gain on Coinsurance Transactions

American Life entered into several reinsurance contracts where it has earned or is earning ceding commissions. These ceding commissions are recorded as a deferred liability and amortized over the life of the business ceded. American Life receives commission and administrative expenses from reinsurance transactions that represent recovery of acquisition costs. These remittances first reduce the DAC associated with the reinsured blocks of business with the remainder being included in the deferred gain on coinsurance transactions that is also being amortized.

Revenue Recognition and Related Expenses

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and are included in deposit-type liabilities. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services and cost of insurance, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statements of Cash Flows.

Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Liabilities for future policy benefits provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the expected life of the annuity contracts.

Service fee revenue is comprised of third-party administration (“TPA”) fees and investment management fees:

●

The TPA fees are related to accounting services performed based on service agreements with varying lengths. Revenue associated with TPA fees are only recognized when the services are performed, which is typically on a monthly or quarterly basis.

●

Fees for investment management fees are based on the total assets managed for each client at a contracted rate. The length of term on the contracts varies by client. The Company accrues investment advisory fees and recognizes revenue based on the market value of the client’s assets at the end of the applicable period, at the client’s contracted rate.

Income Taxes

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state, or local tax examinations by tax authorities for the years before 2019. The Company is not currently under examination for any open years for income taxes. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and DAC. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense.

Comprehensive Loss

Comprehensive Loss is comprised of net income (loss) and other comprehensive loss. Other comprehensive loss includes unrealized gains and losses from fixed maturities classified as available for sale, unrealized gains and losses from other invested assets, and unrealized gains and losses from preferred stock, net of applicable taxes. American Life has treaties with several third-party reinsurers that have FW and Modco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but are owned by the third-party reinsurers, thus, the total return on the asset portfolio belongs to the third-party reinsurers. Under GAAP this is considered an embedded derivative as discussed above under “Reinsurance” and in Note 8 below.

Earnings Per Share

Basic ~~(loss)~~ income per share for the three months ended ~~June~~September 30, 2023 and 2022 was $(10.~~04)~~10 and $21.4899 respectively, which includes a ~~gain~~loss of $3 (2.91) million and ~~loss~~a gain of $20.91 million from an embedded derivative, respectively. Basic ~~(loss)~~ income per share for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 was $(0.~~01)~~09 and $24.5352 respectively, which includes a gain of $31.98 million and $214.96 million from an embedded derivative, respectively.

The Company has 20.0 million voting common shares authorized, two million non-voting common shares authorized, and two million preferred shares authorized. There were 3,744,645 voting common shares issued and outstanding as of ~~June~~September 30, 2023 and 3,727,976 as of December 31, 2022.


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
	2023		2022		2023		2022
(In thousands, except per share amounts)
Numerator:
Net (loss) income attributable to Midwest Holding Inc.	$	(3,883)	$	9,266	$	(53)	$	9,452
Net income attributable to Midwest Holding Inc.	$	385	$	7,431	$	332	$	16,883

Denominator:
Weighted average common shares outstanding		3,~~736~~738,~~933~~070		3,~~737~~736,~~564~~933		3,~~728~~734,~~594~~946		3,~~737~~791,~~564~~082
Effect of dilutive securities:
Stock options and deferred compensation agreements		~~126~~138,~~868~~600		1252,000		~~126~~138,~~868~~600		1252,000
Denominator for earnings (loss) per common share		3,863,801		3,749,564		3,855,462		3,749,564
Denominator for earnings per common share		3,876,670		3,788,933		3,873,546		3,843,082

(Loss) income per common share	$	(1.04)	$	2.48	$	(0.01)	$	2.53
Income per common share	$	0.10	$	1.99	$	0.09	$	4.52

(Loss) income per common share, diluted	$	(1.04)	$	2.47	$	(0.01)	$	2.52
Income per common share, diluted	$	0.10	$	1.96	$	0.09	$	4.45

Adoption of New Accounting Standards

In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 846): Deferral of the Sunset Date of Topic 848. In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in ASU 2022-06 defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Measurement of Credit Losses on Financial Instruments

In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this update include items brought to the FASB’s attention by stakeholders to clarify the guidance in the amendments in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) which was issued in June 2016. These updated amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Under ASU 2016-13, the incurred loss impairment methodology in current GAAP is replaced with a methodology that reflects expected credit losses that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures, not accounted for as insurance (loan commitments, standby letters of credit financial guarantees, and other instruments). In addition, ASU 2016-13 made changes to the accounting for available for sale debt fixed maturities. One such change is to require credit losses to be presented as an allowance rather than a write-down on available for sale debt fixed maturities management does not intend to sell or believes that it is not more likely than not they will be required to sell. The new standard became effective for reporting periods beginning after December 15, 2022, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning accumulated deficit.

The Company’s implementation activities are complete, and the impacts relate to the Company’s investment portfolio. The Company adopted the new guidance on January 1, 2023 and recognized a cumulative effect adjustment that decreased retained earnings by $4.7 million, in conjunction with the $16.5 million allowance for credit losses and $11.8 million to Reinsurance Recoverables. Additionally, the Company recognized an incremental change in the allowance for expected credit losses of $0.2 million in the current period, to bring the retained allowance to approximately $4.5 million. The Company will apply the provisions of the guidance to investments that have

an other-than-temporary impairment on a prospective basis. Accordingly, the amortized cost basis will remain the same before and after adoption and the effective interest rate was not changed at the time of adoption.

Future Adoption of New Accounting Standards

Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09, Financial Services —Insurance (Topic 944). The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new standard becomes effective for reporting periods after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024 for companies eligible as smaller reporting companies. Early application of the amendments in Update 2018-12 is permitted. We anticipate that the adoption of ASU 2018-12 will have a broad impact on our consolidated financial statements and related disclosures and will require us to make changes to certain of our processes, systems and controls. The Company is evaluating the impact this guidance will have on its results of operations and financial position.

Note 2. Non-controlling Interest

Disposal

On December 30, 2021, Midwest closed the sale of approximately 70% of SRC1 to a subsidiary of ORIX Corporation USA for $15.0 million. Under the terms of the agreement, Midwest holds a 30% ownership interest in SRC1. ORIX Advisers, LLC, another subsidiary of ORIX USA, is the manager of the assets underlying SRC1’s reinsurance obligations, replacing Midwest’s asset management arm, 1505 Capital LLC. Midwest carries the original purchase amount of $15.0 million as noncontrolling interest in the equity section of the Consolidated Balance Sheets plus cumulative income of $30.75 million as of ~~June~~September 30, 2023, and a cumulative loss of $5.5 million as of December 31, 2022.

Purchase

In 2020 American Life entered into a series of transactions with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”). Through these transactions American Life acquired preferred equity in AGH in British Pound Sterling (“GBP”) of 3.6 million along with warrants bearing no initial assigned value. American Life subsequently created a special purpose vehicle, Ascona Asset Holding LLC (“AAH”), to hold the Preferred Equity and Warrants, and later created Ascona Collinwood HoldCo LLC (“ACH”) to be the sole member of AAH. American Life and Crestline Re SP1 own 74% and 26%, respectively, of ACH. American Life is carrying the preferred equity at a market USD value of $12.23 million as of ~~June~~September 30, 2023, and $10.5 million as of December 31, 2022. The change in market value for the three months ended ~~June~~September 30, 2023 and 2022, of $ (0.57) million and $0.2 million for the preferred stock and warrants was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $ (0.57) million of investment income, $ (0.12) million was attributable to noncontrolling interest. The change in market value for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, of $2.81 million and $1.8 million for the preferred stock and warrants was recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Of the $2.81 million of investment income, $0.76 million was attributable to noncontrolling interest.

Dividends

In September 2023, SRC1 declared and paid a cash dividend of $1.5 million to its shareholders. Of the amounts declared and paid, $1.0 million were received by the subsidiary of ORIX Corporation USA and $0.5 million was received by Midwest. The amounts received by Midwest have been eliminated in the consolidation of our financial statements in accordance with accounting principles generally accepted in the United States.

Note 3. Investments

The following table represents the amortized cost, allowance for credit losses, gross unrealized gains and losses, and estimated fair value of investments classified as available-for-sale as of ~~June~~September 30, 2023 and December 31, 2022:


			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Estimated
(In thousands)	Cost		Losses		Gains		Losses		Fair Value
June 30, 2023:
September 30, 2023:
Fixed maturities:
Bonds:
U.S. government obligations	$	1,~~451~~448	$	-	$	~~268~~521	$	(6864)	$	1,~~651~~905
Mortgage-backed securities		~~458~~522,~~248~~767		(~~1,035~~386)		1,~~478~~988		(3242,~~477~~045)		~~426~~482,~~214~~324
Asset-backed securities		4439,~~127~~121		-		7684		(32,~~985~~831)		4036,~~218~~374
Collateralized loan obligations		~~358~~385,~~240~~942		(~~480~~613)		13,~~591~~758		(2012,~~485~~363)		~~338~~376,~~866~~724
States and political subdivisions-general obligations		128		-		-		(34)		~~125~~124
States and political subdivisions-special revenue		-		-		-		-		-
Corporate		5468,~~532~~242		(1,~~297~~206)		~~358~~31		(45,~~670~~283)		4861,~~923~~784
Term loans		~~692~~700,~~279~~273		(65,~~104~~332)		1,~~687~~710		(412,~~947~~054)		~~682~~684,~~915~~597
Total fixed maturities	$	1,~~609~~717,~~005~~921	$	(87,~~916~~537)	$	58,~~458~~092	$	(6674,~~635~~644)	$	1,~~538~~643,~~912~~832
Mortgage loans on real estate, held for investment		~~354~~422,~~401~~809		(1,~~493~~577)		-		-		~~352~~421,~~908~~232
Derivatives		3437,~~639~~829		-		95,~~870~~296		(716,~~648~~566)		3626,~~861~~559
Equity securities		5,592		-		-		(~~448~~480)		5,~~144~~112
Other invested assets		~~107~~126,~~149~~696		(1,~~343~~600)		2,~~285~~154		(~~189~~473)		~~107~~126,~~902~~777
Preferred stock		38,~~026~~801		-		~~1,357~~177		(5,~~578~~052)		33,~~805~~926
Deposits and notes receivable		1110,~~012~~774		-		-		-		1110,~~012~~774
Policy loans		5583		-		-		-		5583
Total investments	$	2,~~159~~360,~~879~~505	$	(1110,~~752~~714)	$	1815,~~970~~719	$	(8097,~~498~~215)	$	2,~~086~~268,~~599~~295

December 31, 2022:
Fixed maturities:
Bonds:
U.S. government obligations	$	1,343	$	-	$	-	$	(81)	$	1,262
Mortgage-backed securities		316,105		-		469		(22,508)		294,066
Asset-backed securities		34,728		-		17		(3,989)		30,756
Collateralized loan obligations		308,871		-		726		(21,924)		287,673
States and political subdivisions-general obligations		104		-		-		(3)		101
States and political subdivisions-special revenue		228		-		-		(23)		205
Corporate		46,700		-		415		(5,515)		41,600
Term loans		561,656		-		1,923		(4,607)		558,972
Total fixed maturities	$	1,269,735	$	-	$	3,550	$	(58,650)	$	1,214,635
Mortgage loans on real estate, held for investment		227,047		-		-		-		227,047
Derivatives		30,239		-		2,694		(16,999)		15,934
Equity securities		5,592		-		-		(481)		5,111
Other invested assets		108,979		-		3,667		(215)		112,431
Preferred stock		35,644		-		1,757		(5,986)		31,415
Deposits and notes receivable		8,359		-		-		-		8,359
Policy loans		25		-		-		-		25
Total investments	$	1,685,620	$	-	$	11,668	$	(82,331)	$	1,614,957

The following table presents information related to allowance for credit losses as of ~~June~~September 30, 2023:


(In Thousands)		Balance December 31, 2022	Additional Allowance Recognized Due to Adoption of Accounting Guidance		Credit Loss Expense for the Current Period		Balance ~~June~~September 30, 2023

Fixed maturities
Bonds:
Mortgage-backed securities	$	-	$	3,564	$	(23,~~529~~178)	$	~~1,035~~386
Corporate		-		-		1,~~297~~206		1,~~297~~206
Asset-backed securities		-		273		(273)		-
Collateralized loan obligations		-		588		~~(108)~~25		~~480~~613
Term loans		-		8,518		(23,~~414~~186)		65,~~104~~332
Mortgage loans on real estate, held for investment		-		2,024		(~~531~~447)		1,~~493~~577
Other invested asset		-		1,703		(~~360~~103)		1,~~343~~600
Total allowance	$	-	$	16,670	$	(45,~~918~~956)	$	1110,~~752~~714


(In Thousands)		Balance ~~March~~June 3130, 2023	Additional Allowance Recognized Due to Adoption of Accounting Guidance		Credit Loss Expense for the Current Period		Balance ~~June~~September 30, 2023

Fixed maturities
Bonds:
Mortgage-backed securities	$	31,~~592~~035	$	-	$	(~~2,557~~649)	$	~~1,035~~386
Corporate		-1,297		-		~~1,297~~(91)		1,~~297~~206
Asset-backed securities		~~245~~-		-		~~(245)~~-		-
Collateralized loan obligations		~~610~~480		-		~~(130)~~133		~~480~~613
Term loans		56,~~867~~104		-		~~237~~(772)		65,~~104~~332
Mortgage loans on real estate, held for investment		21,~~709~~493		-		~~(1,216)~~84		1,~~493~~577
Other invested asset		1,~~173~~343		-		~~170~~257		1,~~343~~600
Total allowance	$	1411,~~196~~752	$	-	$	(21,~~444~~038)	$	1110,~~752~~714

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of ~~June~~September 30, 2023 and December 31, 2022.


	~~June~~September 30, 2023				December 31, 2022
	Carrying				Carrying
(In thousands)	Value		Percent		Value		Percent
AAA and U.S. Government	$	~~200~~230,~~014~~903	1314.0	%	$	124,183	10.2	%
AA		2919,~~185~~363	1.92			815	0.1
A		~~420~~411,~~690~~517	2725.30			371,371	30.6
BBB		~~752~~814,~~652~~049	4849.96			619,516	51.0
Total investment grade		1,~~402~~475,~~541~~832	9189.18			1,115,885	91.9
BB and below		~~136~~168,~~371~~000	810.92			98,750	8.1
Total	$	1,~~538~~643,~~912~~832	100.0	%	$	1,214,635	100.0	%

19Reflecting the quality of fixed maturities maintained by us, as of September 30, 2023 and December 31, 2022, 89.8% and 91.9%, respectively, of all fixed maturity securities were investment grade. The BB and below also includes maturities that have no rating.

Reflecting the quality of fixed maturities maintained by us, as of June 30, 2023 and December 31, 2022, 91.1% and 91.9%, respectively, of all fixed maturity securities were investment grade. The BB and below also includes maturities that have no rating.19

The following table summarizes, for all fixed maturity securities in an unrealized loss position as of June 30, 2023 and December 31, 2022 for which an allowance for credit losses has not been recorded and the estimated fair value, pre-tax gross unrealized loss, and number of fixed maturities by consecutive months they have been in an unrealized loss position.


	June 30, 2023						December 31, 2022
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
(In thousands)	Fair Value		Loss		Securities(1)		Fair Value		Loss		Securities(1)
Fixed maturities:
Less than 12 months:
U.S. government obligations	$	-	$	-		-	$	1,135	$	(70)		13
Mortgage-backed securities		233,146		(12,202)		93		233,624		(18,464)		89
Asset-backed securities		14,234		(1,386)		10		24,552		(3,278)		23
Collateralized loan obligations		76,097		(2,786)		52		203,549		(16,730)		252
States and political subdivisions-general obligations		125		(3)		2		101		(3)		1
States and political subdivisions-special revenue		-		-		-		47		(2)		3
Corporate		17,722		(1,010)		16		37,286		(5,426)		64
Term loans		682,545		(4,947)		4		558,337		(4,607)		36
Greater than 12 months:
U.S. government obligations		1,146		(68)		9		126		(11)		5
Asset-backed securities		22,814		(2,599)		23		5,321		(711)		7
Collateralized loan obligations		162,126		(17,699)		240		37,814		(5,194)		47
States and political subdivisions-special revenue		-		-		-		158		(21)		7
Mortgage-backed securities		87,683		(20,275)		57		17,985		(4,044)		14
Corporate		14,888		(3,660)		45		376		(89)		7
Total fixed maturities	$	1,312,526	$	(66,635)		551	$	1,120,411	$	(58,650)		568

The following table summarizes, for all fixed maturity securities in an unrealized loss position as of September 30, 2023 and December 31, 2022 for which an allowance for credit losses has not been recorded and the estimated fair value, pre-tax gross unrealized loss, and number of fixed maturities by consecutive months they have been in an unrealized loss position.


	September 30, 2023						December 31, 2022
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
(In thousands)	Fair Value		Loss		Securities⁽¹⁾		Fair Value		Loss		Securities⁽¹⁾
Fixed maturities:
Less than 12 months:
U.S. government obligations	$	-	$	-		-	$	1,135	$	(70)		13
Mortgage-backed securities		250,705		(8,878)		82		233,624		(18,464)		89
Asset-backed securities		7,576		(311)		6		24,552		(3,278)		23
Collateralized loan obligations		35,221		(740)		24		203,549		(16,730)		252
States and political subdivisions-general obligations		-		-		-		101		(3)		1
States and political subdivisions-special revenue		-		-		-		47		(2)		3
Corporate		30,732		(419)		16		37,286		(5,426)		64
Term loans		689,833		(12,052)		-		558,337		(4,607)		36
Greater than 12 months:
U.S. government obligations		1,149		(64)		9		126		(11)		5
Asset-backed securities		25,030		(2,520)		25		5,321		(711)		7
Collateralized loan obligations		175,805		(11,621)		246		37,814		(5,194)		47
States and political subdivisions-special revenue		124		(4)		2		158		(21)		7
Mortgage-backed securities		143,544		(33,168)		91		17,985		(4,044)		14
Corporate		20,952		(4,867)		52		376		(89)		7
Total fixed maturities	$	1,380,671	$	(74,644)		553	$	1,120,411	$	(58,650)		568

(1)We may reflect a fixed maturity in more than one aging category based on various purchase dates.

Our securities positions resulted in a gross unrealized loss position as of ~~June~~September 30, 2023 that was greater than the gross unrealized loss position at December 31, 2022. The Company views the decrease in fair value for all of the fixed maturity securities with unrealized losses as of ~~June~~September 30, 2023, which are driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility, as temporary. As of ~~June~~September 30, 2023, the Company has not made the decision to sell these securities and the Company does not believe it will be required to sell the fixed maturity securities with unrealized losses before an anticipated recovery in value. Therefore, it was determined that the unrealized losses on the fixed maturity securities were not indicative of any credit loss impairments as of ~~June~~September 30, 2023.

The Company reviews and analyzes all investments on an ongoing basis for changes in market interest rates and credit deterioration. The review process includes analyzing the recoverability of the amortized cost basis of each investment that has a fair value that is

materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for credit loss is a quantitative and qualitative process, which is subject to risks and uncertainties.

The process to identify securities that could potentially have credit loss involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:

•the determination of whether a mark-to-market loss on a fixed income security is due to a deterioration in the underlying credit quality of the security or to temporary market effects such as interest rates through a comprehensive understanding of both the specific security and the broader market context;

•the issuer’s payment history and adherence;

•the remaining payment terms and the financial condition and near-term prospects of the issuer;

•the lack of ability to refinance due to liquidity problems in the credit market;

•the fair value of any associated collateral;

•the availability of any credit protection;

•our intent to sell and the likelihood of needing to sell prior to recovery for debt securities;

•consideration of rating agency actions; and

•changes in estimated cash flows of mortgage and asset backed securities.

See the discussion in Note 8 Reinsurance regarding unrealized gains/(losses) on investments that are owned by our reinsurers and the corresponding offset carried as a (loss)/gain in the associated embedded derivatives.

The Company purchases and sells equipment leases in its investment portfolio. As of ~~June~~September 30, 2023, the Company owned several leases, all of which were performing. No impairment was required as of ~~June~~September 30, 2023.

The amortized cost and estimated fair value of fixed maturities as of ~~June~~September 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Estimated
(In thousands)	Cost		Fair Value
Due in one year or less	$	~~100~~199,~~739~~892	$	99195,~~049~~433
Due after one year through five years		~~859~~879,~~855~~623		~~840~~860,~~065~~178
Due after five years through ten years		~~440~~433,~~299~~369		~~403~~401,~~551~~992
Due after ten years through twenty years		~~175~~162,~~126~~978		~~170~~152,~~768~~915
Due after twenty years		3242,~~986~~059		2533,~~479~~314
	$	1,~~609~~717,~~005~~921	$	1,~~538~~643,~~912~~832

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At ~~June~~September 30, 2023 and December 31, 2022, these required deposits had a total amortized cost of $21.87 million and $1.2 million, respectively, and fair values of $21.87 million and $1.0 million, respectively.

Mortgage loans consist of the following:


(In thousands)	~~June~~September 30, 2023			December 31, 2022

1-4 Family	$	5659,~~335~~820	$	59,579
Hospitality		146,~~144~~385		12,902
Land		7766,~~961~~743		62,119
Multifamily (5+)		58107,~~711~~330		34,072
Retail		4548,~~681~~182		22,119
Other		~~101~~134,~~569~~349		36,256
Allowance for credit loss		(1,~~493~~577)		-
Total mortgage loans	$	~~352~~421,~~908~~232	$	227,047

Geographic Location:

As of ~~June~~September 30, 2023, the commercial mortgages loans were secured by properties geographically dispersed (with the largest concentrations in loans secured by properties in New York (1922%), New ~~Jersey~~Zealand (16%), New ~~Zealand~~Jersey (914%), Florida (78%), and ~~Texas~~California

(75%)). As of December 31, 2022, the commercial mortgages loans were secured by properties geographically dispersed (with the largest concentrations in New York (24%), Florida (15%), Delaware (10%), California (6%), and Arizona (5%)).

The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances. As of ~~June~~September 30, 2023, the Company held one asset valued at $7.7 million with an impairment of $1.4 million and one asset with an impairment for the full value of $0.6 million. At December 31, 2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

Commercial Mortgage Loans


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Loan-to-Value Ratio:
0%-59.99%	$	~~230~~285,~~140~~205	$	108,281
60%-69.99%		7685,~~970~~990		79,968
70%-79.99%		2735,~~704~~536		33,268
80% or greater		1814,~~094~~501		5,530
Total mortgage loans	$	~~352~~421,~~908~~232	$	227,047

The components of net investment income for three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 are as follows:

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

(In thousands)

2023

2022

2023

2022

Fixed maturities

3347,~~841~~552

1421,~~173~~466

67115,~~902~~452

2669,~~837~~699

Mortgage loans

67,~~298~~636

21,~~963~~627

1220,~~973~~610

511,~~383~~265

Other invested assets

24,~~142~~654

~~2,501~~334

510,~~464~~117

36,~~896~~157

Other interest income

108,~~248~~179

811,~~035~~158

1826,~~277~~457

1327,~~579~~222

Gross investment income

5268,~~529~~021

2734,~~672~~585

~~104~~172,~~616~~636

49114,~~695~~343

Less: investment expenses

(59,~~367~~447)

(23,~~515~~911)

(1120,~~564~~711)

(425,~~726~~273)

Less: amounts ceded to reinsurers

(2237,~~914~~778)

(1417,~~616~~736)

(4987,~~611~~688)

(2859,~~186~~349)

Investment income, net of expenses

2420,~~248~~796

1012,~~541~~938

4364,~~441~~237

1629,~~783~~721

Proceeds for the three months ended ~~June~~September 30, 2023 and 2022 from sales of investments classified as available-for-sale were $815.10 million, and $94 million, respectively. ~~Gross~~Proceeds ~~gains~~for ofthe ~~$0.3~~nine ~~million~~months ~~and~~ended ~~$0.1~~September 30, 2023 ~~million~~ and ~~gross~~2022 ~~losses~~from sales of ~~less~~investments ~~than~~classified as available-for-sale were $028.10 million, and $1187.26 million, ~~were~~respectively. ~~realized~~The onproceeds ~~sales~~included ~~and~~those ~~the~~assets ~~realized~~associated ~~losses~~with ~~on sales during~~ the ~~three~~third-party ~~months ended June 30, 2023 and 2022, respectively~~reinsurers.

Gross gains of $0.6 million and $0.1 million and gross losses of less than $0.1 million and $1.2 million were realized on sales and the realized losses on sales during the three months ended September 30, 2023 and 2022, respectively. Gross gains of $0.9 million and $1.5 million and gross losses of less than $0.1 million and $1.7 million were realized on sales and the realized losses on sales during the nine months ended September 30, 2023 and 2022, respectively. Unrealized gain/(loss) included as part of net investment income were losses of $(14.2) million and gains of $10.5 million for the three months ended September 30, 2023 and 2022. Unrealized gain/loss included as part of net investment income were losses of $16.6 million and gains of $16.8 million for the nine months ended September 30, 2023 and 2022. The gains and losses relate only to the assets retained by American Life.

Proceeds for the six months ended June 30, 2023 and 2022 from sales of investments classified as available-for-sale were $58.5 million, and $187.6 million, respectively. Gross gains of $0.3 million and $1.5 million and gross losses of less than $0.1 million and $1.7 million were realized on sales and the realized losses on sales during the six months ended June 30, 2023 and 2022, respectively.

The proceeds included those assets associated with the third-party reinsurers. The gains and losses relate only to the assets retained by American Life. Unrealized gain/(loss) included as part of net investment income were gains of $23.9 million and $10.5 million for the three months ended June 30, 2023 and 2022. Unrealized gain/loss included as part of net investment income were gains of $43.1 million and $16.8 million for the six months ended June 30, 2023 and 2022.

Note 4. Derivative Instruments

The Company enters into derivative instruments to manage risk, primarily equity, interest rate, credit, foreign currency and market volatility. Some of these derivative instruments are to hedge fixed indexed annuity products that guarantee the return of principal to the policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options.

The following is a summary of the derivatives not designated as hedges and embedded derivatives in our FIA product as of ~~June~~September 30, 2023 and December 31, 2022:

~~June~~September 30, 2023

December 31, 2022

(In thousands, except number of contracts)

Location in the

Derivatives Not Designated

Consolidated

Notional

Number of

Estimated

Notional

Number of

Estimated

as Hedging Instruments

Balance Sheets

Amount

Contracts

Fair Value

Amount

Contracts

Fair Value

Equity-indexed options

Derivatives

~~911~~984,~~030~~622

~~668~~705

3626,~~700~~954

831,657

595

15,592

Equity-indexed embedded derivatives

Deposit-type contracts

~~866~~936,~~847~~754

7,~~095~~807

~~142~~146,~~800~~143

782,997

6,131

111,618

At ~~June~~September 30, 2023, the value of the embedded derivative considers all amounts projected to be paid in excess of the minimum guarantee (the amounts payable without any indexation increases) over future periods. The host contract reflects the minimum guaranteed values.

Due to price changes in the capital markets, our securities positions resulted in increased unrealized losses at ~~June~~September 30, 2023, compared to December 31, 2022, reported in accumulated other comprehensive income on the balance sheet. The embedded derivative related to the asset portfolio belonging to the third-party reinsurers offset these unrealized losses. The unrealized losses as of ~~June~~September 30, 2023 were $1412.43 million compared to unrealized losses of $10.5 million as of December 31, 2022.

The following table summarizes the impact of those embedded derivatives related to the funds withheld provision where the total return on the asset portfolio is passed through to the third-party reinsurers:


	~~June~~September 30, 2023						December 31, 2022
(In thousands)	Book Value		Market Value		Total Return		Book Value		Market Value		Total Return
Portfolio	Assets		Assets		Swap Value		Assets		Assets		Swap Value
American Republic Insurance Company	$	~~170~~169,~~992~~677	$	~~163~~161,~~894~~920	$	7,~~098~~757	$	150,413	$	143,952	$	6,461
Crestline Re SP1		~~447~~448,~~113~~450		~~446~~450,~~708~~908		~~405~~(2,458)		354,806		356,374		(1,568)
Ironbound		~~164~~160,~~611~~688		~~159~~154,~~116~~966		5,~~495~~722		159,644		154,477		5,167
Ascendent Re		6465,~~479~~615		6263,~~626~~998		1,~~853~~617		56,064		54,790		1,274
SRC4		~~152~~213,~~401~~013		~~152~~213,~~828~~366		(~~427~~353)		61,646		62,516		(870)
Total	$	~~999~~1,~~596~~057,443	$	~~985~~1,~~172~~045,158	$	1412,~~424~~285	$	782,573	$	772,109	$	10,464

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses of approximately $1412.43 million as of ~~June~~September 30, 2023, and cumulative unrealized losses of $10.5 million as of December 31, 2022, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains or losses on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized losses on the assets held by American Life were offset by gains in the embedded derivative of $31.98 million and a gain in the embedded derivative of $214.96 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively.

We account for this unrealized (loss) pass-through by recording an equivalent realized gain on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.

Note 5. Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

●

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

● Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

●

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

●

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Level 1 measurements

Cash and cash equivalents: Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents as Level 1 measurements in the table below.

Level 2 measurements

Fixed maturity securities: Fixed maturity securities are recorded at fair value on a recurring basis utilizing an independent third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services.

Derivatives: Derivatives are reported at fair market value utilizing a third-party pricing source such as the Standard & Poor’s (“S&P”) 500 index and the S&P Multi-Asset Risk Control (“MARC”) 5% index.

Equity securities: Equity securities at ~~June~~September 30, 2023 consist of exchange traded funds (“ETFs”). The ETFs are considered equity securities and recorded at fair value on a recurring basis utilizing a third-party pricing source with the change in fair value recorded through realized gains and losses on the Consolidated Statements of Comprehensive Loss. As of September 30, 2023 and December 31, 2022 we had purchased $5.1 million of ETFs.

Preferred stock: The Company’s preferred stock investments classified as Level 2 were valued at $10.09 million as of ~~June~~September 30, 2023, and $9.5 million as of December 31, 2022. This investment is carried at fair market value with the change in fair market value is recorded in net investment income on the Consolidated Statements of Comprehensive Loss. Preferred stock with the NAIC designation of Level 2 is considered a high-quality stock.

Deposits and notes receivable: The Company had escrow funds of as of ~~June~~September 30, 2023 and December 31, 2022, of $1.63 million and $0.8 million, respectively. These escrow funds were used to settle mortgage loans that did not close until ~~April~~October and January 2023. The money held in escrow at ~~June~~September 30, 2023 and December 31, 2022 was carried at cost. The Company held in notes receivable as of ~~June~~September 30, 2023 and December 31, 2022, a note of $6.45 million and $6.3 million, respectively, that includes paid-in-kind (“PIK”) interest. The note receivable is between American Life and Chelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a nationally recognized statistical rating organization (“NRSRO”). This note is being carried at cost plus PIK interest.

Level 3 measurements

Term Loans – The assets classified as term loans are carried at unpaid principal net of amortization of discount or accretion, which ap-proximates fair value or carried at fair market value based on a valuation using market standard valuation methodologies. The inputs used to measure the fair value of these assets are classified as Level 3 within the fair value hierarchy.

Mortgage Loans – Mortgage loans are generally stated at principal amounts outstanding, net of deferred expenses and allowance for loan loss. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on an effective yield basis over the term of the loan. Impaired loans are generally carried on a non-accrual status. Loans are ordinarily placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. As of ~~June~~September 30, 2023, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million, and one asset with an impairment for the full value of $0.6 million. At December 31, 2022, the company had one asset valued at $7.7 million with a total impairment of $1.4 million.

Other Invested Assets – Other invested assets include collateral loans, private credit investments, equipment leases, and a private fund investment. The collateral loans, private credit investments, and equipment leases are carried at amortized cost which approximates fair value. The private fund investment is carried at fair value based on market accepted valuation models. The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.

Other Invested Assets – Other invested assets include collateral loans, private credit investments, equipment leases, and a private fund investment. The collateral loans, private credit investments, and equipment leases are carried at amortized cost which approximates fair value. The private fund investment is carried at fair value based on market accepted valuation models. The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.

Deposits and notes receivable: The carrying value of FHLB stock approximates fair value based on market accepted valuation models, since the Company can redeem such stock with FHLB at cost. As a member of the FHLB, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity securities.

Preferred Stock – The Company’s preferred stock investment classified as Level 3 was valued at $23.90 million as of ~~June~~September 30, 2023 and $21.9 million as of December 31, 2022. This investment is carried at fair market value. The change in fair market value is recorded in net investment income on the Consolidated Statements of Comprehensive Loss.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. The fair values for insurance contracts other than deposit-type contracts are not required to be disclosed.

Embedded derivative for equity-indexed contracts: The Company has embedded derivatives in its FIA policyholder obligations. These embedded derivatives are carried at the fair market value as of ~~June~~September 30, 2023 and December 31, 2022. The fair value of the embedded derivative component of our FIA obligation is estimated at each valuation date by projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and discounting the excess of projected contract value amounts at the applicable risk-free interest rates adjusted for our nonperformance risk related to those obligations. The projections of FIA policy contract values are based on best estimate assumptions for future policy growth and decrements including lapse, partial withdrawal and mortality rates. The best estimate assumptions for future policy growth include assumptions for expected index credits on the next policy anniversary date which are derived from fair values of the underlying equity call options purchased to fund such index credits and the present value of expected costs of annual call options purchased in the future by us to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as assumptions used to project policy contract values.

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of ~~June~~September 30, 2023 and December 31, 2022.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable				Estimated
	Markets		Inputs		Inputs		Net Asset		Fair
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Value		Value
June 30, 2023
September 30, 2023
Financial assets
Fixed maturity securities:
Bonds
U.S. government obligations	$	-	$	1,~~651~~905	$	-	$	-	$	1,~~651~~905
Mortgage-backed securities		-		~~426~~482,~~214~~324		-		-		~~426~~482,~~214~~324
Asset-backed securities		-		4036,~~218~~374		-		-		4036,~~218~~374
Collateralized loan obligations		-		~~338~~376,~~866~~724		-		-		~~338~~376,~~866~~724
States and political subdivisions-general obligations		-		~~125~~124		-		-		~~125~~124
States and political subdivisions-special revenue		-		-		-		-		-
Corporate		-		4861,~~923~~784		-		-		4861,~~923~~784
Term loans		-		-		~~682~~684,~~915~~597		-		~~682~~684,~~915~~597
Total fixed maturity securities		-		~~855~~959,~~997~~235		~~682~~684,~~915~~597		-		1,~~538~~643,~~912~~832
Mortgage loans on real estate, held for investment		-		-		~~352~~421,~~908~~232		-		~~352~~421,~~908~~232
Derivatives		-		3626,~~861~~559		-		-		3626,~~861~~559
Equity securities		-		5,~~144~~112		-		-		5,~~144~~112
Other invested assets		-		-		95114,~~138~~013		12,764		~~107~~126,~~902~~777
Preferred stock		-		910,~~952~~940		2322,~~853~~986		-		33,~~805~~926
Deposits and notes receivable		-		87,~~041~~768		23,~~971~~006		-		1110,~~012~~774
Policy loans		-		-		5583		-		5583
Total investments	$	-	$	~~915~~1,~~995~~009,614	$	1,~~157~~245,~~840~~917	$	12,764	$	2,~~086~~268,~~599~~295
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	~~142~~146,~~800~~143	$	—		~~142~~146,~~800~~143

December 31, 2022
Financial assets
Fixed maturity securities:
Bonds
U.S. government obligations	$	—	$	1,262	$	—	$	—	$	1,262
Mortgage-backed securities		—		294,066		—		—		294,066
Asset-backed securities		—		30,756		—		—		30,756
Collateralized loan obligations		—		287,673		—		—		287,673
States and political subdivisions-general obligations		—		101		—		—		101
States and political subdivisions-special revenue		—		205		—		—		205
Corporate		—		41,600		—		—		41,600
Term loans		—		—		558,972		—		558,972
Total fixed maturity securities		—		655,663		558,972		—		1,214,635
Mortgage loans on real estate, held for investment		—		—		227,047		—		227,047
Derivatives		—		15,934		—		—		15,934
Equity securities		—		5,111		—		—		5,111
Other invested assets		—		—		99,997		12,434		112,431
Preferred stock		—		9,544		21,871		—		31,415
Investment escrow		—		784		—		—		784
Federal Home Loan Bank stock		—		—		1,306		—		1,306
Notes receivable		—		6,269		—		—		6,269
Deposits and notes receivable		—		7,053		1,306		—		8,359
Policy loans		—		—		25		—		25
Total investments	$	—	$	693,305	$	909,218	$	12,434	$	1,614,957
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	111,618	$	—		111,618

There were no transfers of financial instruments between any levels during the ~~six~~nine months ended ~~June~~September 30, 2023 or the year ended December 31, 2022.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. As of September 30, 2023 or December 31, 2022, there were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

~~above.~~The Asfollowing ofdisclosure ~~June 30, 2023~~contains orthe ~~December 31~~carrying values, ~~2022,~~ ~~there~~estimated ~~were~~fair novalues and their corresponding placement in the fair value hierarchy, for financial assets orand financial liabilities ~~measured~~as atof ~~fair~~September 30, 2023 ~~value~~and onDecember 31, 2022, ~~a non-recurring basis.~~respectively:

The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of June 30, 2023 and December 31, 2022, respectively:

~~June~~September 30, 2023

Fair Value Measurements Using

Quoted Prices in

Active Markets

Significant Other

Significant

for Identical Assets

Observable

Unobservable

Carrying

and Liabilities

Inputs

Fair

(In thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

Value

Assets:

Policy loans

5583

—

5583

Cash

~~194~~197,~~275~~804

—

~~194~~197,~~275~~804

Liabilities:

Policyholder deposits (deposit-type contracts)

2,~~218~~453,~~725~~282

—

2,~~218~~453,~~725~~282


	December 31, 2022
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	25	$	—	$	—	$	25	$	25
Cash		191,414		191,414		—		—		191,414
Liabilities:
Policyholder deposits (deposit-type contracts)		1,743,348		—		—		1,743,348		1,743,348

The following table presents a reconciliation of the beginning balance for all assets and liabilities measured at fair value on a recurring basis using level three inputs during the ~~six~~nine months ended ~~June~~September 30, 2023:


	~~June~~September 30, 2023
			Total realized and unrealized gains (losses)
	Beginning Balance			Included inIncome	Included in OCI		Net Purchases,Issuances, Sales,and Settlements		Ending Balance
(In thousands)
Assets
Term loans	$	558,972	$	-	$	(412,~~947~~054)	$	~~129~~137,~~377~~679	$	~~683~~684,~~402~~597
Mortgage loans on real estate,
held for investment		227,047		-		-		~~125~~194,~~861~~185		~~352~~421,~~908~~232
Deposits and notes receivable		1,306		-		-		1,~~665~~700		23,~~971~~006
Other invested assets		99,997		-		21,~~096~~681		(612,~~955)~~335		95114,~~138~~013
Preferred stock		21,871		(4,~~220~~874)		-		65,~~202~~989		2322,~~853~~986
Policy loans		25		-		-		3058		5583
Total level 3 assets	$	909,218	$	(4,~~220~~874)	$	(210,~~851~~373)	$	~~256~~351,~~180~~946	$	1,~~158~~245,~~327~~917
Liabilities
Embedded derivative for equity-indexed contracts		(111,618)		3033,~~115~~170		-		(6167,~~297~~695)		(~~142~~146,~~800~~143)
Total level 3 liabilities	$	(111,618)	$	3033,~~115~~170	$	-	$	(6167,~~297~~695)	$	(~~142~~146,~~800~~143)

The following tables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the year ended December 31, 2022:


	December 31, 2022
			Total realized and unrealized gains (losses)
(In thousands)	Beginning Balance			Included in Income	Included in OCI		Net Purchases, Issuances, Sales, and Settlements		Ending Balance
Assets
Term loans	$	267,468	$	-	$	(2,683)	$	294,187	$	558,972
Mortgage loans on real estate,
held for investment		183,203		-		-		43,844		227,047
Deposits and notes receivable		500		-		-		806		1,306
Other invested assets		35,293		-		3,452		61,252		99,997
Preferred stock		18,686		-		(4,229)		7,414		21,871
Policy loans		87		-		-		(62)		25
Total level 3 assets	$	505,237	$	-	$	(3,460)	$	407,441	$	909,218
Liabilities
Embedded derivative for equity-indexed contracts		(123,692)		(10,193)		-		22,267		(111,618)
Total level 3 liabilities	$	(123,692)	$	(10,193)	$	-	$	22,267	$	(111,618)

Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, preferred stock, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.

Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:

●

Nonperformance risk – For contracts we issue, we use the credit spread, relative to the US Department of the Treasury (Treasury) curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives.

●

Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.

●

Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.

Preferred equity and warrants – Significant unobservable inputs we use include surrender rate, discount rates, EBITDA Multiples, current performance data, proprietary pricing models, real-time quotes from contributing dealers, and other market data.

●

EBITDA Multiple -The warrants valued using a market approach guideline public company method ("GCPM") using a multiplier of EBITDA.

●

Discount Rates - For the preferred equity, discounted cash flow models are used to assist with the calculation the fair value.

Other Invested Assets – Valuations are performed through a combination of EBITDA analysis, comparable transaction analysis, and discounted cash flow analysis. Unobservable inputs for these approaches include recent actual or pending transactions, yields of similar debt instruments, and subject company leverage and financial.

●

EBITDA Multiple -The other invested assets valued using a market approach guideline public company method ("GCPM") using a multiplier of EBITDA.

●

Discount Rates - For the other invested assets, discounted cash flow models are used to assist with the calculation the fair value.

Term Loans – Significant unobservable inputs include yield analysis. Significant unobservable inputs we use include discount rates.

Mortgage Loans – Fair value of mortgage loan assets are valued at principal funded, plus any property related direct expenses that contractually can be added.

The following summarizes the unobservable inputs for available for sale and trading securities and the embedded derivatives of fixed indexed annuities and preferred stock (with associated detachable warrants):

~~June~~September 30, 2023

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Term loans

$~~682~~684.96

Yield Analysis

Discount rates

4.6%

17.3%

12.4%

Decrease

Mortgage loans on real estate

$~~352~~421.92

Yield Analysis

Principal funded

Decrease

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$~~142~~146.81

Option Budget Method

Nonperformance risk

0.6%

1.5%

1.1%

Decrease

Option budget

1.1%

5.9%

2.9%

Increase

Surrender rate

0.5%

15% (base)30% (add'l shock)

12.5%

Decrease

Other invested assets

$95114.10

Market Approach

EBITDA Multiples

2.6x

3.1x

2.8x

Discount rates

8.0%

25.5%

14.5%

Preferred stock

$9.78

Yield Analysis

Discount rates

24.0%

28.0%

26.0%

Increase

Detachable warrants

$2.45

Market Approach GPCM

EBITDA Multiples

10.0x

11.5x

100.0%

Decrease

Preferred stock

$1110.87

Market Approach

EBITDA Multiples

2.55x

3.05x

2.8x

Decrease

* Weighted by account value

December 31, 2022

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Term loans

$559.0

Yield Analysis

Discount rates

4.6%

17.3%

12.4%

Decrease

Mortgage loans on real estate

$227.0

Yield Analysis

Principal funded

Decrease

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$111.6

Option Budget Method

Nonperformance risk

0.6%

1.5%

1.1%

Decrease

Option budget

1.1%

5.7%

2.7%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

10.5%

Decrease

Other invested assets

$100.0

Market Approach

EBITDA Multiples

2.6x

3.1x

2.8x

Discount rates

8.0%

25.5%

14.5%

Preferred equity

$6.1

Yield Analysis

Discount rates

24.0%

28.0%

26.0%

Increase

Detachable warrants

$2.2

Market Approach GPCM

EBITDA Multiples

10.0x

11.5x

100.0%

Decrease

Preferred stock

$31.4

Market Approach

EBITDA Multiples

2.55x

3.05x

2.8x

Decrease

* Weighted by account value

Note 6. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for the ~~six~~nine months ended ~~June~~September 30, 2023 and the year ended December 31, 2022:




(In thousands)	~~June~~September 30, 2023		December 31, 2022
Beginning balance	$	1,743,348	$	1,075,439
US Alliance		(~~634~~452)		(2,176)
Unified Life Insurance Company		-(129)		(10)
Ironbound Reinsurance Company Limited		34,~~134~~748		5,959
Ascendant Re		~~145~~149		(3,185)
Crestline SP1		24,~~490~~402		(11,623)
American Republic Insurance Company		2,~~735~~523		(4,080)
SRC4		25,~~791~~475		613
Deposits received		~~494~~755,~~532~~213		745,083
Investment earnings (includes embedded derivative)		3033,~~115~~170		(10,193)
Withdrawals		(5995,~~931~~165)		(51,659)
Policy charges		-		(820)
Ending balance	$	2,~~218~~453,~~725~~282	$	1,743,348

In addition, membership in FHLB provides the Company with access to additional short-term liquidity based on the level of investment in FHLB stock and pledged collateral. At ~~June~~September 30, 2023 and December 31, 2022 funding agreements of $6668.0 million and $29.0 million were outstanding.

Note 7. Debt

On November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is November 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of the Company’s assets. The balance of the revolving credit was $25.0 million at ~~June~~September 30, 2023, and December 31, 2022, with $5.0 million unutilized credit.

Under the terms of the Credit Agreement, the Company has the option of selecting an applicable variable interest rate of (a) an adjusted term standard overnight financing rate (“SOFR”), plus an applicable margin or (b) a base rate, plus an applicable margin. Depending on our debt to capitalization ratio, the applicable margin can range from 2.50% to 3.25% for the base rate and from 3.50% to 4.25% for an adjusted term SOFR loan. Interest paid for the three months ended ~~June~~September 30, 2023 and 2022 was $0.57 million and $0.0 million respectively. Interest paid for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 was $1.17 million and $0.0 million respectively.

The terms of the Credit Agreement require the Company to maintain, among other things, certain financial measures including:

●

Consolidated debt to capitalization must not be greater than 35% on the last day of any fiscal quarter;

●

Risk-based capital of American Life & Security Corp. must not be less than 300% on the last day of any fiscal quarter;

●

Consolidated liquidity must not be less than $3.0 million at any time; and

●

The strength rating of American Life & Security Corp. from A.M. Best must not fall below “B++”.

Note 8. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of ~~June~~September 30, 2023 and December 31, 2022 is as follows:


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Assets:
Reinsurance recoverables	$	3927,~~899~~870	$	20,190
Liabilities:
Deposit-type contracts
Direct	$	2,~~218~~453,~~725~~282	$	1,743,348
Reinsurance ceded		(1,~~123~~157,~~475~~854)		(912,982)
Retained deposit-type contracts	$	1,~~095~~295,~~250~~428	$	830,366

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by third-party reinsurers as of ~~June~~September 30, 2023:

Recoverable/

Total Amount

Recoverable

(Payable) on Benefit

Ceded

Recoverable/

(In thousands)

AM Best

on Paid

on Unpaid

Reserves/Deposit-

Due

(Payable) to/from

Reinsurer

Rating

Losses

type Contracts

Premiums

Reinsurer

Ironbound Reinsurance Company Limited

51,~~338~~327

Optimum Re Insurance Company

690

Sagicor Life Insurance Company

A-

~~238~~299

10,~~626~~006

(~~326~~15)

10,~~538~~290

Ascendant Re

(34,~~906~~724)

Crestline SP1

(149,~~352~~907)

American Republic Insurance Company

36,~~364~~057

SRC4

(1226,~~749~~407)

Unified Life Insurance Company

~~991~~772

(14)

~~1,002~~783

US Alliance Life and Security Company

49,~~997~~784

(23)

49,~~974~~761

~~263~~324

3927,~~999~~598

(~~363~~52)

3927,~~899~~870

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by third-party reinsurers as of December 31, 2022:


							Recoverable on				Total Amount
			Recoverable		Recoverable		Benefit		Ceded		Recoverable
(In thousands)	AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		from
Reinsurer	Rating		Losses		Losses		type Contracts		Premiums		Reinsurer
Ironbound Reinsurance Company Limited		NR	$	-	$	-	$	(344)	$	-	$	(344)
Optimum Re Insurance Company		A		-		-		601		-		601
Sagicor Life Insurance Company		A-		-		154		10,744		(303)		10,595
Ascendant Re		NR		-		-		(2,130)		-		(2,130)
Crestline SP1		NR		-		-		(3,357)		-		(3,357)
American Republic Insurance Company		A		-		-		5,879		-		5,879
SRC4		NR		-		-		(44,442)		-		(44,442)
Unified Life Insurance Company		NR		-		41		986		(17)		1,010
US Alliance Life and Security Company		NR		-		-		52,400		(22)		52,378
			$	-	$	195	$	20,337	$	(342)	$	20,190

Our securities positions resulted in changes in the unrealized loss position as of ~~June~~September 30, 2023, compared to December 31, 2022, that is reported in accumulated other comprehensive (loss) income on the Consolidated Balance Sheets. As discussed in Note 1, American Life has treaties with several third-party reinsurers that have FW and Modco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and total gains or (losses) on the asset portfolios belong to the third-party reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 4.

On June 26, 2021, the NDOI issued its non-disapproval of the Modified Coinsurance Agreement (“Modco AEG Agreement”) with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement was executed on June 29, 2021. Under the Modco AEG Agreement, American Life initially ceded to AEG (and subsequently renewed), on a modified coinsurance basis, a 20% quota share of certain liabilities with respect to its MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its FIA business. Effective February 28, 2023, AEG elected not to extend its commitment period for reinsuring liabilities under its Modco AEG Agreement; as a result, AEG’s current quota share with respect to MYGA and FIA policies is 0%. The Modco AEG Agreement remains in place, and AEG remains responsible for previously ceded liabilities.

On November 10, 2021, the NDOI issued its non-disapproval of the Funds Withheld and Modified Coinsurance Agreement with SRC3, whereby SRC3 agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA products and a quota share percentage of 45% of the liabilities of American Life arising from its FIA products. In the fourth quarter of 2022, the agreement with SRC3 was again amended to provide one-time reinsurance funding for $10.0 million of the liabilities of American Life arising from its 10-year FIA products.

On September 21, 2022, the NDOI issued its approval of the conversion of American Life’s agreement with US Alliance to convert its block of business from a Funds Withheld agreement to a Funds Paid Coinsurance agreement. The conversion was effective as of October 1, 2022, and was triggered by US Alliance becoming a Qualified Institutional Buyer as specified in the original agreement. Upon conversion, American Life began transferring assets held on behalf of US Alliance to the reinsurer, with a corresponding entry made to Amounts Recoverable. The approximate value of assets transferred was $37.9 million.

On September 30, 2022, American Life entered into a reinsurance agreement (the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2022-04 (“SRC4”)). SRC4 was capitalized by loans from Embrace Software, Inc. and Tillman Networks LLC. The Reinsurance Agreement was effective as of July 1, 2022, by and between American Life and SRC4. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed indexed and multi-year guaranteed annuity products. Under the Reinsurance Agreement, SRC4 initially agreed to provide reinsurance funding for a quota share percentage of 45% of the liabilities of American Life arising from its MYGA-5 products and a quota share percentage of 10% of the liabilities of American Life arising from its MYGA-3 products. American Life has established a Modco Deposit Account, a Funds Withheld custody account, and a Trust Account pursuant to the Reinsurance Agreement. The initial settlement included net premium of $21.4 million and net reserves of $21.5 million for the modified coinsurance account. Also on September 30, 2022, American Life entered into an Investment Management Agreement (“IMA”) with CoVenture Management, LLC (“CoVenture”) naming CoVenture as the manager of certain assets held by American Life on behalf of SRC4.

The tables below shows the ceding commissions from the reinsurers, excluding SRC1 and SRC3, and what was earned on a GAAP basis for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022:


	Three months ended ~~June~~September 30,
(In thousands)	2023								2022
Reinsurer	Gross Ceding Commission		ExpenseAllowance(1)		Interest on Ceding Commission		Earned CedingCommission		Gross Ceding Commission		ExpenseAllowance		Interest on Ceding Commission			Earned CedingCommission
Unified Life Insurance Company	$	—	$	—	$	—	$	92	$	-	$	-	$	-	$	$	6
Ironbound Reinsurance Company Limited		—		—		4345		~~125~~121		-		-		4948			~~144~~123
Ascendant Re		~~181~~43		~~175~~42		2325		~~100~~101		-		-		23			7788
US Alliance Life and Security Company		—		—		1112		7393		-		-		1413			7696
Crestline Re SP 1		~~771~~492		~~716~~475		~~193~~146		~~758~~846		1,~~491~~972		2,~~401~~794		88103			~~559~~604
American Republic Insurance Company		1—		48(132)		8452		~~257~~294		1,~~026~~144		1,~~774~~631		3038			~~197~~242
SRC4		~~2,514~~849		~~2,401~~822		8678		~~176~~(65)		-878		-784		-5			-80
	$	31,~~467~~384	$	31,~~340~~207	$	~~440~~358	$	1,~~498~~392	$	23,~~517~~994	$	45,~~175~~209	$	~~204~~230		$	1,~~059~~239


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023								2022
Reinsurer	Gross Ceding Commission		ExpenseAllowance(1)		Interest on Ceding Commission		Earned CedingCommission		Gross Ceding Commission		ExpenseAllowance		Interest on Ceding Commission		Earned CedingCommission
Unified Life Insurance Company	$	—	$	—	$	—	$	1114	$	—	$	—	$	—	$	1420
Ironbound Reinsurance Company Limited		—		—		93138		~~253~~374		—		—		98146		~~258~~381
Ascendant Re		~~181~~224		~~175~~217		4671		~~185~~287		—		—		4770		~~163~~250
US Alliance Life and Security Company		—		—		2537		~~156~~249		—		—		2841		~~163~~259
Crestline SP1		12,~~805~~298		12,~~631~~106		~~272~~418		12,~~640~~486		24,~~525~~497		47,~~231~~026		~~168~~271		1,~~065~~669
American Republic Insurance Company		560		~~753~~621		~~106~~158		~~562~~856		12,~~827~~971		34,~~227~~859		5290		~~349~~592
SRC4		34,~~881~~730		34,~~614~~436		86164		~~264~~197		—878		—783		—5		—80
	$	67,~~427~~812	$	67,~~173~~380	$	~~628~~986	$	34,~~071~~463	$	48,~~352~~346	$	712,~~458~~668	$	~~393~~623	$	23,~~012~~251

(1) Includes: acquisition and administrative expenses, commission expense allowance and product development fees.

The table below shows the ceding commissions deferred on each reinsurance transaction on a GAAP basis:


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Reinsurer	Deferred Gain on Reinsurance Transactions		Deferred Gain on Reinsurance Transactions
US Alliance Life and Security Company(1)	$	-	$	152
Unified Life Insurance Company(1)		~~352~~249		217
Ironbound Reinsurance Company Limited(2)		4,~~811~~750		4,876
Ascendant Re		3,~~104~~096		2,947
US Alliance Life and Security Company(2)		21,~~025~~961		2,069
American Republic Insurance Company(2)		7,~~684~~400		7,502
Crestline SP1(2)		19,~~346~~488		18,475
SRC4(2)		57,~~892~~196		1,825
	$	4344,~~214~~140	$	38,063

These reinsurance transactions on our legacy life insurance business received gross ceding commissions on the effective dates of the transaction. The difference between the statutory net adjusted reserves and the GAAP adjusted reserves plus the elimination of DAC and value of business acquired related to these businesses reduces the gross ceding commission with the remaining deferred and amortized over the lifetime of the blocks of business.

These reinsurance transactions include the ceding commissions and expense allowances which are accounted for as described in (1).

The use of reinsurance does not relieve American Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation for all blocks of business except what is included in the Unified transaction. The reinsurance agreement with Unified discharges American Life’s responsibilities once all the policies have changed from indemnity to assumptive reinsurance. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, separate contingency reserves may be established. As of ~~June~~September 30, 2023 or December 31, 2022, no contingency reserves were established.

American Life expects to reinsure a significant portion of its new insurance policies with a variety of reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. American Life may retain some business with the intent to reinsure some or all at a future date.

Retained and Reinsured Balance Sheets

The tables below shows the retained and reinsurance consolidated balance sheets:


	~~June~~September 30, 2023						December 31, 2022

(In thousands)	Retained		Reinsured		Consolidated		Retained		Reinsured		Consolidated
Assets
Total investments	$	1,~~104~~212,~~198~~973	$	~~982~~1,~~401~~055,322	$	2,~~086~~268,~~599~~295	$	812,177	$	802,780	$	1,614,957
Cash and cash equivalents		~~125~~111,~~156~~119		6986,~~119~~685		~~194~~197,~~275~~804		127,291		64,123		191,414
Deferred acquisition costs, net		5769,~~604~~470		-		5769,~~604~~470		43,433		-		43,433
Premiums receivable		-		~~372~~63		~~372~~63		-		-		-
Accrued investment income		1418,~~648~~835		2025,~~402~~859		3544,~~050~~694		11,307		13,858		25,165
Reinsurance recoverables		(628,~~609~~944)		~~102~~36,~~508~~814		3927,~~899~~870		(6,853)		27,405		20,552
Property and equipment, net		1,~~811~~721		-		1,~~811~~721		1,897		-		1,897
Receivable for securities sold		~~441~~(9,650)		-9,650		~~441~~-		2,033		8,485		10,518
Other assets		912,~~255~~760		21,~~735~~575		1114,~~990~~335		12,259		236		12,495
Total assets	$	1,~~250~~408,~~504~~284	$	1,~~177~~215,~~537~~968	$	2,~~428~~624,~~041~~252	$	1,003,544	$	916,887	$	1,920,431
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	~~944~~526	$	11,~~702~~006	$	1211,~~646~~532	$	1,332	$	11,613	$	12,945
Deposit-type contracts		1,~~103~~301,~~844~~754		1,~~114~~151,~~881~~528		2,~~218~~453,~~725~~282		841,980		901,368		1,743,348
Other policy-holder funds		64,~~069~~219		~~405~~311		64,~~474~~530		4,105		-		4,105
Notes payable		25,000		-		25,000		25,000		-		25,000
Deferred gain on coinsurance transactions		~~231~~416		4243,~~983~~724		4344,~~214~~140		38,063		-		38,063
Payable for securities sold		4427,~~656~~029		-		4427,~~656~~029		8,872		-		8,872
Other liabilities		4027,~~460~~387		79,~~566~~399		4836,~~026~~786		49,815		3,906		53,721
Total liabilities	$	1,~~221~~386,~~204~~331	$	1,~~177~~215,~~537~~968	$	2,~~398~~602,~~741~~299	$	969,167	$	916,887	$	1,886,054
Stockholders’ Equity:
Preferred stock	$	-	$	-	$	-	$	-	$	-	$	-
Voting common stock		4		-		4		4		-		4
Additional paid-in capital		~~139~~138,~~085~~122		-		~~139~~138,~~085~~122		138,482		-		138,482
Treasury stock		(175)		-		(175)		(175)		-		(175)
Accumulated deficit		(67,~~746~~361)		-		(67,~~746~~361)		(63,019)		-		(63,019)
Accumulated other comprehensive loss		(5766,~~433~~886)		-		(5766,~~433~~886)		(51,386)		-		(51,386)
Total Midwest Holding Inc.'s stockholders' equity	$	133,~~735~~704	$	-	$	133,~~735~~704	$	23,906	$	-	$	23,906
Noncontrolling interest		1518,~~565~~249		-		1518,~~565~~249		10,471		-		10,471
Total stockholders' equity		2921,~~300~~953		-		2921,~~300~~953		34,377		-		34,377
Total liabilities and stockholders' equity	$	1,~~250~~408,~~504~~284	$	1,~~177~~215,~~537~~968	$	2,~~428~~624,~~041~~252	$	1,003,544	$	916,887	$	1,920,431

Note 9. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of ~~June~~September 30, 2023 and December 31, 2022 are as follows:


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Deferred tax assets:
Loss carryforwards	$	4,~~519~~146	$	2,672
Capitalized costs		5544		79
Stock option granted		1,~~193~~190		1,066
Policy acquisition costs		89,~~205~~803		6,489
General business credits		6		6
Derivative option allowance		~~310~~-		-
Sec 163(j) limitation		171		171
Benefit reserves		1017,~~478~~189		12,010
Impairments		535		403
Unrealized losses on investments		1517,~~267~~780		13,624
Other		1,928		1,928
Total deferred tax assets		4252,~~667~~792		38,448
Less valuation allowance		(4046,~~729~~138)		(35,305)
Total deferred tax assets, net of valuation allowance		16,~~938~~654		3,143
Deferred tax liabilities:
Unrealized losses on investments		-		-
Due premiums		-		-
Intangible assets		147		147
Derivative option allowance		-4,246		2,150
Bond Discount		12,~~912~~400		936
Property and equipment		(~~121~~139)		(90)
Total deferred tax liabilities		16,~~938~~654		3,143
Net deferred tax assets	$	-	$	-

At ~~June~~September 30, 2023 and December 31, 2022, the Company recorded a valuation allowance of $4046.71 million and $35.3 million, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income.

There was income tax expense of $34.6 million and $2.1.3 million for the three months ended ~~June~~September 30, 2023 and 2022. and $510.95 million and $23.68 million of tax expense for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pretax income, as a result of the following:


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022		2023		2022
Computed expected income tax benefit (expense)	$	~~428~~(1,564)	$	(~~409~~796)	$	(23,~~357~~921)	$	(12,~~508~~305)
Reduction (increase) in income taxes resulting from:
Interest maintenance reserve and reinsurance		(1847)		61176		514		~~(18)~~158
Nondeductible expenses		(3)		(3)		(69)		(58)
Change in valuation allowance		(32,~~593~~896)		~~2,480~~(641)		(36,~~781~~677)		(1,~~052~~693)
Deferred tax adjustment		-		~~(4)~~14		-		~~(14)~~-
AETR adjustment		76(19)		-		76(19)		-
Prior year true-up		~~141~~(77)		-		~~141~~140		-
Subtotal of (increases) decreases		(3,~~397~~042)		~~2,534~~(454)		(36,~~519~~561)		(1,~~089~~543)
Tax (benefit) expense	$	(24,~~969~~606)	$	2(1,~~125~~250)	$	(510,~~876~~482)	$	(23,~~597~~848)

Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control, which occurred on June 28, 2018. As of ~~June~~September 30, 2023, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $710.96 million. The federal NOLs generated by Midwest Holding and American Life prior to June 28, 2018 which are subject to the Section 382 limitation can be carried forward. If not utilized, the NOLs of $1.0.9 million prior to 2017 will expire through the year of 2032.

The NOLs generated by SRC1 prior to December 30, 2021 of less than $03.16 million are subject to Section 382 limitations due to the change in control. However, under the Tax Cuts and Jobs Act of 2017, they will not expire and can be carried forward indefinitely. The NOLs not subject to Section 382 which were generated from June 28, 2018 to December 31, 2022 do not expire and will carry forward indefinitely, however their utilization in any carry forward year is limited to 80% of taxable income in that year. The Company believes that it is more likely than not that the benefit from federal NOL carryforwards will not be realized; thus, we have recorded a full valuation allowance of $12.72 million on the deferred tax assets related to these federal NOL carryforwards.

Note 10. Leases

Our operating lease activities consist of leases for office space and equipment and do not include variable lease payments. The right of use assets and lease liabilities generated by our lease agreements are included in on the Consolidated Balance Sheets in the Other Assets and Other Liabilities categories, respectively.

Supplemental balance sheet information for our leases as of ~~June~~September 30, 2023 and December 31, 2022 is as follows:


(In thousands)	Classification	~~June~~September 30, 2023		December 31, 2022
Assets
Operating	Operating lease right-of-use assets	$	21,~~083~~997	$	2,119

Liabilities
Operating lease	Operating lease liabilities	$	2,~~106~~005	$	2,135

Our operating lease expense for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 is as follows:


		Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	Classification	2023		2022		2023		2022
Operating	General and administrative expense	$	3	$	3	$	710	$	710

Minimum contractual obligations for our leases as of ~~June~~September 30, 2023 are as follows:


(In thousands)	Operating Leases
2023	$	~~224~~112
2024		378
2025		342
2026		345
2027		353
2028		362
2029 and after		1,041
Total remaining lease payments	$	32,~~045~~933

The cash flows related to the operating lease were less than $0.1 million for both the ~~six~~three and the nine months ended ~~June~~September 30, 2023 and 2022.

The weighted average remaining lease terms of our operating leases were approximately eight-and-one-half years and ten years, respectively, as of ~~June~~September 30, 2023 and December 31, 2022. The weighted average discount rate used to determine the lease liabilities for operating leases was 8% as of ~~June~~September 30, 2023 and December 31, 2022, respectively. The discount rate used for operating leases was based on our incremental borrowing rate.

Note 11. Equity

Preferred stock

As of ~~June~~September 30, 2023 and December 31, 2022, the Company had two million shares of preferred stock authorized with none issued or outstanding.

Common Stock

Our voting common stock is traded on The Nasdaq Capital Market under the symbol “MDWT.” Midwest has authorized 20 million shares of voting common stock and two million shares of non-voting common stock. As of ~~June~~September 30, 2023 and December 31, 2022, Midwest had 3,744,645 and 3,727,976 shares of voting common stock issued and outstanding, respectively. As of those dates, there were no shares of Midwest’s non-voting common stock issued or outstanding.

Midwest holds approximately 4,500 shares of voting common stock in its treasury due to a reverse stock split.

Additional paid-in capital

Additional paid-in capital is primarily comprised of the cumulative cash that exceeds the par value received by the Company in conjunction with past issuances of its shares. It also is increased by the amortization expense of the consideration calculated at inception of the stock option grants as discussed in Note 12 – Long-Term Incentive Plans below.

Accumulated Other Comprehensive Income (AOCI)

AOCI represents the cumulative other comprehensive income (loss) items that are reported separate from net loss and detailed on the Consolidated Statements of Comprehensive Loss. AOCI includes the unrealized gains and losses on certain investments and DAC, net of offsets and taxes as follows:


(In thousands)	Unrealizedinvestment gains(losses) on fixed maturities,net of offsets
Balance at December 31, 2021	$	2,634
Other comprehensive (loss) before reclassifications, net of tax		(54,975)
Less: Reclassification adjustments for losses realized in net income		955
Balance, December 31, 2022		(51,386)
Other comprehensive (loss) before reclassifications, net of tax		(616,~~230~~167)
Less: Reclassification adjustments for losses realized in net income, net of tax		~~183~~667
Balance, June 30, 2023	$	(57,433)
Balance, September 30, 2023	$	(66,886)

Note 12. Long-Term Incentive Plans

In 2019, the Board approved the Midwest Holding Inc. (“MHI”) Long-Term Incentive Plan (the “2019 Plan”) that reserves up to 102,000 shares of MHI voting common stock for award issuances. It provides for the grant of options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards, and other incentive awards to eligible employees, consultants and eligible directors, subject to the conditions set forth in the 2019 Plan. In 2019, the shareholders of MHI approved the 2019 Plan. All awards are required to be established, approved, and/or granted by the Compensation Committee of the Board.

In 2020, the Board adopted a new equity incentive plan titled the 2020 Long-Term Incentive Plan (the “2020 Plan”) that reserves up to 350,000 shares of MHI voting common stock for award issuances. The terms of the 2020 Plan are essentially the same as the 2019 Plan. In 2021, the shareholders of MHI approved the 2020 Plan. During 2022, the Board approved the addition of 150,000 shares of voting common stock to be added to the 2020 Plan for future awards and these shares were approved by the shareholders of MHI.

Stock Options

In accordance with the stockholder-approved equity incentive plans above, the Company grants stock options to employees and directors for the purchase of common stock at exercise prices established at the date of the grants. Fair value and compensation at

grant date are calculated using the Black Scholes Model. Compensation expense for option shares is expensed on a straight-line basis over the requisite service periods, accounting for forfeitures as they occur. Stock options become exercisable under various vesting schedules (typically two to four years) and generally expire in ten years after the date of grant. The exercise price of the option is equal to the average daily market price of MHI’s common stock on the date of grant resulting in a grant date intrinsic value of $0.00.

Changes in outstanding options were as follows:


		Weighted Average Exercise Price Per Share		Range of Option Exercise Prices per Share	Total Outstanding	Outstanding, Non-vested	Vested and Exercisable
December 31, 2022	$	32.19	$	11.20 - 55.02	319,121	271,517	47,604
Granted		17.12		17.20	5,750	5,750	-
Prior year adjustment		39.3816		16.37 - 55.02	-	(7,390)	7,390
Vested		-		-	-	-	-
Exercised		-		-	-	-	-
Forfeited		3646.7392		25.00 - 55.02	(419,~~150~~267)	(419,~~150~~267)	-
Expired		-		-	-	-	-
June 30, 2023	$	31.85	$	11.20 - 55.02	320,721	265,727	54,994
September 30, 2023	$	30.90	$	11.20 - 55.02	305,604	250,610	54,994

Option information segregated by ranges of exercise prices were as follows:


	~~June~~September 30, 2023
	Total Outstanding Options				Vested and Exercisable
Range of Option Exercise Prices per Share	Options		Weighted Average Exercise Price per Share	Weighted Average Remaining Term	Options		Weighted Average Exercise Price per Share	Weighted Average Remaining Term

> $50.00	4935,~~353~~853	$	55.02	7.7160	76,390	$	55.02	7.5933
$40.00 - $49.99	127,751		41.25	7.69	36,042		41.25	7.5933
$30.00 - $39.99	-		-	-	-		-	-
$20.00 - $29.99	2523,~~967~~600		23.1636	7.6454	5,877		25.00	7.2804
$10.00 - $19.99	115,000		13.43	9.00	4,285		16.37	7.5933
< $10.00	-	$	-	-	-	$	-	-

The weighted average exercise prices of vested and exercisable options as of ~~June~~September 30, 2023, were $39.3816.

As of ~~June~~September 30, 2023, based on a closing stock price of $26.3215 per share, the aggregate intrinsic (in-the-money) values of vested options and all options outstanding were less than $0.61 million and $1.6 million, respectively.

Restricted Stock and Restricted Stock Units

In 2020, the Company awarded 18,597 shares of restricted stock, with a grant date fair value of $41.25 per share and subject to time-based vesting requirements of one-fourth increments sixty days after each of the first four anniversary dates of the grant date. The restricted stock compensation expense is calculated using the stock prices at grant date and amortizing on a straight-line basis over the requisite service periods. The recipient of the award resigned on March 31, 2022, and received a total of 5,812 vested shares in connection with his termination of employment, while the remaining 12,785 shares of restricted stock were forfeited.

5,089 restricted stock units (“RSUs”) were granted to our non-employee directors in June 2021 with a grant date fair value of $24.34 per share and vested on June 14, 2022, the date of the Company’s 2022 annual meeting of stockholders. The compensation expense relating to these awards was calculated using the grant date fair value and is amortizing on a straight-line basis over the requisite service periods.

On June 14, 2022, the Company granted 18,718 RSUs to our non-employee directors with a grant date fair value of $11.22 per share, although 2,674 of those RSUs were forfeited by former MHI director Douglas Bratton when he left the Board in September 2022. The remaining 16,044 RSUs vested on June 6, 2023 in conjunction with our annual stockholders meeting. The compensation expense relating to these awards was calculated using the grant date fair value and was amortized on a straight-line basis over the requisite service periods.

On June 6, 2023, the Company granted 6,984 RSUs to our non-employee directors with a grant date fair value of $25.70 per share. By their terms, the RSUs will vest on the earlier of June 6, 2024 or the date of our 2024 annual stockholders meeting, although they are also subject to accelerated vesting in connection with the transaction described in Note 18. The compensation expense relating to these awards was calculated using the grant date fair value and will be amortized on a straight-line basis over the requisite service period.


	Total Outstanding Units			Vested Units
	Units		Weighted Average Grand Date Fair Value	Units		Weighted Average Grant Date Fair Value

December 31, 2022	17,207	$	13.84	1,163	$	50.00
Granted	6,984		25.76	-		-
Vested	-		-	-		-
Forfeited	-		-	-		-
Released	(16,044)		11.22	-		-
June 30, 2023	8,147	$	22.08	1,163	$	50.00
September 30, 2023	8,147	$	22.08	1,163	$	50.00

The table below identifies the assumptions used in the Black Scholes Model to calculate the compensation expense for options granted during the ~~six~~nine months ended ~~June~~September 30, 2023 and the year ended December 31, 2022:


	~~June~~September 30,	December 31,
	2023	2022
Volatility	287.3%	4.16% - 4.26%
Weighted-average volatility	287.3%	3.7%
Expected term (in years)	6.54 yrs	2 - 7
Risk-free rate	3.57%	0.02% - 2.15%

For the three months ended ~~June~~September 30, 2023 and 2022, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants above, over vesting tranches which resulted in expense and an increase in additional paid in capital of $0.31 million and negative $(0.47) million, respectively.

For the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants above, over vesting tranches which resulted in expense and an increase in additional paid in capital of $0.67 million and negative $(0.43) million, respectively.

The tables below shows the remaining non-vested shares under the 2019 and 2020 Plans as of ~~June~~September 30, 2023 and December 31, 2022, respectively:


	~~June~~September 30, 2023
	AwardsOutstanding	Weighted Average Grant-Date Fair Value		Weighted Average Exercise Price
Nonvested stock options and restricted
Stock unit awards at December 31, 2022	287,561	$	16.96	$	32.29
Options granted	5,750		16.56		17.12
Restricted stock units granted	6,984		16.56		-
Vested	(23,434)		1513.7659		55.02
Forfeited or expired	(520,~~400~~517)		2027.5199		3646.7392
Ending Balance at June 30, 2023	271,461	$	16.92	$	31.85
Ending Balance at September 30, 2023	256,344	$	16.92	$	30.90


	December 31, 2022
	Stock Options Outstanding	Weighted Average Grant-Date Fair Value		Weighted Average Exercise Price
Nonvested stock options and restricted
stock unit awards at December 31, 2021	317,217	$	25.80	$	40.13
Options granted	117,367		9.57		14.92
Restricted stock units granted	18,718		—		—
Vested	(56,678)		21.12		36.53
Forfeited or expired	(109,063)		23.82		38.87
Ending Balance at December 31, 2022	287,561	$	16.96	$	32.29

Note 13. Statutory Net Income and Surplus

American Life and Seneca Re are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Nebraska Department of Insurance and the Vermont Department of Insurance. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis.

The following table represents the net gains or (losses) as filed in the statutory-basis annual statement with the Nebraska Department of Insurance for American Life and the Vermont Department of Insurance for SRC1 and SRC3:


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022		2023		2022
American Life	$	~~(18~~38,~~528)~~395	$	8(1,~~298~~836)	$	~~(35~~3,~~116)~~279	$	1716,~~891~~055
SRC1	$	~~1,583~~(458)	$	~~(981)~~1,129	$	46,~~797~~853	$	~~(2,253)~~181
SRC3	$	~~629~~745	$	~~(564)~~1,951	$	~~917~~1,662	$	~~(95)~~960

The following table represents the Capital and Surplus as filed in the statutory-basis annual statement with the Nebraska Department of Insurance for American Life and the Vermont Department of Insurance for SRC1 and SRC3:


(In thousands)
		~~June~~September 30, 2023		December 31, 2022
American Life	$	5867,~~135~~018	$	69,936
SRC1	$	1614,~~979~~968	$	9,615
SRC3	$	87,~~348~~983	$	6,088

The following table represents the premiums sales as filed in the statutory-basis annual statement with the Nebraska Department of Insurance for American Life and the Vermont Department of Insurance for SRC1 and SRC3:


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022		2023		2022
American Life	$	~~138~~207,~~920~~689	$	72141,~~498~~602	$	~~231~~438,~~207~~896	$	~~130~~272,~~616~~218
SRC1	$	-	$	-	$	-	$	-
SRC3	$	~~(52)~~-	$	~~23,905~~174	$	123	$	23,~~757~~931

State insurance laws require American Life to maintain certain minimum capital and surplus amounts on a statutory basis. American Life is subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from its domiciliary insurance regulatory authorities. American Life is also subject to risk-based capital (“RBC”) requirements that may further affect its ability to pay dividends. American Life’s statutory capital and surplus as of ~~June~~September 30, 2023 and December 31, 2022, exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements as of those dates.

As of ~~June~~September 30, 2023 and December 31, 2022, American Life did not hold any participating policyholder contracts where dividends were required to be paid.

Note 14. Third-party Administration

The Company, through its investment advisory subsidiary 1505 Capital, offers investment and structuring services. Our reinsurance partners may choose to engage 1505 as the investment advisor for their portfolios. Services are also available to unaffiliated investors. As of ~~June~~September 30, 2023, and December 31, 2022, 1505 Capital had $531.6 million and $501.9 of third-party assets under management, respectively.

Note 15. Policy Administration Fees

The company generates revenue through policy administration for our third-party reinsurers, as well as fees received from early termination of policies. For the three months ended ~~June~~September 30, 2023 and 2022, we received $0.59 million and $0.5 million of fees and for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 we received $12.10 million and $01.94 million of fees.

Note 16. Related Party

Crestline

On April 24, 2020, we entered into a Securities Purchase Agreement with Crestline Assurance Holdings LLC (“Crestline”) an institutional alternative investment management firm under which we issued 444,444 shares of our voting common stock to Crestline. 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. Also, Douglas Bratton, a principal of Crestline, was initially appointed as a director of both our Board and the American Life Board of Directors.

In addition, 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 a Crestline affiliate regarding the 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 a quota share percentage of 40% the liabilities of American Life arising from its FIA products. Through ~~June~~September 30, 2023, American Life had ceded $~~515~~534.36 million face amount of annuities to Crestline Re SP1. American Life received total ceding commissions of $0.85 million and expense reimbursements of $0.75 million in connection with these transactions for the three months ended ~~June~~September 30, 2023 and commissions of $12.63 million and expense reimbursements of $12.61 million for ~~June~~the nine months ended September 30, ~~2022~~2023.

The Reinsurance Agreement also contains the following agreements:

●

American Life and Crestline Re SP1 each entered into investment management agreements with Crestline, pursuant to which Crestline manages the assets that support the reinsured business; and

●

American Life and Crestline Re SP1 entered into a trust agreement whereby Crestline maintains for American Life’s benefit a trust account that supports the reinsured business.

On September 16, 2022, Midwest Holding and Crestline executed a Letter of Understanding relating to the Stockholders Agreement. The Company and Crestline agreed that Crestline’s representative would resign from the Boards of Directors of the Company and American Life. Notwithstanding the foregoing, the parties agreed that the resignation and Crestline’s decision to no longer appoint a ~~director does not constitute a permanent waiver of Crestline’s rights under the Stockholders Agreement to appoint a Crestline Designated~~

director does not constitute a permanent waiver of Crestline’s rights under the Stockholders Agreement to appoint a Crestline Designated Director. The Company and Crestline agreed that the foregoing described agreement will remain in place until the earlier to occur of the date (i) the parties reach written agreement otherwise, (ii) that Crestline is no longer an affiliate of a life insurance entity it recently acquired and (iii) on which Crestline no longer has the right to elect or appoint a Designated Director (and Observer) to the Board.

As of ~~June~~September 30, 2023, and December 31, 2022, Crestline has approximately $~~477~~504.24 million and $423.6 of the Company’s assets under management, respectively, and was a subadvisor on approximately $~~166~~151.76 million and $134.3 million of additional investments as of ~~June~~September 30, 2023 and December 31, 2022, respectively.

Chelsea

On June 29, 2020, Midwest’s subsidiary, American Life, purchased a 17% interest in Financial Guaranty UK Limited through an economic interest in Chelsea Holdings Midwest LLC. American Life has a note receivable from Chelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a nationally recognized statistical rating organization (“NRSRO”) and Class B preferred shares in Chelsea Holdings Midwest LLC. This note is being carried at cost plus PIK of $6.45 million, and the preferred shares are carried at a fair market value of $21.39 million as of ~~June~~September 30, 2023 and $2.3 million as of December 31, 2022, based upon valuations received from an independent third-party.

Note 17. Commitments and Contingencies

Contingent Commitments: We have entered into commitments related to certain investments, where draws or additional funding can be requested under the terms of the agreements. These commitments are inclusive of third-party reinsurer commitments, and were approximately $~~191~~223.30 million as of ~~June~~September 30, 2023. Of the approximately $~~191~~223.30 million in unfunded commitments at ~~June~~September 30, 2023, approximately $5564.82 million related to American Life. The remaining $~~135~~158.58 million represented commitments that have been made by our reinsurance partners. The table shows when different dollar amounts of commitments will expire. The ability of borrowers to request additional funds under these lending agreements varies considerably from loan to loan.


(In thousands)	~~June~~September 30, 2023		December 31, 2022
Due in one year or less	$	7383,~~566~~137	$	52,951
Due in two years		2841,~~892~~058		43,604
Due in three years		2120,~~847~~329		7,731
Due in four years		1124,~~737~~947		13,277
Due in five years and after		5553,~~245~~569		61,432
	$	~~191~~223,~~287~~040	$	178,995

Legal Proceedings: We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

Regulatory Matters: State regulatory bodies and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning the Company’s compliance with laws in relation to, but not limited to, insurance and securities matters. American Life was granted authorization to do business in Kentucky on June 23, 2023, and is currently licensed in 25 states and the District of Columbia as of ~~June~~September 30, 2023. American Life has ~~pending~~an ~~applications~~application pending in one additional ~~states~~state as of ~~June~~September 30, 2023.

Note 18. Pending Merger

On April 30, 2023, Midwest Holding Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Midas Parent, LP, a Delaware limited partnership (“Parent”) and an affiliate of Antarctica Capital, LLC (“Antarctica”), and Midas Merger Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction (or waiver) of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company and whereupon Merger Sub will cease to exist and the Company will be the surviving corporation in the Merger and will continue as a wholly-owned subsidiary of Parent (the “Merger”).

The board of directors of the Company (the “Company Board”) unanimously approved and declared it advisable to enter into the Merger Agreement and resolved to recommend that the Company’s stockholders approve the adoption of the Merger Agreement and the transactions contemplated thereby (the “Transactions”), including the Merger on the terms and subject to the conditions set forth in the Merger Agreement.

As a result of the Merger, at the effective time of the Merger (the “Effective Time”), each outstanding share of common stock of the Company, par value $0.001 per share (the “Company Common Stock”) (other than (i) Company Common Stock held by Parent or the Company or any of their respective wholly owned subsidiaries, and (ii) any shares of Company Common Stock held by stockholders who properly exercise appraisal rights under Delaware law), outstanding immediately prior to the Effective Time, will be converted into the right to receive $27.00 per share in cash, without interest.

Consummation of the Merger is subject to certain conditions, including, but not limited to, (i) the Company’s receipt of approval of the Company’s stockholders, (ii) the absence of any law or order prohibiting or making illegal the consummation of the Merger, (iii) the approval of the Merger by the Nebraska Department of Insurance and the Vermont Department of Financial Regulation (“DFR”) without the imposition of any Burdensome Condition (as defined in the Merger Agreement), and (iv) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement). On May 14, 2023, the DFR granted its approval of the Merger.

OnThe transaction was approved by stockholders on July 26, 2023, and has been approved by the ~~Company~~Vermont ~~held~~Department aof ~~special~~Financial ~~meeting~~Regulation. The (merger is still subject to the ~~“Special~~approval ~~Meeting”)~~of the Nebraska Department of ~~stockholders~~Insurance. atWe ~~which~~continue to work with Antarctica to provide all information requested by the ~~Company’s~~Nebraska ~~stockholders~~Department ~~voted~~of Insurance (NDOI). Upon completion of the NDOI review, a public NDOI hearing will be required before final regulatory approval is received to ~~adopt~~proceed with closing the ~~Merger~~merger. ~~Agreement~~We ~~and~~still ~~approve~~anticipate closing the ~~Merger~~transaction shortly after the hearing and by year-end.

ITEM 2. 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 Annual Report on Form 10-K and it includes many forward-looking statements which 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 herein under “Special Cautionary Note Regarding Forward-Looking Statements,” “Summary of Risks Associated with our Business and Voting Common Stock” and “Risk Factors.” We are under no duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results.

Overview of Company and Business Model

Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated on October 31, 2003 for the purpose of operating a financial services company. We are in the annuity insurance business and operate through our three primary wholly owned subsidiaries, American Life & Security Corp. (“American Life”), asset manager 1505 Capital LLC (“1505 Capital”), and our sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).

We are a financial services company focused on helping people plan and secure their future by providing technology-enabled and services-oriented solutions to support individuals’ retirement through our annuity products. We distribute our annuities through independent distributors who are primarily independent marketing organizations (“IMOs”). Our operations are comprised of three distinct, inter-connected businesses – insurance, reinsurance, and asset management. We seek to reinsure a significant portion of our annuity policies with third-party reinsurers and our captive reinsurance subsidiary, Seneca Re. Our third-party reinsurers include traditional reinsurers and capital markets reinsurers, who are investors seeking exposure to reinsurance revenue and typically do not have their own reinsurance platforms or insurance-related operations. We also have the flexibility to selectively retain assets and liabilities associated with our policies for a period of time when we expect that doing so will provide an attractive return on our capital.

We believe that our operating capabilities and technology platform provide annuity distributors and reinsurers with flexible and cost-effective solutions. We seek to create value through our ability to provide the distributors and reinsurers with annuity product innovation, speed to market for new products, competitive rates and commissions, and streamlined customer and agent experiences. Our capital model allows us to support increasing annuity sales volumes with capital capacity provided by reinsurers although, in connection with plans for future growth, we continue to monitor any need for additional capital. By reinsuring a significant portion of the annuity policies issued, the level of capital needed for American Life is significantly less than retaining all of the business on its books. We believe this “capital light” approach has the potential to produce enhanced returns for our business compared to a traditional insurance company capital structure. This strategy helps reduce our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us.

As of ~~June~~September 30, 2023, approximately 4939% of the deposits received in 2023 for our annuity products were ceded to reinsurance vehicles capitalized by third party reinsurers or held in protected cells within Seneca Re for future reinsurance transactions.

We operate our core business through a total of four subsidiaries under one reportable segment. American Life & Security Corp. (“American Life”) is a Nebraska-domiciled life insurance company, currently licensed to sell, underwrite, and market life insurance and annuity products in 25 states and the District of Columbia. 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 rating was affirmed in March 2023. A.M. Best recently revised its outlook for American Life from Stable to Under Review. All of our annuities are written by American Life.

American Life was granted authorization to do business in Kentucky on June 23, 2023, and has ~~pending~~an ~~applications~~application pending in one additional ~~states~~state as of ~~June~~September 30, 2023.

Our other insurance subsidiary, Seneca Re, is a Vermont-domiciled sponsored captive reinsurance company established in early 2020 to reinsure various types of risks on behalf of American Life and third-party capital providers through special purpose reinsurance entities known as “protected cells.” Through Seneca Re, we assist capital market investors in establishing and licensing new protected cells.

Midwest Capital Corp was established as a holding company and is the immediate parent of Seneca Incorporated Cell, LLC 2021-03 (“SRC3”), both of which are consolidated into our financial statements.

Our fourth subsidiary, 1505 Capital, is an SEC registered investment adviser providing financial, investment advisory, and management services. Our asset management services are available to third-party insurers and reinsurers. At ~~June~~September 30, 2023, 1505 Capital had approximately $531.6 million total third-party assets under management.

We seek to deliver long-term value by growing our annuity volumes and generating profitable fee-based revenue. We generate fees and other revenue based on the gross deposits received on the annuity policies we issue, reinsure, and administer. We provide an end-to-end solution to manage annuity products that includes a broad set of product development, distribution support, policy administration, and asset/liability management services. Our platform enables us to efficiently develop, sell and administer a wide range of annuity products.

Industry Trends and Market Conditions

Market

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 a key role in retirement planning by providing individuals with stable, tax-efficient sources of income. In 2022, annuity premiums accounted for $313 billion of annual premiums, or approximately 48% of the $652 billion of total annual life and annuity premiums according to the Insurance Information Institute. The most common annuities are fixed and variable and can be written on an individual or group basis. Our current products are MYGAs and FIAs written on an individual basis.

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 forecasted to grow from 56 million in 2020 to an estimated 81 million by 2040, according to the U.S. Census Bureau, Population Estimates and Projections. This study also forecasted that the U.S. population aged over 65 years old is expected to grow by 44% from 2020 to 2040, while the total U.S. population is expected to grow by only 12%. Annuities in the U.S. are distributed through a number of channels, most of which are independent from the insurance companies that issue annuities. Independent distribution channels serve as the primary and a growing source of annuity distribution. In the fourth quarter of 2022, approximately 63% of U.S. individual annuity sales occurred through independent distributors, including independent agents, broker-dealers, and banks, according to the Life Insurance Marketing and Research Association (“LIMRA”) 2022 Q4 U.S. Individual Annuities Glimpse. Independent agents are the second largest distribution channel, behind banks, accounting for approximately 18% of U.S. individual annuity sales in the fourth quarter of 2022. IMOs provide independent agents with access to annuity products along with operational support services and functionality to support the distribution services of the agents. 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.

We believe that capital markets investors have been actively seeking investing in and acquiring insurance and reinsurance companies in recent years. 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. However, there are significant regulatory and operational hurdles for capital providers looking to enter the insurance 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 annuities through a variety of reinsurance entities that we can form quickly and operate efficiently with lower upfront and ongoing regulatory and operating costs.

State expansion efforts have taken more time than anticipated, as state insurance regulators would like to see a more fully developed historical financial footprint. We are working diligently to ~~file~~consider filing in more states, responding and providing increased information to regulators and discussing how our business model ensures policyholders are protected, given the capital held and supported by the use of reinsurance.

Our most recently authorized states, Florida, Georgia, and Kentucky, granted certificates of authority as of December 22, 2022, February 24, and June 23, 2023, respectively, and we have commenced operations in these new jurisdictions.

We currently distribute annuity products through 27 third-party IMOs. We believe our product development, prompt policy processing, operating flexibility and speed to market make us a desirable partner for insurance distributors. We are seeking to grow by increasing volumes with our current IMOs and by establishing new IMO relationships.

Competition

We operate in highly competitive markets with a variety of participants, including insurance companies, financial institutions, asset managers, and reinsurance companies. These companies compete in various forms in the annuity market, for investment assets and for services. We seek to build strong relationships along with offering technology-enabled and services-oriented solutions for our partners.

Our experience indicates that the market for annuities is dynamic. The combination of the treasury market experiencing the unprecedented rate increases and the volatility in the market resulting from the ~~war~~wars in Ukraine and the Middle East, along with related economic uncertainties due to inflation, has opened up investment opportunities that allow us, and our reinsurance partners, to support more competitive rates for annuities. Based on our experience with COVID, we expect this investment environment to be conducive to our business model. We have been reviewing policy pricing along with reinsurer appetite to ensure we continue to grow our business while managing risk. We have recently taken pricing action on both our FIA and MYGA products and continue to monitor our competitiveness in the market. We have also increased our focus on marketing, reestablishing, and expanding our relationships on the distribution side through various channels and are reallocating or adding resources relating to this initiative. As a result, we have experienced encouraging sales as ~~2022~~2023 has unfolded. However, we expect competition in our market to remain intense -- particularly from other well established entities providing annuity products.

Interest Rate Environment

The Federal Reserve repeatedly increased the federal funds rate throughout 2022, moving from 0.25% to 4.50%, and continued that trend increasing the rate to 5.0050% in ~~June~~July 2023. We seek to address our interest rate risk through managing the duration of the liabilities and purchasing and holding quality, long-term assets mirroring that duration.

If interest rates were to ~~rise~~continue rising, we believe the yield on our floating rate investments and the yield on new investment purchases would rise. We also believe our products would therefore be more attractive to consumers and, depending on our business plan, our annuities sales would potentially increase.

Discontinuation of LIBOR

The Financial Conduct Authority (“FCA”), the United Kingdom regulator of the London Interbank Offered Rate ("LIBOR"), previously indicated that it intends to stop compelling panel banks to submit quotes used to determine LIBOR after 2021. On November 30, 2020, the Intercontinental Exchange (“ICE”) Benchmark Administration (“IBA”), the administrator of LIBOR, announced a consultation regarding its intention to cease the publication of one week and two-month U.S. Dollar LIBOR settings at the end of December 2021, but to extend the publication of the remaining U.S. Dollar LIBOR settings (overnight and one, three, six, and 12-month U.S. Dollar LIBOR) until the end of June 2023. The IBA intends to share the results of the consultation with the FCA and publish a summary of the responses. U.S. bank regulators acknowledged the announcement and, subject to certain limited exceptions, advised banks to cease writing new U.S. Dollar LIBOR contracts by the end of 2021.

We are in the process of analyzing and identifying our securities, financial instruments, and contracts that utilize LIBOR (collectively “LIBOR Instruments”) to determine if we have any material exposure to the transition from LIBOR. To the extent we hold LIBOR Instruments, the terms of these instruments may have fallback provisions that provide for an alternative reference rate when LIBOR ceases to exist. For securities without adequate fallback provisions already in place, federal legislation has been enacted to provide a safe harbor for transition to the recommended alternative reference rate.

Notwithstanding the availability of statutory guidance on fallback procedures, in preparation for the phase out of LIBOR, we may need to renegotiate our LIBOR Instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our LIBOR Instruments. Furthermore, the discontinuation of LIBOR may adversely impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments.

As a result, the transition of our LIBOR Instruments to alternative reference rates, including the Secured Overnight Financing Rate (“SOFR”), may result in adverse changes to the net investment income, fair market value and return on those investments. We intend to continue evaluating and monitoring the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding the effect of adopting or transitioning to alternative rates such as SOFR, we are unable to predict the overall impact of this change at this time.

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with 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 results of operations and financial position. Our accounting policies, judgments, and estimates have not changed significantly over our disclosed accounting periods. 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

All fixed maturities owned by the Company are considered available-for-sale and are included in the Consolidated financial statements at their fair value as of the financial statement date. Premiums and discounts on fixed maturity debt instruments are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in accumulated other comprehensive income.

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, issuer credit ratings, and the intent and ability of the Company to hold the investment until the recovery of the cost.

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company 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 statement of comprehensive income as an impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security, and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the impairment is bifurcated. The Company recognizes the credit loss portion as realized losses and the noncredit loss portion in accumulated other comprehensive loss. The credit component of 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 the Company’s 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. As of ~~June~~September 30, 2023 and December 31, 2022, the Company held one asset valued at $7.7 million with a total impairment of $1.4 million and $1.4 million, respectively. Additionally, during the first quarter of 2023 the company recognized an impairment for the full value of an asset valued at $0.6 million.

Investment income consists of interest, dividends, gains and losses, and real estate income, which are recognized on an accrual basis along with the amortization of premiums and discounts.

Certain available-for-sale investments are maintained as collateral under funds withheld (“FW”) and modified coinsurance (“Modco”) agreements but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. American Life has treaties with several third-party reinsurers that have FW and Modco provisions. In a Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In aan FW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers to reduce the potential credit risk. The unrealized gains/losses on those investments are passed through to the third-party reinsurers, through the fair value of our total return swap, as either a realized gain or loss on the Consolidated Statements of Comprehensive Loss.

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 ~~June~~September 30, 2023, the sum of the fair value of those licenses exceeded the carrying value of the indefinite-lived intangible assets. These amounts are carried on our balance sheet in Other Assets.

Reinsurance

We ~~expect~~plan 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. 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 seek to mitigate the credit risk relating to reinsurers by generally either requiring that the reinsurer post substantial collateral or make other financial commitments as a security for the reinsured risks. Under these reinsurance agreements, there typically is 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 usually hold collateral from the reinsurer on aan FW basis or require the reinsurer to maintain a trust that holds assets backing up its 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. When our investment advisor subsidiary, 1505 Capital, is appointed to manage these assets, 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 and our MYGA reserves equal the account value from our policy administration system. 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 these 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 be realized.

Recognition of Revenues

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included deposit-type contract liabilities. Annuity premiums are shown as a financing activity in the Consolidated Statements 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 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 Statements 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 must 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 identifying how the hedging instrument is expected to hedge the designated risks related to the hedged item, the method to retrospectively, and prospectively assess the hedging instrument’s effectiveness and the method to 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 also assessed periodically throughout the life of the designated hedging relationship.

In 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 the related options that we currently ~~have~~own. We value our derivatives at fair market value with the offset being recorded on our Consolidated Statements of Comprehensive Loss as a realized gain or (loss).

Additionally, reinsurance agreements written on aan FW 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 our Consolidated Statements of Comprehensive Loss.

Derivatives

The Company has entered into certain derivative instruments to hedge FIA products that guarantee the return of principal to our policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options. The change in fair value of the derivatives for hedging

the FIA index credits and the related embedded derivative liability fluctuate from period to period based on the change in the market interest rates. The indexed reserves are measured at fair value for the current period and future periods. We hedge with options that align with the terms of our FIA products which are between seven and ten years. We have analyzed our hedging strategy on our FIA products and, while the correlation of the hedges to the FIA products is not matched dollar for dollar, we believe the hedges are effective as of ~~June~~September 30, 2023.

American Life also has agreements with several third-party reinsurers that have FW and Modco 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 4 Derivative Instruments” to our Consolidated financial statements. Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses as of ~~June~~September 30, 2023 and December 31, 2022, of approximately $1412.43 million and $10.5 million, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains and losses on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized losses on the assets held by American Life on behalf of the third-party reinsurers were offset by ~~gains~~losses in the embedded derivative of $3 (2.31) million and gains of $10.19 million for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and realized gains of $31.98 million and $214.96 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. We account for this unrealized loss pass-through by recording an equivalent realized gain on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.

Net Income

In this section, unless otherwise noted the discussion below compares the ~~six~~nine months ended ~~June~~September 30, 2023 to the ~~six~~nine months ended ~~June~~September 30, 2022.

We had a comprehensive loss of $6(15.12) million including unrealized loss of $6(15.05) million, mainly from the fixed maturity portfolio, ~~resulting~~but instill aresulted in net ~~loss~~income to Midwest of $0.13 million for the ~~six~~nine months ended ~~June~~September 30, 2023. This compares to a comprehensive loss of $19(38.17) million including unrealized loss of $28(55.56) million, still resulting in a net income of $916.59 million to Midwest in the prior year.

Revenues were up year over year, being impacted by realized gains of $189.4 million for the ~~six~~nine months ended ~~June~~September 30, 2023 versus a loss of $18(14.87) million in the prior year. Investment income increased due to the growth in the retained portfolio and from higher interest rates. Policy administration fees were up year over year, from early surrender activity, and ~~despite~~in line with the increase in liabilities through annuity premiums ceded in the prior year. Amortization of deferred ceded premium ~~grew~~has grown as we have added new reinsurers over time and the portfolio continues to age. Service fee revenue was up ~~relatively~~to ~~consistent at~~ $1.3.6 million in 2023 compared to $1.56 million from the prior year.

Expenses were up, driven by interest credited and the option allowance (see point 3 below). Salaries and benefits increased with additional personnel, repositioning, and ~~retaining~~employee ofretention ~~personnel~~ to support growth and given the tight labor market. ~~Increase~~An increase in other expenses was driven by consulting, legal and accounting fees to support distribution, state expansion, capital initiatives, and technology initiatives.

The effective tax rate was 5256.41% compared to 3632.24% for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively. Our primary insurance entities, American Life, SRC1, and SRC3, are taxed on a statutory basis. GAAP defers the recognition of income related to premiums received until they are earned across the life of the contract. Statutory principles, though, recognize premiums as income in the period they are received, creating the difference between the two statements of income. See Note 9 to our financial statements for further information related to the income tax expense.

Our FIA products have three components influencing our Consolidated Statements of Comprehensive Loss:

1) The embedded derivative in our FIAs. We carry this derivative at fair value, with the change in fair value recorded in the interest credited line of our Consolidated Statements of Comprehensive Loss. Across our FIA products, interest credited was $1410.97 million in 2023 compared with $711.81 million in 2022. Reflecting our risk management, the change in the value of the embedded derivative corresponds to the change in the value of option contracts we use to hedge this exposure.

2) The derivatives we purchase to hedge stock market risk we would otherwise face from our FIA. We carry these derivatives at fair value on our balance sheet, recording the change in fair value in our Consolidated Statements of Comprehensive Loss as either a realized gain or realized loss. As of June 30, 2023, the market value of the derivative assets was $36.7 million compared to $15.6 million as of December 31, 2022 the change is reflected in our net unrealized gain or loss.

3) The option budget reinsurers pay us to purchase derivative assets. We mark these assets to market each period. Separately, we record a payable to the reinsurers that is owed to a reinsurer when a policy is surrendered, an annuitant dies, or a policy

~~lapses.~~either Wea ~~compare~~realized ~~what~~gain ~~the~~or ~~reinsurer~~realized ~~paid~~loss. ~~for~~As ~~the~~of ~~original~~September ~~option~~30, ~~budget~~2023, to the market value ~~at the end~~ of the ~~period.~~derivative ~~The~~assets ~~change~~was in$27 ~~the~~million ~~market~~compared ~~value is added~~ to ~~or subtracted from the payable to the reinsurer to cover the reinsurer’s obligations to the policyholder. This change in market value resulted in negative~~ $(515.6) million ~~expense~~as ~~and~~of ~~was~~December ~~included~~31, in2022 ~~our~~the ~~other~~change ~~operating~~is ~~expense~~reflected in ~~2023~~our ~~compared~~net tounrealized again ~~negative~~or ~~$(5~~loss.~~5) million expense in the prior year.~~

~~American~~3) ~~Life~~The ~~has~~option ~~treaties~~budget ~~with~~reinsurers ~~several~~pay ~~third-party~~us ~~reinsurers~~to ~~that~~purchase ~~have~~derivative ~~funds~~assets. ~~withheld~~We ~~and~~mark ~~modified~~these ~~coinsurance~~assets ~~provisions~~to market each period. ~~Assets~~Separately, ~~held~~we onrecord ~~behalf~~a ofpayable to the ~~third-party~~ reinsurers ~~had~~that ~~unrealized~~is ~~losses~~owed atto ~~June 30, 2023~~a ~~and~~reinsurer ~~December 31, 2022,~~when ~~respectively.~~a ~~The~~policy ~~terms~~is ofsurrendered, ~~the~~an ~~contracts~~annuitant ~~with~~dies, ~~the~~or ~~third-party~~a ~~reinsurers~~policy ~~provide~~lapses. ~~that~~We ~~unrealized~~compare ~~gains~~what orthe ~~losses~~reinsurer onpaid for the ~~asset~~original ~~portfolio~~option ~~accrue~~budget to the ~~reinsurers.~~market Wevalue ~~account~~at ~~for~~the end of the period. The change in ~~these~~the ~~unrealized~~market ~~gains~~value is added to or ~~losses~~subtracted byfrom ~~recording~~the ~~equivalent~~payable ~~realized~~to ~~losses~~the orreinsurer ~~gains~~to oncover ~~our~~the ~~Consolidated~~reinsurer’s ~~Statements~~obligations ofto ~~Comprehensive~~the ~~Loss~~policyholder. WeThis ~~recorded~~change ~~the~~in ~~increase~~market value resulted in ~~the~~negative ~~unrealized~~$0.3 ~~losses~~million onexpense ~~the~~and ~~asset~~was ~~portfolio~~included asin aour ~~realized~~other ~~gain~~operating ofexpense ~~$3.9~~in ~~million~~2023 ~~and~~compared to a negative $2(5.95) million ~~for~~expense in the ~~six~~prior ~~months ended June 30, 2023 and 2022~~year.

American Life has treaties with several third-party reinsurers that have funds withheld and modified coinsurance provisions. Assets held on behalf of the third-party reinsurers had unrealized losses at September 30, 2023 and December 31, 2022, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolio accrue to the reinsurers. We account for the change in these unrealized gains or losses by recording equivalent realized losses or gains on our Consolidated ~~Results~~Statements of ~~Operations~~Comprehensive ~~–Three~~Loss. ~~Months~~We ~~Ended~~recorded ~~June~~the increase in the unrealized losses on the asset portfolio as a realized gain of $1.8 million and $14.6 million for the nine months ended September 30, 2023 and 2022.

Consolidated Results of Operations –Three Months Ended September 30, 2023

Revenues

The following summarizes the sources of our revenue:


	Three months ended ~~June~~September 30,
(In thousands)	2023		2022
Investment income, net of expenses	$	2420,~~248~~796	$	1012,~~541~~938
Net realized losses on investments		2(8,~~087~~946)		~~(12~~4,~~636)~~135
Amortization of deferred gain on reinsurance		1,~~498~~392		1,~~043~~239
Policy administration fees		~~480~~874		~~514~~536
Service fee revenue, net of expenses		~~631~~2,298		~~416~~118
Other revenue		~~122~~5		-33
	$	2916,~~066~~419	$	~~(122)~~18,999

Premium revenue: Sales of our MYGA and FIA products generated a large volume of new business in 2023 and 2022; however, these products are defined as investment contracts under GAAP. Accordingly, the funds we received from our customers under these contracts were recorded on our balance sheet as a deposit-type liability – and not as premium revenue.

Investment income, net of expenses: The components of net investment income for the three months ended ~~June~~September 30, 2023 and 2022 were as follows:


	Three months ended ~~June~~September 30,
(In thousands)	2023		2022
Fixed maturities	$	3347,~~841~~552	$	1421,~~173~~466
Mortgage loans		67,~~298~~636		21,~~963~~627
Other invested assets		24,~~142~~654		~~2,501~~334
Other interest (expense) income		10,248		8,035
Other interest income		8,179		11,158
Gross investment income		5268,~~529~~021		2734,~~672~~585
Less: investment expenses		(59,~~367~~447)		(23,~~515~~911)
Less: amounts ceded to reinsurers		(2237,~~914~~778)		(1417,~~616~~736)
Retained investment income, net of expenses	$	2420,~~248~~796	$	1012,~~541~~938

Investment income, net of expenses consisted of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase was due to the investment income earned on our bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period, as well as deployment of excess cash towards credit investments with attractive yields and risk-return profiles. As of ~~June~~September 30, 2023 and December 31, 2022, on a gross consolidated basis, our investment portfolio (excluding cash) was $2,~~086~~268.63 million and $1,615.0 million, respectively, as a result of proceeds from our MYGA and FIA product sales, reflecting both retained premium proceeds as well as assets held on behalf of our reinsurers.

Net realized (losses) on investments: Net realized gain on investments were a negative $2(8.19) million in 2023 compared with ~~losses~~gains of $~~(12~~4.6)1 million in 2022. The figures include a loss of $ (32.31) million and a gain of $10.19 million from a total return swap embedded derivative in 2023 and 2022, respectively. In 2023, there were net realized gain of $3.4 million related to derivatives we own to hedge the obligations to FIA policyholders; such gains were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

in 2023 and 2022, respectively. In 2023, there were net realized gains of less than $0.1 million related to derivatives we own to hedge the obligations to FIA policyholders; such gains were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

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 4 Derivative Instruments to our Consolidated financial statements and above.

Amortization of deferred gain on reinsurance: The increase in 2023 to $1.54 million from $1.02 million in 2022 was due to higher deferred gain on reinsurance, driven in part by higher reinsured premiums during 2023.

Policy administration fees: Policy administration fees ~~includes~~include fees received for the servicing and initiation of policies ceded to our reinsurers. Also included are fees surrendered by policy holders for early termination of their contracts. The revenue of $0.59 million in the three months ended ~~June~~September 30, 2023 and $0.5 million in 2022 comes from policies written and ceded, as well as additional policy holder early termination.

Service fee revenue, net of expenses: Service fee revenue, net of expenses, consists of fee revenue generated by 1505 Capital, for asset management services provided to third-party clients, some of whom are our reinsurers. The ~~decrease~~increase in this revenue, to $02.63 million in the three months ended ~~June~~September 30, 2023 from $0.41 million in 2022, was due primarily to the level of asset management services provided by 1505 Capital to third-party clients.

Expenses

Our expenses for the periods indicated are summarized in the table below:


	Three months ended ~~June~~September 30,
(In thousands)	2023		2022
Interest credited	$	122,~~590~~524	$	(5,~~496)~~682
Benefits		~~1,206~~(526)		~~994~~1,351
Amortization of deferred acquisition costs		12,~~914~~215		1,~~052~~193
Salaries and benefits		53,~~817~~805		43,~~298~~751
Other operating expenses		~~5,002~~956		(2,~~240)~~317
	$	268,~~529~~974	$	(114,~~392)~~294

Interest credited: The increase was primarily due to the interest ~~credited~~earned by policies across all our products in the ~~second~~third quarter of 2023. Interest credited for our retained MYGA products was ~~positive~~ $4.7 million while interest credited related to our retained FIA policies was $1410.97 million in 2023. MYGA and FIA interest credited were $12.6 million and negative $7.8 million in ~~the three months ended June 30, 2023 and~~ 2022, respectively. The FIA interest credited is related to the fair market value of the embedded derivative which is owed to policyholders. This was partially offset by the realized gain on our total return swap that is included in the net realized gain on investment above.

Benefits: This refers to death benefits on our policies, which were negative $1 (0.25) million and less than $0.1 million in the three months ended ~~June~~September 30, 2023 and 2022 respectively.

Amortization of deferred acquisition costs: The increase was due to the acquisition costs relating to the sale of American Life’s MYGA and FIA products where we retained approximately 5161% of the business in the ~~first~~third quarter of 2023 compared to the 6055% retained in 2022. These figures include the Seneca Re protected cells, SRC1 and SRC3, and DAC amortization.

Salaries and benefits: The ~~increase~~consistent toamount of $53.8 million compared with $4.3.8 million for the second quarter was due to continued costs incurred to attract and add personnel to service our business growth, offset with reductions in certain accrued and amortized expenses. We ~~are~~continue hiring more in-house expertise to service our growth initiatives and reduce the reliance on third-party providers.

Other operating expenses: Other operating expenses were approximately $71.24 million ~~higher~~lower due primarily to:

● Our FIA product has embedded derivatives included in the account value. Those derivatives are market driven. The reinsurers that reinsure the FIA products pay an option allowance to American Life to purchase derivatives. As of ~~June~~September 30, 2023, the mark-to-market adjustment on those allowances was in a positive position so American Life incurred a negative $(50.~~6) million expense payable to the reinsurers for that mark-up. As the market fluctuates going forward, the mark up of the option allowance could go up or down.~~3

● Increases of other expenses related to legal and consulting fees of $5.8 million related primarily to efforts to secure new additional capital sources and the expansion of our business into new jurisdictions.

~~Taxes:~~million ~~Income tax~~ expense ~~increased~~payable ~~by $5.6 million~~ to $3the ~~million~~reinsurers infor ~~2023~~that ~~from a tax benefit of $2~~mark-up.6 ~~million~~As inthe ~~2022.~~market ~~This~~fluctuates ~~change~~going ~~was~~forward, ~~primarily~~the ~~driven~~mark byup aof ~~change~~the inoption ~~the~~allowance ~~reinsurance~~could ~~modified~~go ~~coinsurance~~up ~~tax~~or ~~reserves~~down.

~~Consolidated~~● ~~Results~~Increases of ~~Operations~~other ~~-Six~~expenses ~~Months~~related ~~Ended~~to ~~June 30, 2023~~legal and consulting fees of $5.8 million related primarily to efforts to secure new additional capital sources and the expansion of our business into new jurisdictions.

Taxes: Income tax expense increased by $0.8 million to $4.6 million in 2023 from a tax benefit of $3.8 million in 2022. This change was primarily driven by a change in the reinsurance modified coinsurance tax reserves.

Consolidated Results of Operations - Nine Months Ended September 30, 2023

Revenues

The following summarizes the sources of our revenue:


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022
Investment income, net of expenses	$	4364,~~441~~237	$	1629,~~783~~721
Net realized gains (losses) on investments		189,~~373~~427		(1814,~~810~~676)
Amortization of deferred gain on reinsurance		34,~~071~~463		23,~~012~~251
Policy administration fees		1,~~119~~992		~~862~~1,398
Service fee revenue, net of expenses		13,~~285~~582		1,~~514~~632
Other revenue		~~228~~235		~~100~~132
	$	6783,~~517~~936	$	221,~~461~~458

Investment income, net of expenses: The components of net investment income for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 were as follows:


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022
Fixed maturities	$	67115,~~902~~452	$	2669,~~837~~699
Mortgage loans		1220,~~973~~610		511,~~383~~265
Other invested assets		510,~~464~~117		36,~~896~~157
Other interest (expense) income		18,277		13,579
Other interest income		26,457		27,222
Gross investment income		~~104~~172,~~616~~636		49114,~~695~~343
Less: investment expenses		(1120,~~564~~711)		(425,~~726~~273)
Less: amounts ceded to reinsurers		(4987,~~611~~688)		(2859,~~186~~349)
Retained investment income, net of expenses	$	4364,~~441~~237	$	1629,~~783~~721

Net realized gains (losses) on investments: Net realized ~~gain~~gains on investments were $189.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022 compared with losses of $18(14.87) million in 2022. The figures include a gain of $31.98 million and $214.96 million from a total return swap embedded derivative in 2023 and 2022, respectively. In 2023, there were net realized ~~gain~~gains of $89.52 million related to derivatives we own to hedge the obligations to FIA policyholders; such gains were partially offset by an increase in the mark-to-market change in embedded derivative liability within interest credited expense and an increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based.

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 4 Derivative Instruments to our Consolidated financial statements and above.~~

Amortization of deferred gain on reinsurance: The increase in 2023 to $3.1 million from $2.0 million in 2022 was due to higher deferred gain on reinsurance, driven in part by higher reinsured premiums during 2023.

~~Policy~~Under ~~administration~~GAAP ~~fees:~~this ~~Policy~~arrangement ~~administration~~is ~~fees~~considered ~~includes~~an ~~fees~~embedded ~~received~~derivative ~~for~~as ~~the~~discussed ~~servicing~~in ~~and~~Note ~~initiation~~4 ofDerivative ~~policies~~Instruments ~~ceded~~ to our ~~reinsurers.~~Consolidated ~~Also~~financial ~~included~~statements ~~are fees surrendered by policy holders for early termination of their contracts. The revenue of $1.1 million in the six months ended June 30, 2023~~ and $0above.9 ~~million in 2022 comes from policies written and ceded, as well as additional policy holder early termination.~~

~~Service~~Amortization ~~fee revenue, net~~ of ~~expenses:~~deferred ~~Service~~gain ~~fee~~on ~~revenue, net of expenses, consists of fee revenue generated by 1505 Capital, for asset management services provided to third-party clients, some of whom are our reinsurers.~~ reinsurance: The ~~decrease~~increase in ~~this~~2023 ~~revenue,~~ to $14.35 million ~~in the six months ended June 30, 2023~~ from $13.53 million in 2022, was due ~~primarily~~ to ~~the~~higher ~~level~~deferred ofgain ~~asset~~on ~~management~~reinsurance, ~~services~~driven ~~provided~~in part by ~~1505~~higher ~~Capital~~reinsured topremiums ~~third-party~~during ~~clients~~2023.

Policy administration fees: Policy administration fees includes fees received for the servicing and initiation of policies ceded to our reinsurers. Also included are fees surrendered by policy holders for early termination of their contracts. The revenue of $2.0 million in the nine months ended September 30, 2023 and $1.4 million in 2022 comes from policies written and ceded, as well as additional policy holder early termination.

Service fee revenue, net of expenses: Service fee revenue, net of expenses, consists of fee revenue generated by 1505 Capital, for asset management services provided to third-party clients, some of whom are our reinsurers. The decrease in this revenue, to $3.6 million in the nine months ended September 30, 2023 from $1.6 million in 2022, was due primarily to the level of asset management services provided by 1505 Capital to third-party clients.

Expenses

Our expenses for the periods indicated are summarized in the table below:


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022
Interest credited	$	2022,~~279~~803	$	(126,~~170~~489)
Benefits		21,~~163~~638		~~994~~2,345
Amortization of deferred acquisition costs		35,~~617~~832		13,~~902~~095
Salaries and benefits		1115,~~320~~124		812,~~615~~366
Other operating expenses		1819,~~915~~869		(41,~~060~~744)
	$	5665,~~294~~266	$	(49,~~719)~~573

Interest credited: The increase was primarily due to the interest ~~credited~~earned by policies across all our products in the first ~~two~~three quarters of 2023. Interest credited for our retained MYGA products was positive $712.40 million while interest credited related to our retained FIA policies was $1410.97 million for the ~~six~~nine months ended ~~June~~September 30, 2023. MYGA and FIA interest credited were negative $(2.0) million and negative $(14.2) million in the ~~six~~nine months ended ~~June~~September 30, 2022, respectively. The FIA interest credited is related to the fair market value of the embedded derivative which is owed to policyholders. This was partially offset by the realized gain on our total return swap that is included in the net realized gain on investment above.

Benefits: This refers to death benefits on our policies, which were $21.26 million and $12.03 million in the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 respectively.

Amortization of deferred acquisition costs: The increase was due to the acquisition costs relating to the sale of American Life’s MYGA and FIA products where we retained approximately 5161% of the business in the first ~~two~~three quarters of 2023 compared to the 6158% retained in 2022. These figures include the Seneca Re protected cells, SRC1 and SRC3, and DAC amortization.

Salaries and benefits: The increase to $1115.31 million for the ~~six~~nine months ended ~~June~~September 30, 2023 compared with $812.64 million in 2022 was due to ~~continued~~the ~~costs~~implementation ~~incurred~~of ~~to attract and add personnel to service~~ our ~~business~~employment ~~growth.~~strategy, Wedeveloping ~~are hiring more in-house expertise to service~~ our ~~growth~~internal ~~initiatives~~talent and ~~reduce~~reducing ~~the~~our ~~reliance~~dependency on third- party providers.

Other operating expenses: Other operating expenses were approximately $2321.06 million higher due primarily to:

● Our FIA product has embedded derivatives included in the account value. Those derivatives are market driven. The reinsurers that reinsure the FIA products pay an option allowance to American Life to purchase derivatives. As of ~~June~~September 30, 2023, the mark-to-market adjustment on those allowances was in a positive position so American Life incurred a ~~negative~~ $ (75.6) million expense payable to the reinsurers for that mark-up. As the market fluctuates going forward, the mark up of the option allowance could go up or down.

● Increases of other expenses related to legal and consulting fees of $5.80 million related primarily to efforts to secure new additional capital sources and the expansion of our business into new jurisdictions.

Taxes: Income tax expense increased by $3.3 million to $5.9 million for the six months ended June 30, 2023 from $2.6 million in 2022. This change was primarily driven by a change in the reinsurance modified coinsurance tax reserves.

Taxes: Income tax expense increased by $6.6 million to $10.5 million for the nine months ended September 30, 2023 from $3.9 million in 2022. This change was primarily driven by a change in the reinsurance modified coinsurance tax reserves.

Investments

Most investments on our Consolidated 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 and control over the investment manager. In many of our reinsurance agreements, 1505 Capital acts as the asset manager for a fee.

Our investment guidelines typically include U.S. government bonds, corporate bonds, commercial mortgages, asset backed securities, municipal bonds, and collateral loans. The duration of our investments is 5generally five 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 ~~June~~September 30, 2023 and December 31, 2022. Increases in fixed maturity securities primarily resulted from the sale of our MYGA and FIA products during 2023.


	~~June~~September 30, 2023				December 31, 2022
	Carrying		Percent		Carrying		Percent
(In thousands)	Value		of Total		Value		of Total
Fixed maturity securities:
Bonds:
U.S. government obligations	$	1,~~651~~905	0.1	%	$	1,262	0.1	%
Mortgage-backed securities		~~426~~482,~~214~~324	1819.76			294,066	16.3
Asset-backed securities		4036,~~218~~374	1.85			30,756	1.7
Collateralized loan obligations		~~338~~376,~~866~~724	1415.93			287,673	15.9
States and political subdivisions-general obligations		~~125~~124	—			101	—
States and political subdivisions-special revenue		—	—			205	—
Corporate		4861,~~923~~784	2.15			41,600	2.3
Term loans		~~682~~684,~~915~~597	2927.87			558,972	30.9
Total fixed maturity securities		1,~~538~~643,~~912~~832	6766.47			1,214,635	67.2
Mortgage loans on real estate, held for investment		~~352~~421,~~908~~232	1517.51			227,047	12.6
Derivatives		3626,~~861~~559	1.61			15,934	0.9
Equity securities		5,~~144~~112	0.2			5,111	0.3
Other invested assets		~~107~~126,~~902~~777	45.71			112,431	6.2
Investment escrow		1,~~647~~292	—			784	—
Federal Home Loan Bank stock		23,~~971~~006	0.32			1,306	0.2
Preferred stock		33,~~805~~926	1.54			31,415	1.7
Notes receivable		6,~~394~~476	0.3			6,269	0.3
Policy loans		5583	—			25	—
Cash and cash equivalents		~~194~~197,~~275~~804	8.50			191,414	10.6
Total investments, including cash and cash equivalents	$	2,~~280~~466,~~874~~099	100.01	%	$	1,806,371	100.0	%

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of ~~June~~September 30, 2023 and December 31, 2022.


	~~June~~September 30, 2023				December 31, 2022
	Carrying				Carrying
(In thousands)	Value		Percent		Value		Percent
AAA and U.S. Government	$	~~200~~230,~~014~~903	1314.0	%	$	124,183	10.2	%
AA		2919,~~185~~363	1.92			815	0.1
A		~~420~~411,~~690~~517	2725.30			371,371	30.6
BBB		~~752~~814,~~652~~049	4849.96			619,516	51.0
Total investment grade		1,~~402~~475,~~541~~832	9189.18			1,115,885	91.9
BB and below		~~136~~168,~~371~~000	810.92			98,750	8.1
Total	$	1,~~538~~643,~~912~~832	100.0	%	$	1,214,635	100.0	%

Reflecting the quality of securities maintained by us, 91.1% and 91.9% of all fixed maturity securities were investment grade as of June 30, 2023 and December 31, 2022, respectively.

We expect that our MYGA and FIA products sales will result in an increase in investable assets in future periods.

Reflecting the quality of securities maintained by us, 89.8% and 91.9% of all fixed maturity securities were investment grade as of September 30, 2023 and December 31, 2022, respectively.

We expect that our MYGA and FIA products sales will result in an increase in investable assets in future periods.

Market Risks of Financial Instruments

The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and liquidity risk. With respect to investments that we hold on our balance sheet as collateral, our reinsurers bear the market risks related to these investments, while we bear the market risks on any net retained investments.

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. Our liabilities also have interest rate risk though GAAP does not require our liabilities to be marked to market. We mitigate interest rate risk by monitoring and matching the duration of assets compared to the duration of liabilities.

Credit Risk

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through diversification of investments amongst many corporations and numerous industries. Additionally, our investment policy limits the size of holding in any particular issuer.

Liquidity Risk

We are exposed to liquidity risk when liabilities come due. In order to pay a policyholder, we may need to liquidate assets. If our assets are illiquid assets, we might be unable to convert an asset into cash without giving up capital and income due to a lack of buyers or an inefficient market. We seek to mitigate this risk by keeping a portion of our investment portfolio in liquid investments.

Statutory Accounting and Regulations

Our primary insurance subsidiary, American Life, is required to prepare statutory financial statements in accordance with statutory accounting principles (“SAP”) prescribed by the NDOI. SAP primarily differs from GAAP by charging policy acquisition costs to expense as incurred, establishing future benefit liabilities using actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. For further discussion regarding SAP as well as net income (loss) of American Life under SAP, see Note 13 to our consolidated financial statements. As of ~~June~~September 30, 2023, American Life maintained sufficient capital and surplus to comply with regulatory requirements.

State insurance laws and regulations govern the operations of all insurers and reinsurers such as our insurance and reinsurance company subsidiaries. These various laws and regulations require that insurance companies maintain minimum amounts of statutory surplus as regards policyholders and risk-based capital and determine the dividends that insurers can pay without prior approval from regulators. The statutory net income of American Life is one of the primary sources of additions to our statutory surplus as regards policyholders, in addition to capital contributions from us.

We have reported our insurance subsidiaries’ assets, liabilities and results of operations in accordance with GAAP, which varies from SAP. The following items are principal differences between SAP and GAAP. SAP:

●

requires that we exclude certain assets, called non-admitted assets, from the balance sheet.

●

requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer and amortize policy acquisition costs over the estimated life of the policies.

●

dictates how much of a deferred income tax asset that we can admit on a statutory balance sheet.

● requires that we record certain investments at cost or amortized cost, while we record other investments at fair value; however, GAAP requires that we record all investments at fair value.

● allows bonds to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair value for GAAP.

●

requires that we record certain investments at cost or amortized cost, while we record other investments at fair value; however, GAAP requires that we record all investments at fair value.

●

allows bonds to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair value for GAAP.

●

allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period.

●

requires that we record reserves in liabilities and expense for policies written, while we record all transactions related to the annuity products under GAAP as deposit-type contract liabilities.

● requires that a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over 90 days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance affiliate’s domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity.

●

treats all leases, except leveraged leases, as operating leases, while GAAP differentiates between operating and finance leases.

●

requires an additional admissibility test outlined in Statements on Statutory Accounting Principles, No. 101 and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP. Our insurance subsidiaries must file with the insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholders’ equity under GAAP.

The table below sets forth our SAP net income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 for each of our insurance subsidiaries and then reconciled to GAAP.


	Three months ended ~~June~~September 30,				~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022		2023		2022
Consolidated GAAP net (loss) income	$	(3,883)	$	9,266	$	(53)	$	9,452
Consolidated GAAP net income	$	385	$	7,431	$	332	$	16,883
Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re)		(34,~~694~~824)		54,~~413~~685		(49,~~188~~012)		38,~~856~~541
GAAP net (loss) gain of statutory insurance entities	$	(189)	$	3,853	$	4,135	$	5,596
GAAP net income of statutory insurance entities	$	5,209	$	2,746	$	9,344	$	8,342

GAAP net (loss) income by statutory insurance entity:
GAAP net income by statutory insurance entity:
American Life	$	(35,~~968)~~442	$	10,~~660~~720	$	(13,~~871)~~571	$	1122,~~551~~270
Seneca Re Incorporated Cell 01		4,~~506~~018		(75,~~595~~474)		610,~~415~~433		(713,~~535~~009)
Seneca Re Incorporated Cell 03		(~~726~~3,006)		~~788~~(2,499)		(~~409~~3,415)		~~1,580~~(919)
GAAP net (loss) income	$	(188)	$	3,853	$	4,135	$	5,596
GAAP net income	$	6,454	$	2,747	$	10,589	$	8,342

Reconciliation of GAAP and SAP
GAAP net (loss) income of American Life		(3,968)		10,660		(1,871)		11,551
GAAP net income of American Life		5,442		10,720		3,571		22,270
Increase (decrease) due to:
Deferred acquisition costs		31,~~468~~633		(911,~~052~~350)		24,~~380~~013		(1527,~~846~~196)
Coinsurance transactions		-		88160,~~083~~131		-		~~157~~317,~~744~~875
Carrying value of reserves		(~~144~~219,~~552~~768)		(80153,~~747~~093)		(~~252~~472,~~272~~040)		(~~143~~297,~~935~~028)
Foreign exchange and derivatives		~~(14~~9,~~334)~~479		514,~~767~~659		(2819,~~606~~127)		2035,~~366~~025
Gain (loss) on sale of investments, net of asset valuation reserve		~~(11~~17,~~922)~~265		(622,~~130~~915)		(3114,~~742~~477)		(1235,~~181~~096)
Other		~~152~~224,~~780~~344		~~(282)~~13		~~276~~501,~~995~~339		~~192~~205
SAP net (loss) income of American Life	$	(18,528)	$	8,299	$	(35,116)	$	17,891
SAP net income (loss) of American Life	$	38,395	$	(1,835)	$	3,279	$	16,055
								.
GAAP net income (loss) of Seneca Re Incorporated Cell 01		4,~~506~~018		(75,~~595~~474)		610,~~415~~433		(713,~~535~~009)
Increase (decrease) due to:
Deferred acquisition costs		~~636~~620		~~586~~482		1,~~291~~911		1,~~110~~592
Coinsurance transactions		~~(213)~~-		7174		-		~~148~~222
Carrying value of reserves		(103,~~298~~340)		(~~1,857~~706)		(1013,~~654~~994)		(56,~~551~~257)
Gain on sale of investments, net of asset valuation reserve		565		7,974		1,899		9,789
Foreign exchange and derivatives		6,626		-		20,689		-
Other loss		6,387		(160)		5,846		(214)
Gain on sale of investments, net of asset valuation reserve		(5,942)		8,324		(4,043)		18,113
SAP net income (loss) of Seneca Re Incorporated Cell	$	1,583	$	(981)	$	4,797	$	(2,253)
Other loss		(2,440)		(266)		(8,143)		(480)
SAP net income (loss) of Seneca Re Incorporated Cell 01	$	(458)	$	2,434	$	6,853	$	181

GAAP net income of Seneca Re Incorporated Cell 03		(726)		788		(409)		1,580
GAAP net loss of Seneca Re Incorporated Cell 03		(3,006)		(2,499)		(3,415)		(919)
Increase (decrease) due to:
Deferred acquisition costs		~~602~~466		~~280~~(3,224)		~~974~~1,440		~~521~~(2,703)
Coinsurance transactions		~~(81)~~-		~~23,905~~942		-		2324,~~756~~698
Carrying value of reserves		(12,~~209~~007)		~~(26~~3,~~694)~~239		(13,~~296~~303)		(2724,~~689~~450)
Gain on sale of investments, net of asset valuation reserve		2,043		1,199		1,648		1,785
Foreign exchange and derivatives		5,086		-		4,824		-
Other		-		(42)		-		(48)
Gain on sale of investments, net of asset valuation reserve		1,936		2,613		3,584		4,398
SAP net income (loss) of Seneca Re Incorporated Cell 03	$	629	$	(564)	$	917	$	(95)
Other loss		(1,730)		(16)		(1,468)		(64)
SAP net income of Seneca Re Incorporated Cell 03	$	745	$	1,055	$	1,662	$	960

SAP net (loss) gain of statutory insurance entities	$	(16,316)	$	6,754	$	(29,402)	$	15,543
SAP net income of statutory insurance entities	$	38,682	$	1,654	$	11,794	$	17,196

Key Operating and Non-GAAP Measures

We discuss below non-GAAP financial measures that 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.

Management believes the use of these non-GAAP measures, together with the relevant GAAP measures provides information that may enhance understanding of our results by investors. 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.

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.

Operating Metric – Annuity Premiums

We monitor annuity premiums as a key operating metric in evaluating the performance of our business. 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 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 during a given period that was not ceded to reinsurers and will either be reinsured in a subsequent period or retained by us. We typically 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. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue is accounted under GAAP as deposit-type liabilities on our Consolidated balance sheets and is not recognized in our Consolidated Statements of Comprehensive Loss.


	~~Six~~Nine months ended ~~June~~September 30,
(In thousands)	2023		2022
Annuity Premiums (SAP)
Annuity direct written premiums	$	~~457~~716,~~782~~540	$	~~254~~509,~~145~~660
Ceded premiums		(~~218~~277,~~429~~521)		(~~100~~213,~~023~~761)
Net premiums retained	$	~~239~~439,~~353~~019	$	~~154~~295,~~122~~899

The increase in annuity direct written premiums reflect strong sales as 2023 begins, even in a challenging sales environment, in which competitors were pricing rates on annuity products aggressively. We sell annuities through the IMO channel. We aim to grow annuity direct written premiums by further developing our relationships with existing IMOs and increasing the number of IMO partners that distribute our annuity products, as well as increasing the number of states in which we are licensed to sell our annuity products. We also aim to distribute to new channels, including the registered investment advisor (RIA) channel as well as the bank and broker-dealer channels. The increase in ceded premiums was attributable primarily to the increase in annuity direct written premiums.

Operating Metric – Fees Received for Reinsurance

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

(In thousands)

~~2022~~2023

~~2021~~2022

2023

2022

Fees received for reinsurance(1)

Fees received for reinsurance - total

42,~~760~~318

34,~~197~~500

810,~~222~~540

510,~~626~~126

⁽¹⁾ Consists of: 1) amortization of deferred gain on reinsurance, which is a line item from our GAAP Consolidated Statements of Comprehensive Loss; and 2) deferred coinsurance ceding commission, which is a line item from our GAAP Consolidated Statements of Cash Flows.

For the three months ended ~~June~~September 30, 2023, fees received for reinsurance ~~increased~~decreased by $12.62 million compared to the prior year period ~~due to higher ceded premiums~~. For the three months ended ~~June~~September 30, 2023, the components of fees received for reinsurance included $1.54 million of amortization of deferred gain on reinsurance from our Consolidated Statements of Comprehensive Loss and $31.30 million of deferred coinsurance ceding commission from our Consolidated Statements of Cash Flows.

For the ~~six~~nine months ended ~~June~~September 30, 2023, fees received for reinsurance increased by $20.64 million compared to the prior year period due to higher ceded premiums. For the ~~six~~nine months ended ~~June~~September 30, 2023, the components of fees received for reinsurance included $34.15 million of amortization of deferred gain on reinsurance from our Consolidated Statements of Comprehensive Loss and $56.21 million of deferred coinsurance ceding commission from our Consolidated Statements of Cash Flows.

Reconciliation – Management Expenses to GAAP Expenses

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

2023

2022

2023

2022

Management Expenses

G&A

1210,~~521~~522

68,~~999~~962

2434,~~034~~553

1524,~~850~~814

Management interest credited

310,~~977~~461

24,~~895~~752

718,~~640~~888

510,~~937~~594

Amortization of deferred acquisition costs

12,~~914~~215

1,~~052~~193

35,~~617~~832

13,~~902~~095

Expenses related to retained business

512,~~891~~676

35,~~947~~945

1124,~~257~~720

713,~~839~~689

Management expenses - total

1823,~~412~~198

1014,~~946~~907

3559,~~291~~273

2338,~~689~~503

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

2023

2022

2023

2022

G&A

Management G&A

Salaries and benefits - GAAP

53,~~817~~805

43,~~298~~751

1115,~~320~~124

812,~~615~~366

Other operating expenses - GAAP

~~5,002~~956

(2,~~240)~~317

1819,~~915~~869

(41,~~060~~744)

Subtotal

104,~~819~~761

26,~~058~~068

3034,~~235~~993

410,~~555~~622

Adjustments:

Less: Stock-based compensation

(~~289~~88)

~~(354)~~670

(~~603~~691)

~~(386)~~287

Less: Mark-to-market option allowance

15,~~991~~849

52,~~295~~224

~~(5,598)~~251

1113,~~681~~905

G&A

12,521

6,999

24,034

15,850

Management G&A

10,522

8,962

34,553

24,814

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

2023

2022

2023

2022

Management Interest Credited

Interest credited - GAAP

122,~~590~~524

(5,~~496)~~682

2022,~~279~~803

(126,~~170~~489)

Adjustments:

Less: FIA interest credited - GAAP

(84,~~613)~~252

6(3,~~401~~041)

(1410,~~941~~689)

1411,~~165~~124

Add: FIA options cost - amortized - GAAP

-3,685

12,~~990~~111

26,~~302~~774

35,~~942~~959

Management interest credited

310,~~977~~461

24,~~895~~752

718,~~640~~888

510,~~937~~594

Three months ended ~~June~~September 30,

~~Six~~Nine months ended ~~June~~September 30,

2023

2022

2023

2022

Reconciliation - Management Expenses to GAAP Expenses

Total expenses - GAAP

268,~~529~~974

(114,~~392)~~294

5665,~~294~~266

(49,~~719)~~573

Adjustments:

Less: Benefits

~~(1,206)~~526

(~~994~~1,351)

(21,~~163~~638)

(~~994~~2,345)

Less: Stock-based compensation

(~~289~~88)

~~(354)~~670

(~~603~~691)

~~(386)~~287

Less: Mark-to-market option allowance

15,~~991~~849

52,~~295~~224

~~(5,598)~~251

1113,~~681~~905

Less: FIA interest credited - GAAP

(84,~~613)~~252

6(3,~~401~~041)

(1410,~~941~~689)

1411,~~165~~124

Add: FIA options cost - amortized - GAAP

-3,685

12,~~990~~111

26,~~302~~774

35,~~942~~959

Management expenses - total

1823,~~412~~198

1014,~~946~~907

3559,~~291~~273

2338,~~689~~503

Operating Metric – Management and G&A Expenses

In addition to total expenses, we utilize management expenses as an economic measure to evaluate our financial performance. Management expenses consist of total GAAP expenses adjusted to eliminate items that fluctuate from quarter to quarter in a manner unrelated to core operations, which we believe are useful in analyzing operating trends. The most significant adjustments to arrive at management expenses include the use of management interest credited (as discussed below), the exclusion of stock-based compensation and the exclusion of the mark-to-market option allowance expense (included in other operating expenses) payable to reinsurers to cover their obligations under FIA policies we have reinsured with them. We believe the combined presentation and evaluation of total expenses together with management expenses provides information that can enhance an investor’s understanding of our underlying operating results.

For the three months ended ~~June~~September 30, 2023, GAAP general and administrative expenses totaled $2410.05 million compared to $~~15.~~9.0 million for the prior year. For the three months ended ~~June~~September 30, 2023, as disclosed above, included in these expenses is mainly salaries, benefits and other operating expenses, along with $0.31 million of non-cash stock-based compensation and $ (5.6)8 million of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A.

For the ~~six~~nine months ended ~~June~~September 30, 2023, GAAP general and administrative expenses totaled $2434.06 million compared to $1524.98 million for the prior year. For the ~~six~~nine months ended ~~June~~September 30, 2023, as disclosed above, included in these expenses is mainly ~~salaries, benefits~~

salaries, benefits and other operating expenses, along with $0.67 million of non-cash stock-based compensation and $ (50.6)3 million of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A.

Operating Metric – Management Interest Credited

We utilize management interest credited, a component of management expenses, as an economic measure to evaluate our financial performance. GAAP interest credited contains significant technical considerations related to fair value accounting with respect to the mark-to-market change in the FIA embedded derivative liability and change in actuarial valuation of the FIA reserve, both of which are sensitive to changes in the market as well as changes in actuarial assumptions. Due to these technical considerations that we believe are less meaningful to management and investors, we exclude the GAAP interest credited expense related to our FIA products and include the amortized cost of options we purchase to service our FIA policy obligations. The sum of GAAP interest credited related to our multi-year guaranteed annuity (“MYGA”) products and the amortized cost of options we purchase to service our FIA products constitutes management interest credited.

For the three months ended ~~June~~September 30, 2023, GAAP interest credited totaled $122.65 million compared to $(5.5)7 million for the prior year. For the three months ended ~~June~~September 30, 2023, as disclosed above, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately $8 (4.62) million.

For the ~~six~~nine months ended ~~June~~September 30, 2023, GAAP interest credited totaled $2022.38 million compared to $ (126.25) million for the prior year. For the ~~six~~nine months ended ~~June~~September 30, 2023, as disclosed above, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately $1410.97 million.

Liquidity and Capital Resources

Investments

Information regarding our investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is presented in Part I, Note 3 and the Consolidated Financial Statements in this report.

Comparative Cash Flows

At ~~June~~September 30, 2023 and December 31, 2022, we had cash and cash equivalents totaling $~~194~~197.38 and $191.4 million, respectively. Our short-term liquidity requirements, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity benefits.

We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital transaction expenditures for the foreseeable future. As ~~our~~we further penetrate existing markets and (over time) continue with state expansion ~~continues~~, we expect an increase in our sales of our MYGA and FIA products. However, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of cash flows generated from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, we may be required to raise additional funds, including through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. If such funds are not available in the future, we may be required to delay or significantly modify our operations, each of which could have a material adverse impact on our results of operations or financial condition.

Cash flow is a vital component of our business model because we receive annuity premiums and invest them upon receipt for our reinsurers and usourselves and for the benefit of our policyholders.

The following table summarizes our cash flows from operational, investing and financing activities for the periods indicated. See the Consolidated Statements of Cash Flow in our Consolidated financial statements for more detailed information.


	~~Six~~Nine months ended ~~June~~September 30,
	2023		2022
(In thousands)
Net cash (used in) provided by operating activities	$	(17,886)	$	35,527
Net cash provided by operating activities	$	39,306	$	64,892
Net cash (used in) investing activities		(~~380~~657,~~078~~297)		(~~282~~470,~~004~~724)
Net cash provided by financing activities		~~400~~624,~~825~~381		~~233~~472,~~428~~483
Net (decrease) increase in cash and cash equivalents		2,861		(13,049)
Net increase in cash and cash equivalents		6,390		66,651
Cash and cash equivalents:
Beginning of period		191,414		142,013
End of period	$	~~194~~197,~~275~~804	$	~~128~~208,~~964~~664

Cash Provided by Operating Activities

Net cash provided by operating activities was $6239.43 million for the ~~six~~nine months ended ~~June~~September 30, 2023, which was comprised primarily of an increase in deposit type liabilities of $~~107~~109.4 million and an increase in receivable and payable for securities of $286.96 million, offset by decreases in realized gains on investments of $3720.16 million, reinsurance recoverables of $3337.74 million, and net premium and discount of investments of $89.61 million.

Cash Used in Investing Activities

Net cash used for investing activities for the ~~six~~nine months ended ~~June~~September 30, 2023 was $~~460~~657.3 million. The primary source of cash used was from our purchase of investments from sales of the MYGA and FIA products of $~~722~~995.28 million. Offsetting this use of cash was our sale of investments of $~~264~~341.21 million.

Cash Provided by Financing Activities

Net cash provided by financing activities in the ~~six~~nine months ended ~~June~~September 30, 2023 was $~~400~~624.84 million. The primary source of cash was net receipts on the MYGA and FIA products of $~~457~~716.85 million.

As of ~~June~~September 30, 2023, we held $~~201~~204.29 million of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated. Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to noninvestment grade status or a downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.

Capital Resources

We have determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the NAIC. Historically, our insurance subsidiary has generated capital in excess of such needed levels. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations. Our regulated insurance subsidiary is subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2023 from our insurance subsidiary without prior regulatory approval is approximately $7.4 million. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth and debt interest payments.

Total capital was $2,~~280~~466.91 million at ~~June~~September 30, 2023, including $25.0 million of short-term and long-term debt. Total debt represented 1.1001% of total capital including net unrealized investment gains on fixed maturity securities (1.1102% of total capital excluding net unrealized investment gains on fixed maturity securities) at ~~June~~September 30, 2023.

Stockholders’ equity was $2922.30 million at ~~June~~September 30, 2023, including net unrealized investment ~~gains~~losses on fixed maturity securities of negative $57(66.49) million after taxes and the related impact of DAC associated with annuity contracts with account values. The market value of our common stock and the market value per share were $47.0 million and $26.3215, respectively, at ~~June~~September 30, 2023.

The Company did not pay dividends in the ~~six~~nine months ended ~~June~~September 30, 2023.

The NAIC has established minimum capital requirements in the form of RBC that factors the type of business written by an insurance company, the quality of its assets and various other aspects of its business to develop a minimum level of capital known as “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under SAP, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. As of December 31, 2022, and 2021, the RBC ratio of American Life was 558% and 764%, respectively.

On November 22, 2022, the Company entered into a three-year senior secured revolving credit agreement (“Credit Agreement”) with Royal Bank of Canada and other lenders with a capacity of $30 million (the “Revolving Credit Facility”). The maturity date of the Credit Agreement is November 22, 2025. The obligations under the Credit Agreement are secured by a first priority lien on a variety of our assets. The balance of the revolving credit was $25.0 million at ~~June~~September 30, 2023, with $5.0 million unutilized credit.

Under the terms of the Credit Agreement, the Company has the option of selecting an applicable variable interest rate of (a) an adjusted term ~~standard~~secured overnight financing rate (“SOFR”), plus an applicable margin or (b) a base rate, plus an applicable margin. Depending on our debt to capitalization ratio, the applicable margin can range from 2.50% to 3.25% for the base rate and from 3.50% to 4.25% for an adjusted term SOFR loan.

At its November 2022 meeting, the Company’s Board of Directors approved the “FHLB Program Recommendations and Strategy Document” that allowed for FHLB funding to be used for spread lending business, beginning in the fourth quarter of 2022. The strategy initially utilizes FHLB advances of up to 5% of American Life’s balance sheet. As of ~~June~~September 30, 2023, we had $6668.0 million of borrowings outstanding with the Federal Home Loan Bank (“FHLB”).

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Filing Compare · MIDWEST HOLDING INC.