UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarter ended ~~March 31,~~September 30, 2021
or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-39812

Midwest Holding Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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


Title of each class:		Trading Symbol(s):Name of Each Exchange on Which Registered
Voting Common Stock, $0.001 par value		MDWTThe ~~NASDAQ~~Nasdaq Stock Market LLC

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

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

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

Indicate by check mark whether the registrant has submitted electronically, 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 ☒
(Do not check if a		Emerging growth company ☐
smaller reporting 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 ~~May~~November 1, 2021, there were 3,737,564 shares of ~~the registrant’s~~ Voting Common Stock, par value $0.001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE - None

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	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5156

Item 4.	Controls and Procedures	5156

PART II – OTHER INFORMATION


Item No.	Item Caption	Page
Item 1.	Legal Proceedings	5156

Item 1A.	Risk Factors	5156

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5257

Item 3.	Defaults Upon Senior Securities	5358

Item 4.	Mine Safety Disclosures	5358

Item 5.	Other Information	5358

Item 6.	Exhibits	5459

	Signatures	5560

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIDWEST HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2021		December 31, 2020
(In thousands, except share information)		(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost: $649,483 and $369,156, respectively) (See Note 4)	$	656,781	$	377,163
Mortgage loans on real estate, held for investment		168,184		94,990
Derivative instruments (See Note 5)		17,262		11,361
Equity securities, at fair value (cost: $38,988 in 2021 and 0 in 2020)		38,910		—
Other invested assets		47,021		21,897
Investment escrow		1,307		3,174
Federal Home Loan Bank (FHLB) stock		500		—
Preferred stock		6,934		3,898
Notes receivable		5,885		5,666
Policy loans		55		46
Total investments		942,839		518,195
Cash and cash equivalents		81,487		151,679
Deferred acquisition costs, net		24,037		13,456
Premiums receivable		334		314
Accrued investment income		12,175		6,807
Reinsurance recoverables (See Note 9)		37,720		32,146
Intangible assets		700		700
Property and equipment, net		121		104
Operating lease right of use assets		258		348
Other assets		6,889		1,533
Assets associated with business held for sale (See Note 2)		1,065		1,119
Total assets	$	1,107,625	$	726,401
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	12,388	$	12,776
Policy claims		5,579		162
Deposit-type contracts (See note 11)		960,507		597,868
Advance premiums		1		2
Deferred gain on coinsurance transactions		27,799		18,199
Lease liabilities (See Note 13):
Operating lease		299		397
Other liabilities		19,864		9,553
Liabilities associated with business held for sale (See Note 2)		1,060		1,114
Total liabilities		1,027,497		640,071
Contingencies and Commitments (See Note 12)
Stockholders’ Equity:
Preferred stock, $0.001 par value; authorized 2,000,000 shares; 0 shares issued and outstanding as of September 30, 2021 or December 31, 2020		—		—
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; 0 shares issued and outstanding September 30, 2021 and December 31, 2020, respectively		4		4
Additional paid-in capital		136,236		133,592
Treasury stock		(175)		(175)
Accumulated deficit		(63,178)		(53,522)
Accumulated other comprehensive income		7,241		6,431
Total stockholders' equity		80,128		86,330
Total liabilities and stockholders' equity	$	1,107,625	$	726,401

March 31, 2021

December 31, 2020

(Unaudited)

Assets




Investments, available for sale, at fair value fixed maturities
(amortized cost: $484,140,375 and $369,156,068, respectively) (See Note 4)

$
493,069,034

$
377,163,358
Mortgage loans on real estate, held for investment

109,776,321

94,989,970
Derivative instruments (See Note 5)

9,473,398

11,361,034
Equity securities, at fair value (cost: $42,089,014 in 2021 and zero in 2020)

42,093,166

—
Other invested assets

25,606,108

21,897,130
Investment escrow

3,317,043

3,174,047
Preferred stock

4,300,591

3,897,980
Notes receivable

5,737,608

5,665,487
Policy loans

48,551

45,573
Total investments

693,421,820

518,194,579
Cash and cash equivalents

100,927,152

151,679,274
Deferred acquisition costs, net

19,676,745

13,456,303
Premiums receivable

313,115

313,601
Accrued investment income

9,095,093

6,806,836
Reinsurance recoverables (See Note 9)

38,715,577

32,146,042
Intangible assets

700,000

700,000
Property and equipment, net

101,980

103,964
Operating lease right of use assets

317,715

348,198
Other assets

1,799,371

1,533,179
Assets associated with business held for sale (See Note 2)

1,122,481

1,118,783
Total assets

$
866,191,049

$
726,400,759
Liabilities and Stockholders’ Equity




Liabilities:




Benefit reserves

$
12,784,452

$
12,775,773
Policy claims

164,377

161,703
Deposit-type contracts (See note 11)

714,300,232

597,868,472
Advance premiums

3,111

2,541
Deferred gain on coinsurance transactions

20,596,683

18,198,757
Lease liabilities (See Note 13):

Operating lease

364,128

396,911
Other liabilities

31,230,201

9,552,791
Liabilities associated with business held for sale (See Note 2)

1,115,682

1,114,312
Total liabilities

780,558,866

640,071,260
Contingencies and Commitments (See Note 12)




Stockholders’ Equity:

Preferred stock, $0.001 par value; authorized 2,000,000 shares; no shares issued and outstanding as of March 31, 2021 or December 31, 2020

—

—
Voting common stock, $0.001 par value; authorized 20,000,000 shares; 3,737,564 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively; non-voting common stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding March 31, 2021 and December 31, 2020, respectively

3,738

3,738
Additional paid-in capital

133,853,945

133,592,605
Treasury stock

(175,333)

(175,333)
Accumulated deficit

(55,122,540)

(53,522,078)
Accumulated other comprehensive income

7,072,373

6,430,567
Total stockholders' equity

85,632,183

86,329,499
Total liabilities and stockholders' equity

$
866,191,049

$
726,400,759

See Notes to Consolidated Financial Statements.

Table of Contents

MIDWEST HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three months ended March 31,


2021

2020

Revenues





Premiums

$
—

$
21

Investment income, net of expenses

2,887,363

1,240,978

Net realized (loss) gain on investments (See Note 4)

(4,649,105)

22,600,010

Amortization of deferred gain on reinsurance

460,856

182,438

Service fee revenue, net of expenses

438,146

380,267

Other revenue

248,969

9,777

Total (loss) revenue

(613,771)

24,413,491

Expenses





Interest credited

(2,346,403)

211,202

Benefits

79

(7,103)

Amortization of deferred acquisition costs

502,737

40,509

Salaries and benefits

2,927,227

824,896

Other operating expenses

(1,529,297)

1,325,113

Total expenses

(445,657)

2,394,617

(Loss) income continuing from operations before taxes

(168,114)

22,018,874

Income tax expense (See Note 8)

(1,432,348)

(407,916)

Net (loss) income from continued operations

(1,600,462)

21,610,958

Less: (Loss) income attributable to noncontrolling interest

—

(62,500)

Net (loss) income attributable to Midwest Holding, Inc.

(1,600,462)

21,548,458

Comprehensive income (loss):





Unrealized gains (losses) on investments arising during period, net of offsets, net of tax ($180,885 and $961,012, respectively)

962,880

(4,170,973)

Unrealized losses on foreign currency

—

(405,275)

Less: Reclassification adjustment for net realized gains on investments, net of tax ($85,348 and $4.7 million, respectively)

(321,074)

(22,600,010)

Other comprehensive income (loss)

641,806

(27,176,258)

Comprehensive loss

$
(958,656)

$
(5,627,800)

Earnings (loss) income per common share

Basic

$
(0.43)

$
10.55

Diluted

$
(0.43)

$
10.43


	Three months ended September 30,				Nine months ended September 30,
(In thousands, except per share data)	2021		2020		2021		2020
Revenues
Investment income, net of expenses	$	6,196		434	$	12,303	$	1,277
Net realized (loss) gain on investments (See Note 4)		(2,115)		(1,951)		(2,704)		7,829
Amortization of deferred gain on reinsurance		662		293		1,711		814
Service fee revenue, net of expenses		628		590		1,738		1,359
Other revenue		400		117		1,007		134
Total revenue (loss)		5,771		(517)		14,055		11,413
Expenses
Interest credited		284		380		1,868		464
Benefits		—		(3)		—		(6)
Amortization of deferred acquisition costs		753		235		1,780		376
Salaries and benefits		4,025		1,444		11,466		3,624
Other operating expenses		4,124		1,706		6,769		5,337
Total expenses		9,186		3,762		21,883		9,795
(Loss) income from continuing operations before taxes		(3,415)		(4,279)		(7,828)		1,618
Income tax expense (See Note 8)		351		(1,258)		(1,828)		(2,145)
Net loss attributable to Midwest Holding, Inc.		(3,064)		(5,537)		(9,656)		(527)
Comprehensive income (loss):
Unrealized gains on investments arising during the three months ended September 30 2021 and 2020, net of offsets, net of tax ($154 and $104, respectively); unrealized gains on investments arising during the nine months ended September 30, 2021 and 2020, net of offsets, net of tax ($216 and $77, respectively)		1,085		2,451		2,421		4,954
Unrealized losses on foreign currency		—		406		—		—
Less: Reclassification adjustment for net realized gains on investments, net of tax for the three months ended September 30, 2021 and 2020 ($134 and $23, respectively), and net of tax for the nine months ended September 30, 2021 and 2020 ($428 and $266, respectively)		(505)		1,951		(1,611)		(7,829)
Other comprehensive income (loss)		580		4,808		810		(2,875)
Comprehensive loss	$	(2,484)	$	(729)	$	(8,846)	$	(3,402)
Loss per common share
Basic	$	(0.82)	$	(2.04)	$	(2.58)	$	(0.22)
Diluted	$	(0.82)	$	(2.00)	$	(2.58)	$	(0.21)

See Notes to Consolidated Financial Statements.

Table of Contents

MIDWEST HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Additional

Total

Treasury

Common

Paid-In

Accumulated

Noncontrolling

Stockholders’


Stock

Stock

Capital

Deficit

AOCI*

Interest

Equity
Balance, December 31, 2019

$
—

$
2,042

$
54,494,355

$
(41,081,710)

$
619,584

$
124,477

$
14,158,748
Net loss

—

—

—

(12,440,368)

—

—

(12,440,368)
Capital raise, net of $5,914,995 related expenses

—

1,696

79,310,109

—

—

—

79,311,805
Reverse stock split fractions retired

(175,333)

—

—

—

—

—

(175,333)
Employee stock options

—

—

163,664

—

—

—

163,664
Purchase of remaining 49% of 1505 Capital LLC

—

—

(375,523)

—

—

(124,477)

(500,000)
Unrealized gains on investments, net of taxes

—

—

—

—

5,957,168

—

5,957,168
Unrealized losses on foreign currency, net of taxes

—

—

—

—

(146,185)

—

(146,185)
Balance, December 31, 2020

(175,333)

3,738

133,592,605

(53,522,078)

6,430,567

—

86,329,499
Net loss

—

—

—

(1,600,462)

—

—

(1,600,462)
Employee stock options

—

—

261,340

—

—

—

261,340
Unrealized gains on investments, net of taxes

—

—

—

—

641,806

—

641,806
Balance, March 31, 2021

$
(175,333)

$
3,738

$
133,853,945

$
(55,122,540)

$
7,072,373

$
—

$
85,632,183



	Three months ended September 30,
					Additional
	Treasury		Common		Paid-In		Retained				Noncontrolling		Total
(In thousands)	Stock		Stock		Capital		Earnings		AOCI*		Interest		Equity
Balance at June 30, 2021	$	(175)	$	4	$	135,233	$	(60,114)	$	6,661	$	—	$	81,609
Net loss		—		—		—		(3,064)		—		—		(3,064)
Additional capital raise related expenses		—		—		7		—		—		—		7
Employee stock options		—		—		996		—		—		—		996
Unrealized gains on investments, net of taxes		—		—		—		—		580		—		580
Balance, September 30, 2021	$	(175)	$	4	$	136,236	$	(63,178)	$	7,241	$	—	$	80,128
Balance at June 30, 2020	$	—	$	3	$	69,085	$	(36,072)	$	(7,064)	$	—	$	25,952
Net loss		—		—		—		(5,537)		—		—		(5,537)
Reverse stock split fractions retired		(175)		—		—		—		—		—		(175)
Employee stock options		—		—		30		—		—		—		30
Unrealized gains on investments, net of taxes		—		—		—		—		4,402		—		4,402
Unrealized losses on foreign currency		—		—		—		—		406		—		406
Balance, September 30, 2020	$	(175)	$	3	$	69,115	$	(41,609)	$	(2,256)	$	—	$	25,078


	Nine months ended September 30,
					Additional
	Treasury		Common		Paid-In		Retained				Noncontrolling		Total
(In thousands)	Stock		Stock		Capital		Earnings		AOCI*		Interest		Equity
Balance, December 31, 2020	$	(175)	$	4	$	133,592	$	(53,522)	$	6,431	$	—	$	86,330
Net loss		—		—		—		(9,656)		—		—		(9,656)
Additional capital raise related expenses		—		—		(121)		—		—		—		(121)
Employee stock options		—		—		2,765		—		—		—		2,765
Unrealized gains on investments, net of taxes		—		—		—		—		810		—		810
Balance, September 30, 2021	$	(175)	$	4	$	136,236	$	(63,178)	$	7,241	$	—	$	80,128
Balance, December 31, 2019	$	—	$	2	$	54,494	$	(41,082)	$	620	$	124.00	$	14,158
Net loss		—		—		—		(527)		—		—		(527)
Capital raise, net of $285 related expenses		—		1		14,942		—		—		—		14,943
Reverse stock split fractions retired		(175)		—		—		—		—		—		(175)
Employee stock options		—		—		55		—		—		—		55
Purchase of remaining 49% of 1505 Capital LLC		—		—		(376)		—		—		(124)		(500)
Unrealized gains on investments, net of taxes		—		—		—		—		(2,876)		—		(2,876)
Balance, September 30, 2020	$	(175)	$	3	$	69,115	$	(41,609)	$	(2,256)	$	—	$	25,078

*	Accumulated other comprehensive income ~~(loss)~~

See Notes to Consolidated Financial Statements.

Table of Contents

MIDWEST HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three months ended March 31,

2021

2020
Cash Flows from Operating Activities:




Net (loss) income attributable to Midwest Holding, Inc.

$
(1,600,462)

$
21,548,458
Adjustments to arrive at cash provided by operating activities:




Net premium and discount on investments

(279,584)

37,978
Depreciation and amortization

13,567

15,321
Stock options

261,340

11,934
Net transfers to noncontrolling interest

—

62,500
Amortization of deferred acquisition costs

502,737

40,509
Deferred acquisition costs capitalized

(6,774,293)

(1,483,941)
Net realized losses (gains) on investments

4,649,105

(22,600,010)
Deferred coinsurance ceding commission

2,397,926

1,033,940
Changes in operating assets and liabilities:




Reinsurance recoverables

(6,164,935)

2,617,495
Interest and dividends due and accrued

(2,288,257)

(1,052,329)
Premiums receivable

486

5,599
Policy liabilities

(4,305,256)

1,699,134
Other assets and liabilities

21,408,109

379,158
Other assets and liabilities - discontinued operations

(2,328)

703
Net cash provided by operating activities

7,818,155

2,316,449
Cash Flows from Investing Activities:




Securities available for sale:




Purchases

(176,433,779)

(39,723,572)
Proceeds from sale or maturity

61,831,341

3,852,943
Mortgage loans on real estate, held for investment purchases

Purchases

(16,446,861)

(33,342,545)
Proceeds from sale

1,660,510

2,069,950
Derivatives

Purchases

(4,157,582)

(651,661)
Proceeds from sale

660,355

—
Purchase of equity securities

(42,093,166)

—
Other invested assets

Purchases

(5,159,712)

(2,715,965)
Proceeds from sale

1,307,738

2,388,560
Preferred stock

(474,732)

—
Net change in policy loans

(2,978)

(22,720)
Net purchases of property and equipment

(10,350)

(8,998)
Net cash used in investing activities

(179,319,216)

(68,154,008)
Cash Flows from Financing Activities:




Finance lease

—

(111)
Receipts on deposit-type contracts

123,653,931

47,815,010
Withdrawals on deposit-type contracts

(2,904,992)

(186,689)
Net cash provided by financing activities

120,748,939

47,628,210
Net increase in cash and cash equivalents

(50,752,122)

(18,209,349)
Cash and cash equivalents:




Beginning

151,679,274

43,716,205
Ending

$
100,927,152

$
25,506,856


	Nine months ended September 30,
(In thousands)	2021		2020
Cash Flows from Operating Activities:
Loss attributable to Midwest Holding, Inc.	$	(9,656)	$	(527)
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments		(1,529)		(18)
Depreciation and amortization		38		45
Stock options		2,765		30
Amortization of deferred acquisition costs		1,780		376
Deferred acquisition costs capitalized		(12,449)		(6,784)
Net realized losses (gains) on investments		2,704		(7,829)
Deferred coinsurance ceding commission		9,601		8,161
Changes in operating assets and liabilities:
Reinsurance recoverables		(6,659)		(7,142)
Interest and dividends due and accrued		(5,368)		(3,436)
Premiums receivable		(20)		(1)
Policy liabilities		14,763		6,429
Other assets and liabilities		4,948		13,538
Other assets and liabilities - discontinued operations		(1)		15
Net cash provided by operating activities		917		2,857
Cash Flows from Investing Activities:
Fixed maturities available for sale:
Purchases		(480,700)		(158,933)
Proceeds from sale or maturity		204,452		24,050
Mortgage loans on real estate, held for investment
Purchases		(97,075)		(52,503)
Proceeds from sale		25,749		8,918
Derivatives
Purchases		(14,496)		(5,065)
Proceeds from sale		4,314		—
Purchase of equity securities		(38,972)		—
Other invested assets
Purchases		(58,437)		(26,788)
Proceeds from sale		34,965		13,671
Purchase of restricted common stock in FHLB		(500)		—
Preferred stock		(3,128)		—
Notes receivable		-		(5,516)
Net change in policy loans		(9)		(41)
Net purchases of property and equipment		(54)		(44)
Net cash used in investing activities		(423,891)		(202,251)
Cash Flows from Financing Activities:
Capital contribution		(121)		14,941
Repurchase of common stock		-		(150)
Acquisition of noncontrolling interest		-		(500)
Receipts on deposit-type contracts		367,446		279,537
Withdrawals on deposit-type contracts		(14,543)		(1,718)
Net cash provided by financing activities		352,782		292,110
Net (decrease) increase in cash and cash equivalents		(70,192)		92,716
Cash and cash equivalents:
Beginning		151,679		43,716
Ending	$	81,487	$	136,432

Supplementary information
Cash paid for taxes	$	3,711	$	—

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

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 redomesticated from the State of Nebraska to the ~~state~~State of Delaware on August 27, 2020. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiaries, American Life & Security Corp. (“American Life”), and 1505 Capital LLC (“1505 Capital”) as well as through its sponsored captive reinsurance company, Seneca Reinsurance Company, LLC (“Seneca Re”).

American Life is a Nebraska-domiciled life insurance company, which is also commercially domiciled in Texas, that is currently licensed to sell, underwrite, and market life insurance and annuity products in 2122 states and the District of Columbia.

On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment activities. On June 15, 2020, we purchased the remaining 49% ownership in 1505 Capital for $500,000. 1505 Capital’s financial results have been consolidated with the Company’s since the date of its acquisition.

Effective March 12, 2020, Seneca ~~Reinsurance Company, LLC (“Seneca Re”),~~Re, a Vermont limited liability company, was formed by Midwest to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of risks of its participants through one or more protected cells and to conduct any other business or activity that is permitted for sponsored captive insurance companies under Vermont insurance regulations. On March 30, 2020, Seneca Re received its Certification of Authority to transact the business of a captive insurance company. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of September 30, 2021, Seneca Re has one incorporated cell, Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) which is consolidated in our financial statements. On May 12, 2020, Midwest contributed ~~$300,000~~$300 to Seneca Re for a 100% ownership interest. ~~As of May 13, 2020, Seneca Re established Seneca Protected Cell 2020-01,~~

On April 2, 2019, we obtained a protected cell of Seneca Re (“SRC1”). Effective December 21, 2020, Seneca Re converted SRC1 to Seneca Incorporated Cell, LLC 2020-01. Midwest contributed $3,000,000 to capitalize SRC1. Crestline Management, L.P. (“Crestline Management”),51% ownership in 1505 Capital, a Delaware limited partnership, through an affiliated entity (see below) owns approximately 11.9% of Midwest’s voting common stock. On July 24, 2020, the Nebraska Department of Insurance (“NDOI”) issued its non-disapproval of the Funds Withheld Coinsuranceliability company, that was established in 2018 to provide financial and Modified Coinsurance Agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”) of Seneca Re, now known as Crestline Re SP1. Effective December 8, 2020, American Life entered into a novation agreement with SRC2investment advisory and Crestline Re SPC, an exempted segregated portfolio company incorporated under the laws of the Cayman Islands, for and on behalf of Crestline Re SP1, a segregated portfolio company of Crestline Re SPC, under which the above-described reinsurance, trustmanagement services to clients and related ~~asset management agreements were novated and replaced~~investment activities. On June 15, 2020, we purchased the remaining 49% ownership in 1505 Capital for $500. 1505 Capital’s financial results have been consolidated with ~~substantially similar agreements entered into by American Life and Crestline Re SP1.~~the Company’s since the date of its acquisition.

On April 24, 2020, Midwest entered into a Securities Purchase Agreement with Crestline Assurance Holdings LLC, a Delaware limited liability company (“Crestline Assurance”), Xenith Holdings LLC, and Vespoint ~~and Pursuant~~LLC, pursuant to ~~the Agreement,~~which Crestline Assurance purchased 444,444 shares of the Company’s voting common stock, par value $0.001 per share (“common stock”), at a purchase price of $22.50 per share for $10.0 million. Under the agreement, the Company contributed $5.0 million to American Life. Also, effective as of April 24, 2020, in a separate transaction, Midwest sold 231,655 shares of common stock to various investors in a private placement at $22.50 per share for $5.227 million. ~~Under the~~

On July 27, 2020, American Life entered into a reinsurance agreement ~~the Company contributed $5.0 million to American Life.~~

~~Also,~~(the “Reinsurance Agreement”) with a new protected cell formed by Seneca Re (Seneca Incorporated Cell, LLC 2020-02 (“SRC2”)). SRC2 was capitalized by Crestline Management, L.P. (“Crestline”), a significant shareholder of Midwest via a Crestline subsidiary, Crestline Re SPC1. The Reinsurance Agreement, which was effective as of April 24, 2020, ~~American life~~and was entered into pursuant to a Master Letter Agreement ~~with~~(the “Master Agreement”) dated and effective as of April 24, 2020, among American Life, Seneca Re and ~~Crestline Management regarding a flow~~Crestline. The Reinsurance Agreement supports American Life’s new business production by providing reinsurance capacity for American Life to write certain kinds of fixed and multi-year guaranteed annuity ~~reinsurance and related asset~~products. Concurrently with the Reinsurance Agreement:

●

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

●

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

Under the Master Agreement, Crestline ~~Management~~ agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from its multi-year guaranteed annuities (“MYGA”) and a quota share percentage of 40% for American Life’s fixed indexed annuity (“FIA”) products. ~~This agreement~~The Master Agreement expires on April 24, 2023.

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In addition, pursuant to the Master Agreement, the parties thereto have agreed to enter into a separate agreement whereby, among other things and subject to certain conditions, American Life will agree to reinsure additional new business production to one or more reinsurers formed and/or capitalized by Crestline, Midwest or an appropriate affiliate will refer potential advisory clients to Crestline, and American Life will consider investing in certain assets originated or sourced by Crestline.

Effective December 8, 2020, American Life entered into a novation agreement with SRC2 and Crestline Re SPC, for and on behalf of Crestline Re SP1, under which the above-described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline Re SP1.

In December 2020, the Company completed a public offering of its ~~voting~~ common stock for gross proceeds of ~~$70,000,000~~$70.0 million (see Note 17). In connection therewith, the Company's ~~voting~~ common stock was approved for listing and began trading on the Nasdaq Capital Market (“NASDAQ”) upon the closing of the ~~public~~ offering.

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Management evaluates the Company as ~~one~~1 reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of annuity products ~~and life insurance~~ through American Life, and then reinsuring such products with third-party reinsurers, and since May 13, 2020, with ~~SRC1. The Company’s historical~~Seneca Re protected cells. American Life’s legacy product offerings consisted of a multi-benefit life insurance policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product. ~~These product offerings were underwritten, marketed, and managed as a group of similar products on an overall portfolio basis.~~ American Life presently offers ~~five~~5 annuity products, ~~two MYGA,~~2 MYGAs, a FIA, and ~~two~~2 bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products.

Basis of Presentation

~~These~~Our consolidated financial statements for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 and year ended December 31, 2020 have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform to the current period’s presentation with no impact on results of operations or total stockholders’ equity. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period results, have been made. The ~~accompanying unaudited consolidated financial statements~~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, 2020 (“2020 Form 10-K”), should be read in conjunction with the ~~audited~~reading of these interim unaudited consolidated financial ~~statements and noted thereto~~statements.

The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ~~ended~~ending December 31, ~~2020 included in the Company’s annual report on Form 10-K.~~2021.

Investments

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

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, the 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 impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security, and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the impairment is bifurcated. The Company

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recognizes the credit loss portion as realized losses and the noncredit loss portion in accumulated other comprehensive loss. The credit component of other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. The Company had no0 impairment ~~recognized~~to recognize as of ~~March 31,~~September 30, 2021. As of ~~year-ended~~ December 31, 2020, the Company analyzed ~~the~~its securities portfolio and determined that an impairment of approximately ~~$35,000~~$35 should be recorded for ~~one~~1 debt security, an impairment of ~~$500,000~~$500 was recognized on a preferred stock, and a valuation allowance of ~~$776,973~~$777 established on ~~one~~1 lease. The valuation allowance on the lease of ~~$776,973~~$777 was released as of March 31, 2021 due to the sale of the investment. The Company believes the remaining investments were not impaired as of December 31, 2020.

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

Certain available-for-sale investments are maintained as collateral under funds withheld (“FW”) and modified coinsurance (“Modco”) agreements but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. American Life

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has treaties with several third-party reinsurers that have ~~funds withheld~~FW and ~~modified coinsurance~~Modco provisions. In a ~~modified coinsurance arrangement (“Modco”),~~Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a ~~funds withheld coinsurance~~FW agreement, ~~(“FW”),~~ assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers to reduce the potential credit risk. The unrealized gains/losses on those investments are passed through to the third-party reinsurers as either a realized gain or loss on the Consolidated Statements of Comprehensive Loss.

Mortgage loans on real estate, 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. NoNaN such valuation allowance was established ~~for the~~ as of ~~March 31,~~September 30, 2021 or as of December 31, ~~2020, respectively.~~

~~Investment escrow~~

The Company held in escrow $3,317,043 and $3,174,047 as of March 31, 2021 and of December 31, 2020, respectively. The cash was used to settle other invested assets that closed in April 2021 and January 2021, respectively.

~~Other invested assets~~

The Company purchases and sells equipment leases in its investment portfolio. Other invested assets also includes loans held for investments. The Company entered into a fund investment on November 3,2020 for $15.8 million with an additional $3.9 million invested on December 16, 2020. At December 31, 2020, we had a $19.7 million investment in the fund. Effective January of 2021, this investment was repackaged into a special purpose vehicle between American Life and PF Collinwood Holdings, LLC (“PFC”) with American Life owning 100% of the entity. Subsequent to the repackaging of the fund investment into the special purpose vehicle, the classification of the investment remains in other invested assets.

Derivative Instruments

Derivatives are used to hedge the risks experienced in our ongoing operations, such as equity, interest rate, and cash flow risks, or for other risk management purposes, which primarily involve managing liability risks associated with our indexed annuity products and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the Consolidated Balance Sheets.

To qualify for hedge accounting, at the inception of the hedging relationship, we ~~would~~ formally document our designation of the hedge as a cash flow or fair value hedge and our risk management objective and strategy for undertaking the hedging transaction. In this documentation, we ~~would~~ identify how the hedging instrument is expected to hedge the designated risks related to the hedged item, the method ~~that would~~to be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which would be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship.

During the last quarter of 2020, the Company began investing in foreign currency futures to hedge the fluctuations in the foreign currency. The formal documentation and hedge effectiveness was ~~also~~ not completed at the date we entered into those

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futures contracts; therefore, they do not qualify for hedge accounting. The futures fair market values were recorded on our Consolidated Statements of Comprehensive Loss as realized gains or (losses).

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

Equity Securities

Equity securities at ~~March 31,~~September 30, 2021 and 2020 ~~consist~~consisted of ~~mutual funds. Equity securities~~exchange traded funds (“ETFs”). The ETF’s are carried at fair value with the change in fair value recorded through realized gains and losses in Consolidated Statements of Comprehensive Loss. As of September 30, 2021, we held $38.9 million of ETFs and 0 as of December 31, 2020.

Federal Home Loan Bank (FHLB) stock

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

Membership allows access to various funding arrangements to provide a source of additional liquidity. As of September 30, 2021, there were 0 outstanding funding arrangements.

Other Invested Assets

Other invested assets also consists of approximately $19.2 million of various investments. Of this total, approximately $6.9 million are non-registered private funds with underlying assets with characteristics of bonds. The remaining assets are student loan funding pools, joint ventures, other corporate assets, equipment leases and private equity funds. At December 31, 2020, we had a $19.7 million investment in a private fund. Effective January 2021, this investment was repackaged into a special purpose vehicle between American Life and an unaffiliated entity, PF Collinwood Holdings, LLC (“PFC”), with American Life owning 100% of the entity. NaN gain or loss was recognized from the repackaging of PFC. The fair value of PFC as of September 30, 2021 was $14.9 million.

Investment escrow

The Company held in escrow $1.3 million and $3.2 million as of September 30, 2021 and of December 31, 2020, respectively. The cash held at year end was used to purchased mortgages in October 2021 and January 2021, respectively.

Preferred Stock

~~Preferred stock of~~The Company impaired in full a ~~non-affiliated company was purchased for $500,000 during the third quarter of 2019. An impairment analysis of the~~ preferred stock ~~was performed as of June 30, 2020, due to a change in valuation of an invested asset held by the non-affiliated company. The~~ investment ~~asset had collateral supporting the investment that was less than the book value of the asset; therefore, the Company impaired the full amount of $500,000~~ as of December 31, 2020. This was recorded as a reduction of the asset on the Consolidated Balance Sheets of $500 and a corresponding bad debt expense on the Consolidated Statements of Comprehensive Loss. ~~There was no additional impairment of this preferred stock as of March 31, 2021.~~

~~The Company authorized~~In 2020 American Life entered into a series of transactions ~~between American Life and~~with an unaffiliated entity, Ascona Group Holdings Ltd (“AGH”). One of the transactions involved the acquisition of Pound Sterling (“GBP”) ~~3,345,022~~3.6 million of preferred equity in Ascona Group Holdings Limited (“the Preferred Equity”) along with warrants bearing no initial assigned value (the “Warrants” ~~as of September 28, 2020.~~). American Life initially created a special purpose vehicle, ~~called~~ Ascona Asset Holding LLC (“AAH”), to hold the Preferred Equity and Warrants, and later created Ascona Collinwood HoldCo LLC (“ACH”) to be the sole member of AAH. American Life and Crestline Re SP1 own 74% and 26%, respectively, of ACH. We are carrying the preferred equity at a market value of $4.7 million as of September 30, 2021 and $3.9 million of December 31, 2020 and the warrants had a market value of $2.2 million as of September 30, 2021 and 0 value as of December 31, 2020.

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Notes receivable

The Company held in notes receivable as of ~~March 31,~~September 30, 2021 and December 31, 2020, a note carried at fair value of ~~$5,737,608~~$5.9 and ~~$5,665,487,~~$5.7 million, respectively, between American Life and a ~~third-party~~related party. The note receivable has an annual interest rate of 5% which is paid in kind (“PIK”) interest per annum that increases the outstanding note balance. This note was rated BBB+ by a nationally recognized statistical rating ~~organization (“NRSRO”).~~organization. This note ~~is being carried at the fair market value.~~ matures on June 18, 2050.

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. NoNaN 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. As of ~~March 31,~~September 30, 2021 and December 31, 2020, the Company held approximately GBP ~~47,621~~1.1 million and GBP ~~505,349~~500 in ~~several of our~~ custody accounts, respectively. The USD equivalent held was approximately ~~$65,703~~$1.5 million and ~~$690,787,~~$700, respectively. As of ~~March 31,~~September 30, 2021 and December 31, 2020, the Company held approximately EUR ~~527,981~~2.6 million and ~~87,633,~~90, respectively. The USD equivalent held was approximately ~~$620,536~~$3.0 million and ~~$107,000,~~$110, respectively. As of ~~March 31,~~September 30, 2021 and December 31, 2020, we had ~~realized losses of approximately $75,000 and~~ gains of approximately ~~$45,000,~~$290 and approximately $50, respectively, related to the change in the foreign currency exchange rate of the GBP and ~~Euro~~EUR that were recorded in realized (losses) gains on investments in the Consolidated Statements of Comprehensive Loss. The Company had money market investments of approximately ~~$61.2~~$49.1 million and $100.6 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

Deferred acquisition costs

Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to third-party reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred. These costs are capitalized, to the extent recoverable, and amortized over the life of

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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~~DAC 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 of each calendar year unless events occur which require an immediate review. The Company determined that no events occurred in the ~~three~~nine months ended ~~March 31,~~September 30, 2021 that suggest a review should be undertaken. The Company performed a recoverability analysis during the fourth quarter of 2020 and determined that ~~all~~no material impairment existed in connection with recovery of the DAC balances ~~were recoverable as of December 31, 2020.~~.

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 ~~$12,334~~$13 and ~~$10,316~~$13 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Depreciation expense totaled $37 and $35 for the nine months ended September 30, 2021 and 2020, respectively. Accumulated depreciation totaled ~~$1,035,668~~$1.1 and ~~$1,023,334~~$1.0 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

During the first quarter of 2021, the Company began the implementation of a new cloud-based enterprise resource planning and enterprise performance management system. The Company expects to capitalize an estimated $850 of related consultation and support expenses relating to this system and will begin amortizing these fees over a period of five years from the date of implementation. The useful life of the system has been estimated at five years in accordance with guidance in ASC 350,

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Intangibles – Goodwill and Other (as updated by ASU 2018-15). As of September 30, 2021, the Company had capitalized approximately $815 of expenses incurred. The expected date of implementation is first quarter 2022.

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~~nine months ended ~~March 31,~~September 30, 2021 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~~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~~recoverables as appropriate. There were no0 allowances established as of ~~March 31,~~September 30, 2021 or December 31, 2020.

We expect to reinsure substantially all of our new insurance policies with a variety of reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral, and other administration fees. We believe this strategy will help preserve American Life’s capital while supporting its growth because American Life will have lower capital requirements when its business is reinsured due to lower overall financial exposure versus retaining the insurance policy business itself. See Note 89 below for further discussion of our reinsurance activities.

There are two main categories of reinsurance transactions: 1) “indemnity,” where we cede a portion of our risk but retain the legal responsibility to our policyholders should our reinsurers not meet their financial obligations; and 2) “assumption,”

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where we transfer the risk and legal responsibilities to the reinsurers. The reinsurers are required to acquire the appropriate regulatory and policyholder approvals to convert indemnity policies to assumption policies.

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

As indicated above under “Nature of ~~operations,~~Operations,” Midwest formed Seneca Re in early 2020. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re and as of ~~December 31, 2020,~~September 30, 2021, Seneca Re has one incorporated cell, Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) which was consolidated in our financial statements.

~~Effective December 8, 2020,~~ American Life entered into a novation agreement with SRC2 and Crestline Re SPC, ~~an exempted segregated portfolio company incorporated under the laws of the Cayman Islands,~~ for and on behalf of Crestline Re SP1, ~~an exempted segregated portfolio company of Crestline Re SPC,~~ under which the above-described reinsurance, trust and related asset management agreements were novated and replaced with substantially similar agreements entered into by American Life and Crestline Re SP1.

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

American Life currently has treaties with several third-party reinsurers and one related party reinsurer. Of the third-party reinsurers, only ~~three~~four have ~~funds withheld~~FW or ~~modified coinsurance~~Modco provisions. In a ~~modified coinsurance arrangement,~~Modco agreement, the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a ~~funds withheld coinsurance~~FW agreement, assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurers, to reduce the potential credit risk. Under those provisions with third-party reinsurers, the assets backing the treaties are maintained by American Life as investments but the assets and total returns or losses on the investments are owned by the reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in Comprehensive Loss and Note 5 below. ~~As a result of recent market volatility, assets~~

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately ~~$2.5~~$2.0 million and $2.9 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the unrealized gains on the assets held by American Life were offset by ~~a gain~~gains in the embedded derivative of ~~$400,000~~$900 and ~~a loss~~losses of $2.9 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. We account for this unrealized ~~loss~~gain (loss) pass-through by recording equivalent realized ~~losses~~gains or (losses) on our Consolidated Statements of Comprehensive Loss and in amount payable to our third-party reinsurers on the Consolidated Balance Sheets. For further discussion see Note 5. Derivative Instruments below.

Benefit reserves

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

Policy claims

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

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Deposit-type contracts

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

Deferred gain on coinsurance transactions

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

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

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the years before ~~2016.~~2017. 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.

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.

Revenues from ceding commissions on traditional life and annuity products are deferred on the Consolidated Balance Sheets and amortized over the life of the policies.

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

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.

Revenues on service fees and third-party administration fees are recorded as income when incurred.

Comprehensive ~~loss~~Loss

Comprehensive ~~loss~~Loss is comprised of net ~~(loss) income~~loss and other comprehensive ~~income (loss).~~loss. Other comprehensive ~~income (loss)~~loss includes unrealized gains and losses from ~~marketable securities~~fixed maturities classified as available for sale and unrealized gains and losses from foreign currency transactions, net of applicable taxes. American Life has treaties with several third-party reinsurers that have ~~funds withheld~~FW and ~~modified coinsurance~~Modco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but are owned by the third-party reinsurers, thus, the total return on the asset portfolio belongs to the third-party reinsurers. Under GAAP this is considered an embedded derivative as discussed above under “Reinsurance” and in Note 5 below. ~~As a result of recent market volatility, the~~

The investments carried by American Life for the third-party reinsurers contained unrealized gains of approximately ~~$2.5~~$2.0 million and $2.9 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

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The terms of the contracts with the third-party reinsurers provided that unrealized gains and losses on the portfolios accrue to the third-party reinsurers. We account for ~~this~~a gain as a pass through to the third-party reinsurer by booking equivalent embedded derivative realized losses or gains in our Consolidated Statements of Comprehensive Loss. Accordingly, ~~as of March 31,~~for the three months ended September 30, 2021 and 2020, such gains of ~~$400,000~~$1.3 million and 4.1 million, respectively, were recorded. For the nine months ended September 30, 2021 and 2020, such realized gains of ~~$23.2~~$1.3900 and $4.14 million, respectively, were recorded. The remaining investments retained by American Life as of ~~March 31,~~September 30, 2021 and December 31, 2020, had unrealized gains of approximately ~~$5.9~~$5.6 million and $5.1 million, respectively, that included unrealized gains from assets held for SRC1. For further discussion see Note 5. Derivative Instruments below.

Basic loss per share for the three months ended September 30, 2021 and 2020 was ($0.82) and ($2.04), respectively, which included the aforementioned gain of $1.3 million and 4.1 million, respectively. Basic (loss) earnings per share for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020 was ($~~0.43)~~2.58) and ~~$10.55,~~($0.22), respectively, which included the aforementioned gain of ~~$400,000~~$900 and ~~$23.2~~of $4.4 million, respectively. Basic loss per share for the three months ended ~~March 31,~~September 30, 2021 and 2020 without the aforementioned loss was ($0.46) and ($0.53), respectively. Basic loss per share for the nine months ended September 30, 2021 and 2020 without the aforementioned gain was ($~~0.55)~~2.56) and ($~~0.83)~~1.98), respectively. See Note 7 for further information.

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Reclassifications

Certain reclassifications have been made on the Statements of Comprehensive Loss for the three and nine months ended ~~March 31,~~September 30, 2020. These reclassifications do not impact the overall ~~Net~~net loss or ~~Net~~net loss per common shares line items of the Consolidated Statement of Comprehensive Loss for the three and nine months ended ~~March 31, 2020.~~September 30, 2021.

Adoption of New Accounting Standards

In January 2020, the FASB issued ASU No. 2020-1, Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. This amendment was adopted effective January 1, ~~2021. As of March 31,~~ 2021 ~~the Company does not have any equity method transactions or options to purchases securities that would fall under this update; therefore, there is~~with no impact to ~~the Company at this time.~~our financial statements.

Future adoption of New Accounting Standards

In November 2019, the FASB issued ASU No. 2019-10, Financials Services Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (topic 842). The ~~board~~FASB developed a philosophy to extend and simplify how effective dates are staggered between larger public companies and all other entities. For business entities that meet the definition of a smaller reporting company (“SRC”), the amendments in ASU 2018-12 are effective for fiscal years beginning after December 15, ~~2021.~~ 2023.

In December 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09, Financial Services —Insurance (Topic 944). The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new standard becomes effective after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 for companies eligible as smaller reporting companies. Early application of the amendments in Update 2018-12 is permitted. We are unable to quantify the impact of the pending adoption as we are still in the process of evaluating the standard.

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 FASB’s attention by stakeholders to clarify the guidance in the amendments in ASU 201613, 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 32620. Under ASU 201613, 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. In November 2019, the FASB issued ASU No. 2019-10, Financials Services Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (topic 842). The FASB developed a philosophy to extend and simplify how effective dates are staggered between larger public companies and all other entities. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

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)

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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.

~~In December 2018, the FASB issued ASU No. 2018-12,~~ ~~Financial Services—Insurance~~ ~~(Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09,~~ ~~Financial Services —Insurance~~ (Topic 944). The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The new standard becomes effective after December 15, 2023 , and interim periods within fiscal years beginning after December 15, 2024 for companies eligible as smaller reporting companies. Early application of the amendments in Update 2018-12 is permitted.

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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 2. Assets and Liabilities Associated with Business 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”), an unaffiliated Texas domiciled stock insurance company. The Reinsurance Agreement ~~provides~~provided that American Life ~~will~~would cede and Unified ~~will~~would agree 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 (“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 July 1, 2018.

As of ~~March 31,~~September 30, 2021 and December 31, 2020, 90% and ~~81%~~89%, respectively, of the indemnity policies were converted to assumptive policies thereby releasing American Life from all of its legal obligations related to those policies.

The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was ~~$3,500,000~~$3.5 million (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the statutory reserves and liabilities 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 is recognized in our Consolidated Statements of Comprehensive ~~Loss as of March 31,~~Loss. Ceding Commission amortized for the three months ended September 30, 2021 and 2020 ~~were $7,628~~was $8 and ~~$67,451, respectively.~~

~~Table~~$17, respective. Ceding Commission amortized for the nine months ended September 30, 2021 and 2020 was $28 and $296, respectively, and is recognized in our Consolidated Statements of ~~Contents~~Comprehensive Loss.

Our Consolidated Balance Sheets were required to be restated under GAAP 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 ~~March 31,~~September 30, 2021 and as of December 31, 2020:

As of March 31,

As of December 31,


2021

2020
Carrying amounts of major classes of assets included as part of discontinued operations:




Policy loans

$
33,614

$
33,161
Reinsurance recoverables

1,057,488

1,061,979
Premiums receivable

31,379

23,643
Total assets held for sale in the Consolidated Balance Sheets

$
1,122,481

$
1,118,783

Carrying amounts of major classes of liabilities included as part of discontinued operations:




Benefit reserves

$
600,534

$
594,710
Policy claims

24,029

35,302
Deposit-type contracts

489,166

482,966
Advance premiums

335

71
Accounts payable and accrued expenses

1,618

1,263
Total liabilities held for sale in the Consolidated Balance Sheets

$
1,115,682

$
1,114,312


	As of September 30,		As of December 31,
(In thousands)	2021		2020
Carrying amounts of major classes of assets included as part of discontinued operations:
Policy loans	$	28	$	33
Reinsurance recoverables		1,017		1,062
Premiums receivable		20		24
Total assets held for sale in the Consolidated Balance Sheets	$	1,065	$	1,119

Carrying amounts of major classes of liabilities included as part of discontinued operations:
Benefit reserves	$	567	$	595
Policy claims		36		35
Deposit-type contracts		456		483
Accounts payable and accrued expenses		1		1
Total liabilities held for sale in the Consolidated Balance Sheets	$	1,060	$	1,114

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Note 3. Purchase of Non-controlling Interest

On April 2, 2019, Midwest entered into a contract to acquire a 51% controlling ownership in 1505 ~~Capital LLC (“1505 Capital”), a Delaware limited liability company.~~Capital. 1505 Capital was organized to provide financial and investment advisory and management services to clients and any related investment, trading, or financial activities. Midwest purchased for $1.00 its 51% ownership and on June 15, 2020, purchased the remaining 49% ownership in 1505 Capital for ~~$500,000. As of March 31, 2021 we had no noncontrolling interest and as of March 31, 2020, the non-controlling interest was carried at $186,977, respectively.~~$500.

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Note 4. Investments

The amortized cost and estimated fair value of investments as of ~~March 31,~~September 30, 2021 and December 31, 2020 were as follows:


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated		Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
March 31, 2021:
(In thousands)									Cost		Gains		Losses		Fair Value
September 30, 2021:
Fixed maturities:
U.S. government obligations	$	2,050,526	$	72,518	$	3,941	$	2,119,103	$	1,931	$	54	$	4	$	1,981
Foreign governments		1,601,810		—		59,622		1,542,188
Mortgage-backed securities		25,177,296		801,599		150,316		25,828,579		54,267		989		11		55,245
Collateralized loan obligations		294,652,723		7,445,031		836,415		301,261,339		307,082		4,026		455		310,653
States and political subdivisions -- general obligations		106,228		11,102		—		117,330		106		11		—		117
States and political subdivisions -- special revenue		5,288,295		839,535		4,703		6,123,127		5,140		1,091		1		6,230
Trust preferred		2,218,142		—		65,604		2,152,538		16,501		85		189		16,397
Corporate		153,045,355		1,350,165		470,690		153,924,830		264,456		2,454		752		266,158
Total fixed maturities	$	484,140,375	$	10,519,950	$	1,591,291	$	493,069,034	$	649,483	$	8,710	$	1,412	$	656,781
Mortgage loans on real estate, held for investment		109,776,321		—		—		109,776,321		168,184		—		—		168,184
Derivatives		12,582,719		2,021,763		5,131,084		9,473,398		16,559		5,357		4,654		17,262
Federal Home Loan Bank (FHLB) stock										500		—		—		500
Equity securities		42,089,014		4,152		—		42,093,166		38,988		—		78		38,910
Other invested assets		25,606,108		—		—		25,606,108		45,088		3,051		1,118		47,021
Investment escrow		3,317,043		—		—		3,317,043		1,307		-		—		1,307
Preferred stock		4,300,591		—		—		4,300,591		4,683		2,251		—		6,934
Notes receivable		5,737,608		—		—		5,737,608		5,885		—		—		5,885
Policy loans		48,551		—		—		48,551		55		—		—		55
Total investments	$	687,598,330	$	12,545,865	$	6,722,375	$	693,421,820	$	930,732	$	19,369	$	7,262	$	942,839

December 31, 2020:
Fixed maturities:
U.S. government obligations		5,744,221	$	426,427	$	5,665		6,164,983		5,744	$	426	$	6		6,164
Mortgage-backed securities		14,638,299		276,219		157,104		14,757,414		14,638		276		157		14,757
Asset-backed securities		216,500,672		5,623,083		350,146		221,773,609		216,501		5,623		350		221,774
States and political subdivisions -- general obligations		106,528		10,802		—		117,330		107		11		—		118
States and political subdivisions -- special revenue		5,293,365		908,986		147		6,202,204		5,293		909		—		6,202
Trust preferred		2,218,142		66,674		—		2,284,816		2,218		67		—		2,285
Corporate		124,654,841		1,379,513		171,352		125,863,002		124,655		1,379		171		125,863
Total fixed maturities		369,156,068		8,691,704		684,414		377,163,358		369,156		8,691		684		377,163
Mortgage loans on real estate, held for investment		94,989,970		—		—		94,989,970		94,990		—		—		94,990
Derivatives		8,532,252		3,257,069		428,287		11,361,034		8,532		3,257		428		11,361
Other invested assets		21,897,130		—		—		21,897,130		21,897		—		—		21,897
Investment escrow		3,174,047		—		—		3,174,047		3,174		—		—		3,174
Preferred stock		3,897,980		—		—		3,897,980		3,898		—		—		3,898
Notes receivable		5,665,487		—		—		5,665,487		5,666		—		—		5,666
Policy loans		45,573		—		—		45,573		46		—		—		46
Total investments	$	507,358,507	$	11,948,773	$	1,112,701	$	518,194,579	$	507,359	$	11,948	$	1,112	$	518,195

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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 ~~March 31,~~September 30, 2021 and December 31, 2020.

March 31, 2021

December 31, 2020

Carrying

Carrying


Value

Percent

Value

Percent

AAA and U.S. Government

$
16,259,820

3.3
%
$
3,070,750

0.8
%
AA

60,286,560

12.2

5,818,163

1.5

A

8,295,924

1.7

49,445,266

13.1

BBB

367,244,456

74.5

247,635,730

65.7

Total investment grade

452,086,760

91.7

305,969,909

81.1

BB and other

40,982,274

8.3

71,193,449

18.9

Total

$
493,069,034

100.0
%
$
377,163,358

100.0
%


	September 30, 2021				December 31, 2020
	Carrying				Carrying
(In thousands)	Value		Percent		Value		Percent
AAA and U.S. Government	$	2,892	0.4	%	$	3,071	0.8	%
AA		573	0.1			5,818	1.5
A		144,482	22.0			49,445	13.1
BBB		386,980	58.9			247,636	65.7
Total investment grade		534,927	81.4			305,970	81.1
BB and other		121,854	18.6			71,193	18.9
Total	$	656,781	100.0	%	$	377,163	100.0	%

Reflecting the quality of securities maintained by us, ~~91.7~~as of September 30, 2021 and December 31, 2020, 81.4% and 81.1%, respectively, of all fixed maturity securities were investment grade.

The following table summarizes, for all fixed maturity securities in an unrealized loss position as of ~~March 31,~~September 30, 2021 and December 31, 2020, the estimated fair value, pre-tax gross unrealized loss, and number of securities by consecutive months they have been in an unrealized loss position.

March 31, 2021

December 31, 2020

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

$
181,710

$
856

1

$
54,910

$
180

2
Foreign governments

1,542,188

59,622

2

—

—

—
Mortgage-backed securities

6,199,138

150,316

8

5,707,617

157,104

5
Collateralized loan obligations

49,601,561

783,611

81

14,878,370

246,969

19
States and political subdivisions -- special revenue

773,149

4,703

13

5,584

147

1
Trust preferred

2,152,538

65,604

3

—

—

—
Corporate

12,024,859

411,096

18

3,859,616

104,262

7
Greater than 12 months:












U.S. government obligations

75,560

3,085

3

119,700

5,485

4
Collateralized loan obligations

2,906,839

52,804

3

7,020,479

103,177

6
Corporate

411,218

59,594

4

287,473

67,090

3
Total fixed maturities

$
75,868,760

$
1,591,291

136

$
31,933,749

$
684,414

47


	September 30, 2021						December 31, 2020
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
(In thousands)	Fair Value		Loss		Securities⁽¹⁾		Fair Value		Loss		Securities⁽¹⁾
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	105	$	1		1	$	55	$	—		2
Mortgage-backed securities		5,688		11		7		5,708		157		5
Collateralized loan obligations		81,972		455		101		14,878		247		19
States and political subdivisions -- special revenue		124		1		3		6		—		1
Trust preferred		9,844		189		6		—		—		—
Corporate		72,073		731		50		3,860		104		7
Greater than 12 months:
U.S. government obligations		73		3		3		120		6		4
Collateralized loan obligations		—		—		—		7,020		103		6
Corporate		330		21		3		287		67		3
Total fixed maturities	$	170,209	$	1,412		174	$	31,934	$	684		47

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

Our securities positions resulted in a gross unrealized loss position as of ~~March 31,~~September 30, 2021 that was greater than the gross unrealized loss position at December 31, 2020 due to a decline in ~~the market.~~market values. We performed an analysis and determined that there were no indicators that we should doperform a cash flow testing analysis and no0 impairment was required as of ~~March 31,~~September 30, 2021. During the impairment analysis performed atas of December 31, 2020 one of our assets had been in a loss position for over two years and had a decrease in its credit rating since 2019; ~~therefore, the~~ cashflow testing on that security determined an impairment existed so we ~~had~~recorded an impairment of ~~$35,000 recorded.~~$35. As of ~~March 31,~~September 30, 2021, management ~~believes~~believed the Company ~~will~~would fully recover its cost basis in the remaining securities and management ~~does~~did not have the intent to sell, nor iswas it more likely than not that the Company will be required to sell, such securities until they recover or mature.

The majority of the unrealized losses are related to our collateralized loan obligations (“CLOs”). CLOs are typically illiquid and are intended to be held to maturity. ~~Thus, risk of loss is minimal.~~ The Company has monitored the underlying unrealized

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losses and believes they pose minimal risk of material loss in the long-term due to the quality of the underlying ~~credits~~credits. The loss on the CLOs as of ~~March 31,~~September 30, 2021 and December 31, 2020 were related to interest rates and not credit related losses.

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See the discussion above under “Comprehensive loss” in Note 1 regarding unrealized gains/losses on investments that are owned by our reinsurers and the corresponding offset carried as a gain in the associated embedded ~~derivative.~~derivatives.

The Company purchases and sells equipment leases in its investment portfolio. As of ~~March 31,~~September 30, 2021, the Company owned several leases. An impairment analysis was completed on the only non-performing lease in the portfolio inas of June 30, 2020 and it was determined that the underlying collateral value was substantially less than the outstanding remaining lease payments of $3.6 million. The Company ~~in June 2020~~ recognized a valuation allowance as of ~~$776,973~~June 30, 2020 of $777 on that asset. During March 2021, the non-performing asset was sold for a loss of $2.4 million. The valuation allowance was released and a loss of $2.4 million was recognized; however, this asset was held on behalf of a third-party reinsurer. Therefore, due to the terms of the reinsurance agreements, the loss was passed through to the third-party reinsurer by reducing its investment income earned.

The amortized cost and estimated fair value of fixed maturities as of ~~March 31,~~September 30, 2021, 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. No securities due in the next year are in an unrealized loss position, further supporting management’s decision not to recognize an other-than-temporary impairment.

Amortized

Estimated

Cost

Fair Value
Due in one year or less

$
39,416,008

$
39,490,973
Due after one year through five years

81,750,979

82,444,187
Due after five years through ten years

123,414,500

126,327,202
Due after ten years through twenty years

189,358,612

193,167,354
Due after twenty years

50,200,276

51,639,318

$
484,140,375

$
493,069,034


	Amortized		Estimated
(In thousands)	Cost		Fair Value
Due in one year or less	$	28,636	$	28,713
Due after one year through five years		121,140		122,389
Due after five years through ten years		380,355		384,055
Due after ten years through twenty years		67,401		68,387
Due after twenty years		48,939		50,332
No maturity		3,012		2,905
	$	649,483	$	656,781

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. As of ~~March 31,~~September 30, 2021 and December 31, 2020, these required deposits had a total amortized cost of ~~$3,425,344~~$3.2 and ~~$3,361,830~~$3.5 million and fair values of ~~$3,534,064~~$3.2 million and ~~$3,486,914,~~$3.7, respectively.

Mortgage loans consist of the following:

March 31, 2021

December 31, 2020
Industrial

$
—

$
1,250,000
Commercial mortgage loan - multi-family

56,992,974

66,916,151
Other

52,783,347

26,823,819
Total mortgage loans

$
109,776,321

$
94,989,970


(In thousands)		September 30, 2021		December 31, 2020
Industrial	$	—	$	1,250
Commercial mortgage loan - multi-family		70,210		66,916
Other		97,974		26,824
Total mortgage loans	$	168,184	$	94,990

~~Geographic Locations:~~

As of ~~March 31,~~September 30, 2021, the commercial mortgages loans were secured by properties geographically dispersed ~~throughout the United States~~ (with the largest concentrations in ~~New York (24%), Pennsylvania (12%), California (12%)) and included~~ loans secured by properties in ~~Europe (11%~~Delaware (36%) New York (29%), Pennsylvania (6%), Arizona (5%), California (4%), and non-US (8%)). As of December 31, 2020, the commercial mortgages loans were secured by properties geographically dispersed ~~throughout the United States~~ (with the largest concentrations in New York (28%), Pennsylvania (14%), California (14%)) and ~~included loans secured by properties in~~ Europe (12%)).

The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances.


(In thousands)	September 30, 2021		December 31, 2020
Loan-to-Value Ratio:
0%-59.99%	$	83,284	$	49,280
60%-69.99%		18,126		22,349
70%-79.99%		66,774		23,361
80% or greater		—		—
Total mortgage loans	$	168,184	$	94,990

Table of Contents

~~Commercial Mortgage Loans~~

March 31, 2021

December 31, 2020
Loan-to-Value Ratio:

0%-59.99%
$
62,245,607

$
49,279,601
60%-69.99%

10,123,145

22,349,295
70%-79.99%

15,724,612

23,361,074
80% or greater

21,682,957

—
Total mortgage loans
$
109,776,321

$
94,989,970

The components of net investment income for the three and nine months ended ~~March 31,~~September 30, 2021 and ~~year ended December 31,~~ 2020 ~~was~~were as follows:


	Three months ended March 31,				Three months ended September 30,				Nine months ended September 30,
	2021		2020
(In thousands)					2021		2020		2021		2020
Fixed maturities	$	3,050,777	$	1,167,614	$	6,373	$	322	$	13,103	$	1,364
Mortgage loans		173,777		2,524		938		81		1,479		81
Other		55,813		—
Other invested assets						74		63		225		63
Other interest income						-		-		266		—
Gross investment income		3,280,367		1,170,138		7,385		466		15,073		1,508
Less: investment (expenses) refund		(393,004)		70,840
Less: investment expenses						(1,189)		(32)		(2,770)		(231)
Investment income, net of expenses	$	2,887,363	$	1,240,978	$	6,196	$	434	$	12,303	$	1,277

Proceeds for the three months ended ~~March 31,~~September 30, 2021 and 2020 from sales of ~~investments~~fixed maturities classified as available-for-sale were ~~$61,831,341~~$72.0 million and ~~$3,852,943,~~$5.6 million, respectively. Gross gains of ~~$572,807~~$376 and ~~$149,548~~$154 and gross losses of ~~$166,386~~$262 and ~~$24,832~~$45 were realized on those sales during the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Proceeds for the nine months ended September 30, 2021 and 2020 from sales of fixed maturities classified as available-for-sale were $204.5 million and $24.1 million, respectively. Gross gains of $2.2 million and $1.3 million and gross losses of $454 and $76 were realized on those sales during the nine months ended September 30, 2021 and 2020, respectively.

The proceeds included those assets associated with the third-party reinsurers. The gains and losses relate only to the assets retained by American Life.

Note 5. Derivative Instruments

The Company enters into derivative instruments to manage risk, primarily equity, interest rate, credit, foreign currency and market volatility.

The following is a summary of the notional amount, number of contracts and fair value of our asset and liability derivatives of ~~March 31,~~September 30, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

Location in the

Consolidated

Derivatives Not Designated

Statement of
Notional

Number of

Estimated

Notional

Number of

Estimated
as Hedging Instruments

Balance Sheets
Amount

Contracts

Fair Value

Amount

Contracts

Fair Value
Equity-indexed options

Derivatives
$
369,592,465

328

$
8,769,901

$
272,853,853

252

$
11,361,034
Equity-indexed
embedded derivatives

Deposit-type
contracts

364,115,193

2,826

89,030,443

311,964,195

2,101

84,501,492

September 30, 2021

December 31, 2020

Location in the

(In thousands)

Consolidated

Derivatives Not Designated

Statement of

Notional

Number of

Estimated

Notional

Number of

Estimated

as Hedging Instruments

Balance Sheets

Amount

Contracts

Fair Value

Amount

Contracts

Fair Value

Equity-indexed options

Derivatives

481,039

456

14,736

272,854

252

11,361

Equity-indexed
embedded derivatives

Deposit-type
contracts

487,781

3,401

107,396

311,964

2,101

84,501

For December 31, 2020 reporting, the methodology used to bifurcate the GAAP liability into host contract and embedded derivative was refined. In prior reporting periods a simplified approach was followed given the size of the block, which set the value of the embedded derivative equal to the market value of the options held to provide for the current indexed crediting obligation. At December 31, 2020, the value of the embedded derivative now considers all amounts projected to be paid in excess of the minimum guarantee (the amounts payable without any indexation increases) over future periods. The host contract reflects the minimum guaranteed values. For informational purposes only, the GAAP liability at December 31, 2020 under the old approach would have been $320,306,031, split as $308,608,885 host contract and $11,697,146 embedded derivative.

~~Table of Contents~~

The following table summarizes the impact of ~~those embedded derivatives~~unrealized (gains) on the investments related to the ~~funds withheld provision~~FW and Modco provisions where the total return on the asset portfolio is passed through to the ~~third-party-reinsurers:~~third-party reinsurer as embedded derivatives:

March 31, 2021

December 31, 2020

Book Value

Market Value

Total Return

Book Value

Market Value

Total Return
Portfolio

Assets

Assets

Swap Value

Assets

Assets

Swap Value
Ironbound

$
99,580,060

$
100,714,751

$
(1,134,691)

$
98,714,156

$
99,747,812

$
(1,033,656)
SDA

30,008,920

30,177,243

(168,323)

27,224,279

27,479,836

(255,557)
US Alliance

36,986,356

37,401,248

(414,892)

35,707,207

36,360,501

(653,294)
Crestline Re SP1

94,802,319

95,590,421

(788,102)

62,162,766

63,130,867

(968,101)
Total

$
261,377,655

$
263,883,663

$
(2,506,008)

$
223,808,408

$
226,719,016

$
(2,910,608)


	September 30, 2021						December 31, 2020
(In thousands)	Book Value		Market Value		Total Return		Book Value		Market Value		Total Return
Portfolio	Assets		Assets		Swap Value		Assets		Assets		Swap Value
American Republic Insurance Company	$	43,537	$	43,722	$	(185)	$	—	$	—	$	—
Crestline Re SP1		145,882		146,293		(411)		62,163		63,131		(968)
Ironbound		156,775		157,881		(1,106)		98,714		99,748		(1,034)
Ascendent Re		54,085		54,281		(196)		27,224		27,480		(256)
US Alliance		44,024		44,141		(117)		35,707		36,360		(653)
Total	$	444,303	$	446,318	$	(2,015)	$	223,808	$	226,719	$	(2,911)

As of ~~March 31,~~September 30, 2021 and December 31, 2020, the total return swap value was recorded as ~~a decrease~~unrealized gains of ~~$2,506,008~~$2.0 million and ~~an increase of $2,910,608,~~$2.9 million, respectively. The ~~decrease~~increase in our ~~unrealized~~realized gain of ~~$404,600~~$900 resulted in ~~a decrease~~an increase in our amounts recoverable from reinsurers on our Consolidated Balance Sheets since December 31, 2020 and a realized gain of ~~$404,600~~$900 and ~~realized~~ loss

Table of ~~$2,910,608,~~Contents

of $2.9 million, for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively, on our Consolidated Statements of Comprehensive Loss.

Note 6. Fair Values of Financial Instruments

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

●

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

●

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

●

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

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

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

Level 1 measurements

Cash equivalents: ~~The carrying value of~~Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents ~~and short-term investments approximate~~as Level 1 measurements in the ~~fair value because of the short maturity of the instruments.~~table below.

~~Table of Contents~~

Level 2 measurements

~~Cash:~~ ~~The carrying value of cash approximates the fair value because of the short maturity of the instruments.~~

Investment escrow: The Company had ~~one asset in~~ escrow ~~in escrow~~funds of as of ~~March 31,~~September 30, 2021 and December 31, 2020, ~~that was~~of $1.3 million and $3.2 million, respectively. These escrow funds were used to settle a mortgage ~~loan~~loans that did not close until ~~April~~January 2021 and ~~January 2021,respectively.~~October 2021. The ~~asset~~money held in escrow at ~~March~~September 31, 2021 and December 31, 2020 was carried at cost.

Fixed maturity securities: Fixed maturity securities are recorded at fair value on a recurring basis utilizing a third-party pricing source such as the Clearwater AVS+ SVO pricing. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services. For the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and year ended December 31, 2020, 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.

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

Equity securities: Equity securities at ~~March 31,~~September 30, 2021 ~~and 2020~~ consist of ~~mutual funds. Equity~~exchange traded funds (“ETFs”). The ETF’s are considered equity securities ~~are carried~~and recorded at fair value on a recurring basis utilizing a third-party pricing source with the change

Table of Contents

in fair value recorded through realized gains and losses on the statement of operations. As of September 30, 2021 we had purchased $38.9 million of ETFs and none as of December 31, 2020.

Notes receivable: The Company held in notes receivable as of ~~March 31,~~September 30, 2021 and December ~~30,~~31, 2020, a note of ~~$5,737,608~~$5.9 million and ~~$5,665,487,~~$5.7 million, respectively, that includes paid-in-kind (“PIK”) ~~interest,~~interest. The note receivable is between American Life and ~~a third-party~~Chelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a ~~NRSRO.~~nationally recognized statistical rating organization (“NRSRO”). This note is being carried at ~~the~~ fair market value.

Level 3 measurements

Fixed maturity securities: The carrying value of assets classified as fixed maturity securities are generally carried at fair value. The Company invests in assets that are classified as fixed maturity securities that include term loans where the cost of those securities ~~are~~is considered their fair value; therefore, these assets are classified as Level 3 within the fair value hierarchy.

Mortgage loans on real estate, held for investment: Mortgage loans are generally stated at principal amounts outstanding, net of deferred expenses and allowance for loan loss. The Company determined that the net principal amount represents the fair value of the mortgages. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on an effective yield basis over the term of the loan. Impaired loans are generally carried on a non-accrual status. Loans are ordinarily placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due.

Other invested assets:~~The carrying value of assets classified as other investments approximates fair value.~~ Other invested assets include equipment leases, ~~a fund investment,~~non-registered private funds with underlying assets with characteristics of bonds, student loan funding pools, joint ventures, other corporate assets, and ~~loans held for investments.~~private equity funds. The inputs used to measure the fair value of these assets are classified as Level 3 within the fair value hierarchy.

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

Preferred stock: The preferred stock ~~investment was~~investments are recorded at ~~its~~their principal value as there ~~was~~were no traded market values for ~~this stock.~~these stocks. As of September 30, 2021, the principal value was $4.7 million and the fair market value of the warrants was $2.2 million.

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

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

~~Table of Contents~~

Embedded derivative for equity-indexed contracts: The Company has embedded derivatives in its FIA policyholder obligations. These embedded derivatives are ~~being~~ carried at the fair market value as of ~~March 31,~~September 30, 2021 and December 31, 2020. The fair value of the embedded derivative component of our FIA obligation is estimated at each valuation date by projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and discounting the excess of projected contract value amounts at the applicable risk-free interest rates adjusted for our nonperformance risk related to those obligations. The projections of FIA policy contract values are based on best estimate assumptions for future policy growth and decrements including lapse, partial withdrawal and mortality rates. The best estimate assumptions for future policy growth include assumptions for expected index credits on the next policy anniversary date which are derived from fair values of the underlying equity call options purchased to fund such index credits and the present value of expected costs of annual call options purchased in the future by us to fund index credits beyond the next policy anniversary. The projections of minimum

Table of Contents

guaranteed contract values include the same best estimate assumptions for policy decrements as assumptions used to project policy contract values.

~~Table of Contents~~

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value ~~on a recurring basis~~ as of ~~March 31,~~September 30, 2021 and December 31, 2020.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable		Estimated
	Markets		Inputs		Inputs		Fair
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Value
September 30, 2021
Financial assets
Fixed maturity securities:
U.S. government obligations	$	—	$	1,981	$	—	$	1,981
Mortgage-backed securities		—		55,245		—		55,245
Collateralized loan obligations		—		310,653		—		310,653
States and political subdivisions — general obligations		—		117		—		117
States and political subdivisions — special revenue		—		6,230		—		6,230
Trust preferred		—		16,397		—		16,397
Corporate		—		36,205		229,953		266,158
Total fixed maturity securities		—		426,828		229,953		656,781
Mortgage loans on real estate, held for investment		—		—		168,184		168,184
Derivatives		—		17,262		—		17,262
Equity securities		—		38,910		—		38,910
Other invested assets		—		—		47,021		47,021
Investment escrow		—		1,307		0		1,307
Federal Home Loan Bank (FHLB) stock		—		—		500		500
Preferred stock		—		—		6,934		6,934
Notes receivable		—		5,885		—		5,885
Policy loans		—		—		55		55
Total Investments	$	—	$	490,192	$	452,647	$	942,839
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	107,396		107,396

December 31, 2020
Fixed maturity securities:
U.S. government obligations	$	—	$	6,164	$	—	$	6,164
Mortgage-backed securities		—		14,757		—		14,757
Collateralized loan obligations		—		221,774		—		221,774
States and political subdivisions — general obligations		—		118		—		118
States and political subdivisions — special revenue		—		6,202		—		6,202
Trust preferred		—		2,285		—		2,285
Corporate		—		18,609		107,254		125,863
Total fixed maturity securities		—		269,909		107,254		377,163
Mortgage loans on real estate, held for investment		—		—		94,990		94,990
Derivatives		—		11,361		—		11,361
Other invested assets		—		—		21,897		21,897
Investment escrow		—		3,174		—		3,174
Preferred stock		—		—		3,898		3,898
Notes receivable		—		5,666		—		5,666
Policy loans		—		—		46		46
Total Investments	$	—	$	290,110	$	228,085	$	518,195
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	84,501		84,501

Significant

Quoted

Other

Significant

In Active

Observable

Unobservable

Estimated

Markets

Inputs

Inputs

Fair


(Level 1)

(Level 2)

(Level 3)

Value
March 31, 2021








Financial assets

Fixed maturity securities:








U.S. government obligations

$
—

$
2,119,103

$
—

$
2,119,103
Foreign governments

1,542,188

1,542,188
Mortgage-backed securities

—

25,828,579

—

25,828,579
Collateralized loan obligations

—

301,261,339

—

301,261,339
States and political subdivisions — general obligations

—

117,330

—

117,330
States and political subdivisions — special revenue

—

6,123,127

—

6,123,127
Trust preferred

—

2,152,538

—

2,152,538
Corporate

—

30,912,098

123,012,732

153,924,830
Total fixed maturity securities

—

370,056,302

123,012,732

493,069,034
Mortgage loans on real estate, held for investment

—

—

109,776,321

109,776,321
Derivatives

—

9,473,398

—

9,473,398
Equity securities

—

42,093,166

—

42,093,166
Other invested assets

—

—

25,606,108

25,606,108
Investment escrow

—

3,317,043

—

3,317,043
Preferred stock

—

—

4,300,591

4,300,591
Notes receivable

—

5,737,608

—

5,737,608
Policy loans

—

—

48,551

48,551
Total Investments

$
—

$
430,677,517

$
262,744,303

$
693,421,820
Financial liabilities

Embedded derivative for equity-indexed contracts

$
—

$
—

$
89,030,443

89,030,443

December 31, 2020







Fixed maturity securities:








U.S. government obligations

$
—

$
6,164,983

$
—

$
6,164,983
Mortgage-backed securities

—

14,757,414

—

14,757,414
Collateralized loan obligations

—

221,773,609

—

221,773,609
States and political subdivisions — general obligations

—

117,330

—

117,330
States and political subdivisions — special revenue

—

6,202,204

—

6,202,204
Trust preferred

—

2,284,816

—

2,284,816
Corporate

—

18,608,995

107,254,007

125,863,002
Total fixed maturity securities

—

269,909,351

107,254,007

377,163,358
Mortgage loans on real estate, held for investment

—

—

94,989,970

94,989,970
Derivatives

—

11,361,034

—

11,361,034
Other invested assets

—

—

21,897,130

21,897,130
Investment escrow

—

3,174,047

—

3,174,047
Preferred stock

—

—

3,897,980

3,897,980
Notes receivable

—

5,665,487

—

5,665,487
Policy loans

—

—

45,573

45,573
Total Investments

$
—

$
290,109,919

$
228,084,660

$
518,194,579
Financial liabilities

Embedded derivative for equity-indexed contracts

$
—

$
—

$
84,501,492

84,501,492

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There were no0 transfers of financial instrumentsbetweenanylevels during the ~~three~~nine months ended ~~March 31,~~September 30, 2021. For the year ended December 31, 2020 we transferred third-party corporate bonds in the aggregate amount of $107.2 million between from level 2 ~~and~~to level 3.3 as there is no active market for unrated bonds.

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.

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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 ~~March 31,~~September 30, 2021 and December 31, 2020, respectively:


	March 31, 2021										September 30, 2021
			Fair Value Measurements Using										Fair Value Measurements Using
			Quoted Prices in										Quoted Prices in
			Active Markets		Significant Other		Significant						Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable						for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair		Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
(In thousands)											Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	48,551	$	—	$	—	$	48,551	$	48,551	$	55	$	—	$	—	$	55	$	55
Cash and cash equivalents		100,927,152		61,217,719		39,709,433		—		100,927,152
Cash equivalents												81,487		61,218		—		—		81,487
Liabilities:
Policyholder deposits (Deposit-type contracts)		714,300,232		—		—		714,300,232		714,300,232		960,507		—		—		960,507		960,507


	December 31, 2020										December 31, 2020
			Fair Value Measurements Using										Fair Value Measurements Using
			Quoted Prices in										Quoted Prices in
			Active Markets		Significant Other		Significant						Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable						for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair		Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
(In thousands)											Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	45,573	$	—	$	—	$	45,573	$	45,573	$	46	$	—	$	—	$	46	$	46
Cash and cash equivalents		151,679,274		100,566,580		51,112,694		—		151,679,274
Cash equivalents												151,679		100,567		—		—		151,679
Liabilities:
Policyholder deposits (Deposit-type contracts)		597,868,472		—		—		597,868,472		597,868,472		597,868		—		—		597,868		597,868

The following tables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the ~~three~~nine months ended ~~March 31, 2021 and~~September 30, 2021:



	As of						As of
	December 31,							September 30,
(In thousands)	2020		Additions		Sales		2021
Assets
Fixed maturities	$	107,254	$	169,846	$	47,147		229,953
Mortgage loans on real estate,
held for investment		94,990		98,943		25,749		168,184
Federal Home Loan Bank (FHLB) stock		—		500		—		500
Other invested assets		21,897		59,964		34,840		47,021
Preferred stock		3,898		3,036		-		6,934
Total Investments	$	228,039	$	332,289	$	107,736	$	452,592

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The following tables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the year ended December 31, 2020:

As of

As of

December 31,

March 31,


2020

Additions

Sales

2021
Assets








Fixed maturities

$
107,254,007

$
30,204,134

$
14,445,409

123,012,732
Mortgage loans on real estate,

held for investment

94,989,970

16,446,861

1,660,510

109,776,321
Other invested assets

21,897,130

5,016,716

1,307,738

25,606,108
Preferred stock

3,897,980

402,611

—

4,300,591
Policy loans

45,573

2,978

—

48,551
Total Investments

$
228,084,660

$
52,073,300

$
17,413,657

$
262,744,303


	As of										As of
	December 31,							Valuation				December 31,
(In thousands)	2019		Additions		Sales			Allowance	Impairment		2020
Assets
Fixed maturities	$	—	$	107,254	$	—	$	—	$	—	$	107,254
Mortgage loans on real
estate, held for investment		13,810		99,357		18,177		—		—		94,990
Other invested assets		2,469		74,723		54,518		(777)		—		21,897
Preferred stock		500		3,898		—		—		(500)		3,898
Total Investments	$	16,779	$	285,232	$	72,695	$	(777)	$	(500)	$	228,039

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As of

As of

December 31,

Valuation

December 31,


2019

Additions

Sales


Allowance

Impairment

2020
Assets










Fixed maturities

$
—

$
107,254,007

$
—

$
—

$
—

$
107,254,007
Mortgage loans on real estate,

held for investment

13,810,041

99,356,435

18,176,506

—

—

94,989,970
Other invested assets

2,468,947

74,722,714

54,517,558

(776,973)

21,897,130
Preferred stock

500,000

3,897,980

—

—

(500,000)

3,897,980
Policy loans

106,014

—

60,441

—

—

45,573
Total Investments

$
16,885,002

$
285,231,136

$
72,754,505

$
(776,973)

$
(500,000)

$
228,084,660

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

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

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

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

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

The following summarizes the unobservable inputs for available for sale and trading securities and the embedded derivatives of fixed indexed annuities:

March 31, 2021

September 30, 2021

(In millions, except for percentages)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$89.0

Option Budget Method

Nonperformance risk

0.3%

1.1%

0.6%

Decrease

$107.4

Option Budget Method

Nonperformance risk

3.0%

1.1%

0.6%

Decrease

Option budget

1.4%

3.4%

2.5%

Increase

Option budget

1.1%

3.4%

2.4%

Increase

Surrender rate

0.5%

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

7.3%

Decrease

Surrender rate

0.5%

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

7.6%

Decrease

* Weighted by account value

2625

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December 31, 2020

(In millions, except for percentages)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$84.5

Option Budget Method

Nonperformance risk

0.3%

1.3%

0.7%

Decrease

Option budget

2.6%

3.4%

2.7%

Increase

Surrender rate

0.5%

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

7.6%

Decrease

* Weighted by account value

Note 7. Earnings Loss Per Share

The ~~par value per each~~ Company ~~share is $0.001 with 20,000,000~~has 20.0 million voting common shares authorized, ~~2,000,000~~2 million non-voting common shares authorized, and ~~2,000,000~~2 million preferred shares authorized. ~~With the infusion of capital in our December 2020 public offering of voting common stock and the issuance of voting common stock in~~There were 3,737,564 voting common shares issued and outstanding as of ~~March 31,~~September 30, 2021 and December 31, 2020.

(Loss) earnings per basic share attributable to the Company’s voting common stock 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 March 31, 2021 and 2020, were 3,737,564 and 2,042,670, respectively.


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

(in thousands, except per share amounts)
Numerator:
Net loss attributable to Midwest Holding, Inc.	$	(3,064)	$	(5,537)	$	(9,656)	$	(527)

Denominator:
Weighted average common shares outstanding		3,737,564		2,718,967		3,737,564		2,435,115
Effect of dilutive securities:
Stock options and deferred compensation agreements		31,450		47,517		31,450		47,517
Denominator for earnings (loss) per common share - assuming dilution		3,769,014		2,766,484		3,769,014		2,482,632

Loss per common share	$	(0.82)	$	(2.04)	$	(2.58)	$	(0.22)
Loss per common share - assuming dilution	$	(0.82)	$	(2.00)	$	(2.58)	$	(0.21)

(Loss) earnings per diluted share attributable to the Company’s voting common stock was computed based on the average shares outstanding and options granted under our 2020 and 2019 Long-Term Incentive Plans (“LTIPs”), as if all were vested and exercised. The weighted average number of diluted shares outstanding during the three months ended March 31, 2021 and 2020 were 3,737,564 and 2,065,045, respectively.

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Note 8. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of ~~March 31,~~September 30, 2021 and December 31, 2020 were as follows:


	March 31, 2021		December 31, 2020
(in thousands)					September 30, 2021		December 31, 2020
Deferred tax assets:
Loss carryforwards	$	1,945,126	$	1,556,855	$	1,364	$	1,557
Capitalized costs		162,476		174,364		139		175
Stock option granted		65,796		14,270		595		14
Unrealized losses on investments		1,478,807		1,534,332		669		1,534
Policy acquisition costs		2,308,354		2,243,267		3,074		2,243
Charitable contribution carryforward		2,490		2,490		2		2
Sec 163(j) limitation		155,492		153,809		154		154
Benefit reserves		4,316,821		3,568,914		6,753		3,569
Total deferred tax assets		10,435,362		9,248,301		12,750		9,248
Less valuation allowance		(8,403,415)		(7,001,687)		(10,267)		(7,002)
Total deferred tax assets, net of valuation allowance		2,031,947		2,246,614		2,483		2,246
Deferred tax liabilities:
Unrealized losses on investments		1,774,671		1,994,232		1,819		1,994
Due premiums		81,789		81,789		82		82
Intangible assets		147,000		147,000		147		147
Derivative option allowance						396		��
Bond Discount		24,942		20,556		34		20
Property and equipment		3,545		3,037		5		3
Total deferred tax liabilities		2,031,947		2,246,614		2,483		2,246
Net deferred tax assets	$	—	$	—	$	—	$	—

As of ~~March 31,~~September 30, 2021 and December 31, 2020, the Company recorded a valuation ~~allowance~~allowances of ~~$8,403,415~~$10.3 million and ~~$7,001,687,~~$7.0 million, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

There was income tax expense ~~of $1,432,348 and $407,916~~ for the three months ended ~~March 31,~~September 30, 2021 and 2020 of $(351) and $1.3 million, respectively, and income tax expense for the nine months ended September 30, 2021 and 2020 of $1.8 million and negative tax expense of $2.1 million, respectively. 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 March 31,				Three months ended September 30,				Nine months ended September 30,
	2021		2020
(in thousands)					2021		2020		2021		2020
Computed expected income tax benefit	$	(35,304)	$	4,610,839	$	(749)	$	(899)	$	(1,676)	$	340
Increase (reduction) in income taxes resulting from:
State tax net of federal benefit						—		152		—		152
IMR and reinsurance		67,045		—		65		—		240		—
Nondeductible expenses		1,454		(55,233)		1		1		4		4
Change in valuation allowance		1,401,730		(4,147,690)		333		1,429		3,266		1,421
Dividends received deduction		(2,577)		—		(1)		—		(6)		—
Other						—		575		—		228
Prior year true-up						—		—		—		—
Subtotal of increases		1,467,652		(4,202,923)		398		2,157		3,504		1,805
Tax expense	$	1,432,348	$	407,916	$	(351)	$	1,258	$	1,828	$	2,145

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 ~~March 31,~~September 30, 2021, the deferred tax assets included the expected

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tax benefit attributable to federal NOLs of ~~$9,164,004.~~$6.5 million. 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 ~~$752,036~~$1.1 million prior to 2017 will expire through the year

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2032. The CARES Act of ~~2032,~~2020 temporarily removed the NOL limitations enacted under the Tax Cuts and ~~the~~Jobs Act of 2017 on tax years ended December 31, 2018 through December 31, 2020. Therefore, NOLs generated from June 28, 2018 to ~~March~~December 31, ~~2021~~2020 do not expire and will carry forward indefinitely. NOLs generated after December 31, 2020 also do not expire and can be carried 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 ~~$4,971,956~~$1.4 million on the deferred tax assets related to these federal NOL carryforwards.

Loss carry forwards for tax purposes as of ~~March 31,~~September 30, 2021, have expiration dates that range from 2024 through ~~2040.~~2040.

Note 9. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of ~~March 31,~~September 30, 2021 and December 31, 2020 and for the three and nine months ended ~~March 31,~~September 30, 2021 and, 2020, respectively, are as follows:


(in thousands)	September 30, 2021		December 31, 2020
Assets:
Reinsurance recoverables	$	37,720	$	32,146
Liabilities:
Deposit-type contracts
Direct	$	960,507		597,868
Reinsurance ceded		(596,068)		(405,981)
Retained deposit-type contracts	$	364,439	$	191,887


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
(in thousands)
Premiums
Direct	$	37	$	225	$	139	$	678
Reinsurance ceded		(37)		(225)		(139)		(678)
Total Premiums	$	—	$	—	$	—	$	—
Future policy and other policy benefits
Direct	$	3	$	52	$	25	$	99
Reinsurance ceded		(3)		(52)		(25)		(99)
Total future policy and other policy benefits	$	—	$	—	$	—	$	—

March 31, 2021

December 31, 2020
Assets:




Reinsurance recoverables

$
38,715,577

$
32,146,042
Liabilities:

Deposit-type contracts

Direct

$
714,300,232

597,868,472
Reinsurance ceded

(448,843,239)

(405,981,150)
Retained deposit-type contracts

$
265,456,993

$
191,887,322

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Three months ended March 31,

2021

2020




Premiums

Direct
$
48,087

$
231,674
Reinsurance ceded

(48,087)

(231,674)
Total Premiums
$
—

$
—
Future policy and other policy benefits

Direct
$
6,856

31,287
Reinsurance ceded

(6,856)

(31,287)
Total future policy and other policy benefits
$
—

$
—

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by third-party reinsurers except for a reinsurance with Unified as it was accounted for as discontinued operations as of ~~March 31,~~September 30, 2021:


							Recoverable/				Total Amount
			Recoverable		Recoverable		(Payable) on Benefit		Ceded		Recoverable/
(in thousands)	AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		(Payable) to/from
Reinsurer	Rating		Losses		Losses		type Contracts		Premiums		Reinsurer
Ironbound Reinsurance Company Limited		NR	$	—	$	—	$	(2,242)	$	—	$	(2,242)
Optimum Re Insurance Company		A		—		—		561		—		561
Sagicor Life Insurance Company		A-		—		164		10,834		289		10,709
Ascendant Re		NR		—		—		2,612		—		2,612
Crestline SP1		NR		—		—		15,847		—		15,847
American Republic Insurance Company		NR		—		—		4,771		—		4,771
US Alliance Life and Security Company		NR		—		—		5,502		40		5,462
			$	—	$	164	$	37,885	$	329	$	37,720

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

$
—

$
—

$
524,932

$
—

$
524,932
Sagicor Life Insurance Company

A-

—

143,750

11,269,714

273,495

11,139,969
SDA Annuity & Life Re

NR

—

—

3,714,765

—

3,714,765
Crestline SP1

NR

—

—

16,319,419

—

16,319,419
US Alliance Life and Security Company

NR

—

—

7,045,473

28,981

7,016,492

$
—

$
143,750

$
38,874,303

$
302,476

$
38,715,577

~~Table of Contents~~

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 as of December 31, 2020:


							Recoverable on				Total Amount								Recoverable on				Total Amount
			Recoverable		Recoverable		Benefit		Ceded		Recoverable				Recoverable		Recoverable		Benefit		Ceded		Recoverable
	AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		from
(in thousands)													AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		from
Reinsurer	Rating		Losses		Losses		type Contracts		Premiums		Reinsurer		Rating		Losses		Losses		type Contracts		Premiums		Reinsurer
Optimum Re Insurance Company		A	$	—	$	—	$	524,734	$	—	$	524,734		A	$	—	$	—	$	525	$	—	$	525
Sagicor Life Insurance Company		A-		—		141,107		11,285,364		276,596		11,149,875		A-		—		141		11,286		277		11,150
SDA Annuity & Life Re		NR		—		—		3,540,697		—		3,540,697
Ascendant Re														NR		—		—		3,541		—		3,541
Crestline SP1		NR		—		—		9,695,427		—		9,695,427		NR		—		—		9,695		—		9,695
US Alliance Life and Security Company		NR		—		—		7,264,229		28,920		7,235,309		NR		—		—		7,264		29		7,235
			$	—	$	141,107	$	32,310,451	$	305,516	$	32,146,042			$	—	$	141	$	32,311	$	306	$	32,146

~~Due to price decreases in the capital markets, our~~Our securities positions resulted in changes in the unrealized gains position as of ~~March 31,~~September 30, 2021 compared to December 31, 2020, reported in accumulated other comprehensive income on the Consolidated Balance Sheets. As discussed in ~~Note.~~Note 1, American Life has treaties with several third-party reinsurers that have ~~funds withheld~~FW and ~~modified coinsurance~~Modco provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 5. ~~As a result of the change in market prices, the~~The assets had unrealized gains of approximately ~~$2.5~~$2.0 million and $2.9 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the unrealized gains on the assets held by American Life were offset by a ~~loss~~gain in the embedded derivative of ~~$400,000~~$900 and a loss of $2.9 million, respectively. We account for this gain pass through by recording equivalent realized losses on our Consolidated Statements of Comprehensive Loss.

Effective November 7, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco SDA Agreement”) with SDA Annuity & Life Re (“SDA”), a Cayman Islands-domiciled reinsurance company. Under the FW/Modco SDA Agreement, American Life cedes to SDA, on a ~~funds withheld coinsurance~~FW and ~~modified coinsurance~~Modco basis, 5% quota share of certain liabilities with respect to its multi-year guaranteed annuity MYGA business and an initial 95% quota share of certain liabilities with respect to its ~~fixed indexed annuity~~ FIA through December 31, 2019. Effective January 1, 2020 ~~and 30%~~ through March 31, ~~2021. American Life has established two accounts~~2020, the quota share decreased to ~~hold~~30%. Effective April 1, 2020 through August 24, 2020, the ~~assets~~quota share decreased to 15%. Effective August 25, 2020 through April 7, 2021, the quota share decreased to 0% for MYGA and FIA. Effective April 8, 2021 through July 2, 2021, the ~~FW/Modco Agreement, a Funds Withheld Account~~quota share for MYGA and ~~a Modco Deposit Account.~~FIA was increased to 10%.

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 initial settlement included net premium income of ~~$3,970,509~~$4.0 million and net statutory reserves of ~~$3,986,411.~~$4.0 million. The initial settlement for the funds withheld account was ~~$2,256,802~~$2.3 million and for the ~~Modified coinsurance~~Modco deposit was ~~$1,504,535~~$1.5 million and the reserves required

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was ~~$2,391,847~~$2.4 million and ~~$1,594,564,~~$1.6 million, respectively. The amount owed to the ~~funds withheld~~FW account and the Modified coinsurance deposit account from the trust account was ~~$135,044~~$135 and ~~$90,029,~~$90, respectively which was funded at the closing of the SDA transaction. ~~Effective~~

On August ~~25, 2020,~~26, 2021, SDA changed its name to Ascendant Re (“ASCRE”). American Life established two accounts to hold the ~~quota share was reduced to zero~~assets for ~~both MYGA~~the FW/Modco Agreement, a Funds Withheld Account and ~~FIA products.~~a Modco Deposit Account.

Effective April 15, 2020, American Life entered into a Funds Withheld and Funds Paid Coinsurance Agreement (“US Alliance Agreement”) ~~between American Life and~~with US Alliance Life and Security Company, a Kansas reinsurance company (“US Alliance”). Under the US Alliance Agreement, American Life will cede to US Alliance, on a funds withheld and funds paid coinsurance basis, an initial 49% quota share of certain liabilities with respect to American Life’s FIA business effective January 1, 2020 through March 31, 2020. Effective from March 1, 2020 through March 10, 2020, American Life ~~will cede~~ceded a 45.5% quota share of certain liabilities with respect to its MYGA business to US Alliance. Effective March 11, 2020 through March 31, 2020, on a funds withheld and funds paid coinsurance basis, the quota share ~~will increase~~increased to 66.5% of certain liabilities with respect to its MYGA business. Effective April 1, 2020, the FIA quota share was reduced to 40% and the MYGA quota share was reduced to 25%. American Life ~~has~~ established a US Alliance Funds Withheld Account to hold the assets for the US Alliance Agreement.

~~Table of Contents~~

In addition, a trust account was established among American Life, US Alliance and Capitol Federal Savings Bank, for the sole benefit of American Life to fund the Funds Withheld Account for any shortage in required reserves.

The initial settlement included net premium income of ~~$13,542,325~~$13.5 million and net statutory reserves of ~~$14,706,862.~~$14.7 million. The initial settlement for the Funds Withheld Account was ~~$12,729,785~~$12.7 million and to the trust account was ~~$812,539~~$800 from American Life and ~~$5,000,000~~$5.0 million from US Alliance. Effective June 30, 2020, the FIA quota share was reduced to ~~zero~~0 and effective July 1, 2020, the MYGA quota share was reduced to ~~zero.~~0.

Effective April 24, 2020, American life entered into a Master Letter Agreement with Seneca Re and Crestline Management regarding a flow of annuity reinsurance and related asset management, whereby Crestline Management agreed to provide reinsurance funding for a quota share percentage of 25% of the liabilities of American Life arising from the MYGA and a quota share percentage of 40% of the FIA products. This agreement expires on April 24, 2023.

On July 24, 2020, the Nebraska Department of Insurance (“NDOI”) issued its non-disapproval of the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Seneca Incorporated Cell, LLC 2020-02 (“SRC2”) of Seneca Re, now known as Crestline RE SP1. The agreement closed on July 27, 2020. Under the agreement, American Life ceded to SRC2, on a Funds Withheld and Modified Coinsurance basis, an initial 25% quota share of certain liabilities with respect to American Life’s MYGA business and 40% quota share of certain liabilities with respect to American Life’s FIA business effective April 24, 2020. Effective July 1, 2021, the quota share for FIA decreased from 40% to 25%. American Life ~~has~~ established a SRC2 Funds Withheld Account and a Modified Coinsurance Account to hold the assets pursuant to the agreement. The NDOI approved the inclusion of the SRC2 coinsurance in American Life’s March 31, 2020 statutory financial statements.

~~Effective~~In addition, a trust account was established on July ~~1, 2018,~~23, 2020 among American Life, ~~entered into an assumptive~~SRC2 and ~~indemnity coinsurance transaction with Unified~~U.S. Bank, National Association for the sole benefit of American Life to ~~transfer 100%~~fund the SRC2 Funds Withheld Account and the SRC2 Modco deposit account for any shortage in required reserves.

On June 26, 2021, the NDOI issued its non-disapproval of the ~~risk related~~Modified Coinsurance Agreement (“Modco AEG Agreement”) with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement closed on June 30, 2021. Under the Modco AEG Agreement, American Life cedes to AEG, on a modified coinsurance basis, 20% quota share of certain liabilities with respect to its multi-year guaranteed annuity MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its fixed indexed annuity FIA. American Life has established a Modco Deposit Account to hold the assets for the Modco Agreement. The initial settlement included net premium income of $37.5 million and net statutory reserves of $34.8 million for the modified coinsurance account. The amount paid to the ~~remaining legacy block~~Modified coinsurance deposit account from AEG was $2.4 million.

Table of business, see Note 2 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.Contents

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, value of business acquired (“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 March 31, 2021 and 2020, Unified had converted 90% and 81%, respectively, of the indemnity coinsurance to assumptive coinsurance. American Life had amortization income for the three months ended March 31, 2021 and 2020, of $7,629 and $67,451, respectively. The ending deferred ceding commission as of March 31, 2021 and December 31, 2020 was $269,306 and $276,935, respectively.

Under GAAP, ceding commissions are deferred on the Consolidated Balance Sheets and are amortized over the period of the policyholder contracts. The tables below shows the ceding commissions from the reinsurers excluding SRC1 and what was earned on a GAAP ~~basis:~~basis for the three and nine months ended September 30, 2021 and 2020:

Three months ended March 31,

2021

2020
Reinsurer

Effective Date
of Transaction

Gross Ceding Commission

Expense
Allowances⁽¹⁾

Interest on Ceding Commissions

Earned
Ceding
Commission

Gross Ceding Commission

Expense
Allowances

Interest on Ceding Commissions

Earned
Ceding
Commission
Ironbound Reinsurance Company Limited

July 2019

$
—

$
14,457

$
54,445

$
122,216

$
674,645

$
673,612

$
45,369

$
95,740
SDA Annuity & Life Re

November 2019

—

24,317

21,712

46,072

298,982

548,464

13,526

7,153
US Alliance Life and Security Company⁽²⁾

November 2019

2,178

20,735

15,339

66,606

—

—

—

—
Crestline SP1

July 2020

2,345,135

4,678,207

49,855

215,762

—

—

—

—

$
2,347,313

$
4,737,716

$
141,351

$
450,656

$
973,627

$
1,222,076

$
58,895

$
102,893


	Three months ended September 30,
(in thousands)	2021								2020
Reinsurer	Gross Ceding Commission		Expense Allowance⁽¹⁾		Interest on Ceding Commission		Earned Ceding Commission		Gross Ceding Commission		Expense Allowance		Interest on Ceding Commission		Earned Ceding Commission
Ironbound Reinsurance Company Limited	$	—	$	395	$	51	$	113	$	—	$	11	$	56	$	127
Ascendant Re		—		1,061		26		73		488		976		18		26
US Alliance Life and Security Company		496		87		16		74		7		7		15		64
Crestline Re SP 1		1,246		2,277		69		314		3,837		7,249		13		55
American Republic Insurance Company		937		1,470		14		78		—		—		—		—
	$	2,679	$	5,290	$	176	$	652	$	4,332	$	8,243	$	102	$	272


	Nine months ended September 30,
(in thousands)	2021								2020
Reinsurer	Gross Ceding Commission		Expense Allowance⁽¹⁾		Interest on Ceding Commission		Earned Ceding Commission		Gross Ceding Commission		Expense Allowance		Interest on Ceding Commission		Earned Ceding Commission
Ironbound Reinsurance Company Limited	$	—	$	424	$	160	$	358	$	688	$	690	$	166	$	317
Ascendant Re		496		1,106		69		163		1,356		2,605		47		44
US Alliance Life and Security Company		2		125		46		195		2,280		4,017		23		74
Crestline SP1		5,623		11,052		180		813		3,838		7,248		13		55
American Republic Insurance Company		3,160		5,849		26		146		—		—		—		—
	$	9,281	$	18,556	$	481	$	1,675	$	8,162	$	14,560	$	249	$	490

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

~~(2) US Alliance Life and Security Company funds withheld and funds paid treaty.~~

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

March 31, 2021

December 31, 2020
Reinsurer

Effective Date
of Transaction

Deferred Ceding Commission

Deferred Ceding Commission
US Alliance Life and Security Company⁽¹⁾

September 2017

$
169,726

$
172,297
Unified Life Insurance Company⁽¹⁾

July 2018

269,306

276,935
Ironbound Reinsurance Company Limited⁽²⁾

July 2019

5,634,707

5,642,095
SDA Annuity & Life Re⁽²⁾

November 2019

2,662,423

2,703,496
US Alliance Life and Security Company⁽³⁾

April 2020

2,446,254

2,472,559
Crestline SP1

July 2020

9,414,267

6,931,375

$
20,596,683

$
18,198,757


(in thousands)	September 30, 2021		December 31, 2020
Reinsurer	Deferred Ceding Commission		Deferred Ceding Commission
US Alliance Life and Security Company⁽¹⁾	$	165	$	172
Unified Life Insurance Company⁽¹⁾		249		277
Ironbound Reinsurance Company Limited⁽²⁾		5,594		5,642
Ascendant Re		3,227		2,703
US Alliance Life and Security Company⁽²⁾		2,429		2,473
American Republic Insurance Company⁽²⁾		3,250		—
Crestline SP1⁽²⁾		12,885		6,932
	$	27,799	$	18,199

(1)

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

(2)

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

~~(3)~~

~~US Alliance Life and Security Company funds withheld and funds paid treaty.~~

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

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, separate contingency reserves may be established. As of ~~March 31,~~September 30, 2021 and December 31, 2020, no0 contingency reserves ~~were~~had been established.

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

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Retained and Reinsurer Balance Sheets

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


	March 31, 2021						December 31, 2020						September 30, 2021						December 31, 2020

	Retained		Reinsurance		Consolidated		Retained		Reinsurance		Consolidated
(in thousands)													Retained		Reinsurance		Consolidated		Retained		Reinsurance		Consolidated
Assets
Total investments		305,022,890		388,398,930		693,421,820		185,367,430		332,827,149		518,194,579	$	418,170	$	524,669	$	942,839	$	185,368	$	332,827	$	518,195
Cash and cash equivalents		72,613,680		28,313,472		100,927,152		102,334,579		49,344,695		151,679,274		51,583		29,904		81,487		102,335		49,344		151,679
Accrued investment income		3,193,353		5,901,740		9,095,093		1,955,938		4,850,898		6,806,836		3,471		8,704		12,175		1,956		4,851		6,807
Deferred acquisition costs, net		19,676,745		—		19,676,745		13,456,303		—		13,456,303		24,037		—		24,037		13,456		—		13,456
Reinsurance recoverables (See Note 8)		—		38,715,577		38,715,577		—		32,146,042		32,146,042
Reinsurance recoverables														—		37,720		37,720		—		32,146		32,146
Other assets		2,918,643		1,436,019		4,354,662		2,685,341		1,432,384		4,117,725		8,921		446		9,367		2,685		1,433		4,118
Total assets	$	403,425,311	$	462,765,738	$	866,191,049	$	305,799,591	$	420,601,168	$	726,400,759	$	506,182	$	601,443	$	1,107,625	$	305,800	$	420,601	$	726,401
Liabilities and Stockholders’ Equity
Liabilities:
Policyholder liabilities	$	265,456,993	$	461,795,179	$	727,252,172	$	191,887,322	$	418,921,167	$	610,808,489	$	364,439	$	614,036	$	978,475	$	191,887	$	418,921	$	610,808
Deferred gain on coinsurance transactions		20,596,683		—		20,596,683		18,198,757		—		18,198,757		27,799		—		27,799		18,199		—		18,199
Other liabilities		31,739,452		970,559		32,710,011		9,384,013		1,680,001		11,064,014		33,816		(12,593)		21,223		9,384		1,680		11,064
Total liabilities	$	317,793,128	$	462,765,738	$	780,558,866	$	219,470,092	$	420,601,168	$	640,071,260	$	426,054	$	601,443	$	1,027,497	$	219,470	$	420,601	$	640,071
Stockholders’ Equity:
Voting common stock		3,738		—		3,738		3,738		—		3,738		4		—		4		4		—		4
Additional paid-in capital		133,678,612		—		133,678,612		133,417,272		—		133,417,272		136,061		—		136,061		133,417		—		133,417
Accumulated deficit		(55,122,540)		—		(55,122,540)		(53,522,078)		—		(53,522,078)		(63,178)		—		(63,178)		(53,522)		—		(53,522)
Accumulated other comprehensive income		7,072,373		—		7,072,373		6,430,567		—		6,430,567		7,241		—		7,241		6,431		—		6,431
Total Midwest Holding Inc.'s stockholders' equity	$	85,632,183	$	—	$	85,632,183	$	86,329,499	$	—	$	86,329,499	$	80,128	$	—	$	80,128	$	86,330	$	—	$	86,330
Total liabilities and stockholders' equity	$	403,425,311	$	462,765,738	$	866,191,049	$	305,799,591	$	420,601,168	$	726,400,759	$	506,182	$	601,443	$	1,107,625	$	305,800	$	420,601	$	726,401

Note 10. Long-Term Incentive Plans

2019 Plan

On June 11, 2019, our Board of Directors approved the Midwest Holding Inc. Long-Term Incentive Plan (the ~~”2019~~“2019 Plan”) that reserves up to 102,000 shares of our voting common stock for award issuances. It provides for the grant of options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards to eligible employees, consultants and eligible directors, subject to the conditions set forth in the 2019 Plan. Shareholder approval of the plan occurred on June 11, 2019. All awards are required to be established, approved, and/or granted by the compensation committee of our Board.

On July 19, 2019, we granted stock options for 17,900 shares of voting common stock under the 2019 Plan that are exercisable during a ten-year period after the date of grant at a price of $25.00 per share, with ~~one-third~~one-third exercisable after July 17, 2021 and ~~two-thirds~~two-thirds exercisable after July 17, 2023. The fair market value of the shares was $8.00 per share at the grant date. Using the Black Scholes Model, we determined the compensation expense was ~~$143,200~~$143 over the vesting term of the stock

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options. The factors we used to determine the expense were: the weighted average fair market value at grant date of $8.00 per share, the exercise price of $25.00 per share, the option term of 10 years, an annual risk-free interest rate of 1.84% based upon the 10-year U.S. Treasury rate at grant date, volatility of the price of the stock before the date of the grants, the amount of shares and the closely held nature of the stock before the grants.

On July 21, 2020, we granted stock options for 26,300 shares of voting common stock. Using the Black Scholes Model, we determined the compensation expense was ~~$334,950~~$335 over the five year vesting term of the stock options. The factors we used to determine the expense were: the weighted average fair market value at grant date of ~~$14.50~~$25.00 per share, the exercise price of per share, the time to maturity of 10 years, an annual risk-free interest rate of .55% based upon the 10-year U.S. Treasury rate at grant date and a 60% volatility based on a valuation by an outside evaluator relating to the grants of these options.

On September 15, 2020, we granted stock options for 6,667 shares of voting common stock at an exercise price of ~~$25.00~~$41.25 per share. Using the Black Scholes Model, we determined the compensation expense was ~~$144,014~~$144 over the five year vesting term of the stock options. The factors we used to determine the expense were: the weighted average fair market value at grant date of

~~Table of Contents~~

~~$21.60~~ $21.60 per share, the exercise price of $41.25 per share, the time to maturity of 10 years, an annual risk-free interest rate of .69% based upon the 10-year U.S. Treasury rate at grant date and a 66.2% volatility based on a valuation by an outside evaluator relating to the grants of these options.

On November 16, 2020, we granted stock options for 35,058 shares of voting common stock at an exercise price of $41.25 per share. Using the Black Scholes Model, we determined the compensation expense was ~~$1,032,458~~$1.0 million over the five year vesting term of the stock options. The factors we used to determine the expense were: the weighted average fair market value at grant date of $29.45 per share, the exercise price of $41.25 per share, the time to maturity of 10 years, an annual risk-free interest rate of .91% based upon the 10-year U.S. Treasury rate at grant date and a 66.3% volatility based on a valuation by an outside evaluator relating to the grant of these options.

~~Also,~~2020 Plan

On November 16, 2020, our Board of Directors adopted a new equity incentive plan titled the 2020 Long-Term Incentive Plan (the "2020 Plan") that reserves up to 350 shares of voting common stock for award issuances. The terms of the 2020 Plan are essentially the same as the 2019 Plan. On June 29, 2021, the 2020 Plan was approved by the shareholders.

In connection with the adoption of the 2020 Plan and the employment agreements with A. Michael Salem and Michael Minnich, our Co-Chief Executive Officers, we granted each of Messrs. Salem and Minnich stock options for 74,751 shares of our voting common stock plus additional stock options of 18,500 to other employees, with an exercise price of $41.25 per share exercisable in one-fifth increments on each yearly anniversary of the date of grant. Using the Black Scholes Model, we determined the compensation expense was $4.9 million over the five year vesting term of the stock options. The factors we used to determine the compensation expense were: weighted average fair market value at grant date of $29.45 per share, the exercise price of $41.25 per share, option term of 10 years, annual risk-free interest rate of .91% based upon the 10-year U.S. Treasury rate at grant date and a 66.3 % volatility based on a valuation by an outside evaluator relating to these option grants.

On November 16, 2020 we granted an award of restricted stock for 18,597 shares of voting common stock to an officer. Using the Black Scholes Model, we determined the compensation expense was ~~$547,682~~$548 over the five year vesting term of the restricted stock ~~options.~~award. The factors we used to determine the expense were: the weighted average fair market value at grant date of $29.45 per share, the exercise price of $41.25 per share, an annual risk-free interest rate of .91% based upon the 10-year U.S. Treasury rate at grant date and a 66.3% volatility based on a valuation by an outside evaluator relating to this restricted stock grant.

On February 15, 2021, we granted stock options for 49,528 shares of voting common stock at an exercise price of $55.02 per share. Using the Black Scholes Model, we determined the compensation expense was $1.6 million over the two and four years vesting terms of the stock options. The factors we used to determine the expense were: the weighted average fair market value at grant date of $49.38 per share, the exercise price of $55.02 per share, the time to maturity of 10 years, an annual risk-free interest rate of 1.54% based upon the 10-year U.S. Treasury rate at grant date and a 65.7% volatility based on a valuation by an outside evaluator relating to the grant of these options.

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On March 11, 2021, we granted stock options for 9,500 shares of voting common stock at an exercise price of $55.02 per share. Using the Black Scholes Model, we determined the compensation expense was $332 over the two and four years vesting terms of the stock options. The factors we used to determine the expense were: the weighted average fair market value at grant date of $34.95 per share, the exercise price of $55.02 per share, the time to maturity of 10 years, an annual risk-free interest rate of 1.54% based upon the 10-year U.S. Treasury rate at grant date and a 65.7% volatility based on a valuation by an outside evaluator relating to the grant of these options.

On June 1, 2021, we granted stock options for 4,000 shares of voting common stock at an exercise price of $55.02 per share. On September 17, 2021, we granted stock options of 43,000 shares of voting common stock at an exercise price of $41.25 per share. Using the Black Scholes Model, we determined the compensation expense was $118 over the two, four and six years vesting terms of the stock options. The factors we used to determine the expense were: the weighted average fair market value at the two grant dates above of $0.26 per share and of $2.71 per share, respectively, the exercise price of $55.02 and $41.25 per share, respectively, the time to maturity of 10 years, an annual risk-free interest rate of 0.84% and 0.96%, respectively, based upon the 10-year U.S. Treasury rate at grant date and a 4.97% and 4.97%, respectively, volatility based on a valuation by an outside evaluator relating to the grant of these options.

On January 16, 2021 and May 1, 2020, ~~restricted stock and~~ stock options for ~~4,650~~3,932 and 200 shares with a fair market value of $29.45 and $8.00 per share, respectively, became vested ~~on the restricted stock~~ and in connection with the resignation of ~~two~~2 Board members. For the three months ended March 31, 2021 and the year ended December 31, 2020 we amortized the compensation expense from the stock option grants on the three dates above, over the two and four year vesting tranches, for an expense and additional paid in capital of $261,340 and $163,664, respectively. As of ~~March 31,~~September 30, 2021 and December 31, 2020, the outstanding non-vested stock under the 2019 ~~Plan~~and 2020 Plans was ~~96,322~~approximately 73,000 and ~~100,972,~~288,000, respectively with ~~zero~~12,750 and ~~3,350~~5,050 shares being forfeited ~~as of March 31,~~during the nine months ended September 30, 2021 and year ended December 31, 2020, respectively.

For the three months ~~March 31,~~ended September 30, 2021 and 2020, we amortized the compensation expense related to the 2019 ~~Plan,~~and 2020 Plans, from the stock grants on the ~~three~~ dates above, over the ~~two~~vesting tranches which resulted in expenses and ~~four year~~an increase in additional paid in capital of approximately $1.0 million and $30, respectively. For the nine months ended September 30, 2021 and 2020, we amortized the compensation expense related to the 2019 and 2020 Plans, from the stock grants on the dates above, over the vesting tranches as an expense and an increase in additional paid in capital of ~~$261,340~~approximately $2.8 million and ~~$11,933, respectively~~

$55, respectively.

The table below shows the award activity for the nine months ended September 30, 2021 and the remaining non-vested shares under the 2019 ~~Plan:~~and 2020 Plans:

March 31, 2021

December 31, 2020

Stock Options/
Restricted Stock
Outstanding⁽¹⁾

Stock Options
Outstanding⁽¹⁾
Beginning balance

100,972

17,900
Options granted under the 2019 Plan

—

68,025
Restricted stock granted under the 2019 Plan

—

18,597
Forfeited

—

(3,350)
Vested

(4,650)

(200)
Ending Balance

96,322

100,972

	~~(1)~~	~~Reflects reverse stock split of 500:1 as of August 27, 2020.~~
		Stock Options/ Restricted Stock Outstanding
Beginning balance, December 31, 2020		100,972
Options granted under the 2019 Plan
Options granted and approved under the 2020 Plan		281,712
Forfeited		(4,132)
Vested		(17,800)
Ending Balance		360,752

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Note 11. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of policyholders 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 March 31,~~as of September 30, 2021 and the year ended December 31, 2020:


	March 31, 2021		December 31, 2020
(In thousands)					September 30, 2021		December 31, 2020
Beginning balance	$	597,868,472	$	171,168,785	$	597,868	$	171,169
US Alliance		(655,762)		(3,307,587)		822		(3,308)
Ironbound Reinsurance Company Limited		1,522,105		6,080,196		4,983		6,080
SDA Annuity & Life Re (includes MVA adjustment and embedded derivative)		(344,905)		3,053,160
Ascendant Re						1,437		3,053
Crestline SP1		(2,492,215)		3,606,833		696		3,607
American Republic Insurance Company						509		—
Deposits received		123,653,931		415,561,302		367,446		415,561
Investment earnings (includes embedded derivative)		(2,346,402)		4,214,828		1,868		4,215
Withdrawals		(2,904,992)		(2,509,045)		(14,543)		(2,509)
Policy charges						(579)		—
Ending balance	$	714,300,232	$	597,868,472	$	960,507	$	597,868

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 received a Certificate of Authority to conduct business during 2020 from each of the following states and the District of Columbia: Utah, Montana, Louisiana and Ohio. American Life has pending applications in ~~six~~ additional states that are expected to be approved by the end of 2021. The ~~Nebraska Department of Insurance (“NDOI”)~~NDOI granted American Life ~~approval~~non-disapproval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Ironbound prior to closing of the agreement in July 2019. The NDOI granted American Life ~~approval~~non-disapproval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with SDA prior to closing of the agreement in December 2019. The NDOI granted American Life ~~approval~~non-disapproval to enter into the Funds Withheld and Funds Paid Coinsurance Agreement with US Alliance prior to closing of the agreement on April 15, 2020. The NDOI granted American Life ~~approval~~non-disapproval to enter into the Funds Withheld and Modified Coinsurance Agreement with Seneca Re through SRC1 prior to closing of the agreement on May 13, 2020. The NDOI granted American Life ~~approval~~non-disapproval to enter into the FW and Modco Agreement with Seneca Re SRC2 prior to closing of the agreement on July 27, 2020. The NDOI granted American Life non-disapproval to enter into the Modco Agreement with AEG prior to closing of the agreement on June 30, 2021.

Note 13. Leases

Our operating lease activities consist of leases for office space and equipment. Our finance lease activities consisted of ~~one~~1 lease for hardware which we owned at the end of the lease agreement on March 31, 2020. ~~None~~NaN of our lease agreements include variable lease payments.

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Supplemental balance sheet information as of ~~March 31,~~September 30, 2021 and December 31, 2020, are as follows:


		As of		As of
(In thousands)							As of		As of
Leases	Classification	March 31, 2021		December 31, 2020		Classification	September 30, 2021		December 31, 2020
Assets
Operating	Operating lease right-of-use assets	$	317,715	$	348,198	Operating lease right-of-use assets	$	258	$	348

Liabilities
Operating lease	Operating lease liabilities	$	364,128	$	396,911	Operating lease liabilities	$	299	$	397

Our operating and finance leases expenses for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, were as follows:


		Three months ended March 31,
(In thousands)							Three months ended September 30,				Nine months ended September 30,
Leases	Classification	2021		2020		Classification	2021		2020		2021		2020
Operating	General and administrative expense	$	1,233	$	2,092	General and administrative expense	$	—	$	2	$	2	$	7

Finance lease cost:
	Amortization expense		—		2,913	Amortization expense		—		—		—		3
	Interest expense		—		111

Minimum contractual obligations for our operating leases ~~as of March 31,~~at September 30, 2021, are as follows:


	Operating Leases
2021 (excluding three months ended March 31, 2021)	$	122,891
(in thousands)			Operating Leases
2021 (excluding nine months ended September 30, 2021)			$	41
2022		156,608		157
2023		161,674		162
2024		13,508		14
Total remaining lease payments	$	454,681	$	374

Supplemental cash flow information related to leases was as follows:


	Three months ended March 31,				Three months ended September 30,				Nine months ended September 30,
	2021		2020
(in thousands)					2021		2020		2021		2020
Cash payments
Operating cash flows from operating leases	$	(2,300)	$	(1,035)	$	(3)	$	—	$	(8)	$	(1)
Operating cash flows from finance leases		—		1,164		—		1		—		5

The weighted average remaining lease terms of our operating leases were approximately less than one year as of September 30, 2021 and a year and half ~~years and two years~~ as of ~~March~~December 31, ~~2021 and~~ 2020, respectively. The weighted average discount rate used to determine the lease liabilities for ~~finance leases was 6% and~~ operating leases was 8% as of ~~March 31,~~September 30, 2021 and December 31, 2020, 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 of American Life

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the ~~Nebraska Department of Insurance.~~NDOI. 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. As filed in the statutory-basis annual statement with the ~~Nebraska Department of Insurance,~~NDOI, American Life’s statutory net (loss) gains for the ~~three~~nine months ~~March 31,~~September 30, 2021 and 2020 were ~~$6,109,058~~$2.6 million and ~~$423,474,~~$423, respectively. Capital and surplus of American Life as of ~~March 31,~~September 30, 2021 and December 31, 2020 was ~~$77,818,776~~$75.6 million and ~~$77,446,537,~~$77.4, respectively. The net ~~gain was~~gains were primarily due to the ceding commission and reserve adjustments earned on the Ironbound, ~~SDA,~~ASCRE, US Alliance, SRC1, and Crestline Re SP1 reinsurance transactions; offset by continuing expenses incurred to provide services on the new software and related technology to distribute products through national marketing organizations. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2021, the MYGA and FIA sales were

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~~$9,368,962~~ $82.3 million and ~~$114,284,969~~$285.2 million compared to the MYGA and FIA sales ~~$31,565,506~~$86.5 million and ~~$16,249,504~~$193.0 million as of ~~March 31,~~September 30, 2020. An additional ~~$3,489,795~~$523 of MYGA and ~~$36,050,004~~$1.9 million of FIA sales were pending as of ~~March 31,~~September 30, 2021.

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State insurance laws require American Life to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiary is subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from its domiciliary insurance regulatory authorities. American Life is also subject to risk-based capital (“RBC”) requirements that may further affect its ability to pay dividends. American Life’s statutory capital and surplus as of ~~March 31,~~September 30, 2021 and December 31, 2020 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC ~~requirements.~~requirements as of those dates.

As of December 31, 2020, American Life had an invested asset that was impaired as a result of the fair market of the underlying collateral being valued less that the book value. This was a non-admitted asset for statutory ~~accounting.~~accounting purposes. This asset was held in our modified coinsurance account for Ironbound so it was passed through to the third-party reinsurer through as a reduction of the investment income earned by the third-party reinsurer. As of March 31, 2021, this invested asset was sold for a loss of $2.4 million that was passed through to the third-party reinsurer as a reduction of ~~their~~its investment income earned.

As of ~~March 31,~~September 30, 2021 and December 31, 2020, American Life did not hold any participating policyholder contracts where dividends were required to be paid.

Note 15. 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. TPA fee income earned for TPA ~~administration~~services during the three months ended ~~March 31,~~September 30, 2021 and ~~year ended December 31,~~ 2020 were ~~$207,500~~108 and ~~$8,160,~~$7, respectively. TPA fee income earned for TPA services during the nine months ended September 30, 2021 and 2020 were approximately $423 and $21, respectively.

Note 16. Reverse Stock Split

On August 10, 2020, Midwest filed Articles of Amendment of Amended and Restated Articles of Incorporation (“Amendment”) that changed the total number of shares that the Company is authorized to issue to ~~22,000,000~~22 million shares of common stock, of which ~~20,000,000~~20 million were designated as voting common stock with a par value of $0.001 per share and ~~2,000,000~~2 million designated as non-voting common stock with a par value of $0.001 per share. The Amendment also provides for ~~2,000,000~~2 million shares of preferred stock with a par value of $0.001 per share. The Amendment provided that each 500 shares of voting common stock either issued or outstanding would be converted into one share of voting common stock through a reverse stock split. Fractional shares were not issued in connection with the reverse stock split but were paid out in cash. The Company paid approximately ~~$175,000~~$175 for those fractional shares and is now holding treasury stock represented by that amount. The effective date, August 27, 2020, for the reverse stock split was retrospectively applied to these financial statements. Outstanding shares of voting common stock as of ~~March 31,~~September 30, 2021 and December 31, 2020, were 3,737,564.

Note 17. Capital Raise

On December 21, 2020, Midwest completed a public offering of ~~1,000,000~~1 million shares of its voting common stock ~~offered by the Company~~ at a price ~~to the public~~ of $70.00 per share. The Midwest voting common stock was concurrently approved for listing on the Nasdaq Capital Market under the ticker symbol “MDWT.”

Midwest raised ~~$70,000,000~~$70.0 million of gross proceeds from the ~~capital raise~~public offering and incurred commissions and expenses of approximately ~~$5,914,995~~$6.0 million that were offset against those proceeds.

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Note 18. Equity

Preferred stock

As of ~~March 31,~~September 30, 2021 and December 31, 2020, the Company had ~~2,000,000~~2 million shares of preferred stock authorized but ~~none~~NaN were issued or outstanding.

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Common Stock

The voting common stock is traded on ~~the NASDAQ~~The Nasdaq Capital Market under the symbol ~~“MDWT”.~~“MDWT.” Midwest has authorized ~~20,000,000~~20 million shares of voting common stock and 2 million shares of non-voting common stock. As of ~~March 31,~~September 30, 2021 and December 31, 2020, Midwest had 3,737,564 shares of voting common stock issued and outstanding. As of those dates, there were 0 shares of Midwest’s non-voting common stock issued or outstanding.

Midwest holds approximately 4,500 shares of voting common stock in its treasury due to the reverse stock split discussed in Note 16 above.

Additional paid-in capital

Additional paid-in capital is primarily comprised of the cumulative ~~excess~~ cash that exceeds the par value received by the Company in conjunction with past issuances of its shares. It also is increased by the amortization expense of the consideration calculated at inception of the stock option ~~grant~~grants as discussed in ~~Note.~~Note 10 – Long-Term Incentive ~~Plan~~Plans above.

Accumulated Other Comprehensive Income ~~(Loss)~~(AOCI)

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


	Unrealized investment gains (losses) on AFS securities, net of offsets		Unrealized gains on foreign currency		Accumulated other comprehensive income (loss)
(In thousands)							Unrealized investment gains (losses) on fixed maturities, net of offsets		Unrealized gains on foreign currency		Accumulated other comprehensive income (loss)
Balance at December 31, 2019	$	473,399	$	146,185	$	619,584	$	474	$	146	$	620
Other comprehensive income before Reclassifications		7,398,432		—		7,398,432		7,398		—		7,398
Unrealized gains on foreign currency		—		(146,185)		(146,185)		—		(146)		(146)
Less: Reclassification adjustments for losses realized in net income		(1,441,264)		—		(1,441,264)		(1,441)		—		(1,441)
Balance at December 31, 2020		6,430,567		—		6,430,567		6,431		—		6,431
Other comprehensive income (loss) before reclassifications, net of tax		962,880		—		962,880		2,421		—		2,421
Less: Reclassification adjustments for losses realized in net income, net of tax		(321,074)		—		(321,074)		(1,611)		—		(1,611)
Balance at March 31, 2021	$	7,072,373	$	—	$	7,072,373
Balance at September 30, 2021							$	7,241	$	—	$	7,241

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Note 19. Deferred Acquisition Costs

The following table represents a rollforward of DAC, net of reinsurance:

March 31, 2021

December 31, 2020
Beginning balance

$
13,456,303

$
—
Additions

6,681,991

13,919,206
Amortization

(502,737)

(670,233)
Interest

36,855

138,295
Impact of unrealized investment losses

4,333

69,035
Ending Balance

$
19,676,745

$
13,456,303


(In thousands)	September 30, 2021		December 31, 2020
Beginning balance	$	13,456	$	—
Additions		12,450		13,919
Amortization		(1,800)		(670)
Interest		20		138
Impact of unrealized investment losses		(89)		69
Ending Balance	$	24,037	$	13,456

Note 20. Subsequent Event

~~Table~~On March 29, 2021, Midwest Capital Corp (“MCC”) was formed as a Delaware corporation by filing a Certificate of ~~Contents~~Incorporation with the Secretary of State. As of November 10, 2021, the NDOI issued its nondisapproval of and the Vermont Department of Financial Regulation approved the Funds Withheld Coinsurance and Modified Coinsurance Agreement between American Life and Seneca Incorporated Cell, LLC 2021-03 (“SRC3”) of Seneca Reinsurance Company, LLC. Based on the NDOI’s nondisapproval, the SRC3 transaction will be included in American Life’s statutory filing as of September 30, 2021. Under the agreement, American Life ceded to SRC3, on a funds withheld and modified coinsurance basis, an initial 35% quota share of certain liabilities with respect to American Life’s MYGA and FIA business effective July 1, 2021. On July 3, 2021, the MYGA and FIA quota share increased to 45%. In connection with the formation of SRC3, and also effective as of November 10, 2021, Midwest entered into a Stock Purchase Agreement with MCC and, in turn, MCC entered into both an Operating Agreement and a Participant Contract with SRC3.

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~~assist the reader ~~understand~~in understanding the financial condition of the Company as of ~~March 31,~~September 30, 2021, compared with December 31, 2020, and the results of operations for the three and nine months ended ~~March 31,~~September 30, 2021, compared with corresponding ~~period~~periods in 2020 of Midwest Holding Inc. and its consolidated subsidiaries. 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, 2020 (“2020 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 and Risk Factors

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 (the “Securities Act”), 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 new products or 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, many 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 “Item 1A. Risk Factors” of our 2020 Form 10-K and below in Part III – Other Information – Item 1A Risk Factors.

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All such forward-looking statements speak only as of the date of this report. 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 our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statements are based.

Overview

We ~~were~~are a technology-enabled, services-oriented annuity platform and financial services company formed on October 31, ~~2003 for~~2003. We design and develops in-demand annuity products that are distributed through independent distribution channels, to a large and growing demographic of U.S. retirees. We originate, manage and transfer these annuities through reinsurance arrangements to asset managers and other third-party investors, who are seeking financially attractive products. We also provide the ~~primary purpose of becoming a financial services company.~~operational and regulatory infrastructure and expertise to enable asset managers and third-party investors to form, capitalize and manage their own reinsurance capital vehicles. We operate our business primarily through three subsidiaries, American Life, 1505 Capital, and Seneca Re. American Life is licensed to sell, underwrite, and market life insurance and annuity products in 2122 states and the District of Columbia and has pending applications in additional states. We also provide insurance company administrative services through a division known as “m.pas” that was formed in 2019. 1505 Capital provides investment advisory and related asset management services. Seneca Re reinsures various types of the life insurance risks through one or more single purposes entities or ~~“cells.~~“protected cells.”

In 2018, we began implementation of a new business plan with the purpose of leveraging technology and reinsurance to distribute insurance products through independent marketing organizations (“IMOs”).

American Life’s sales force continues to grow, with eight third-party IMOs presently offering our products. American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2020. A.M. Best also upgraded American Life's long-term issuer credit rating to bbb+ from bbb in December 2020.

Beginning in mid-2019, American Life began ceding portions of its MYGA and FIA annuity business to third-party insurance companies and Seneca Re that we refer to as “quota shares.” For detailed information see “Note 9 — Reinsurance” to our Consolidated Financial Statements included in this Form 10-Q.

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Effective March 12, 2020, we formed Seneca Re for the purpose of reinsuring various types of risks through one or more single purpose entitles, or “protected cells.” On March 30, 2020, Seneca Re received its certificate of authority to transact business as a captive insurance company. On May 12, 2020, we contributed ~~$300,000~~$300 to Seneca Re for a 100% ownership interest. Seneca Re has one incorporated cell, Seneca Incorporated Cell, LLC 2020-01 (“SRC1”) as of ~~December 31, 2020.~~September 30, 2021. We contributed a total of $15.0 million through December 31, 2020 to capitalize SRC1, which is consolidated in our financial statements.

Effective on April 24, 2020, we raised capital of ~~$5,227,000~~$5.2 million from various third-party investors and issued 231,655 shares of voting common stock at $22.50 per share. Also, on April 24, 2020, we signed a securities purchase agreement with Crestline Assurance Holdings LLC (“Crestline”) for additional capital of $10.0 million and issued 444,444 shares of our voting common stock to Crestline ~~Assurance~~ at $22.50 per share.

On August 10, 2020, Midwest filed Articles of Amendment of Amended and Restated Articles of Incorporation (“Amendment”) that changed the total number of shares it is authorized to issue to ~~22,000,000~~22 million shares of common stock, of which ~~20,000,000~~20 million were designated as voting common stock with a par value of $0.001 per share and ~~2,000,000~~two million shares were designated as non-voting common stock with a par value of $0.001 per share. The Amendment also provides for ~~2,000,000~~two million shares of authorized preferred stock with a par value of $0.001 per share. The Amendment provided that upon effectiveness, each 500 shares of common stock either issued or outstanding would be converted into one share of voting common stock through a reverse stock split. The Amendment was effective as of August 27, 2020. Fractional shares were not issued in connection with the reverse stock split but were paid in cash. The Company paid approximately ~~$175,000~~$175 for those fractional shares and is now holding treasury stock represented by that amount. Outstanding shares as of ~~March 31,~~September 30, 2021 and December 31, 2020 were 3,737,564. All prior periods disclosed in this ~~10-Q~~report have been restated to reflect the reverse stock split per share amounts.

On December 21, 2020, Midwest completed a $70 million public offering of ~~1,000,000~~one million shares of its voting common stock ~~offered by the Company~~ at a price ~~to the public~~ of $70.00 per share. On December 17, 2020, ~~Midwest~~the voting common stock was listed on the Nasdaq Capital Market under

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the ticker symbol “MDWT.” The aggregate net proceeds tofrom the ~~Company~~offering were approximately $64.4 million, after deducting underwriting discounts and ~~commissions.~~

commissions but before other offering expenses.

Midwest used the net proceeds of the offering to support the growth of its insurance subsidiaries, American Life, with a capital contribution of $50.0 million, and Seneca Re, with a capital contribution of $7.5 million. The rest of the proceeds were designated for general corporate purposes.

On June 26, 2021, the NDOI issued its non-disapproval of the Modified Coinsurance Agreement (“Modco AEG Agreement”) with American Republic Insurance Company (“AEG”), an Iowa domiciled reinsurance company. The agreement closed on June 30, 2021. Under the Modco AEG Agreement, American Life ceded to AEG, on a modified coinsurance (“Modco”) basis, 20% quota share of certain liabilities with respect to its multi-year guaranteed annuity MYGA-5 business and an initial 20% quota share of certain liabilities with respect to its fixed indexed annuity FIA. American Life has established a Modco Deposit Account to hold the assets for the Modco AEG Agreement.

Also on September 30, 2021 SRC1 paid a cash dividend to Midwest of $2.5 million which was recorded as a reduction of Midwest’s investment in SRC1.

COVID-19

We continue to closely monitor developments related to the COVID-19 pandemic to assess any potential adverse impact on our business. Due to the evolving and highly uncertain nature of this pandemic, it currently is not possible to provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our results of operations, financial condition or liquidity. Management implemented the Company’s business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. The employees returned to the office on July 8, 2020. Operations continued as normal despite a sharp increase in sales during the period. We continue to monitor the Center for Disease Control and Prevention and State of Nebraska guidelines regarding employee safety.

Market conditions in the third quarter of 2021 resulted in continued low interest rate spreads and positive equity markets. The overall economy continued to look positive, but concerns rose around employment participation, consumer confidence and the housing market beginning to show signs of slowing down. The spread of the Covid-19 Delta variant continued to impact certain areas of the U.S.

Our management will continue to monitor our investments and cash flows to evaluate the impact as this pandemic evolves.

Industry Trends and Market Conditions

Interest Rate Environment

Overall, interest rates remain at low levels and are expected to remain there in the short term given the market support occurring through buying and seeking higher yields by investors. We seek to address our interest rate risk through managing the duration of the liabilities and purchasing and holding high quality, long-term assets that mirror that duration.

Competition

We are operating in a highly competitive market with various sizes of diversified financial institutions, established insurance and reinsurance companies. Our annuity market is being impacted by the growing aging population and the need to evaluate their retirement options. We believe our technology and customer service along with our ability to structure solutions position us to provide value to annuity consumers through various distribution channels.

Unrealized Losses; Embedded Derivatives

American Life has agreements with several third-party reinsurers that have funds withheld (“FW”) and modified coinsurance (“Modco”) ~~coinsurance~~ provisions under which the assets related to the reinsured business are maintained by American Life as collateral; however, ownership of the assets and the total return on the asset portfolios belong to the third-party reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in “Note 5 — Derivative Instruments” to

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our Consolidated Financial Statements. ~~As a result of price increases in 2021 and late 2020, assets~~Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately ~~$2.5~~$2.0 million as of ~~March 31,~~September 30, 2021 compared to unrealized ~~losses~~gains of approximately ~~$23.2~~$4.4 million as of ~~March 31,~~September 30, 2020. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party

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reinsurers. We account for these unrealized gains by recording equivalent realized losses on our Consolidated Statements of Comprehensive Loss. Accordingly, the unrealized gains on the assets held by American Life on behalf of the third-party reinsurers were offset by recording an embedded derivative ~~loss~~gain of ~~$400,000~~$900 and ~~derivative gains of $23.2~~$4.4 million, respectively. If prices of investments fluctuate, the unrealized losses of the third-party reinsurers may also fluctuate; therefore, the associated embedded derivative gain (loss) recognized by us for ~~March 31,~~September 30, 2021 and December 31, 2020, would be reduced accordingly.

~~Critical Accounting Policies and Estimates~~

Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K (“2020 Form 10-K MD&A”) 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 2020 Form 10-K MD&A.

~~Net (Loss) Income~~

~~Net loss increased during the three months ended March 31, 2021 compared to the net gain during the three months ended March 31, 2020 primarily due to the following:~~

~~Total (losses) revenue drivers:~~

There are three components associated with our FIA products: 1) the fair market value of the derivative asset entered into in order to mitigate the fluctuation of the embedded liability on our policyholder contracts, 2) the change in the fair market value of the embedded liability, and 3) the option allowance related to our third-party reinsurers that are marked to market at the end of the period. As of March 31, 2021, the change in the market value of the option derivatives decreased resulting in a realized loss of $6.3 million. The decrease in the embedded liability resulted in a decrease in our interest credited of $2.3 million. The third component resulted in a gain resulting from the mark-to-market gain of $4.1 million on our options allowance with the third-party reinsurers presented in other operating expenses.

American Life has treaties with several third-party reinsurers that have funds withheld and modified coinsurance provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and total returns or losses on the asset portfolios belong to the third-party reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 5. As a result of the changes in the market prices, the assets held on behalf of the third-party reinsurers had unrealized gains of approximately $2.5 million and unrealized losses of $23.2 million, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolios accrue to the third-party reinsurers. We account for the change in unrealized gains or losses related to the third-party reinsurers by recording equivalent realized gains or losses on our Consolidated Statements of Comprehensive Loss. We recorded the decrease in the unrealized gains since December 31, 2020 as a realized gain of $400,000 compared to a realized gain of $23.2 million during the first quarter of 2020.

~~Expense drivers~~

As mentioned above in 1.a., the decrease in interest credited and general operating expenses related to the embedded derivatives in our FIA products of $2.3 million and the mark-to-market option allowance gain of $4.1 million was offset by our losses on our derivative assets.

~~Increase of $2.1 million in salaries and benefits due to increasing our personnel to service our new business growth.~~

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Consolidated Results of Operations - Three Months Ended ~~March 31,~~September 30, 2021 and 2020

Comprehensive Net Loss

In this section, unless otherwise noted the discussion compares the three months ended September 30, 2021 to the like period in 2020.

A net loss was incurred compared to net income primarily due to the following:

Total loss drivers:

a)There are three components associated with our FIA products: 1) the fair market value of the derivative asset entered into in order to mitigate the fluctuation of the embedded liability on our policyholder contracts, 2) the change in the fair market value of the embedded liability, and 3) the option allowance related to our third-party reinsurers that are marked to market at the end of the period. The change in the market value of the option derivative assets decreased, resulting in a realized loss of $2.6 million compared to a gain of approximately $1.9 million. The interest credited was $300 and $400, respectively. The embedded derivative liability decrease was included in the overall interest credited. The decrease in the embedded liability resulted in an decrease in our interest credited of approximately $41. In 2020, interest credited was higher due to the increase in the embedded liability. The third component resulted in a loss resulting from the mark-to-market increase of the embedded liability of approximately $900 on our options allowance with the third-party reinsurers which is presented in other operating expenses compared to a mark-to-market decrease of approximately $100.

b)American Life has treaties with several third-party reinsurers that have FW and Modco provisions. As a result of the changes in market prices, the assets held on behalf of the third-party reinsurers had unrealized gains of approximately $2.0 million and $4.4 million at September 30, 2021 and September 30, 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolios accrue to the third-party reinsurers. We account for the change in these unrealized gains or losses by recording equivalent realized gains or losses on our Consolidated Statements of Comprehensive Loss. We recorded the decrease in the unrealized gains as a realized gain of $1.3 million compared to a realized loss of $4.1 million.

c)Certain assets are recorded on a statutory basis at the lower of cost or market. We have unrealized gains on these assets of approximately $2.0 million which were passed through to the reinsurers through the settlement process as a realized loss on our consolidated financials outside the GAAP embedded derivative total return swap discussed above. We did not have any unrealized gains or losses in 2020 that were recorded at the lower of cost or market.

Expense drivers: Our most material expense is salaries and benefits which increased $2.6 million under salaries and increased $2.4 million in other operating expenses benefits due to increasing our personnel and expenses to service our new business growth.

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Revenues

The following summarizes the sources of our revenue for the periods indicated:

Three months ended March 31,

2021

2020
Premiums

$
—

$
21
Investment income, net of expenses

2,887,363

1,240,978
Net realized gains on investments (See Note 4)

(4,649,105)

22,600,010
Amortization of deferred gain on reinsurance

460,856

182,438
Service fee revenue, net of expenses

438,146

380,267
Other revenue

248,969

9,777

$
(613,771)

$
24,413,491


	Three months ended September 30,
(In thousands)	2021		2020
Investment income, net of expenses	$	6,196	$	434
Net realized gains (loss)on investments (See Note 4)		(2,115)		(1,951)
Amortization of deferred gain on reinsurance		662		293
Service fee revenue, net of expenses		628		590
Other revenue		400		117
	$	5,771	$	(517)

Premium revenue: The introduction of our MYGA and FIA products discussed ~~above~~below generated a large volume of new business; however, these products are defined as investment contracts and U.S. GAAP requires that premiums be deferred as deposit-type liabilities on our Consolidated Balance Sheets. American Life expects to introduce additional versions of these annuity products later in 2021.

~~The table below shows premium issued under statutory accounting principles (“SAP”) on our two annuity products:~~

Three months ended March 31,

2021

2020

MYGA

FIA

MYGA

FIA

Premium⁽¹⁾

Premium⁽¹⁾

Premium⁽¹⁾

Premium⁽¹⁾
First quarter
$
9,368,962

$
114,284,969

$
31,565,506

$
16,249,504

~~(1)~~

Under SAP, the MYGA and FIA premiums are treated as premium revenue. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue that is recognized under SAP is accounted for under GAAP as deposit-type liabilities on our Consolidated Balance Sheets and is not recognized on our Consolidated Statements of Comprehensive Loss.

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


	Three months ended March 31,				Three months ended September 30,
	2021		2020
Fixed maturities	$	3,050,777	$	1,167,614
(In thousands)					2021		2020
Fixed maturities income					$	6,373	$	322
Mortgage loans		173,777		2,524		938		81
Other		55,813		—
Other invested assets						74		63
Gross investment income		3,280,367		1,170,138		7,385		466
Less: investment (expenses) refund		(393,004)		70,840
Less investment expenses						(1,189)		(32)
Investment income, net of expenses	$	2,887,363	$	1,240,978	$	6,196	$	434

Investment income, net of expenses, was $6.2 million, compared to $400. Investment income, net of expenses, consists of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase in investment income ~~for 2021 over 2020~~ was due to the investment income earned on the bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the ~~period. Our~~period, as well as deployment of excess cash towards credit investments with attractive yields and risk-return profiles. On a gross consolidated basis, our investment portfolio ~~grew to $535,162,200~~(excluding cash) was $942.8 million as of ~~March 31,~~September 30, 2021 compared to ~~$125,832,863~~$518.2 million as of ~~March~~December 31, 2020, as a result of proceeds from our MYGA and FIA product sales. As of March 31, 2021 and 2020, American Life ceded $47.5 million and $25.7 million, respectively, of premiums to reinsurers and transferred approximately $3.1 million of investment income related to the ceded premiums as required by the terms of its reinsurance agreements.

Net realized ~~(losses) gains~~losses on investments: ~~The net~~Net realized ~~(loss) gains~~losses on investments ~~for the three months ended March 31, 2021 and 2020~~ were losses of ~~$4.6~~$2.1 million ~~and gains of $22.6~~compared to $2.0 million, ~~respectively,~~ which included a gain of ~~$400,000~~$1.3 million and ~~$23.2~~a loss of $4.1 million from ana total return swap embedded derivative in 2021 and 2020, respectively. ~~There~~In 2021, there were net realized losses of ~~$5.4~~$2.6 million related to derivatives

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~~utilized~~ we own to hedge the obligations to FIA policyholders; such losses were partially offset by ~~decreases~~a decrease in ~~FIA-related~~the mark-to-market change in embedded derivative liability within interest credited expense and ~~decreases~~increase in FIA-related mark-to-market option allowance expense flowing through other operating expenses.

The change in fair value of FIA hedging derivatives is driven by the performance of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which increased 1% in 2021, compared to an increase of 8% in 2020; the value of our FIA hedging options tends to increase in rising equity markets and decrease in declining markets, such as the stock market sell-off experienced towards the end of the third quarter of 2021. Also included in the realized losses is the lower of cost or market realized loss of $2.0 million.

American Life has treaties with several reinsurers that have ~~funds withheld~~FW coinsurance provisions, under which the assets backing the treaties are maintained by American Life as collateral but the assets and total return on the asset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 5 — Derivative Instruments to our Consolidated Financial Statements. The change in fair value of the total return swap is included in net realized gains or losses on investments. ~~As a result of price decreases in 2021 and the market volatility in the first quarter of 2020 and recovery in the market in the last quarter of 2020, assets~~Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately ~~$2.5~~$2.0 million and ~~unrealized losses of approximately $23.2~~$4.1 million as of ~~March 31,~~September 30, 2021 and 2020, respectively. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the portfolios

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accrue to the third-party reinsurers. We ~~account for these~~recorded the unrealized gains by recording equivalent realized losses on our Consolidated Statements of Comprehensive Loss. Accordingly, for the three months ended March 31, 2021 and 2020, the change in unrealized gains on the assets held by American Life on behalf of theaccrued to third-party reinsurers ~~were offset by recording an embedded derivative~~via a total return swap a realized gain of ~~$400,000~~$1.3 million and ~~an embedded derivative gain~~a realized loss of ~~$23.2~~$4.1 million, respectively.

Amortization of deferred gain on reinsurance: The flat performance or slight increase in 2021 ~~compared to the comparative period in 2020~~ was due to ~~the~~higher amortization of the ~~ceding commission~~ deferred ~~from~~gain on reinsurance, driven in part by slightly higher reinsured premiums during the ~~additional reinsurance agreements, several with third-party reinsurers which were not in effect in the first quarter of 2020.~~period.

Service fee revenue, net of expenses: Service fee revenue, net of expenses, consists of fee revenue generated by our internal asset manager 1505 Capital for asset management services provided to third-party clients, some of whom are our reinsurers. The flat performance was due primarily to the flat performance in the level of asset management services provided by 1505 Capital to third-party clients.

Other revenue: Other revenue consists of revenue generated by us for providing ancillary services such as third-party administration (“TPA”) to clients. The increase in 2021 was due ~~primarily~~ to the ~~increases in 1505 Capital’s asset management~~increased provision of ancillary services, ~~provided on the increased investment portfolio of our third-party reinsurers.~~

~~Other revenue:~~ ~~The increase in third-party administration (“TPA”) fees earned results from providing additional administrative services~~including TPA, to ~~clients compared to 2020.~~

clients.

Expenses

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

Three months ended March 31,

2021

2020
Interest credited

$
(2,346,403)

$
211,202
Benefits

79

(7,103)
Amortization of deferred acquisition costs

502,737

40,509
Salaries and benefits

2,927,227

824,896
Other operating expenses

(1,529,297)

1,325,113

$
(445,657)

$
2,394,617


	Three months ended September 30,
(In thousands)	2021		2020
Interest credited	$	284	$	380
Benefits		—		(3)
Amortization of deferred acquisition costs		753		235
Salaries and benefits		4,025		1,444
Other operating expenses		4,124		1,706
	$	9,186	$	3,762

Interest credited: The decrease was ~~due~~ primarily due to the FIA product and the decrease in the fair market value of the embedded derivative liability owned by us to FIA ~~policyholders.~~policyholders, offset by interest credited related to the MYGA product This decrease in this liability owed to FIA policyholders is partially ~~offset in~~hedged by our net realized ~~(loss) gains~~loss on investments, as referenced above, which ~~saw~~resulted in a ~~$5.4~~$2.6 million decrease in the fair market value of derivative assets used to partially hedge this obligation to FIA policyholders. Interest credited related to our retained FIA policies was approximately negative $500 and approximately positive $100, respectively. Management’s estimated, amortized cost of servicing our retained FIA policies was approximately $2.4 million and $400, respectively.

Benefits: Death benefits changed ~~insignificantly over prior year. In the first quarter of 2020, we escheated legacy claims and reduced our claims accrual resulting in the 2020 negative balance.~~insignificantly.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs deferred on the sale of American Life’s MYGA and FIA products where we retained approximately 49% of the business in 2021 compared to the ~~same period~~55% retained in ~~2020 that were not ceded to third-party reinsurers.~~2020.

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Salaries and benefits: The increase was due to the addition of personnel to service our new business growth. We ~~are hiring~~continue to hire more in-house expertise to service our growth initiatives.

Other operating expenses: Other operating expenses were approximately ~~$2.9~~$2.4 million ~~lower~~higher than prior year. The primary items of this ~~decrease~~increase are:

1)●

FIA products contain embedded derivative liabilities, which are market driven. The reinsurers that reinsure our FIA products pay an option allowance to American Life to purchase derivative assets used to hedge the FIA embedded derivative liabilities. ~~As of March 31, 2021, the~~The mark-to-market on those option allowances ~~were in a negative position.~~increased during the period. As a result, American Life incurred ~~$4,114,501~~$900 of expense payable to the reinsurers. The derivative assets utilized to partially hedge this mark-to-market option allowance resulted in a $2.6 million loss flowing through net realized (loss) gains on investments, as referenced above.

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●

Other increases in other expenses related to legal fees of $470 due to growth initiatives; taxes, licenses and fees of approximately $320 due to Nebraska and Vermont year-end and examination fees; and audit and actuarial fees of $230 due to increased audit costs resulting from the auditing complexities involved in implementing on our business plan.

Consolidated Results of Operations - Nine months ended September 30, 2021

In this section, unless otherwise noted the discussion compares the nine months ended September 30, 2021 to the like period in 2020.

Net Loss

Net loss increased compared to net income primarily due to the following:

Total losses drivers:

a)As indicated above, there are three components associated with our FIA products: 1) the fair market value of the derivative asset entered into in order to mitigate the fluctuation of the embedded liability on our policyholder contracts, 2) the change in the fair market value of the embedded liability, and 3) the option allowance related to our third-party reinsurers that are marked to market at the end of the period. The change in the market value of the option derivative assets decreased resulting in a realized loss of $4.3 million compared to a gain of $2.0 million. The interest credited was $1.9 million compared to $500. The embedded derivative liability increase was included in the overall interest credited. The third component resulted in a gain resulting from the mark-to-market decrease of the embedded liability of $1.9 million on our options allowance with the third-party reinsurers which is presented in other operating expenses compared to a mark-to-market decrease of approximately $200.

b)As discussed above, American Life has treaties with several third-party reinsurers that have FW and Modco provisions. The assets held on behalf of the third-party reinsurers had unrealized gains of approximately $2.0 million at September 30, 2021 and $4.4 million at September 30, 2020. The terms of the contracts with the third-party reinsurers provide that unrealized gains or losses on the asset portfolios accrue to the third-party reinsurers. We account for the change in unrealized gains or losses related to the third-party reinsurers by recording equivalent but opposite realized gains or losses on our Consolidated Statements of Comprehensive Loss. We recorded the decrease in the unrealized gains as a realized gain of $900 compared to a realized gain of $4.4 million.

Expense drivers: Increase of $7.8 million in salaries and benefits and increase of $1.4 million in other operating expenses benefits were primarily due to increasing our personnel and expenses to implement our business growth plan.

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Revenues:

The following summarizes the sources of our revenue for the periods indicated:


	Nine months ended September 30,
(In thousands)	2021		2020
Investment income, net of expenses	$	12,303	$	1,277
Net realized (loss) gains on investments (See Note 4)		(2,704)		7,829
Amortization of deferred gain on reinsurance		1,711		814
Service fee revenue, net of expenses		1,738		1,359
Other revenue		1,007		134
	$	14,055	$	11,413

Premium revenue: The introduction of our MYGA and FIA products discussed above generated a large volume of new business; however, these products are defined as investment contracts and U.S. GAAP requires that premiums be deferred as deposit-type liabilities on our Consolidated Balance Sheets. American Life expects to introduce additional versions of these annuity products in the later in 2021.

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


	Nine months ended September 30,
(In thousands)	2021		2020
Fixed maturities	$	13,103	$	1,364
Mortgage loans		1,479		81
Other invested assets		225		63
Other interest income		266		—
Gross investment income		15,073		1,508
Less: investment expenses		(2,770)		(231)
Investment income, net of expenses	$	12,303	$	1,277

Investment income, net of expenses, consists of investment income generated from our retained investment assets that are not ceded to reinsurers. The increase in investment income was due to the investment income earned on the bonds and mortgage loans purchased with the sales of our MYGA and FIA products that were not ceded to reinsurers during the period, as well as deployment of excess cash towards credit investments with attractive yields and risk-return profiles.

On a gross consolidated basis, our investment portfolio (excluding cash) was $942.8 million as of September 30, 2021 compared to $518.2 million as of December 31, 2020, as a result of proceeds from our MYGA and FIA product sales.

American Life ceded $193.6 million compared to $178.0 million of premiums to reinsurers.

Net realized (loss) gains on investments: Net realized losses on investments were $2.7 million compared to a gain of $7.8 million, which included a gain of $900 and $4.4 million, respectively, from a total return swap embedded derivative in 2021 and 2020, respectively. There were net realized losses in 2021 of $4.3 million related to equity derivatives we own to hedge the obligations to FIA policyholders; such losses were partially offset by a decrease in the mark-to-market change in embedded derivative liability within interest credited expense and decrease in FIA-related mark-to-market option allowance expense flowing through other operating expenses. The change in fair value of FIA hedging derivatives are driven by the performance of the indices upon which our call options are based. Also included in the realized losses for 2021 is the lower of cost or market realized loss of $2.0 million. The majority of our call options are based on the S&P 500 index which increased 16% in 2021, compared to an increase of 4% in 2020; the value of our FIA hedging options tends to increase in rising equity markets and decrease in declining markets, such as the stock market sell-off experienced towards the end of the third quarter of 2021.

American Life has treaties with several reinsurers that have FW coinsurance provisions, under which the assets backing the treaties are maintained by American Life as collateral but the assets and total return on the asset portfolios belong to the reinsurers. Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized gains of approximately $2.0 million and unrealized losses of approximately $4.4 million as of September 30, 2021

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and 2020, respectively. We recorded the unrealized loss accrued to third-party reinsurers via a total return swap since December 30, 2021, as a realized gain of $900 compared to a realized loss of $4.4 million in 2020.

Amortization of deferred gain on reinsurance: The increase was due to higher amortization of the deferred gain on reinsurance, driven in part by slightly higher reinsured premiums.

Service fee revenue, net of expenses: Service fee revenue, net of expenses, consists of fee revenue generated by our internal asset manager 1505 Capital for asset management services provided to clients, some of whom are our reinsurers. The slight increase was due primarily to the slight increase in the level of asset management services provided by 1505 Capital to clients.

Other revenue: Other revenue consists of revenue generated by us for providing ancillary services such as third-party administration (“TPA”) to clients. The increase was due to the increased provision of ancillary services, including TPA, to clients.

Expenses are summarized in the table below.


	Nine months ended September 30,
(In thousands)	2021		2020
Interest credited	$	1,868	$	464
Benefits		—		(6)
Amortization of deferred acquisition costs		1,780		376
Salaries and benefits		11,466		3,624
Other operating expenses		6,769		5,337
	$	21,883	$	9,795

Interest credited: The increase was due primarily due interest credited relating to the MYGA product, offset by the decrease in the fair market value of the embedded derivative liability owned by us to FIA policyholder, partially hedged by our net realized loss on the investments, as referenced above, which saw a $4.3 million decrease in the fair market value of derivative assets used to partially hedge this obligation to the FIA policyholders. Interest credited related to our retained FIA policies was approximately positive $38 and $100, respectively. Management’s estimated, amortized cost of servicing our retained FIA policies was $4.3 million and $500, respectively.

Benefits: Death benefits changed insignificantly.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs deferred on the sale of American Life’s MYGA and FIA products where we retained approximately 47% of the business in 2021 compared to the 36% retained in 2020. Management expects the retained business to decrease during the last half of 2021 as we cede this business to new third-party reinsurers.

Salaries and benefits: The increase was due to the addition of personnel to service our new business growth. We continue to hire more in-house expertise to service our growth initiatives.

Other operating expenses: Other operating expenses were approximately $1.4 million higher than prior year. The primary items of this increase are:

Decrease:

●

Due to the valuation completed in June of 2020 on an investment in an unaffiliated reinsurance company, an impairment of $500 was recorded for the full value of the preferred stock whereas no impairment was recorded in 2021.

●

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a result, American Life incurred $1.9 million of income ~~and~~ receivable from the reinsurers. The derivative assets utilized to partially hedge this mark-to-market option allowance saw a ~~$5.4~~$4.3 million loss flowing through net realized (loss) gains on investments, as referenced above.

Increases:

2)●

~~Decreases offset by~~Increases in other expenses related to taxes, licenses and fees of approximately ~~$460,000~~$1.1 million due to Nebraska and Vermont year-end and ~~exam~~state examination fees; audit and actuarial expenses of ~~$137,000~~$800 due to increased audit costs, ~~associate with the growing business; and~~legal fees of $800 to execute deal initiatives, $700 to consultants to assist ~~with the~~implementing our business plan, and $300 of overhead office expenses to support our growth of the ~~business of $242,000.~~business.

Investments

~~Most~~A majority of the investments on our Consolidated Balance Sheets are held on behalf of our reinsurers as collateral under our reinsurance agreements. As a result, our investment allocations are largely a function of our collective reinsurer investment allocations. While the reinsurers own the investment risk on these assets, we typically restrict their investment allocations via control over the selection of the asset manager as well as asset restrictions set forth in investment guidelines. Additionally, in many of our reinsurance agreements, our affiliate investment manager, 1505 Capital, is selected as the asset manager.

1505 Capital had approximately $407 million of total third-party assets under management as of September 30, 2021.

The investment guidelines typically include U.S. government bonds, corporate bonds, commercial mortgages, asset backed securities, municipal bonds, mutual funds and collateral loans. The duration of our investments is 5 to 10 years in line with that of our liabilities. We do allow non-U.S. dollar denominated investments where the foreign exchange risk is hedged back to U.S. dollars.

The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of ~~March 31, 20201~~September 30, 2021 and December 31, 2020. Increases in fixed maturity securities primarily resulted from the sale of our new MYGA and FIA products during 2021. ~~Most~~A majority of the investments as of ~~March 31,~~September 30, 2021 and December 31, 2020 are held as collateral for our reinsurers.


	September 30, 2021				December 31, 2020
	Carrying		Percent		Carrying		Percent
(In thousands)	Value		of Total		Value		of Total
Fixed maturity securities:
U.S. government obligations	$	1,981	0.2	%	$	6,164	0.9	%
Mortgage-backed securities		55,245	5.4			14,757	2.2
Collateralized loan obligations		310,653	30.3			221,774	33.1
States and political subdivisions -- general obligations		117	—			118	—
States and political subdivisions -- special revenue		6,230	0.6			6,202	0.9
Trust preferred		16,397	1.6			2,285	0.3
Corporate		266,158	26.0			125,863	18.9
Total fixed maturity securities		656,781	64.1			377,163	56.3
Mortgage loans on real estate, held for investment		168,184	16.4			94,990	14.2
Derivatives		17,262	1.7			11,361	1.7
Equity securities		38,910	3.8			-	—
Other invested assets		47,021	4.6			21,897	3.3
Investment escrow		1,307	0.1			3,174	0.5
Federal Home Loan Bank (FHLB) stock		500	—			—	—
Preferred stock		6,934	0.7			3,898	0.6
Notes receivable		5,885	0.6			5,666	0.8
Policy Loans		55	—			46	—
Cash and cash equivalents		81,487	8.0			151,679	22.6
Total investments, including cash and cash equivalents	$	1,024,326	100.0	%	$	669,874	100.0	%

March 31, 2021

December 31, 2020

Carrying

Percent

Carrying

Percent


Value

of Total

Value

of Total

Fixed maturity securities:









U.S. government obligations

$
2,119,103

0.3
%
$
6,164,983

0.9
%
Foreign governments

1,542,188

0.2

—

—

Mortgage-backed securities

25,828,579

3.3

14,757,414

2.2

Collateralized loan obligations

301,261,339

37.9

221,773,609

33.1

States and political subdivisions -- general obligations

117,330

—

117,330

—

States and political subdivisions -- special revenue

6,123,127

0.8

6,202,204

0.9

Trust preferred

2,152,538

0.3

2,284,816

0.3

Corporate

153,924,830

19.4

125,863,002

18.9

Total fixed maturity securities

493,069,034

62.2

377,163,358

56.3

Mortgage loans on real estate, held for investment

109,776,321

13.8

94,989,970

14.2

Derivatives

9,473,398

1.2

11,361,034

1.7

Equity securities

42,093,166

5.3

—

—

Other invested assets

25,606,108

3.2

21,897,130

3.3

Investment escrow

3,317,043

0.4

3,174,047

0.5

Preferred stock

4,300,591

0.5

3,897,980

0.6

Notes receivable

5,737,608

0.7

5,665,487

0.8

Policy Loans

48,551

—

45,573

—

Cash and cash equivalents

100,927,152

12.7

151,679,274

22.6

Total investments, including cash and cash equivalents

$
794,348,972

100.0
%
$
669,873,853

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 ~~March 31,~~September 30, 2021 and December 31, 2020.


	September 30, 2021				December 31, 2020
	Carrying				Carrying
(In thousands)	Value		Percent		Value		Percent
AAA and U.S. Government	$	2,892	0.4	%	$	3,071	0.8	%
AA		573	0.1			5,818	1.5
A		144,482	22.0			49,445	13.1
BBB		386,980	58.9			247,636	65.7
Total investment grade		534,927	81.4			305,970	81.1
BB and other		121,854	18.6			71,193	18.9
Total	$	656,781	100.0	%	$	377,163	100.0	%

Reflecting the quality of securities maintained by us, ~~91.7%~~81.4% and 81.1% of all fixed maturity securities were investment grade as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

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

Market Risks of Financial Instruments

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

Interest Rate Risk

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

Credit Risk

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

Liquidity Risk

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

Statutory Accounting and Regulations

Our primary insurance subsidiary, American Life, is required to prepare statutory financial statements in accordance with SAP prescribed by the NDOI. SAP primarily differs from GAAP by charging policy acquisition costs to expense as incurred, establishing future benefit liabilities using actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. For further discussion regarding SAP as well as net ~~income (loss)~~loss of American Life

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~~Life~~ under SAP, see Note 1614 to our Consolidated Financial Statements. American Life maintains sufficient capital and surplus to comply with regulatory requirements as of ~~March 31,~~September 30, 2021.

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

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

~~requires that we exclude certain assets, called non-admitted assets, from the Consolidated Balance Sheets.~~

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

~~dictates how much of a deferred income tax asset can be admitted on a statutory Consolidated Balance Sheets.~~

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

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

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

~~requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis as reported under GAAP.~~

~~requires that we record reserves liabilities and expenses, while we record all transactions related to the annuity products under GAAP as a deposit-type contract liability.~~

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

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

•

requires that we exclude certain assets, called non-admitted assets, from the Consolidated Balance Sheets.

•

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

•

dictates how much of a deferred income tax asset can be admitted on a statutory Consolidated Balance Sheets.

•

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

•

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

•

requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis as reported under GAAP.

•

requires that we record reserves liabilities and expenses, while we record all transactions related to the annuity products under GAAP as a deposit-type contract liability.

•

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

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Three months ended March 31,

2021

2020
Consolidated GAAP net loss
$
(1,600,462)

$
21,548,458
Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re)

(563,308)

(248,457)
GAAP net loss of statutory insurance entities
$
(1,037,154)

$
21,796,915

GAAP net income (loss) by statutory insurance entity:

American Life
$
(1,979,850)

$
21,796,915
Seneca Re Protected Cell

942,696

—

$
(1,037,154)

$
21,796,915

Reconciliation of GAAP and SAP

GAAP net gain (loss) of American Life

(1,979,850)

21,796,915
Increase (decrease) due to:

Deferred acquisition costs

(10,708,867)

(2,430,194)
Coinsurance transactions

56,453,111

47,629,572
Carrying value of reserves

(42,565,237)

(42,516,516)
Foreign exchange and derivatives

6,013,367

—
Gain on sale of investments, net of asset valuation reserve

(2,325,448)

(23,582,019)
Other

1,221,982

1,050
SAP net income of American Life
$
6,109,058

$
898,808

GAAP net income of Seneca Re Protected Cell

942,696

—
Increase (decrease) due to:

Deferred acquisition costs

(4,867,782)

—
Coinsurance transactions

36,234,430

—
Carrying value of reserves

(35,076,712)

—
Gain on sale of investments, net of asset valuation reserve

1,492,880

Other

(2,037,242)

SAP net loss of Seneca Re Protected Cell

(3,311,730)

—

SAP net income of statutory insurance entities
$
2,797,328

$
898,808

The following reconciles our GAAP net loss to our SAP net loss for the periods indicated.


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Consolidated GAAP net loss	$	(3,064)	$	(5,537)	$	(9,656)	$	(527)
Exclude: Midwest non-insurance transaction entities (American Life & Seneca Re)		(1,708)		(3,454)		(4,090)		(2,626)
GAAP net (loss) income of statutory insurance entities	$	(1,356)	$	(2,083)	$	(5,566)	$	2,099

GAAP net (loss) income by statutory insurance entity:
American Life	$	(3,314)	$	(2,359)	$	(6,595)	$	1,210
Seneca Re Protected Cell		1,958		276		1,029		889
	$	(1,356)	$	(2,083)	$	(5,566)	$	2,099

Reconciliation of GAAP and SAP
GAAP net (loss) income of American Life		(3,314)		(2,360)		(6,595)		1,210
Increase (decrease) due to:
Deferred acquisition costs		(7,300)		(10,490)		(27,976)		(20,188)
Coinsurance transactions		38,031		63,778		141,019		85,553
Carrying value of reserves		(28,103)		(49,926)		(102,774)		(54,576)
Gain on sale of investments, net of asset valuation reserve		926		3,242		(1,146)		(5,135)
Other		76		(476)		67		(372)
SAP net (loss) income of American Life	$	316	$	3,768	$	2,595	$	6,492

GAAP net income of Seneca Re Protected Cell		1,958		276		1,029		889
Increase (decrease) due to:
Deferred acquisition costs		325		(1,651)		(4,397)		(4,245)
Coinsurance transactions		(61)		40,681		37,764		67,667
Carrying value of reserves		(1,064)		(41,842)		(36,847)		(68,160)
Gain on sale of investments, net of asset valuation reserve		100		—		1,895		—
Other		(101)		—		(874)		—
SAP net income (loss) of Seneca Re Protected Cell	$	1,157	$	(2,536)	$	(1,430)	$	(3,849)

SAP net (loss) income of statutory insurance entities	$	1,473	$	1,232	$	1,165	$	2,643

Non-GAAP Financial Measures

We discuss below ~~certain~~ non-GAAP financial ~~measures~~measure that ~~our~~ management uses in conjunction with GAAP financial measures as an integral part of managing our business and to, among other things:

• monitor and evaluate the performance of our business operations and financial performance;

• facilitate internal comparisons of the historical operating performance of our business operations;

• review and assess the operating performance of our management team;

• analyze and evaluate financial and strategic planning decisions regarding future operations; and

• plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.

Non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, our operating performance measures as prescribed by GAAP.

Operating Metric – Annuity Premiums

We monitor annuity premiums as a key operating metric in evaluating the performance of our business. Annuity premiums, also referred to as sales or direct written premiums, do not correspond to revenues under GAAP, but are relevant metrics to understand our business performance. Under statutory accounting ~~practices,~~principles, or SAP, our annuity premiums received are treated as premium revenue. Our premium metrics include all sums paid into an individual annuity in a given period. We typically

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transfer all or a substantial portion of the premium and policy obligations to reinsurers. Ceded premium represents the premium we transfer to reinsurers in a given period. Retained premium represents the portion of

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premium received during a given period that was not ceded to reinsurers and will either be reinsured in a subsequent period or retained by us. We typically retain premiums prior to transferring them to reinsurers to facilitate block and other reinsurance transactions involving portfolios of annuity premiums.

The following table sets forth premiums received under SAP. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue is accounted under GAAP as deposit-type liabilities on our Consolidated Balance Sheets and is not recognized in our Consolidated Statements of Comprehensive ~~Loss.~~(Loss) Income.


	Three months ended March 31,				Three months ended September 30,				Nine months ended September 30,
	2021		2020
(In thousands)					2021		2020		2021		2020
Annuity Premiums (SAP)
Annuity direct written premiums	$	123,653,931	$	47,815,010	$	117,926	$	132,051	$	367,446	$	279,547
Ceded premiums		(47,464,279)		(25,728,698)		(60,062)		(58,992)		(193,632)		(177,979)
Net premiums retained	$	76,189,652	$	22,086,312	$	57,864	$	73,059	$	173,814	$	101,568

The table below shows premium issued under SAP on our two annuity products:

~~Adjusted Revenue~~


	Nine months ended September 30,
	2021				2020
		MYGA		FIA		MYGA		FIA
(In thousands)	Premium		Premium⁽¹⁾		Premium		Premium⁽¹⁾
Annuity direct written premium
First Quarter	$	9,369	$	114,285	$	31,566	$	16,250
Second Quarter		26,191		99,674		27,400		72,271
Third Quarter		46,718		71,208		27,537		104,514
Total Issued	$	82,278	$	285,167	$	86,503	$	193,035

~~Our adjusted revenue represents~~We had annuity direct written premiums for the ~~revenue we receive~~three months ended September 30, 2021 and ~~retain taking into account~~2020, of $117.9 million and of $132.1 million., respectively. We had annuity direct written premiums for the ~~reinsurance transactions we complete. We define adjusted revenue as revenue including the impact~~nine months ended September 30, 2021 and 2020, of ~~reinsurance transactions completed during the relevant period~~$367.4 million and ~~excluding the total return on the asset portfolios that are owned by reinsurers but held by us, which~~$279.5 million, respectively. The increase in annuity direct written premiums reflects strong sales in the ~~table below is the net realized (gains) losses on investments. We hold these assets primarily to reduce potential credit risk~~first half of the ~~reinsurers. Under~~year, while the third quarter, as discussed above, encountered a challenging sales environment, in which competitors were pricing rates on annuity products aggressively. We sell annuities through the IMO channel. We aim to grow annuity direct written premiums by further developing our ~~agreements~~relationships with ~~reinsurers,~~existing IMOs and increasing the ~~assets backing~~number of IMO partners that distribute our annuity products, as well as increasing the reinsurance agreements are typically maintained by us as collateral but the assets and the total return on the asset portfolios are received by the reinsurers. We receive ceding commissions from reinsurers based on ceded premium in a given period, the products reinsured and the termsnumber of ~~the reinsurance agreements. The revenue we receive from ceding commissions is recognized and earned immediately under SAP upon the completion of a reinsurance transaction~~states in which we ~~have~~are licensed to sell our annuity products. We also aim to distribute to new channels, including the registered investment advisor (RIA) channel as well as the bank and broker-dealer channels.

We had ceded premiums for the three months ended September 30, 2021 and 2020,of $60.1 million and $59.0 million, respectively. The flat to ~~reinsurers. There~~slight increase in ceded premiums was partially attributable to the decrease in annuity direct written premiums discussed above. We had ceded premiums for the nine months ended September 30, 2021 and 2020, of $193.6 million and $178.0 million, respectively. The increase in ceded premiums was attributable primarily to the increase in annuity direct written premiums discussed above.

Operating Metric – Fees Received for Reinsurance


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Fees received for reinsurance⁽¹⁾
Fees received for reinsurance - total	$	3,589	$	4,545	$	11,312	$	8,975

⁽¹⁾ Consists of: 1) amortization of deferred gain on reinsurance, which is ~~no collectability risk as the commissions are paid to us in full in cash when the policies are written~~a line item from our GAAP Consolidated Statements of Comprehensive Loss; and ~~there are no further expenses associated with the collected premiums. The adjustment for~~2) deferred coinsurance ceding commission, which is a line item ~~entry derived directly~~ from our GAAP Consolidated Statements of Cash ~~Flows in our Consolidated Financial Statements. Our management uses adjusted revenue~~Flows.

Fees received for reinsurance is defined as ~~an internal measure of our underlying business performance and it provides useful insights into our results of operations.~~

Under GAAP, ceding commissions are deferred on our Consolidated Balance Sheets as a deferred gain on coinsurance transactions and are subsequently amortized through amortization of deferred gain on reinsurance on the ~~Consolidated Statements of Comprehensive Loss over the period of the policy contracts.~~

~~The following table sets forth a reconciliation of total revenue to adjusted revenue~~net fees received for ~~the three months ended March 31, 2021 and 2020 respectively:~~

Three months ended March 31,

2021
2020
Total revenue - GAAP
$
(613,771)

$
24,413,491
Adjustments:

Net realized gains on investments

(404,600)

(23,238,919)
Deferred coinsurance ceding commission

2,397,926

1,033,940
Adjusted revenue
$
1,379,555

$
2,208,512

~~Adjusted Net Income (Loss)~~

Adjusted net income (loss) is management’s evaluation of the impact of revenue we receive and retain taking into account the reinsurance transactions we complete. Under these provisions with third-party reinsurers, the assets backing the treaties are maintained by American Life as collateral and are carried on the Consolidated Balance Sheets for American Life, but the assets are owned by the third-party reinsurer; thus, the total return on the asset portfolio belongs to the third-party reinsurers. Under GAAP this is considered an embedded derivative but is not designated as a hedge. We make an Consolidated Statements of

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Comprehensive Loss adjustment for net realized losses on investments related to the embedded derivative. The net realized losses on investments related to the embedded derivative is included in GAAP net loss but is reversed dollar for dollar in the calculation of GAAP other comprehensive income through a reclassification adjustment for net realized gains on investments. We define adjusted net income (loss) as net income (loss) including the impact of reinsurance transactions completed during the period and ~~excluding the total return~~includes ceding commission. We calculate fees received for reinsurance by summing two components: 1) amortization of

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deferred gain on ~~the asset portfolios that are owned by reinsurers and held by us. These items have no direct expense and the tax effect of these adjustments is already included in our tax basis,~~reinsurance, which is ~~similar to~~a line item from our ~~Adjusted Net Income. Our management uses adjusted net income (loss) as an internal measure~~GAAP Consolidated Statements of Comprehensive Loss; and 2) deferred coinsurance ceding commission, which is a line item from our ~~underlying business performance and because it provides useful insights into our results~~GAAP Consolidated Statements of ~~operations.~~Cash Flows.

~~The following table sets forth a reconciliation of net loss to adjusted net income (loss) for~~For the three months ended ~~March 31,~~September 30, 2021, fees received for reinsurance decreased by $1.0 million compared to the prior year period due to lower ceded premiums. For the three months ended September 30, 2021, the components of fees received for reinsurance included $700 of amortization of deferred gain on reinsurance from our GAAP Consolidated Statements of Comprehensive Loss and ~~2020, respectively:~~$2.9 million of deferred coinsurance ceding commission from our GAAP Consolidated Statements of Cash Flows.

For the nine months ended September 30, 2021, fees received for reinsurance increased by $2.3 million as compared to the prior year period due to higher ceded premiums. For the nine months ended September 30, 2021, the components of fees received for reinsurance included $1.7 million of amortization of deferred gain on reinsurance from our GAAP Consolidated Statements of Comprehensive (Loss) Income and $9.6 million of deferred coinsurance ceding commission from our GAAP Consolidated Statements of Cash Flows.

Reconciliation – Management Expenses to GAAP Expenses


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Management Expenses
G&A	$	6,212	$	3,279	$	17,357	$	9,152

Management interest credited		3,230		639		6,110		856
Amortization of deferred acquisition costs		753		235		1,780		376
Expenses related to retained business		3,983		874		7,890		1,232
Management expenses - total	$	10,195	$	4,153	$	25,247	$	10,384

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
G&A
Salaries and benefits - GAAP	$	4,025	$	1,444	$	11,466	$	3,624
Other operating expenses - GAAP		4,124		1,706		6,769		5,337
Subtotal		8,149		3,150		18,235		8,961
Adjustments:
Less: Stock-based compensation		(996)		(12)		(2,765)		(25)
Less: Mark-to-market option allowance		(941)		141		1,887		216
G&A	$	6,212	$	3,279	$	17,357	$	9,152

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Management Interest Credited
Interest credited - GAAP	$	284	$	380	$	1,868	$	464
Adjustments:
Less: FIA interest credited - GAAP		549		(115)		(38)		(109)
Add: FIA options cost - amortized		2,397		374		4,280		501
Management interest credited	$	3,230	$	639	$	6,110	$	856

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Reconciliation - Management Expenses to GAAP Expenses
Total expenses - GAAP	$	9,186	$	3,762	$	21,883	$	9,795
Adjustments:
Less: Benefits		—		3		—		6
Less: Stock-based compensation		(996)		(12)		(2,765)		(25)
Less: Mark-to-market option allowance		(941)		141		1,887		216
Less: FIA interest credited - GAAP		549		(115)		(38)		(109)
Add: FIA options cost - amortized		2,397		374		4,280		501
Management expenses - total	$	10,195	$	4,153	$	25,247	$	10,384

Three months ended March 31,

2021
2020
Net loss attributable to Midwest Holding Inc. - GAAP
$
(1,600,462)

$
21,548,458
Adjustments:

Net realized gains on investments

(404,600)

(23,238,919)
Deferred coinsurance ceding commission

2,397,926

1,033,940
Total adjustments

1,993,326

(22,204,979)
Income tax (expense) benefit adjustment⁽¹⁾

—

—
Adjusted net income (loss)
$
392,864

$
(656,521)

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Operating Metric – Management Expenses

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

For the three months ended September 30, 2021, GAAP general and administrative expenses totaled $8.1 million compared to $3.2 million for the prior year. For the three months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in these expenses is mainly salaries, benefits and other operating expenses, along with $1.0 million of non-cash stock-based compensation and $900 of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A.

For the nine months ended September 30, 2021, GAAP general and administrative expenses totaled $18.2 million compared to $9.0 million for the prior year. For the nine months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in these expenses is mainly salaries, benefits and other operating expenses, along with $2.8 million of non-cash stock-based compensation and negative $1.9 million of non-cash mark-to-market expense of our derivative option allowance, which we exclude in our management G&A.

Operating Metric – Management Interest Credited

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

For the three months ended September 30, 2021, GAAP interest credited totaled $300 compared to $400 for the prior year. For the three months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately negative $500. For the three months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, management’s estimated, amortized cost of servicing our retained FIA policies was approximately $2.4 million.

For the nine months ended September 30, 2021, GAAP interest credited totaled $1.9 million compared to $500 for the prior year. For the nine months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in these expenses is GAAP interest credited related to our retained FIA policies of approximately positive $38. For the nine months ended September 30, 2021, as disclosed above in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, management’s estimated, amortized cost of servicing our retained FIA policies was approximately $4.3 million.

Liquidity and Capital Resources

As of ~~March 31,~~September 30, 2021, we had cash and cash equivalents totaling ~~$151,679,274. Approximately $15,227,000~~$81.5 million. During the first half of 2021, management used the ~~increase~~proceeds from the capital raises in ~~cash was due~~2020 to ~~the completion of private sales of our voting common stock in April 2020 and approximately $65,000,000 was due to the completion of a public offering completed on December 21, 2020.~~purchase investments. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital transaction expenditures for the foreseeable future.

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The NAIC has established minimum capital requirements in the form of ~~RBC~~risk based capital (“RBC”) that factors the type of business written by an insurance company, the quality of its assets, and various other aspects of its business to develop a minimum level of capital known as “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under SAP, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. AsRBC ratio is calculated each fiscal year-end and as of December 31, 2020, the RBC ratio of American Life was 1,092,205%.

As discussed in Note 9. Reinsurance to the Consolidated Financial Statements, American Life had a legacy block of business that was ceded ~~off~~ to a third-party reinsurer on July 1, 2018 through an indemnity reinsurance agreement that transferred 90% to an assumptive reinsurer, resulting in American Life transferring all the risk and financial obligations of those policyholders to the third-party reinsurer.

Comparative Cash Flows

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

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~~The following table summarizes our cash flows from operational, investing and financing activities for the periods indicated.~~

Three months ended March 31,

2021

2020

Net cash provided by operating activities

$
7,818,155

$
2,316,449
Net cash used in investing activities

(179,319,216)

(68,154,008)
Net cash provided by financing activities

120,748,939

47,628,210
Net increase in cash and cash equivalents

(50,752,122)

(18,209,349)
Cash and cash equivalents:

Beginning of period

151,679,274

43,716,205
End of period

$
100,927,152

$
25,506,856


	Nine months ended September 30,
	2021		2020
(In thousands)
Net cash provided by operating activities	$	917	$	2,857
Net cash used in investing activities		(423,891)		(202,251)
Net cash provided by financing activities		352,782		292,110
Net (decrease) increase in cash and cash equivalents		(70,192)		92,716
Cash and cash equivalents:
Beginning of period		151,679		43,716
End of period	$	81,487	$	136,432

Cash Provided by Operating Activities

Net cash provided by operating activities was ~~$7,818,155~~$917 for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, which was comprised primarily of capitalized DAC of $12.4 million, amounts recoverable from reinsurers of $6.7 million, and accrued investment income of $5.4 million. These were offset by policy liabilities of $14.8 million primarily due to an increase in ~~other assets and liabilities of $21,408,109 primarily due~~deposit type contracts ceded to ~~payable for securities, an increase in net realized losses of $4,649,105,~~reinsurers; an increase in deferred coinsurance ceding commission due to a third-party reinsurance transaction of ~~$2,397,926. These were offset by capitalized deferred acquisition costs of $6,774,293, amounts recoverable from reinsurers of $6,164,935, policy~~$9.6 million, and an increase in other assets and liabilities of ~~$4,305,256 primarily due to the increase in deposit type contracts ceded to reinsurers, and accrued investment income of $2,288,257.~~$4.9 million.

Cash Used in Investing Activities

Net cash used for investing activities was ~~($179,319,216).~~$423.9 million. The primary use of cash resulted from our purchase of investments from sales of the MYGA and FIA products of ~~$244,765,832.~~$693.3 million. Offsetting this use of cash was our sale of investments in available-for-sale securities for proceeds of ~~$65,459,944.~~$269.5 million.

Cash Flow Provided by Financing Activities

Net cash provided by financing activities was ~~$120,748,939.~~$352.8 million. The primary source of cash was net receipts on the MYGA and FIA products of ~~$123,653,931~~$367.4 million and the primary use of cash was withdrawals on those products of ~~$2,904,992.~~$14.5 million.

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 our investment portfolio with a corresponding effect on investment income.

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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.

Contractual Obligations

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

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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 subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board.

Management, (with the participation of our principal executive officers and 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 ~~March 31,~~September 30, 2021. Based on this evaluation, our principal executive and financial officers concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were 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 SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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.

In addition to the risks previously disclosed in Item 1A – Risk Factors of our 2020 10-K, readers of this report should also consider that since March 13, 2020, the related federal, state and local governmental responses to COVID-19 have affected economic and financial market conditions as well as the operations, results and prospects of companies across many industries.

COVID-19 Risks

The ongoing events resulting from the outbreak of the COVID-19 pandemic, and the uncertainty regarding future similar events, could have an adverse impact on our financial condition, results of operations, cash flows, liquidity, and prospects.

We continue to monitor closely ~~monitor~~ developments related to the coronavirus (COVID-19) pandemic to assess any potential adverse impact on our business. Due to the evolving and highly uncertain nature of this event, it currently is not possible provide a longer-term estimate of potential insurance or reinsurance exposure or the indirect effects the pandemic may have on our

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results of operations, financial condition or liquidity. Management implemented the Company’s business continuity plan in early March 2020 and operated through July 2020 with the majority of employees working remotely. Operations continued as normal despite a sharp increase in sales during the period. We continue to monitor the Centers for Disease Control and Prevention and Nebraska guidelines regarding employee safety.

If the COVID-19 pandemic and associated economic slowdown continues, resurges or ~~resurges,~~mutates to a different variation, it could adversely impact on our future results of operations, financial condition, cash flows, liquidity and prospects in a number of ways, including:

●

Our investment portfolio (and, specifically, the valuations of investment assets we hold) could be materially, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a ~~continued~~ slowdown in the U.S. or in

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global economic conditions may also adversely affect the values and cash flows of these assets. Our investments in mortgages and asset-backed securities could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed by governmental authorities. Further, extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical investment practices in dealing with more orderly markets;

●

Potential impacts on our operations due to efforts to mitigate the pandemic, including government mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures, which could result in an adverse impact on our ability to conduct our business, including our ability to sell policies, and adjust certain claims;

●

While we have implemented risk management and contingency plans and have taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic, and such measures may not adequately predict the impact on our business.

●

We also outsource certain critical business activities to third parties such as our IMOs. As a result, we rely upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While we monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside our control. If one or more of the third parties on whom we rely for critical business activities experience operational difficulties or failures as a result of the impacts from the spread of COVID-19, it may have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows; and

●

Potential impacts of COVID-19 on reinsurers and the cost and availability of reinsurance.

Additionally, there is risk that the current efforts underway by governmental and non-governmental organizations to combat the spread and severity of COVID-19 and related public health issues may not be effective or may be prolonged. Finally, we cannot predict how legal and regulatory responses to concerns about COVID-19 and related public health issues, will impact our business. The continued spread of COVID-19 and its variations has led to disruption and volatility in the global capital markets which could increase our funding costs and limit our access to the capital markets. Accordingly, we may in the future have difficulty accessing capital on attractive terms, or at all, which could have a material adverse effect on our business, results of operations, financial condition, and liquidity.

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

~~Use of Proceeds from Registered Securities~~

~~Pursuant~~On June 1, 2021, we granted to ~~Registration Statement No. 333-249828 declared effective, by the Securities and Exchange Commission, on December 21, 2020, Piper Sandler & Co. and JMP Securities, LLC, as underwriters sold 1,000,000~~an officer a stock option pursuant to our 2019 Long-Term Incentive Plan to purchase 4,000 shares of ~~the Company’s $0.001 par value~~our voting common stock ~~at the public offering~~with a per share exercise price of ~~$70 per share.~~$55.02. None of the options are currently exercisable. The ~~offering closed on December 21 2020. Aggregate underwriting discounts~~option grant exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The options are non-transferable. The recipient of the option is financially sophisticated and ~~commissions were approximately $4,850,000 resulting in net proceeds to~~has adequate access, through his employment and status as an officer of the Company, ~~of $65,450,000 before offering expenses.~~to information about us.

~~Expenses of approximately $779,527 were paid by the Company in connection with the offering through March 31, 2021 (excluding underwriting discounts and commissions set forth above) include:~~

Legal, accounting and professional fees

221,626
SEC filing, NASDAQ listing fees and expenses

500,634
Direct payments to directors, officers and 10%

shareholders (not including regular salaries)

57,267

$
779,527

After payment of the foregoing expenses, net proceeds to the Company were approximately $64.3 million. Of this amount and through March 31, 2021, these proceeds had been applied as follows: Midwest used the net proceeds of the offering to

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support the growth of its insurance subsidiaries, American Life, with a capital contribution of $50.0 million, and Seneca Re, with a capital contribution of $7.5 million. The rest of the proceeds have been allocated for general corporate purposes.

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 Co-Principal Executive Officers 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 Co-Principal Executive Officers 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 Principal 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 *		Inline XBRL Instance Document.
101.SCH *		Inline XBRL Taxonomy Extension Schema Document.
101.CAL *		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB *		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF *		Inline XBRL Taxonomy Extension Definition Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

*	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: ~~May 14,~~November 12, 2021


	MIDWEST HOLDING INC.


	By:	/s/ A. Michael Salem
	Name:	A. Michael Salem
	Title:	Co-Chief Executive Officer
		(Co-Principal Executive Officer)


	MIDWEST HOLDING INC.

	By:		/s/ Michael Minnich
	Name:		Michael Minnich
	Title:		Co-Chief Executive Officer
			(Co-Principal Executive Officer)


	MIDWEST HOLDING INC.


	By:		/s/ Debra K. Havranek
	Name:		Debra K. Havranek
	Title:		Vice President, Principal Financial Officer and
			Treasurer

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	As of March 31,		As of December 31,
	2021		2020
Carrying amounts of major classes of assets included as part of discontinued operations:
Policy loans	$	33,614	$	33,161
Reinsurance recoverables		1,057,488		1,061,979
Premiums receivable		31,379		23,643
Total assets held for sale in the Consolidated Balance Sheets	$	1,122,481	$	1,118,783

Carrying amounts of major classes of liabilities included as part of discontinued operations:
Benefit reserves	$	600,534	$	594,710
Policy claims		24,029		35,302
Deposit-type contracts		489,166		482,966
Advance premiums		335		71
Accounts payable and accrued expenses		1,618		1,263
Total liabilities held for sale in the Consolidated Balance Sheets	$	1,115,682	$	1,114,312


Legal, accounting and professional fees		221,626
SEC filing, NASDAQ listing fees and expenses		500,634
Direct payments to directors, officers and 10%
shareholders (not including regular salaries)		57,267
	$	779,527