Form 10-Q MIDWEST HOLDING INC. For: Sep 30

Form 10-Q MIDWEST HOLDING INC. For: Sep 30

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November 8, 2019 4:29 PM EST

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

COMMISSION FILE NUMBER 000-10685

Midwest Holding Inc.

(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code: (402) 489-8266

Former name, former address and former fiscal year, if changed since last report: Not applicable

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

Title of each class:		Trading Symbol(s)		Name of each exchange on which registered:
Common Stock		MDWT		None

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, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 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, a smaller reporting company or an emerging growth 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 is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 1, 2019, there were 1,023,408,553 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

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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 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	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II – OTHER INFORMATION


Item No.	Item Caption	Page
Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

	Signatures	40

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	September 30, 2019		December 31, 2018
		(Unaudited)
Assets
Investments, available for sale, at fair value fixed maturities (amortized cost: $66,897,963 and $19,226,841, respectively) (see Note 6)	$	67,264,433	$	17,384,183
Mortgage loans on real estate, held for investment		10,098,478		—
Other invested assets		2,976,375		—
Preferred stock		500,000		—
Policy loans		42,902		43,843
Total investments		80,882,188		17,428,026
Cash and cash equivalents		24,369,609		2,832,567
Deferred acquisition costs, net		2,311,232		—
Premiums receivable		346,137		346,870
Accrued investment income		755,197		200,708
Reinsurance recoverables (Note 9)		24,103,438		23,100,644
Intangible assets		700,000		700,000
Property and equipment, net		71,052		91,414
Operating lease right of use assets		500,615		592,065
Other assets		369,128		261,884
Assets associated with business held for sale (see Note 4)		8,118,055		20,937,071
Total assets	$	142,526,651	$	66,491,249
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	16,251,544	$	16,012,655
Policy claims		205,040		270,785
Deposit-type contracts		87,901,054		7,234,927
Advance premiums		927		490
Long-term debt		—		18,938,705
Deferred gain on coinsurance transactions		6,721,254		3,899,999
Lease liabilities (See Note 13):
Finance lease		3,720		9,299
Operating lease		554,921		646,519
Other liabilities		7,189,689		1,062,087
Liabilities associated with business held for sale (see Note 4)		8,116,325		21,052,733
Total liabilities		126,944,474		69,128,199
Commitments and Contingencies (See Note 12)
Stockholders' Equity:
Preferred stock, Series C, $0.001 par value. Authorized 1,500,000 shares; issued and outstanding none as of September 30, 2019 and 1,500,000 as of December 31, 2018		—		1,500,000
Common stock, $0.001 par value. Authorized 1,970,000,000 shares; issued and outstanding 1,023,408,553 as of September 30, 2019 and 22,873,764 as of December 31, 2018.		1,023,409		22,874
Additional paid-in capital		53,451,243		33,006,242
Accumulated deficit		(39,337,736)		(35,348,052)
Accumulated other comprehensive income (loss)		396,600		(1,818,014)
Total Midwest Holding Inc.'s stockholders' equity (deficit)		15,533,516		(4,136,950)
Noncontrolling interest		48,661		—
Total stockholders' equity (deficit)		15,582,177		(4,136,950)
Total liabilities and stockholders' equity	$	142,526,651	$	66,491,249

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Revenues
Insurance premiums	$	2,327	$	3,589	$	(152)	$	16,296
Investment income, net of expenses		(308,100)		210,981		330,910		615,913
Net realized gains (losses) on investments		12,532		(83,613)		9,315		(285,487)
Amortization of deferred gain on reinsurance		613,079		12,094		2,465,678		36,282
Miscellaneous income		132,298		27,425		214,633		78,709
Total Revenues		452,136		170,476		3,020,384		461,713
Expenses:
Interest credited		(208,292)		478		42,895		93,646
Benefits		—		6,904		1,872		47,936
Increase in benefit reserves		34,500		2,338		34,500		(54,621)
Amortization of deferred acquisition costs		66,638		—		88,503		—
Salaries and benefits		667,634		559,377		1,782,708		1,471,914
Other operating expenses		1,393,014		1,575,152		4,898,134		2,529,145
Total expenses		1,953,494		2,144,249		6,848,612		4,088,020
Loss from continuing operations before taxes		(1,501,358)		(1,973,773)		(3,828,228)		(3,626,307)
Federal income tax		(114,642)		—		(114,642)		—
Loss from continuing operations		(1,616,000)		(1,973,773)		(3,942,870)		(3,626,307)
Discontinued operations
Loss from discontinued operations		—		10,494		—		(15,496)
Income tax expense		—		—		—		—
Gain (loss) on discontinued operations		—		10,494		—		(15,496)
Net loss		(1,616,000)		(1,963,279)		(3,942,870)		(3,641,803)
Less: Gain attributable to noncontrolling interest		(46,814)		—		(46,814)		—
Net loss attributable to Midwest Holding Inc.		(1,662,814)		(1,963,279)		(3,989,684)		(3,641,803)
Comprehensive loss:
Unrealized gains (losses) on investments arising during period		512,773		(137,982)		2,223,929		(1,232,778)
Less: reclassification adjustment for net realized (gains) losses on investments		(12,532)		83,613		(9,315)		285,487
Other comprehensive income (loss)		500,241		(54,369)		2,214,614		(947,291)
Comprehensive loss:	$	(1,115,759)	$	(2,017,648)	$	(1,728,256)	$	(4,589,094)
Net loss per common share
Basic	$	(0.002)	$	(0.090)	$	(0.009)	$	(0.160)
Diluted	$	(0.002)	$	(0.002)	$	(0.009)	$	(0.010)

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)



			Additional								Total
	Common		Paid-In		Accumulated				Noncontrolling		Stockholders’
	Stock		Capital		Deficit		AOCI*		Interests		Equity (Deficit)
Balance, December 31, 2017	$	22,861	$	33,006,255	$	(30,282,518)	$	(511,219)	$	—	$	2,235,379
Preferred stock conversion adjustment		13		(13)		—		—		—		—
Net loss		—		—		(5,065,534)		—		—		(5,065,534)
Unrealized losses on investments		—		—		—		(1,306,795)		—		(1,306,795)
Balance, December 31, 2018		22,874		33,006,242		(35,348,052)		(1,818,014)		—		(4,136,950)
Net loss		—		—		(3,989,684)		—		—		(3,989,684)
Xenith note interest waived		—		845,536		—		—		—		845,536
Xenith note conversion		927,681		18,172,319		—		—		—		19,100,000
Class C preferred stock conversion		72,854		1,427,146		—		—		—		1,500,000
Change in equity of noncontrolling interests		—		—		—		—		48,661		48,661
Unrealized gains on investments		—		—		—		2,214,614		—		2,214,614
Balance, September 30, 2019	$	1,023,409	$	53,451,243	$	(39,337,736)	$	396,600	$	48,661	$	15,582,177

*Accumulated other comprehensive income (loss)

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended September 30,
	2019		2018
Cash Flows from Operating Activities:
Net loss	$	(3,989,684)	$	(3,641,803)
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments		80,563		80,271
Depreciation and amortization		44,820		157,251
Amortization of deferred acquisition costs		88,503		—
Deferred acquisition costs capitalized		(2,395,710)		—
Net realized gains on investments		13,654		285,487
Deferred coinsurance ceding commission		2,821,255		(36,282)
Notes payable interest accrued		845,536		—
Commutation of Security National Life Insurance assumed business		—		(2,543,898)
Changes in operating assets and liabilities:
Reinsurance recoverables		(1,002,794)		(436,510)
Accrued investment income		(554,489)		20,806
Premiums receivable		733		23,692
Policy liabilities		76,877,920		734,324
Other assets and liabilities		6,170,613		133,975
Other assets and liabilities - discontinued operations		(117,392)		834,678
Net cash provided by or used for operating activities		78,883,528		(4,388,009)
Cash Flows from Investing Activities:
Securities available for sale:
Purchases		(50,253,728)		(7,381,392)
Proceeds from sale or maturity		2,488,387		9,313,456
Other invested assets purchased
Purchases		(2,976,375)		(100,000)
Proceeds from sale		—		104,892
Preferred stock purchased		(500,000)		—
Mortgage loans on real estate, held for investment purchases		(10,098,478)		—
Net change in policy loans		941		11,037
Net purchases of property and equipment		(17,349)		(6,707)
Net cash used in or provided by investing activities		(61,356,602)		1,941,286
Cash Flows from Financing Activities:
Finance lease		(333)		(333)
Proceeds from issuance of preferred stock		—		1,500,000
Proceeds from issuance of notes payable		—		600,000
Net transfers to noncontrolling interest		48,661		—
Receipts on deposit-type contracts		4,088,640		650
Withdrawals on deposit-type contracts		(126,852)		(49,678)
Net cash provided by financing activities		4,010,116		2,050,639
Net increase (decrease) in cash and cash equivalents		21,537,042		(396,084)
Cash and cash equivalents:
Beginning		2,832,567		951,527
Ending	$	24,369,609	$	555,443

Supplemental Disclosure of Non-Cash Information
Conversion of notes payable
Book value of note payable	$	(19,100,000)	$	—
Common stock		927,680		—
Additional paid in capital		18,172,320		—
Conversion of preferred stock
Book value of preferred stock		(1,500,000)		—
Common stock		72,855		—
Additional paid in capital		1,427,145		—
	$	—	$	—

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and Basis of Presentation

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 is in the life and annuity insurance business and operates through its wholly owned subsidiary, American Life & Security Corp. (“American Life”). As discussed in Note 3, on June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). On April 2, 2019, we obtained a 51% ownership in 1505 Capital LLC, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment, trading and financial activities.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions from the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10‑Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018 (“2018 Form 10‑K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our 2018 Form 10‑K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three months and nine months ended September 30, 2019, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019. All material inter-company accounts and transactions have been eliminated in consolidation.

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. Bond premiums and discounts 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 comprehensive loss.

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, industry outlook, financial condition of the issuer, 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 other-than-temporary impairment. If the

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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 other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting 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. No other-than-temporary impairments were recognized during the nine months ended September 30, 2019 or 2018.

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

Mortgage loans on real estate, held for investment

Mortgage loans on real estate, held for investment are carried at unpaid principal balances. Interest income on mortgage loans on real estate, held for investment 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 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. These evaluations are revised as conditions change and new information becomes available. No such valuation allowance was established as of September 30, 2019.

Other invested assets

The Company purchases and sells leases in its investment portfolio. Within the third quarter 2019, the Company had invested in and sold two leases. As of September 30th, 2019, the Company owned two lease investments.

Preferred Stock

Preferred stock was purchased during the third quarter of 2019. The Company believes the cost of the preferred stock equals fair market value as of September 30, 2019, timing of the investment. An evaluation of the preferred stock fair market value will be performed in the fourth quarter to 2019 to determine whether there is an impairment or increase in fair market value.

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. At September 30, 2019 and December 31, 2018, the Company had no cash equivalents. At September 30, 2019, the Company held approximately 1.7 million in Great British Pounds (“GBP”) in cash in two of our custody accounts. The USD equivalent held was approximately $2.1 million.

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Deferred acquisition costs

Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to 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.

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 require an immediate review. The Company determined that no events occurred in the nine months ended September 30, 2019 that suggest a review should be undertaken.

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 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $9,652 and $12,524 for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense totaled $28,972 and $37,758 for the nine months ended September 30, 2019 and 2018, respectively. Accumulated depreciation totaled $964,452 and $942,323 as of September 30, 2019 and December 31, 2018, 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. Management has determined that no such events occurred in the three months ended September 30, 2019 that would indicate the carrying amounts may not be recoverable.

Reinsurance

In the normal course of business, the Company seeks to limit any single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of September 30, 2019 or December 31, 2018.

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

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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.

Deferred gain on ceding commissions

American Life has entered into several indemnity reinsurance contracts where it 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 ceding commissions from reinsurance transactions that represent recovery of acquisition costs. These commissions reduce the DAC associated with that block of business by offsetting the DAC amortization on the Company’s income statement.

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 2015. The Company is not currently under examination for any open years. 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 deferred acquisition costs. 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. The Company had no accruals for payments of interest and penalties at September 30, 2019 or December 31, 2018.

Revenue recognition and related expenses

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. 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.

Liabilities for future policy benefits are 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.

Comprehensive loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses from marketable securities classified as available for sale, net of applicable taxes.

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Common and preferred stock and earnings (loss) per share

Common and preferred stock and earnings (loss) per share: The par value per each Company share is $0.001 with 1,970,000,000 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. On June 18, 2019, Xenith exercised the right to convert its 1,500,000 Series C preferred stock and the $19,100,000 notes payable to voting common stock at the conversion rate of approximately $0.02 per common share. At September 30, 2019 and December 31, 2018, the Company had 1,023,408,553 and 22,873,764 voting common shares issued and outstanding, respectively. At September 30, 2019 and December 31, 2018, the Company had none and 1,500,000 Series C preferred shares outstanding, respectively.

The Series C preferred shares were converted by Xenith to voting common shares on June 18, 2019 at a rate of approximately $0.02 per share for 72,854,474 voting common shares. The stated annual dividend rate on the Series C preferred shares was 8%. At the time of the conversion, Xenith forgave all previously accrued dividends from June 28, 2018 through the conversion date.

Loss per basic share attributable to the Company’s common stockholders was computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the three months ended September 30, 2019 and 2018 was 1,023,408,553 and 22,873,716 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2019 and 2018 were 426,019,650 and 22,873,764 shares, respectively.

Loss per diluted share attributable to the Company’s common stockholders for the three and nine months ended September 30, 2019 was computed based on the average shares outstanding and Long-Term Incentive Plan (“LTIP”), as if all vested and converted, was 1,025,965,696 and 428,576,793, respectively. The loss per diluted share attributable to the Company’s common stockholders for 2018 was computed based on the average shares outstanding plus the notes payable, the Preferred Shares, and the LTIP as converted as if all vested and converted. The weighted average number of shares outstanding during the three and nine months ended September 30, 2018 were 1,025,965,696 and 362,607,418 shares, respectively.

Reclassifications

Certain reclassifications have been made on the Consolidated Balance Sheets and Statements of Comprehensive Loss for the year ended December 31, 2018 and the nine months ended September 30, 2018. These reclassifications do not impact the overall Net loss or Net loss per common shares line items of the Consolidated Statement of Comprehensive Loss for the three months and nine months ended September 30, 2018.

Note 2. New Accounting Standards

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The lease liability is measured at the present value of the lease payments over the lease term with the right-of-use asset measured as the lease liability amount and including adjustments for certain lease incentives and initial direct costs. Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP. This ASU permitted a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption. On January 1, 2019, the Company adopted this standard using a modified retrospective adoption approach. The adoption resulted in the Company identifying three operating leases and one financial lease which were subject to this guidance. The impact to the Consolidated Statements of Comprehensive Income (Loss) was minimal. We identified four leases with net assets of $506,441 and $592,065 and lease liabilities of $558,641 and $655,818 for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

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On February 14, 2018, the FASB issued ASU No. 2018‑02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued. The Company has evaluated the impact of this update and has determined that this does not impact us currently due to not recording unrealized losses or gains net of tax. The Company has incurred net operating losses since inception so it does not record deferred tax assets or deferred tax liabilities due to establishing a valuation allowance.

In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (“ASU 2014‑09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASU 2014‑09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015‑14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015‑14”). This amendment deferred the effective date of the previously issued ASU 2014‑09 until the interim and annual reporting periods beginning after December 15, 2017. In addition, the FASB has issued four related ASU’s on principal versus agent guidance (ASU 2016‑08), identifying performance obligations and the licensing implementation guidance (ASU 2016‑10) a revision of certain SEC Staff Observer comments (ASU 2016‑11) and implementation guidance (ASU 2016‑12). The guidance permits two methods of transition upon adoption: full retrospective and modified retrospective. The Company adopted ASU 2014‑09 on January 1, 2018 and utilized the modified retrospective method. Insurance contracts, lease contracts and investments are not within the scope of ASU 2014‑09; therefore, this standard does not apply to the majority of our consolidated revenues. For the Company’s miscellaneous income, which is within the scope of this guidance, the Company reviewed its service fee income revenue streams and compared its historical accounting policies and practices to the new adopted standard. The Company believes its historical revenue recognition was materially consistent with the way we recognized service fee income as of September 30, 2019.

Future adoption of New Accounting Standards

In August 2018, the FASB issued ASU No. 2018‑15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement That is a Service Contract. Under ASU No. 2018‑15, the amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. In order to determine which costs can be capitalized, we are to follow the guidance in Subtopic 350‑40. Cost for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and the post-implementation stage are expensed as the activities are performed. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Management has reviewed and evaluated the impact of this pending new standard and will implement this starting in fiscal year 2020. The Company has incurred substantial implementation costs related to the new cloud based technology that was incurred in 2018 and decided not to early adopt this ASU.

In August 2018, the FASB issued ASU No. 2018‑12, Financial Services-Insurance (Topic 944). This update 1) modifies the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, 2) simplifies the accounting for certain market-based options or guarantees associated with deposit contracts, 3) simplifies the amortization of deferred acquisition costs, and 4) addresses the effectiveness of the required disclosures. This ASU becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2023. 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. We are unable to determine the impact at this time of ASU No. 2018‑12 as we are still in the process of evaluating the standard.

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In November 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this update include items brought to the Board’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, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from an incurred loss to an expected credit loss. An allowance for the expected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an adjustment to the allowance can be made. The new standard becomes effective after December 15, 2022. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

Note 3. Change in Control

On June 28, 2018 we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). Vespoint LLC, a Delaware limited liability company (“Vespoint”), owns 100% of the voting stock of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by A. Michael Salem and Michael Minnich, who are Co-Chief Executive Officers of Vespoint and Executive Officers of Midwest and American Life.

The terms and conditions of the Agreement were described in Midwest’s Current Report on Form 8‑K filed with the SEC on May 14, 2018. All conditions to consummation of the Agreement, including approval of the transactions contemplated therein by the State of Nebraska Department of Insurance (“NDOI”), were subsequently met and a closing was held pursuant to the Agreement on June 28, 2018 (the “Closing”).

Issuance of Series C Convertible Preferred Stock - At the closing of the Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock (“Series C Preferred Stock”) to Xenith for $1,500,000, which was recorded in our balance sheet as Mezzanine Equity, and it ranked senior to our voting common stock on liquidation with a preference of $1.00 per share. Subject to the availability of funds, annual dividends of 8% of the Series C Preferred Stock liquidation preference were payable by us; if not paid the dividends accrued. Also, at any time after June 28, 2025 and subject to Nebraska law, Xenith would have required us to redeem the Series C Preferred Stock at the liquidation preference (plus accrued dividends) or fair market value, whichever was greater. If the shares were not redeemed for any reason, an interest rate of 12% per year would have begun. The Preferred Stock voted along with the voting common stock as a single Series on an “as converted” basis. Also, Holders of Preferred Stock voting as a separate Series were entitled to elect five of the Company’s eight members of its Board of Directors. The Preferred Stock had several protections against the Company taking action that would adversely affect the rights of holders of Preferred Stock such as mergers, liquidation, dilutive stock issuances, among others. On June 18, 2019, the Series C Preferred Stock shares were converted, at Xenith’s election, into 72,854,474 shares of our voting common stock at approximately $0.02 per share. All accrued dividends were waived.

At closing of the Agreement, Xenith loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with cash interest of 4% per annum payable quarterly and accrued interest of another 4% per annum payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. Both notes were converted by Xenith into an aggregate 29,141,790 voting common shares on June 18, 2019.

The Agreement further provided that Xenith, in its sole discretion, could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into voting common stock at the price of $0.02 per share. Xenith loaned an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000. The additional notes were converted, at Xenith’s election, into 898,538,525 shares of voting common stock on June 18, 2019. All interest on the notes through June 18, 2019 was waived for payment and was accounted for as a capital contribution to Midwest.

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Substantially all the proceeds from the Loans and Series C Preferred Stock were contributed to our insurance subsidiary, American Life, to be used for general business purposes.

The table below summarizes conversion of the Notes and shares of Series C Preferred Stock into voting common stock and the total outstanding voting common stock as of September 30, 2019:


	As Converted Voting Common Stock
	Number	Percentage
Previous company shareholders	22,873,764	2.2	%
Note conversion ($500,000)	24,284,825	2.4	%
Note conversion ($100,000)	4,856,965	0.5	%
Note conversion ($1,000,000)	48,569,650	4.7	%
Note conversion ($17,500,000)	849,968,875	83.1	%
Series C Preferred stock conversion	72,854,474	7.1	%
Total shares outstanding as of September 30, 2019	1,023,408,553	100.0	%

Note 4. Assets and Liabilities Held for Sale

On November 30, 2018, American Life entered into an Assumption and Indemnity Reinsurance Agreement (“Reinsurance Agreement”) with Unified Life Insurance Company (“Unified”), a Texas domiciled stock insurance company. The Reinsurance Agreement provides that American Life ceded and Unified agreed to reinsure, on an indemnity reinsurance basis, 100% of the liabilities and obligations under substantially all of American Life’s life, annuity and health policies (“Policies”). The Agreement closed on December 10, 2018, as previously disclosed in Midwest’s Current Report on Form 8‑K filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2018. The effective date of the Agreement was July 1, 2018.

After the closing of the Reinsurance Agreement, Unified began the process of preparing and delivering certificates of assumption and other materials to policyholders of American Life in order to effect an assumption of the Policies by Unified such that all of American Life’s rights and obligations under the policies arising on and after July 1, 2018 would be completely assumed by Unified without further indemnification or other obligations, except for liabilities, claims and obligations incurred before July 1, 2018. Unified is obligated to indemnify American Life against all liabilities and claims and all of its policy obligations from and after the July 1, 2018.

The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was $3,500,000 (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the Statutory Reserves and Liabilities, as defined in the Reinsurance Agreement, directly related to the policies, to Unified.

The Ceding Commission is being amortized on a straight-line basis over the life of the policies. When the policies are converted to assumptive, meaning American Life has no liability exposure for those policies, the remaining Ceding Commission will be recognized in our income statement.

As of September 30, 2019, 73% of the indemnity policies were converted to assumptive policies thereby releasing American Life from its legal obligations related to those policies.

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Our balance sheet was required to be restated for all periods shown with the assets and liabilities which were ceded by American Life to Unified into separate line items as assets and liabilities held for sale. The table below summarizes the assets and liabilities that are included in discontinued operations as of September 30, 2019 and as of December 31, 2018:


	As of September 30,		As of December 31,
	2019		2018
Carrying amounts of major classes of assets included as part of discontinued operations:
Policy loans	$	79,057	$	366,849
Reinsurance recoverables		7,986,308		20,359,326
Premiums receivable		52,690		210,896
Total assets held for sale in the Consolidated Balance Sheet	$	8,118,055	$	20,937,071

Carrying amounts of major classes of liabilities included as part of discontinued operations:
Benefit reserves	$	2,956,701	$	9,799,834
Policy claims		133,203		127,666
Deposit-type contracts		5,004,273		11,050,139
Advance premiums		10,076		21,699
Accounts payable and accrued expenses		12,072		53,395
Total liabilities held for sale in the Consolidated Balance Sheet	$	8,116,325	$	21,052,733

Our income statement was also required to be restated for all periods shown breaking out the net income between continuing operations and discontinued operations. There were no items in 2019 that were reclassified as discontinued operations, therefore, the table below summarizes only the losses that are included in discontinued operations for the three and nine months ended September 30, 2018:


	Three months ended September 30,		Nine months ended September 30,
	2018		2018
Major line items constituting pretax loss of discontinued operations:
Premiums	$	440,891	$	1,375,419
Death and other benefits		(74,538)		(485,651)
Interest credited		(106,728)		(311,847)
Increase in benefit reserves		(164,724)		(234,246)
Amortization of deferred acquisition costs		(58,822)		(261,735)
Other operating expenses		(25,585)		(97,436)
Loss on discontinued operations	$	10,494	$	(15,496)

Note 5. Non-controlling Interest

On April 2, 2019, Midwest entered into a contract to acquire a 51% ownership in 1505 Capital LLC (“1505 Capital”), a Delaware limited liability company, located in New York. 1505 Capital was organized to provide financial and investment advisory and management services to clients and any related investment, trading or financial activities. Class A Units were authorized to be issued up to 1,000 shares. Midwest purchased for $1 a total of 510 of the Class A Units and Aurora Financial Services, Inc. owns the remaining 490 Class A Units.

As of September 30, 2019, Midwest consolidated the 1505 Capital income of $95,539 into the consolidated financials from April 2, 2019 through September 30, 2019. Midwest’s portion of income was $48,725 and the non-control interest income was $46,814.

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Note 6. Investments

The cost or amortized cost and estimated fair value of investments classified as available-for-sale as of September 30, 2019 and December 31, 2018 are as follows:


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2019:
Fixed maturities:
U.S. government obligations	$	2,097,035	$	10,003	$	60,787	$	2,046,251
Mortgage-backed securities		874,209		7		13,499		860,717
Asset-backed securities		46,242,975		71,513		60,865		46,253,623
States and political subdivisions -- general obligations		262,079		5,522		—		267,601
States and political subdivisions -- special revenue		25,142		187		—		25,329
Corporate		17,396,523		611,300		196,911		17,810,912
Total fixed maturities	$	66,897,963	$	698,532	$	332,062	$	67,264,433
Mortgage loans on real estate, held for investment		10,098,478		—		—		10,098,478
Other invested assets		2,976,375		—		—		2,976,375
Preferred stock		500,000		—		—		500,000
Total Investments	$	80,472,816	$	698,532	$	332,062	$	80,839,286
December 31, 2018:
Fixed maturities:
U.S. government obligations	$	2,112,816	$	247	$	117,112	$	1,995,951
Mortgage-back securities		1,068,976		—		64,925		1,004,051
States and political subdivisions -- general obligations		265,473		—		2,289		263,184
States and political subdivisions -- special revenue		25,231		—		58		25,173
Corporate		15,754,345		14		1,658,535		14,095,824
Total fixed maturities	$	19,226,841	$	261	$	1,842,919	$	17,384,183

The Company has two securities that individually exceed 10% of the total of the state and political subdivisions categories as of September 30, 2019. The amortized cost, fair value, credit ratings, and description of each security is as follows:


	Amortized		Estimated
	Cost		Fair Value		Credit Rating
September 30, 2019:
Fixed maturities:
States and political subdivisions -- general obligations
Bellingham, Washington	$	107,999	$	111,904	AA+
Longview, Washington Refunding		154,080		155,697	Aa3
Total	$	262,079	$	267,601

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The following table summarizes, for all securities in an unrealized loss position at September 30, 2019 and December 31, 2018, the estimated fair value, pre-tax gross unrealized loss and number of securities by consecutive months they have been in an unrealized loss position.


	September 30, 2019						December 31, 2018
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities(1)		Fair Value		Loss		Securities(1)
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	1,114,692	$	57,823		6	$	7,862	$	430		1
Asset-backed securities		16,023,788		60,865		12		—		—		—
Mortgage-back securities		159,722		1,136		3		—		—		—
Corporate		1,638,993		27,169		9		3,351,664		315,617		23
Greater than 12 months:
U.S. government obligations		354,151		2,964		2		1,785,949		116,682		10
Mortgage-back securities		680,652		12,363		14		1,004,052		64,925		19
States and political subdivisions -- general obligations		—		—		—		263,183		2,289		2
States and political subdivisions -- special revenue		—		—		—		25,173		58		1
Corporate		2,091,953		169,742		12		10,628,745		1,342,918		58
Total fixed maturities	$	22,063,951	$	332,062		58	$	17,066,628	$	1,842,919	$	114

(1)

We may reflect a security in more than one aging category based on various purchase dates.

Based on our review of the securities in an unrealized loss position at September 30, 2019 and December 31, 2018, no other-than-temporary impairments were deemed necessary. Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2019, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.

The amortized cost and estimated fair value of fixed maturities at September 30, 2019, 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
	Cost		Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years		1,720,127		1,731,192
Due after five years through ten years		11,583,552		11,564,598
Due after ten years through twenty years		46,435,050		46,637,790
Due after twenty years		7,159,234		7,330,853
	$	66,897,963	$	67,264,433

The following table presents a reconciliation of the beginning balance for investments measured at fair value on a recurring basis using Level 3 inputs at September 30, 2019 and December 31, 2018:


	September 30, 2019		December 31, 2018
Beginning balance	$	—	$	—
Apartments and business		10,098,478		—
Preferred stock		500,000		—
Short-term leases		2,976,375		—
Total mortgage loans	$	13,574,853	$	—

The Company holds no valuation allowance as of September 30, 2019 due to impairment of these mortgages.

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The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2019 and December 31, 2018, these required deposits had a total amortized cost of $3,242,342 and $2,958,178 and fair values of $3,197,545 and $2,772,809, respectively.

The components of net investment income for the three and nine months ended September 30, 2019 and 2018 are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Fixed maturities	$	(289,015)	$	201,440	$	342,104	$	598,632
Mortgage loans		68,810		—		78,466		—
Other		(1,102)		15,314		6,973		44,780
		(221,307)		216,754		427,543		643,412
Less investment expenses		(86,793)		(5,773)		(96,633)		(27,499)
Investment (loss) income, net of expenses	$	(308,100)	$	210,981	$	330,910	$	615,913

Proceeds for the three months ended September 30, 2019 and 2018 from sales of investments classified as available-for-sale were $82,222 and $2,977,954, respectively. Gross gains of $0 and $3,062 and gross losses of $9,512 and $91,567 were realized on those sales during the three months ended September 30, 2019 and 2018, respectively. Proceeds for the nine months ended September 30, 2019 and 2018 from sales of investments classified as available-for-sale were $2,488,387 and $9,313,456, respectively. Gross gains of $9,006 and $27,972 and gross losses of $22,660 and $318,351 were realized on those sales during the nine months ended September 30, 2019 and 2018, respectively.

Note 7. 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 in the alternative 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 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.

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Notes payable: Notes payable consisted of the convertible notes entered into due to the Xenith transaction and were recorded net of issuance costs. As of September 30, 2019, Midwest had no outstanding notes payable.

Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a 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. For the period ended September 30, 2019, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.

Cash: The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.

Mortgage loans on real estate, held for investment: Mortgage loans are carried at their principal value as there are no traded market values for these loans. Mortgage loans are categorized as Level 3 in the fair value hierarchy.

Other invested assets: Short-term equipment leases are carried at their principal value as there are no traded market values for these leases. Other invested assets are categorized as Level 3 in the fair value hierarchy.

Preferred stock: Series C Preferred Stock was recorded at its principal value as there are no traded market values for this stock. The Series C Prefer Stock was categorized as Level 3 in the fair value hierarchy. As discussed in Note 9, the Series C Preferred Stock was converted into voting common shares on June 18, 2019.

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. Policy loans are categorized as Level 3 in the fair value hierarchy.

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. These liabilities are categorized as Level 3 in the fair value hierarchy.

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The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable		Estimated
	Markets		Inputs		Inputs		Fair
	(Level 1)		(Level 2)		(Level 3)		Value
September 30, 2019
Fixed maturities:
U.S. government obligations	$	—	$	2,046,251	$	—	$	2,046,251
Mortgage-backed securities		—		860,717		—		860,717
Asset-backed securities		—		46,253,623		—		46,253,623
States and political subdivisions — general obligations		—		267,601		—		267,601
States and political subdivisions — special revenue		—		25,329		—		25,329
Corporate		—		17,810,912		—		17,810,912
Total fixed maturities		—		67,264,433		—		67,264,433
Mortgage loans on real estate, held for investment		—		—		10,098,478		10,098,478
Other invested assets		—		—		2,976,375		2,976,375
Preferred stock		—		—		500,000		500,000
Total Investments	$	—	$	67,264,433	$	13,574,853	$	80,839,286
December 31, 2018
Fixed maturities:
U.S. government obligations	$	—	$	1,995,951	$	—	$	1,995,951
Mortgage-back securities		—		1,004,051		—		1,004,051
States and political subdivisions - general obligations		—		263,184		—		263,184
States and political subdivisions - special revenue		—		25,173		—		25,173
Corporate		—		14,095,824		—		14,095,824
Total fixed maturities	$	—	$	17,384,183	$	—	$	17,384,183

There were no transfers of financial instruments between any levels during the nine months ended September 30, 2019 or during the year ended December 31, 2018.

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. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

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 September 30, 2019 and December 31, 2018, respectively:


	September 30, 2019
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	42,902	$	—	$	—	$	42,902	$	42,902
Cash		24,369,609		24,369,609		—		—		24,369,609
Liabilities:
Policyholder deposits
(Deposit-type contracts)		87,901,054		—		—		87,901,054		87,901,054

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	December 31, 2018
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	43,843	$	—	$	—	$	43,843	$	43,843
Cash		2,832,567		2,832,567		—		—		2,832,567
Liabilities:
Policyholder deposits
(Deposit-type contracts)		7,234,927		—		—		7,234,927		7,234,927
Notes payable		18,938,705		—		—		18,938,705		18,938,705

Note 8. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2019 and December 31, 2018 are as follows:


	September 30, 2019		December 31, 2018
Deferred tax assets:
Loss carryforwards	$	1,062,759	$	1,429,458
Capitalized costs		233,806		269,472
Unrealized losses on investments		—		390,349
Policy acquisition costs		661,065		—
Charitable contribution carryforward		2,394		—
Property and equipment		15,508		—
Benefit reserves		565,405		192,858
Total deferred tax assets		2,540,937		2,282,137
Less valuation allowance		(2,210,492)		(1,928,454)
Total deferred tax assets, net of valuation allowance		330,445		353,683
Deferred tax liabilities:
Unrealized losses on investments		74,080		—
Due premiums		83,754		117,144
Intangible assets		147,000		147,000
Policy loans		25,611		86,245
Property and equipment		—		3,294
Total deferred tax liabilities		330,445		353,683
Net deferred tax assets	$	—	$	—

At September 30, 2019 and December 31, 2018, the Company recorded a valuation allowance of $2,210,492 and $1,928,454, 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 carryforwards are expected to be available to reduce taxable income.

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 September 30, 2019, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $5,060,759. The federal NOLs generated prior to June 28, 2018 which are subject to Section 382 limitation can be carried forward. If not utilized, the NOLs of $890,636 prior to 2017 will expire through the year of 2032, and the NOLs generated from June 28, 2018 to September 30, 2019 do not expire and will carry forward indefinitely, but 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 $1,1,062,759 on the deferred tax assets related to these federal NOL carryforwards.

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There was income tax expense of $114,642 for the nine months ended September 30, 2019 and no income tax expense for the nine months ended September 30, 2018. 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 September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Computed expected income tax benefit	$	(325,116)	$	(477,395)	$	(813,759)	$	(764,779)
Increase (reduction) in income taxes resulting from:
Meals, entertainment and political contributions		(1,778)		1,628		3,858		5,832
Change in loss carryforward due to 382 limitation		—		202,994		—		5,735,023
COD Interest		—		—		177,563		—
Other		(38,325)		(54,442)		512		(89,110)
		(40,103)		150,180		181,933		5,651,745
Tax benefit before valuation allowance		(365,219)		(327,215)		(631,826)		4,886,966
Change in valuation allowance		479,861		327,215		746,468		(4,886,966)
Net income tax expenses	$	114,642	$	—	$	114,642	$	—

Note 9. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of September 30, 2019 and December 31, 2018 and for the nine months ended September 30, 2019 and 2018 is as follows:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Statements of comprehensive income:
Premiums assumed	$	—	$	1,922	$	—	$	10,268
Premiums ceded		180,149		231,012		702,450		871,677
Benefits assumed		—		357		—		92,792
Benefits ceded		51,866		46,390		167,895		149,452
Commissions assumed		—		4		—		18
Commissions ceded		1,566		1,644		8,146		5,864

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer except for Unified as it is accounted for as discontinued operations:


							Recoverable on				Total Amount
			Recoverable		Recoverable		Benefit		Ceded		Recoverable
	AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		from
Reinsurer	Rating		Losses		Losses		type Contracts		Premiums		Reinsurer
Optimum Re Insurance Company		A-	$	—	$	—	$	489,737	$	—	$	489,737
Sagicor Life Insurance Company		A-		—		116,727		11,389,369		270,196		11,235,900
Ironbound Reinsurance Company Limited		NR		—		—		474,577		—		474,577
US Alliance Life and Security Company		NR		—		23,000		11,944,833		64,609		11,903,224
			$	—	$	139,727	$	24,298,516	$	334,805	$	24,103,438

Effective July 25, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco Agreement”) with Ironbound Reinsurance Company Limited, an unaffiliated reinsurance

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company organized under the laws of Barbados (“Ironbound”). In a modified coinsurance arrangement (“Modco”), the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a funds withheld coinsurance agreement (“FW”), assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurance, to reduce the potential credit risk. Under the FW/Modco Agreement, American Life will cede to Ironbound, on a funds withheld coinsurance and modified coinsurance basis, an initial ninety-five (95%) quota share of certain liabilities with respect to its multi-year guaranteed annuity (“MYGA”) business. American Life has established two accounts to hold the assets for the FW/Modco Agreement, a Funds Withheld Account and a Modco Deposit Account.

In addition, a trust account was established on June 30, 2019 among American Life, Ironbound and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the Funds Withheld Account and the Modco Deposit Account for any shortage in required reserves.

The initial settlement included net premium income of $45,005,536 (gross premiums of $46,568,321 minus gross commissions paid of $1,562,786) and net statutory reserves of $47,271,267. The initial settlement for the Funds Withheld Account was $24,928,934 and for the Modco Deposit Account was $16,619,289 and the reserves required was $26,944,622 and $17,963,081, respectively. The amount owed to the Funds Withheld Account and the Modco Deposit Account from the trust account was $2,015,688 and $1,343,792, respectively which was funded at the closing of the Ironbound transaction. American Life earned a ceding commission plus commission allowance of $5,215,477 as of September 30, 2019. The ceding commission and commission allowance of $5,215,477 was deferred to the balance sheet and had a deferred ceding commission balance of $5,071,440 which was net of amortization as of September 30, 2019.

Effective July 1, 2018, American Life entered into an assumptive and indemnity coinsurance transaction with Unified to transfer 100% of the risk related to the remaining legacy block of business, see Note 4 above for further discussion. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to Unified for cash of $14,320,817, which was net of a ceding allowance of $3,500,000 plus the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. Unified assumed certain responsibilities for incurred claims, surrenders and commission from the effective date.

The ceding commission of $3,500,000 was recorded net of the difference between statutory and GAAP net adjusted reserves, the elimination of DAC of $1,890,013, VOBA of $338,536, and the remaining deferred profit from our legacy business of $26,896. The remaining $3,069,690 was reflected as a deferred gain and will be recognized into income over the expected duration of the legacy blocks of business. As of September 30, 2019, Unified had converted 73% of the indemnity coinsurance to assumptive coinsurance. American Life had amortization expense for nine months ended September 30, 2019 of $82,611. As a result of the assumption of 73% of the indemnity policies, $2,131,291 was additionally released into income for the nine months ended September 30, 2019. The ending deferred ceding commission at September 30, 2019 was $779,046.

American Life and Security National Life Insurance (“SNL”) reached an agreement to commutate the assumed block of life business effective July 31, 2018. American Life recorded a GAAP loss of $154,780 due to the difference between the GAAP and statutory reserves and the write-off of the remaining VOBA. Net adjusted reserves transferred back to SNL totaled $2,543,898 on a GAAP basis.

At September 30, 2019 and December 31, 2018, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to Sagicor were $11,235,900 and $11,494,161, respectively. At September 30, 2019 and December 31, 2018, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to US Alliance were $11,903,224 and $11,149,888, respectively. American Life remains contingently liable on the ceded reinsurance should Sagicor or US Alliance be unable to meet their respective obligations.

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.

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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, a separate contingency reserve may be established. At September 30, 2019 and December 31, 2018, no contingency reserve was established.

Note 10. Notes Payable

At closing of the Agreement, Xenith loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with interest of 8% per annum of accrued interest of another 4% per annum payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. The Agreement further provided that Xenith, in its sole discretion, may loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into our voting common stock at $0.02 per share. Xenith contributed an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000.

The Company had total accrued interest of $845,536 on the Xenith notes through June 18, 2019. This included interest not recorded from June 28, 2018 through December 31, 2018 of $131,711 and interest from January 1, 2019 through June 18, 2019 of $713,825. All interest on the notes from inception through June 18, 2019 were waived by Xenith. The accrued interest was accounted for as an additional capital contribution.

The following table sets forth information regarding loans made to us by Xenith through June 18, 2019 and the number of shares of voting common stock each loan was converted into:


			Shares of Common
	Loan		Stock into which
	Principal		Loan Was
Date of Loan	Amount		Converted
June 28, 2018	$	500,000	24,284,825
June 28, 2018		100,000	4,856,965
October 10, 2018		1,000,000	48,569,650
December 7, 2018		17,500,000	849,968,875
Total	$	19,100,000	927,680,315

As of September 30, 2019, Midwest had no notes outstanding to Xenith.

Note 11. 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 three months ended September 30, 2019 and the year ended December 31, 2018:


	Nine Months Ended		Year Ended
	September 30, 2019		December 31, 2018
Beginning balance	$	7,234,927	$	8,314,297
US Alliance		442,370		804,187
Ironbound Reinsurance Company Limited		76,216,386		—
Deposits received		4,088,640		(1,881,411)
Investment earnings		42,895		650
Withdrawals		(126,852)		47,936
Contract charges		2,688		(50,732)
Ending balance	$	87,901,054	$	7,234,927

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Under the terms of American Life’s historical coinsurance agreement with a third party, American Life assumed certain deposit-type contract obligations. These were commutated effective July 31, 2018. The deposits, withdrawals and interest credited in the table above represents the sales of the 5% retained MYGA product for 2019 and activity from the third party through July 31, 2018.

Note 12. Contingencies and Commitments

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 received a Certificate of Authority to conduct business in Iowa during the first quarter of 2019. American Life is seeking approval to conduct business in additional states during 2019.The Nebraska Department of Insurance (“NDOI”) granted American Life approval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Ironbound prior to its closing in July. American Life is waiting on approval from the NDOI for a second Funds Withheld Coinsurance and Modified Coinsurance Agreement with another reinsurer.

Note 13. Leases

Our operating lease activities consist of leases for office space and equipment. Our finance lease activities consist of leases for hardware which we will own at the end of the lease agreement. None of our lease agreements include variable lease payments. See discussion of the January 1, 2019 implementation impact at Note 1. Basis of Presentation and Summary of Significant Accounting Policies.

Supplemental balance sheet information as of September 30, 2019 for our leases is as follows:


		As of		As of
Leases	Classification	September 30, 2019		December 31, 2018
Assets
Noncurrent:
Finance	Office and other equipment, net of accumulated depreciation and amortization	$	5,826	$	14,564
Operating	Operating lease right-of-use assets		500,615		592,065
Total leased assets		$	506,441	$	606,629

Liabilities
Current:
Finance lease	Finance lease liabilities	$	3,720	$	9,299
Noncurrent:
Operating lease	Operating lease liabilities		554,921		646,519
Total leased liabilities		$	558,641	$	655,818

The difference between assets and liabilities includes a $5,266 adjust to the finance lease and a $54,454 adjustment to an operating lease, both at the beginning of the period as part of the ASC 842 implementation adjustment.

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Our operating and finance leases expenses for the three and nine months ended September 30, 2019 are as follows:


		Three months ended September 30,				Nine months ended September 30,
Leases	Classification	2019		2018		2019		2018
Operating	General and administrative expense	$	3,344	$	4,609	$	10,453	$	13,829

Finance lease cost:
	Amortization expense		2,914		1,120		8,739		3,360
	Interest expense		111		111		333		333

Minimum contractual obligations for our leases as of September 30, 2019 are as follows:


	Operating Leases		Finance Lease
2019 (excluding nine months ended September 30, 2019)	$	39,079	$	2,133
2020		160,958		2,133
2021		164,081		—
2022		156,608		—
2023		161,674		—
2024		13,508		—
Total remaining lease payments	$	695,908	$	4,266

Supplemental cash flow information related to leases was as follows:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Cash payments
Operating cash flows from operating leases	$	(190)	$	1,076	$	(148)	$	3,228
Operating cash flows from finance leases		1,164		(628)		2,328		(1,258)
Financing cash flows from finance leases		(111)		(111)		(333)		(333)

The weighted average remaining lease terms of our finance and operating leases were six months and approximately three years, respectively and as of September 30, 2019. As of December 31, 2018 the weighted average remaining lease terms of our finance and operating leases were fifteen months and three and a half years, respectively. The weighted average discount rates used to determine the lease liabilities for finance leases was 6% and operating leases was 8% as of September 30, 2019 and December 31, 2018, respectively. The discount rate used for finance leases was based on the rates implicit in the leases. The discount rate used for operating leases was based on our incremental borrowing rate.

Note 14. Statutory Net Income and Surplus

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Nebraska 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. American Life’s statutory net losses for the nine months ended September 30, 2019 and 2018 were $149,247 and $3,107,135, respectively. Capital and surplus of American Life as of September 30, 2019 and December 31, 2018 was $18,035,576 and $20,979,285, respectively. The net loss was primarily due to the continuing expenses incurred to provide services on the new software and related technology to distribute products through national marketing organizations. The MYGA sales began late in January 2019 with $79,500,172 of face amount of policies issued during the nine months ending September 30, 2019. An additional $6,902,677 was pending as of September 30, 2019. Even though American Life had a significant increase in statutory revenue, the earnings profile of MYGA products are characterized by up-front statutory losses.

As mentioned in Note 9. Reinsurance above, American Life entered into the FW/Modco Agreement with Ironbound to cede 95% of the MYGA business. Premiums net of commissions and ceding commission and administrative fees ceded

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to Ironbound was $70,035,588 and the reserve requirement of $75,741,809 was ceded to Ironbound as of September 30, 2019.

Note 15. Surplus Notes

Our surplus notes of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. The Company retired the notes in full as of December 31, 2018, including any accrued interest, through the transfer of the 10 condominiums in Hawaii owned by American Life. The book value of the surplus notes, including interest, was $876,400. The book value of the 10 condominiums in Hawaii was $493,648. We recognized a gain of $382,752 on the settlement of the condos and surplus notes.

Note 16. Third Party Administration

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to non-affiliated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended September 30, 2019 and 2018 amounted to $11,880 and $24,600, respectively. Fees earned during the nine months ended September 30, 2019 and 2018 were $40,140 and $71,940, respectively.

Note 17. Long Term Incentive Plan

On June 11, 2019 during the Company’s annual meeting of shareholders, the Company’s shareholders approved the Midwest Holding Inc. 2019 Long-Term Incentive Plan (“LTIP”). The purposes of this plan are to create incentives which are designed to motivate participants to put forth maximum effort toward the success and growth of the Company and to enable the Company to attract and retain experienced individuals who by their position, ability and diligence are able to make important contributions to the Company’s success. Toward these objectives, this plan provides for the grant of options, restricted stock awards, restricted stock units, stock appreciation right (“SARs”), performance units, performance bonuses, stock awards and other incentive awards to eligible employees. Also the plan provides for the grant of nonqualified stock options, restricted stock awards, restricted stock units, SARs, performance units, stock awards and other incentive awards to consultants and eligible directors, subject to the conditions set forth in this plan. Under the LTIP, the aggregate number of shares of common stock that may be covered that are designated as incentive stock options may not exceed 51,000,000.

On July 19, 2019, stock options for 8,950,000 shares at an exercisable conversion price of $.05 per share were granted on a company-wide basis with one-third exercisable after July 17, 2021 and two-thirds exercisable after July 17, 2023. The fair market value of the shares was approximately $.05 a share at grant date.

Note 18. Subsequent Events

On November 5, 2019, the Nebraska Department of Insurance (“NDOI”) approved the Funds Withheld Coinsurance and Modified Coinsurance Agreement (“SDA Agreement”) between American Life and SDA Annuity & Life Re (“SDA”), a Cayman Islands-domiciled reinsurance company. The SDA Agreement closed on November 7, 2019. Under the SDA Agreement, American Life will cede to SDA, on a funds withheld coinsurance and modified coinsurance basis, an initial five (5%) quota share of certain liabilities with respect to its multi-year guaranteed annuity (“MYGA”) business. American Life will also cede to SDA, on a funds withheld coinsurance and modified coinsurance basis, an initial ninety-five (95%) quota share of certain liabilities with respect to its fixed indexed annuity (“FIA”) business through December 31, 2019 and thirty (30%) thereafter. American Life has established two accounts to hold the assets for the SDA Agreement, a SDA Funds Withheld Account and a SDA Modco Deposit Account.

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In addition, a trust account was established on November 7, 2019 among American Life, SDA and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the SDA Funds Withheld Account and the SDA Modco Deposit Account for any shortage in required reserves.

The NDOI approved the inclusion of the SDA coinsurance in American Life’s September 30, 2019 statutory financials.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of September 30, 2019, compared with December 31, 2018, and the results of operations for the three months ended September 30, 2019, compared with the corresponding period in 2018 of Midwest Holding Inc. and its consolidated subsidiary. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part 1 – Item 1. Financial Statements” of this Report; and our Form 10‑K for the year ended December 31, 2018 (“2018 Form 10‑K”), including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our 2018 Form 10‑K.

All such forward-looking statements speak only as of the date of this Form 10‑Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We presently conduct our business through our sole life insurance subsidiary, American Life & Security Corp. (“American Life”). In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska.

On April 2, 2019, we obtained a 51% ownership in 1505 Capital LLC, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and any related investment, trading and financial activities.

Critical Accounting Policies and Estimates

The MD&A included in our 2018 Form 10‑K contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the “Critical Accounting Policies and Estimates” discussed in our 2018 Form 10‑K.

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Consolidated Results of Operations - Three Months Ended September 30, 2019

On June 28, 2018, Midwest closed on the Agreement with Xenith as discussed above in Note 3 to Item 1. Following the closing, we embarked upon a new business plan which includes leveraging technology to distribute insurance products through Independent Marketing Organizations ("IMOs").

We also reinsured our existing legacy block of insurance business through a reinsurance agreement with a third party reinsurer in exchange for a ceding commission of $3.5 million as described below. In addition, American Life obtained an A.M. Best Rating of B++ in December 2018. We purchased and installed comprehensive new technology during the fourth quarter of 2018 and we began selling our first MYGA product in late January 2019 through the IMOs.

American Life closed a reinsurance agreement on December 10, 2018 with a third party insurance company to cede 100% of the remaining legacy block of business, with the transaction being effective July 1, 2018. See Note 4 Assets and Liabilities Held for sale in the Notes to Consolidated Financial Statements above. Due to the assumptive nature of this agreement, this transaction qualifies to be reported as Discontinued Operations under ASC 2014‑08 Presentation of Financial Statements (Topic 205); therefore, our 2018 income statement reflects net income from continuing operations and income from discontinued operations. The discussion below reflects the continuing operations changes year over year.

On July 25, 2019, American Life closed a reinsurance agreement with a third party insurance company to cede 95% of the MYGA business, with the transaction being effective from inception of the sales of the MYGA product. This transaction eliminates 95% of the interest credited on the MYGA deposit-type contracts.

Net Loss: The change in net loss for continuing operations decreased primarily due to the release of $383,709 of the deferred ceding commission into income due to an additional 33% indemnity coinsurance being converted to assumptive by Unified, the additional amortization of deferred gains related to the Ironbound transaction, an increase in our miscellaneous income due to the consolidation of 1505 Capital LLC, the decrease in our interest credited due to the Ironbound transaction, and an increase in our realized gains. These were offset by increases in our salaries and benefits, the decrease in investment income ceded to Ironbound, and an increase in DAC amortization.


	Three months ended September 30,
	2019		2018
Premiums	$	2,327	$	3,589
Investment (losses) income, net of expenses		(308,100)		210,981
Net realized gains (losses) on investments		12,532		(83,613)
Amortization of deferred gain on reinsurance		613,079		12,094
Miscellaneous income		132,298		27,425
	$	452,136	$	170,476

Premium revenue: The premium revenue decreased slightly quarter over quarter. The introduction of our MYGA product discussed above generated a meaningful volume of premiums; however, the premium income for this product was considered an investment contract and was deferred to deposit-type liabilities on our balance sheet. American Life launched a new fixed indexed annuity (“FIA”) product on October 7, 2019 and is ramping up sales with our national marketing organizations. We expect that the fourth quarter annuity premium could increase substantially. We expect that premium income from both the FIA and MYGA products will not be a major source of income until American Life develops new life insurance products in the future and achieves significant additional product sales.

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Investment (loss) income, net of expenses: The components of our net investment (loss) income are as follows:


	Three months ended September 30,
	2019		2018
Fixed maturities	$	(289,015)	$	201,440
Mortgage loans		68,810		—
Other		(1,102)		15,314
		(221,307)		216,754
Less investment expenses		(86,793)		(5,773)
Investment (loss) income, net of expenses	$	(308,100)	$	210,981

The large decrease in the third quarter of 2019 was due to ceding the investment income earned on the bonds purchased with the $79,500,172 of sales of our MYGA product from inception through September 30, 2019. Our investment portfolio grew to $80,339,286 in the third quarter of 2019 due to the increased sales of the MYGA product which American Life used to purchase investments with higher rates of return. American Life ceded $75,439,663 of premiums to a third party reinsurance and transferred $1,034,551 of its investment income as required by the terms of the agreement.

Net realized gains and losses on investments: The net realized gains (losses) increased primarily due to not having to sell bonds to cover operating expenses in in the third quarter of 2019 compared to the like period in 2018 when market conditions were poor prior to the Xenith infusion of capital. Also, the Federal Reserve Bank decreased their interest rates which resulted in improvement in the market in 2019. We do not believe we will be required to sell bonds at a loss in the remaining months of 2019.

Amortization of deferred gain on reinsurance: The increase was due to an additional 33% of indemnity coinsurance being converted to assumptive reinsurance where we no longer have a legal obligation for those policies. American Life released into income 33% of the remaining deferred ceding commission. The total deferred ceding commissions released into income for the third party reinsurers was $613,078 and $12,094 for the three months ended September 30, 2019 and 2018, respectively.

Miscellaneous income: Miscellaneous income increased due to the consolidation of an investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by the decrease in TPA fees. We had only one customer for whom we performed these services. TPA fees earned during the three months ended September 30, 2019 and 2018 were $11,880 and $24,600, respectively.

Expenses are summarized in the table below.


	Three months ended September 30,
	2019		2018
Interest credited	$	(208,292)	$	6,904
Death and other benefits		—		478
Increase in benefit reserves		34,500		2,338
Amortization of deferred acquisition costs		66,638		—
Salaries and benefits		667,634		559,377
Other operating expenses		1,393,014		1,575,152
	$	1,953,494	$	2,144,249

Interest credited: The decrease was due to ceding 95% of the MYGA deposit-type contracts to a third party reinsurer. The transaction closed on July 25, 2019 and was effective back to inception of the sales of the MYGA business which ceded all the interest credited earned in the first half of 2019 in the third quarter of 2019. The interest credited in 2018 related to a block of business from SNL that was commutated on July 31, 2018.

Death and other benefits: Death benefits decreased due the commutation of the SNL block of business as of July 31, 2018.

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Increase in benefit reserves: The increase in benefit reserves was due to the recording of reserves for two Universal Life policies that were not included in the reinsurance transaction that closed in the fourth quarter of 2018.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs deferred on the sale of American Life’s MYGA product starting in late January 2019 and the subsequent amortization and the restatement of prior year for the legacy block of business amortization as an expense for discontinued operations.

Salaries and benefits: The increase was due to the addition of personnel to service the new business growth.

Other operating expenses: Other operating expenses decreased primarily due to approximately $201,000 of audit and other fees relating to the year-end 2018 audit that was delayed until July 2018, the loss from the commutation of the assumed block of business from SNL of $154,000, consulting expenses and association dues decreases of $95,758 in 2018 compared to 2019. These decreases were offset by the consolidation of 1505 Capital LLC and the establishment of a payable to 1505 Capital LLC of approximately $77,000, the increase in DAC amortization of approximately $77,000 related to the sales of the MYGA product, fees related to our state expansion efforts of $43,000 and increase of approximately $37,000 incurred for consultants, continuing technology and software development.

Consolidated Results of Operations - Nine Months Ended September 30, 2019

The following discussion compares the results of the nine months ended September 30, 2019 with the nine months ended September 30, 2018. Unless the context indicates otherwise, the 2019 results are stated first followed by 2018 results.

Net Loss: The change in net loss for continuing operations increased primarily due to an increase in operating expenses related to our new technology implementation and product development that continued in 2019, an increase in salaries and benefits to support expansion of business, and the decrease in investment income. These were offset by the release of 73% of the deferred ceding commission into income due to 73% indemnity coinsurance being converted to assumptive by Unified.

Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below.


	Nine months ended September 30,
	2019		2018
Premiums	$	(152)	$	16,296
Investment income, net of expenses		330,910		615,913
Net realized gains (losses) on investments		9,315		(285,487)
Amortization of deferred gain on reinsurance		2,465,678		36,282
Miscellaneous income		214,633		78,709
	$	3,020,384	$	461,713

Premium revenue: Premium revenue decreased primarily due to the premium in 2018 that was related to an assumed block of business which was commutated in July 2018. In 2019 we had a refund of premium that we had included in 2018. The introduction of our MYGA product discussed above generated a meaningful volume of premiums; however, the premium income for this product was considered an investment contract and was deferred to deposit-type liabilities on our balance sheet. American Life launched a new fixed indexed annuity (“FIA”) product on October 7, 2019 and is ramping up sales with our national marketing organizations. We anticipate that the fourth quarter annuity premium deposits could increase over prior quarters. We expect that premium income from both the FIA and MYGA products will not be a major source of income until American Life develops new life insurance products in the future and achieves significant additional product sales.

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Investment income, net of expenses: The components of our net investment income are as follows:


	Nine months ended September 30,
	2019		2018
Fixed maturities	$	342,103	$	598,632
Mortgage loans		78,466		—
Other		6,974		44,780
		427,543		643,412
Less investment expenses		(96,633)		(27,499)
Investment income, net of expenses	$	330,910	$	615,913

The decrease was due to ceding the investment income earned on the bonds purchased with the sales of our MYGA product from inception through September 30, 2019. Our investment portfolio grew substantially in 2019 due to the increased sales of the MYGA product which American Life used to purchase investments with higher rates of return.

Net realized gains(losses) on investments: The net realized gains (losses) increased primarily due to not having to sell bonds to cover operating expenses in 2019 compared to 2018 when market conditions were poor prior to the Xenith infusion of capital. Also, the Federal Reserve Bank decreased their interest rates which resulted in improvement in the market in 2019. We do not believe we will be required to sell bonds at a loss in the remaining months of 2019.

Amortization of deferred gain on reinsurance: The increase was due to 73% of indemnity coinsurance being converted to assumptive reinsurance where we no longer have a legal obligation for those policies. American Life released into income 73% of the remaining deferred ceding commission. This increase included the new deferred ceding commission amortization from the reinsurance transaction with a third party reinsurer entered into during 2019.

Miscellaneous income: Miscellaneous income increased due to the consolidation of an investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by the decrease in TPA fees. We had only one customer for whom we performed these services. TPA fees earned during the nine months ended September 30, 2019 and 2018 were $40,140 and $71,940, respectively.

Expenses are summarized in the table below.


	Nine months ended September 30,
	2019		2018
Interest credited	$	42,895	$	47,936
Death and other benefits		1,872		93,646
Increase in benefit reserves		34,500		(54,621)
Amortization of deferred acquisition costs		88,503		—
Salaries and benefits		1,782,708		1,471,914
Other operating expenses		4,898,134		2,529,145
	$	6,848,612	$	4,088,020

Interest credited: The slight decrease was due to the 5% retention on the sale of the new MYGA product during the nine months of 2019 that was classified as deposit-type funds. The remaining 95% interest was ceded to a third party reinsurer. The interest credited in 2018 related to a block of business from SNL that was commutated on July 31, 2018.

Death and other benefits: Death benefits decreased due the commutation of the SNL block of business as of July 31, 2018. The benefits incurred in 2019 were for policies that were not included with our July 1, 2018 reinsurance transaction.

Increase in benefit reserves: The change in benefit reserves was a result of the commutation of the SNL business as of July 31, 2018. The additional reserves in 2019 was attributed to several policies that were not included in the reinsurance

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transaction in 2018. The MYGA product does not carry reserves as the premium was reclassified as a liability on the balance sheet on a GAAP basis.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs on the sale of American Life’s MYGA product starting in late January 2019 and the subsequent amortization and the restatement of prior year for the legacy block of business amortization as an expense for discontinued operations.

Salaries and benefits: The increase was due to the addition of remuneration for two officers as a result of the Xenith transaction as discussed above in Note 3 – Change in Control in the Notes to Consolidated Financial Statements in this Report.

Other operating expenses: Other operating expenses increased primarily due to approximately $1,300,000 of expenses incurred for consultants, continuing technology and software development, and portal and web design. We incurred approximately $845,536 of interest on the Xenith notes payable that included approximately $131,000 for 2018 that was not previously included. Xenith forgave the payment of the interest accrued upon the conversion of the notes payable; as a result the payable was treated as an additional capital contribution. The consolidation of 1505 Capital LLC resulted in an increase of expenses of $76,000. Legal fees increased approximately $85,000 as a result of the state expansion initiatives, the settlement of the Hawaii condos, and fees associated with seeking a new reinsurer; these legal fees were offset by legal costs related to the acquisition of Midwest by Xenith that occurred in 2018. Management expects to be incurring additional product development and system related costs in the fourth quarter of 2019.

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, mortgages, and policy loans. The Company has modified its investment strategy to purchase larger position securities with increased yields. The duration of our new investments will be less than ten years for the majority of those investments. 1505 Capital LLC will be providing investment and management services to the Company going forward. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2019 and December 31, 2018.


	September 30, 2019				December 31, 2018
	Carrying		Percent		Carrying		Percent
	Value		of Total		Value		of Total
Fixed maturity securities:
U.S. government obligations	$	2,046,251	1.9	%	$	1,995,951	9.9	%
Mortgage-backed securities		860,717	0.8			1,004,051	5.0
Asset-backed securities		46,253,623	43.9			—	—
States and political subdivisions - general obligation		267,601	0.3			263,184	1.3
States and political subdivisions - special revenue		25,329	—			25,173	0.1
Corporate		17,810,912	16.9			14,095,824	69.5
Total fixed maturity securities		67,264,433	63.8			17,384,183	85.8
Mortgage loans on real estate, held for investment		10,098,478	9.6			—	—
Other invested assets		2,976,375	2.8			—	—
Preferred stock		500,000	0.5			—	—
Cash and cash equivalents		24,369,609	23.3			2,832,567	14.0
Policy Loans		42,902	—			43,843	0.2
	$	105,251,797	100.0	%	$	20,260,593	100.0	%

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The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2019 and December 31, 2018.


	September 30, 2019				December 31, 2018
	Carrying				Carrying
	Value		Percent		Value		Percent
AAA and U.S. Government	$	3,217,407	4.8	%	$	3,045,768	17.5	%
AA		3,638,942	5.4			1,721,450	9.9
A		14,502,835	21.6			4,221,297	24.3
BBB		42,593,153	63.3			8,261,450	47.5
Total investment grade		63,952,337	95.1			17,249,965	99.2
BB and other		3,312,096	4.9			134,218	0.8
Total	$	67,264,433	100.0	%	$	17,384,183	100.0	%

Reflecting the quality of securities maintained by the Company, 95.1% and 99.2% of all fixed maturity securities were investment grade as of September 30, 2019 and December 31, 2018, respectively. Due to the low interest rate environment, the Company has invested in bonds with “A” or “BBB” ratings.

Market Risks of Financial Instruments

The Company holds a portfolio of investments that primarily includes cash, bonds, stocks, and real estate loans, held for investment. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.

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. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

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 and Capital Resources

At September 30, 2019, the Company had cash and cash equivalents totaling $24,369,609. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital transaction expenditures for the foreseeable future.

The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality

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of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, 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. On October 10, 2018 and December 7, 2018, Xenith contributed an additional $1,000,000 and $17,500,000, respectively to Midwest in the way of convertible notes. Midwest subsequently contributed all $18,500,000 to American Life. The additional funding allowed American Life to settle the Unified Life Insurance Company (“Unified”) coinsurance transaction instead of liquidating a portion of its bond portfolio. As a direct result of the capital contributions from the Xenith transaction discussed above and the ceding 100% of our remaining block of business to Unified, our RBC at December 31, 2018 was 5,480%.

Effective July 1, 2018, American Life completed the 2018 reinsurance transaction discussed above. We paid no commissions or brokerage fees relating to this transaction. While the third party reinsurer assumed certain liabilities and obligations, we are not relieved of our legal liability to the policyholders until all the policies are transferred from “indemnity” to “assumptive.” Therefore, the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets under Assets and Liabilities Held for Sale. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to the third party reinsurer for cash of $14,320,817, which was net of a ceding allowance of $3,500,000 plus the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. The third party reinsurer assumed all responsibilities for incurred claims, surrenders and commission from the effective date. As of September 30, 2019, 73% of the reinsured block of business was converted from indemnity to assumptive reissuance. We and the third party reinsurer expect a portion of the remaining business will be assumed by December 31, 2019.

Surplus notes American Life had issued of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. American Life reached an agreement with the holder of the notes in late 2018 to retire the surplus notes in full, including any accrued interest, through the transfer of the 10 condominiums in Hawaii owned by American Life. This transaction received regulatory approval in December 2018. The book value at December 31, 2018 of the surplus notes was $876,400 and the book value of the 10 condominiums in Hawaii was $493,648 with an estimated market value of $830,000. We recognized a gain of $382,752 on the settlement of the transaction.

Net cash provided by operating activities was $78,883,528 for September 30, 2019, which was comprised primarily by an increase in policy liabilities of $76,877,920 primarily due increase in deposit-type contracts ceded to reinsurers, an increase in our other assets and liabilities due to a payable for securities of $5,250,000, and an increase in deferred coinsurance ceding commission due to the Ironbound transaction of $2,821,255 , partially offset by the deferred acquisition costs capitalized of $2,395,710 and the amounts recoverable from reinsurers of $1,002,794. Net cash used for investing activities was $61,356,602. The primary source of cash used was from our purchase of investments from sales of the MYGA product of $63,828,581. Offsetting this use of cash was our sale of investments in available-for-sale securities. Net cash provided by financing activities was $4,010,116. The primary source of cash was net receipts on the MYGA product.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

Off-Balance Sheet Arrangements

We have no 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.

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Contractual Obligations

As a “smaller reporting company,” the Company is not required to provide the table of contractual obligations required pursuant to this Item.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company,” the Company is not required to provide disclosure pursuant to this Item.

ITEM 4. CONTROLS AND PROCEDURES.

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiary, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

Management, (with the participation of our principal executive officer/principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2019. Based on this evaluation, our principal executive officer/principal financial officer concluded that, as of the end of December 31, 2018 covered in the Form 10‑K report, our disclosure controls and procedures along with the related internal controls over financial reporting were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer/principal financial officer to allow timely decisions regarding required disclosure.

Material Weakness Previously Identified

Refer to Item 9A of Part II of our 2017 Form 10‑K/A and Item 4 of our September 30, 2018 Form 10‑Q/A Amendment No. 2 for detail about previously identified material weaknesses in the Company’s internal control over financial reporting over timeliness of obtaining and assimilating all information and a complex and non-routine transaction. The Company has implemented the following remediation steps to address this material weakness: (i) meeting with our auditing firm on a timely schedule, (ii) established an enterprise risk management program, (iii) monitored and engaged an auditing advisor to assist with complex transactions, and (iv) retained consultants to verify and strengthen controls. The Company’s management determined these weaknesses were remediated as of June 30, 2019.

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PART II – OTHER INFORMATION

ITEM 1. 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.

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018 in response to Item 1A of Part I of such Form 10‑K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.


EXHIBIT NUMBER		DESCRIPTION
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principle Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principle Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		XBRL Instance Document.
101.SCH *		XBRL Taxonomy Extension Schema Document.
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB *		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document.

*Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 8, 2019


	MIDWEST HOLDING INC.


	By:	/s/ A. Michael Salem
	Name:	A. Michael Salem
	Title:	Chief Executive Officer, Principal Executive Officer

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, A. Michael Salem, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Midwest Holding Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 8, 2019		/s/ A. Michael Salem
		A. Michael Salem
		Chief Executive Officer, Principal Executive Officer

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Debra K. Havranek, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Midwest Holding Inc. (the “Company”);

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 8, 2019		/s/ Debra K. Havranek
		Debra K. Havranek
		Vice President, Treasurer, Principal Financial Officer

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Midwest Holding Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 8, 2019		/s/ A. Michael Salem
		A. Michael Salem
		Chief Executive Officer, Principal Executive Officer

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 8, 2019		/s/ Debra K. Havranek
		Debra K. Havranek
		Vice President, Treasurer, Principal Financial Officer

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September 30, 2019

December 31, 2018

Balance sheets:

Benefit and claim reserves ceded