MIDWEST HOLDING INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - MIDWEST HOLDING INC.	Financial_Report.xls
EX-32 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - MIDWEST HOLDING INC.	exhibit32.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - MIDWEST HOLDING INC.	exhibit31-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO SECTION 302 - MIDWEST HOLDING INC.	exhibit31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014 or
	o	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to.
COMMISSION FILE NUMBER 000-10685

Midwest Holding Inc.
(Exact name of registrant as specified in its charter)

Nebraska	20-0362426
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2900 S. 70th, Suite 400, Lincoln, Nebraska	68506
(Address of principal executive offices)	(Zip Code)

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

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

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a
smaller reporting company)

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

As of November 14, 2014, there were 13,167,654 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Statements of Cash Flows	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION

Item No.	Item Caption	Page
Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	Signatures	41

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Midwest Holding Inc. and Subsidiaries
Consolidated Balance Sheets

	September 30, 2014			December 31, 2013
	(unaudited)
Assets
Investments, available for sale, at fair value
Fixed maturities (amortized cost: $16,831,594 and $14,932,459, respectively)	$	16,402,362		$	14,190,707
Equity securities (cost: $75,000 and $75,000 respectively)		75,000			75,000
Equity method investments		1,579,173			1,800,859
Equity securities, at cost		248,633			1,273,938
Mortgage loans on real estate, held for investment		658,210			665,569
Real estate, held for investment		544,819			553,849
Policy loans		505,614			369,513
Notes receivable		—			27,383
Short-term investments		1,064,980			1,180,314
Total investments		21,078,791			20,137,132
Cash and cash equivalents		2,451,805			3,377,978
Amounts recoverable from reinsurers		29,484,226			30,660,618
Interest and dividends due and accrued		190,233			189,280
Due premiums		620,532			653,137
Deferred acquisition costs, net		2,697,408			2,722,819
Value of business acquired, net		749,267			821,771
Intangible assets, net		700,000			700,000
Goodwill		1,129,824			1,129,824
Property and equipment, net		346,608			372,368
Other assets		1,915,130			1,473,745
Total assets	$	61,363,824		$	62,238,672
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	33,521,273		$	33,866,409
Policy claims		882,028			529,139
Deposit-type contracts		15,972,961			14,739,655
Advance premiums		94,182			87,850
Total policy liabilities		50,470,444			49,223,053
Accounts payable and accrued expenses		1,675,607			1,451,464
Surplus notes		550,000			550,000
Total liabilities		52,696,051			51,224,517
Commitments and Contingencies (See Note 8)
Stockholders’ Equity:
Preferred stock, Series A, $0.001 par value. Authorized 2,000,000 shares;
issued and outstanding 74,159 shares as of September 30, 2014 and
December 31, 2013		74			74
Preferred stock, Series B, $0.001 par value. Authorized 1,000,000 shares;
issued and outstanding 101,669 shares as of September 30, 2014 and no
shares outstanding as of December 31, 2013		102			—
Common stock, $0.001 par value. Authorized 120,000,000 shares; issued and
outstanding 13,167,654 shares as of September 30, 2014 and
9,120,239 as of December 31,2013		13,168			9,121
Additional paid-in capital		29,541,093			25,131,714
Stock subscription receivable		—			(1,917	)
Accumulated deficit		(20,423,946	)		(17,707,433	)
Accumulated other comprehensive loss		(462,718	)		(740,091	)
Total Midwest Holding Inc.’s stockholders’ equity		8,667,773			6,691,468
Noncontrolling interests		—			4,322,687
Total stockholders’ equity		8,667,773			11,014,155
Total liabilities and stockholders’ equity	$	61,363,824		$	62,238,672

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Income:
Premiums	$	942,162		$	916,087		$	2,915,450		$	3,121,040
Investment income, net of expenses		45,400			113,259			60,614			413,566
Net realized gains (losses) on investments		104,741			(85,117	)		99,080			7,047
Miscellaneous income		87,413			68,694			249,455			116,702
		1,179,716			1,012,923			3,324,599			3,708,355
Expenses:
Death and other benefits		188,219			172,934			873,448			490,122
Increase in benefit reserves		419,087			201,578			795,600			895,972
Amortization of deferred acquisition costs		141,196			271,022			467,290			723,258
Salaries and benefits		637,761			380,762			1,782,497			1,456,315
Other operating expenses		679,725			476,445			2,583,196			1,821,333
		2,065,988			1,502,741			6,502,031			5,387,000
Gain (loss) before income tax expense		(886,272	)		(489,818	)		(3,177,432	)		(1,678,645	)
Income tax expense		—			—			—			—
Net gain (loss)		(886,272	)		(489,818	)		(3,177,432	)		(1,678,645	)
Less: Gain (loss) attributable to noncontrolling interests		(25,085	)		(125,432	)		(460,919	)		(262,540	)
Net gain (loss) attributable to Midwest Holding Inc.	$	(861,187	)	$	(364,386	)	$	(2,716,513	)	$	(1,416,105	)
Comprehensive income (loss)
Unrealized gains (losses) on investments
arising during period	$	(135,801	)	$	(40,411	)	$	322,181		$	(619,927	)
Less: reclassification adjustment for net
realized (gains) losses on investments		(13,929	)		85,117			(8,268	)		(7,047	)
Other comprehensive income (loss)		(149,730	)		44,706			313,913			(626,974	)
Less: Comprehensive income attributable to
noncontrolling interest		(17,288	)		27,651			36,540			(43,682	)
Total comprehensive income (loss) attributable to
Midwest Holding Inc.		(132,442	)		17,055			277,373			(583,292	)
Comprehensive income (loss) attributable to Midwest Holding Inc.	$	(993,629	)	$	(347,331	)	$	(2,439,140	)	$	(1,999,397	)
Net gain (loss) attributable to Midwest Holding Inc.
per common share, basic and diluted	$	(.08	)	$	(0.04	)	$	(0.28	)	$	(0.16	)

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

	Nine months ended September 30,
	2014			2013
Cash Flows from Operating Activities:
Net loss	$	(2,716,513	)	$	(1,678,645	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Net adjustment for premium and discount on investments		117,007			91,324
Depreciation and amortization		214,738			227,196
Deferred acquisition costs capitalized		(441,879	)		(731,574	)
Amortization of deferred acquisition costs		467,290			723,258
Net realized losses (gains) on investments		(99,080	)		(7,047	)
Equity in the net loss (income) of unconsolidated subsidiaries		242,694			(64,692	)
Non-cash compensation expense		1,917			8,625
Changes in operating assets and liabilities:
Amounts recoverable from reinsurers		1,176,392			1,290,630
Interest and dividends due and accrued		(953	)		(4,413	)
Due premiums		32,606			171,279
Policy liabilities		(165,257	)		(392,755	)
Other assets and liabilities		(217,242	)		609,801
Net cash (used in) provided by operating activities		(1,388,280	)		242,987
Cash Flows from Investing Activities:
Securities available for sale:
Purchases		(9,511,327	)		(8,530,031	)
Proceeds from sale or maturity		7,447,297			6,004,022
Equity securities carried at cost:		—			—
Purchases		(27,383	)		—
Proceeds from sale		1,143,500			9,000
Proceeds from payments on mortgage loans on real estate, held for investment		7,359			9,073
Net change in policy loans		(136,101	)		(31,752	)
Proceeds from payments on notes receivable		27,383			—
Net change in short-term investments		115,334			(4,350	)
Purchases of property and equipment		(107,444	)		(86,549	)
Net cash used in investing activities		(1,041,382	)		(2,630,587	)
Cash Flows from Financing Activities:
Repurchases of common stock		(58,251	)		(215,783	)
Proceeds from issuance of preferred stock		610,011			—
Payments on surplus notes		—			(100,000	)
Net transfers from noncontrolling interest		(490,919	)		(97,182	)
Receipts on deposit-type contracts		1,705,351			1,938,203
Withdrawals on deposit-type contracts		(292,703	)		(256,714	)
Net cash provided by financing activities		1,503,489			1,268,524
Net increase (decrease) in cash and cash equivalents		(926,173	)		(1,119,076	)
Cash and cash equivalents:
Beginning		3,377,978			4,346,555
Ending	$	2,451,805		$	3,227,479

See Notes to Consolidated Financial Statements.

Midwest Holding Inc. and Subsidiaries
Supplemental Cash Flow Information
(Unaudited)

	Nine months ended September 30,
	2014		2013
Supplemental Disclosure of Non-Cash Information:
Exchange of common stock for non-controlling interest	$	3,861,768	$	—

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

Nature of operations: Midwest Holding Inc. (Midwest or the Company) was incorporated in Nebraska on October 31, 2003 for the primary purpose of organizing a life insurance subsidiary. From 2003 to May 2009, Midwest was focused on raising capital, first through private placements and finally through an intra-state offering of 2,000,000 common shares at $5.00 per share. These offerings sold out, including a 10% oversale on the final offering. Midwest became operational during the year ended December 31, 2009. Upon capitalizing American Life & Security Corp. (American Life) and acquiring Capital Reserve Life Insurance Company (Capital Reserve), as described below, Midwest deemed it prudent to raise additional capital to fund primarily the expansion of the life insurance operation. Beginning in 2009, American Life, a wholly owned subsidiary of Midwest, was authorized to do business in the State of Nebraska. American Life was also granted a certificate of authority to write insurance in the State of Nebraska on September 1, 2009. American Life is engaged in the business of underwriting, selling, and servicing life insurance and annuity policies.

During the second quarter of 2010, American Life completed the purchase of a 100% ownership interest in Capital Reserve, a dormant insurance company domiciled in Missouri. The purchase was effective as of January 1, 2010. Capital Reserve is licensed in the states of Kansas and Missouri. Currently, 100% of the policies issued by Capital Reserve are reinsured to an unaffiliated reinsurer.

In August 2010, Midwest began an exempt offering of shares to existing holders in the state of Nebraska at $5.00 per share. Midwest raised approximately $7,400,000 before capital raising expenses through this offering that extended into 2011. Additionally, Midwest offered a newly-created class of preferred shares (Class A preferred stock) to residents of Latin America. The preferred shares are non-voting and convert to common shares in 2015 at the rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). The shares were sold at $6.00 per share and a total of 74,159 were sold in 2010.

On November 8, 2010, the Company entered into an agreement to acquire all of the issued and outstanding capital stock of Old Reliance Insurance Company (Old Reliance), an Arizona-domiciled life insurance company. The plan provided for American Life to merge into Old Reliance following the purchase, with the survivor changing its name to American Life & Security Corp. In the transaction, the sole shareholder of Old Reliance received: (i) Approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of voting common stock of the Company ($750,000 fair value). The transaction including the merger was consummated on August 3, 2011.

During the third quarter of 2011, control was attained on a previous noncontrolling interest in Security Capital Corporation (Security Capital), an Arkansas corporation formerly known as Arkansas Security Capital Corporation. Security Capital is a development stage company that has not conducted operations apart from raising capital.

In August 2011, the Company acquired an ownership interest in Hot Dot, Inc. (Hot Dot), a company organized to develop, manufacture, and market the Alert Patch. The Alert Patch is a thermochromatic patch for monitoring and detecting body temperature. Hot Dot is a development stage company that has not conducted operations apart from raising capital and acquiring the patent mentioned previously. The Company’s ownership of Hot Dot was approximately 11.9% as of September 30, 2014. The Company accounts for its investment in Hot Dot using the equity method.

During the first quarter of 2012, the Company purchased additional shares of Great Plains Financial Corporation (Great Plains Financial). As a result of the increased ownership, the Company changed its method of carrying the investment from cost to equity. During the third quarter of 2012, the Company began providing TPA services to Great Plains Financial and Great Plains Financial’s wholly owned subsidiary, Great Plains Life Assurance Company (Great Plains Life). At the end of the third quarter of 2012, Mark Oliver, our Chief Executive Officer and a member of our Board of Directors, was assigned to serve as President of the Company in addition to his role as Executive Vice President, CEO, and CFO of Great Plains Financial. During the fourth quarter of 2012, the Company purchased additional shares of Great Plains Financial, which increased our ownership to 24.5% as of December 31, 2012. As a result of the Company’s ability to significantly influence the operations of Great Plains Financial, the Company began consolidating Great Plains Financial during fourth quarter of 2012. An additional purchase of shares in the first quarter of 2013 increased our ownership of Great Plains Financial to 25.7%.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

On February 20, 2013, the Company commenced a private placement offering under Regulation D of the Securities Act of 1933. The Company offering was for a maximum amount of $10,000,000. Sales of common shares were made in Units, with each Unit consisting of fifty shares of common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016. This offering ended October 31, 2013.

On November 25, 2013, the Company entered into a Plan and Agreement of Exchange (the “Exchange Agreement”) with Great Plains Financial and Security Capital whereby the shareholders of Great Plains Financial and Security Capital would receive shares of Midwest voting common stock equal to an agreed upon value of shares currently owned in each respective company. The Exchange Agreement was approved by the shareholders of each of Great Plains and Security Capital at special shareholders’ meetings held on June 30, 2014 and July 1, 2014, respectively. The Exchange Agreement was finalized on August 5, 2014 and Great Plains and Security Capital became wholly owned subsidiaries of Midwest. The exchange was finalized by the issuance of 4,094,379 shares of common stock. Great Plains’ subsidiary, Great Plains Life Assurance, became a subsidiary of American Life.

On May 9, 2014, American Life entered into a Purchase Option Agreement (the “Agreement”) with an unrelated company whereby the unrelated company paid American Life the sum of $25,000 in consideration for the option and first right of refusal to acquire all of the outstanding capital stock of Capital Reserve. Under terms of the Agreement, the purchase price for the outstanding capital stock of Capital Reserve shall be an amount equal to the Capital and Surplus of Capital Reserve as reflected on the most recent statutory financial statement filed with regulatory authorities prior to the notice of intent to exercise, plus $50,000. This option and right of first refusal expires on May 31, 2015.

In May, 2014, Midwest offered a newly-created class of preferred shares (Series B preferred stock) at $6.00 per share. The Series B shares are non-cumulative, non-voting and convertible to common shares after May 1, 2017 at a rate of 2.0 common shares for each preferred share.

Basis of presentation: The accompanying consolidated financial statements include the accounts of Midwest, our wholly owned subsidiary American Life, American Life’s wholly owned subsidiary Capital Reserve and Great Plains Life, Midwest’s wholly owned subsidiaries, Security Capital and Great Plains Financial. Hereafter, entities are collectively referred to as the “Company,” “we,” “our” or “us.”

Management evaluates the Company as one reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of life insurance products through its subsidiaries. The product offerings, the underwriting processes, and the marketing processes are similar. The Company’s product offerings consist of a multi-benefit life insurance policy that combines cash value life insurance with a tax deferred annuity and a single premium term life product. These product offerings are underwritten, marketed, and managed primarily as a group of similar products on an overall portfolio basis.

These consolidated financial statements have been prepared in conformity with accounting principles generally accepted 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 with the current period’s presentation with no impact on results of operations or total stockholder’s equity.

Investments: All fixed maturities and a portion of the equity securities owned by the Company are considered available-for-sale and are included in the financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in comprehensive loss.

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

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. No other-than-temporary impairments were recognized during the nine months ended September 30, 2014 or 2013.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Included within the Company’s equity securities carried at cost and equity method investments are certain privately placed common stocks for several holding companies organized for the purpose of forming life insurance subsidiaries. Our privately placed common stocks are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. These securities do not have a readily determinable fair value. The Company does not control these entities economically, and therefore does not consolidate these entities. The Company reports the earnings from privately placed common stocks accounted for under the equity method in net investment income.

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

Mortgage loans on real estate, held for investment: Mortgage loans on real estate, held for investment are carried at unpaid principal balances. Interest income on mortgage loans on real estate, held for investment is recognized in net investment income at the contract interest rate when earned. A mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances on mortgage loans are established based upon losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate. These evaluations are revised as conditions change and new information becomes available. No valuation allowance was established for mortgage loans on real estate, held for investment as of September 30, 2014 and December 31, 2013, primarily as a result of the seller’s guaranteed performance of the mortgage loans acquired as part of the Old Reliance transaction. Four of the five mortgage loans held by the Company matured on 12/31/2013. The Company agreed to extend the maturity to November 2014. One of the mortgage loans was paid off on October 17, 2014 and the remaining three loans have sale contracts pending and are expected to close during the fourth quarter of 2014.

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

Notes receivable: Notes receivable are stated at their outstanding principal amount. Outstanding notes accrue interest based on the terms of the respective note agreements.

Short-term investments: Short-term investments are stated at cost and consist of certificates of deposit. At September 30, 2014 and December 31, 2013, the cost of these investments approximates fair value due to the short duration to maturity.

Real estate, held for investment: Real estate, held for investment is comprised of ten condominiums in Hawaii. Real estate is carried at depreciated cost. Depreciation on residential real estate is computed on a straight-line basis over 50 years. All properties are fully leased. Depreciation expense totaled $3,010 for the three months ended September 30, 2014 and 2013. Depreciation expense totaled $9,030 for the nine months ended September 30, 2014 and 2013.

Cash and cash equivalents: The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At September 30, 2014 and December 31, 2013, cash equivalents consisted primarily of money market accounts. The Company has cash on deposit with financial institutions which at times may exceed the Federal Deposit Insurance Corporation insurance limits. The Company has not suffered any losses in the past and does not believe it is exposed to any significant credit risk in these balances.

Deferred acquisition costs: Deferred acquisition costs consist of incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. 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.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred. No events occurred in the nine months ended September 30, 2014 that suggest a review should be undertaken.

The following table provides information about deferred acquisition costs for the periods ended September 30, 2014 and December 31, 2013, respectively.

	Nine months ended			Year Ended
	September 30,			December 31,
	2014			2013
Balance at beginning of period	$	2,722,819		$	2,650,957
Capitalization of commissions, sales and issue expenses		441,879			933,702
Gross amortization		(467,290	)		(861,840	)
Balance at the end of period	$	2,697,408		$	2,722,819

Value of business acquired: Value of business acquired represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. As previously discussed, American Life purchased Capital Reserve during 2010, resulting in an initial capitalized asset for value of business acquired of $116,326. This asset is being amortized on a straight-line basis, which approximates the earnings pattern of the related policies, over ten years. The Company recognized amortization expense of $2,908 and $8,724 for each of the three and nine months ended September 30, 2014 and 2013, respectively, relative to this transaction.

Additionally, the Company paid an upfront ceding commission of $375,000 to Security National Life (SNL). An initial asset was established for the value of this business acquired totaling $348,010, representing primarily the ceding commission. This asset is being amortized on a straight-line basis, which approximates the earnings pattern of the related policies, over ten years, resulting in annual amortization of $34,801. Amortization recognized during each of the three and nine months ended September, 2014 and 2013 relative to this transaction totaled $8,700 and $26,100, respectively. The agreement has an automatic renewal provision unless the Company notifies SNL of its intention not to renew, no less than 180 days prior to the expiration of the then current agreement. Each automatic renewal period is for one year. This reinsurance remains in place.

Additionally, American Life purchased Old Reliance in August 2011, resulting in an initial capitalized asset for value of business acquired of $824,485. This asset is being amortized over the life of the related policies (refer to “revenue recognition and related expenses” discussed later regarding amortization methods). Amortization recognized during the three months ended September 30, 2014 and 2013 totaled $16,614 and $17,331, respectively. Amortization recognized during the nine months ended September 30, 2014 and 2013 totaled $37,679 and $77,529, respectively.

The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. Recoverability of value of business acquired is evaluated 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. No events occurred in the nine months ended September 30, 2014 that would indicate a review should be undertaken.

Goodwill and Other Intangible Assets: Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The Company elected to forgo the qualitative impairment analysis and performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2013, the fair value of the Company’s reporting unit exceeded the carrying value of the net assets assigned to that unit and the Company was not required to perform further testing for impairment. Management's determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations, peer company price to earnings multiples, and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.

The Company assesses the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. No events occurred in the nine months ended September 30, 2014 that suggest a review should be undertaken.

Property and equipment: Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $44,393 and $41,475 for the three months ended September 30, 2014 and 2013, respectively. Depreciation expense totaled $133,203 and $121,886 for the nine months ended September 30, 2014 and 2013, respectively. Accumulated depreciation totaled $678,849 and $499,550 as of September 30, 2014 and December 31, 2013, respectively.

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

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. No such events occurred in the nine months ended September 30, 2014 that would indicate the carrying amounts may not be recoverable.

Reinsurance: In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of September 30, 2014 or December 31, 2013.

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

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

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

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Income taxes: The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2009. 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 they believe are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at September 30, 2014 and December 31, 2013.

Revenue recognition and related expenses: Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies 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.

Amounts received under our multi-benefit policy form are allocated to the life insurance portion and the annuity portion based upon the signed policy.

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 premium paying period using the net level premium method. Traditional life insurance products are treated as long duration contracts, which generally remain in force for the lifetime of the insured.

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

Common and preferred stock and earnings (loss) per share: The par value per common share is $0.001 with 120,000,000 shares authorized. At both September 30, 2014 and December 31, 2013, the Company had 13,167,654 common shares issued and outstanding.

The Class A preferred shares are non-cumulative, non-voting and convertible to common shares after May, 2015, at a rate of 1.3 common shares for each preferred share (subject to customary anti-dilution adjustments). There is no stated dividend rate on the Class A shares, but the holders of Class A shares will receive a dividend on each outstanding share of Class A preferred stock in an amount equal to the amount of the dividend payable on each share of common stock. The par value per preferred share is $0.001 with 2,000,000 shares authorized. At both September 30, 2014 and December 31, 2013, the Company had 74,159 Class A preferred shares issued and outstanding.

The Class B preferred shares are non-cumulative, non-voting and convertible to common shares after May 1, 2017 at a rate of 2.0 common shares for each preferred shares. The par value per preferred share is $0.001 with 1,000,000 shares authorized. The stated dividend rate on the Class B preferred shares is 7%, commencing after December 31, 2014. At September 30, 2014, the Company had 101,669 Class B preferred shares issued and outstanding.

Earnings (loss) per share attributable to the Company’s common stockholders were computed based on the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the three months ended September 30, 2014 and 2013 were 11,159,771 and 9,103,149 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2014 and 2013 were 9,807,554 and 9,108,328 shares, respectively.

Stock subscription receivable: Our Board of Directors approved the issuance of 40,000 shares of voting common stock on March 7, 2010 to Mark Oliver, our Chief Executive Officer and a member of our Board of Directors. The shares were issued for $1.15 per share, which was the approximate fair value of the shares as of the date of issuance. The purchase price was paid by Mr. Oliver through delivery of a five-year promissory note secured by a pledge of the shares purchased. All conditions were met in mid 2014. The balance of the receivable as of September 30, 2014 and December 31, 2013 was $0 and $1,917, respectively. This receivable was partially forgiven, resulting in noncash compensation expense of $0 and $2,875 for the three months ended September 30, 2014 and 2013, respectively, and $1,917 and $8,625 for the nine months ended September 30, 2014 and 2013, respectively.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Risk and uncertainties: Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our consolidated financial statements. The more significant of those risks and uncertainties, as well as the Company’s method for mitigating the risks, are presented below and throughout the notes to the consolidated financial statements.

Estimates—The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets, deferred acquisition costs, value of business acquired, goodwill, and future contract benefits.
Reinsurance—Reinsurance contracts do not relieve us from our obligations to insureds. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible when necessary. We evaluate the financial condition of our reinsurers to minimize our exposure to losses from reinsurer insolvencies. Management believes that any liabilities arising from this contingency would not be material to the Company’s financial position.
Investment Risk—The Company is exposed to risks that issuers of securities owned by the Company will default or that interest rates will change and cause a decrease in the value of our investments. As interest rates decline, the velocity at which these securities pay down the principal may increase. Management mitigates these risks by conservatively investing in investment-grade securities and by matching maturities of our investments with the anticipated payouts of our liabilities.
Liquidity Risk—The company has investments in development stage companies, which are either seeking to raise capital to form life insurance subsidiaries in their respective states of incorporation (Arkansas, Colorado, Idaho, Minnesota and New Mexico) or have recently formed a life insurance subsidiary (South Dakota and Wyoming). There is no public market for shares of these investments, and there is no assurance that one will develop. Therefore, the shares will have limited marketability for an indefinite period of time. There is not currently, and may never be, an active market in these securities, and there is no assurance that any of these securities will ever become publicly traded or that an active trading market will develop or be sustained. Consequently, we may not be able to liquidate our investment in these securities.
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.

The Company attempts to mitigate its exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.
Credit Risk—The Company is 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. The Company manages its credit risk through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management.
Vulnerability Due to Certain Concentrations—The Company monitors economic and regulatory developments that have the potential to impact our business. Federal legislation has allowed banks and other financial organizations to have greater participation in insurance businesses. This legislation may present an increased level of competition for sales of the Company’s products.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

New Accounting Standards: In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists, which finalizes Proposed ASU No. EITF-13C, and requires an entity's unrecognized tax benefit to be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU applies prospectively for reporting periods beginning after December 15, 2013. Retrospective application and early adoption are also permitted. We do not expect ASU No. 2013-11 to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) regarding accounting for revenue recognition that identifies the accounting treatment for an entity's contracts with customers. Although insurance contracts are excluded from this ASU, other customer contracts of the Company would be covered. This guidance is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating this guidance, but it does not believe that there will be a material impact to the consolidated financial statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent or material to the Company at this time.

Note 2. Noncontrolling Interests

The effects on our equity of changes in our ownership interest in equity securities were as follows.

Three months ended September 30,

Nine months ended September 30,

2014

2013

2014

2013

Net gain (loss) attributable to Midwest Holding Inc.

(861,187

)

(364,386

)

(2,716,573

)

(1,416,105

)

Transfers (to) from noncontrolling interests:

Decrease in Midwest Holding Inc.’s additional

paid-in capital for Great Plains Financial stock

purchases, net of change in ownership

—

(14,009

)

Increase to Midwest Holding Inc.’s equity

due to acquisition of remaining shares of Great Plains

and Security Capital from non-controlling interests

3,861,768

—

3,867,768

—

Change from net loss attributable to Midwest Holding

Inc. and transfers from noncontrolling interests

3,000,581

(364,386

)

1,145,195

(1,430,114

)

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Note 3. Investments

The amortized cost and estimated fair value of investments classified as available-for-sale as of September 30, 2014 and December 31, 2013 are as follows:

Gross

Amortized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

September 30, 2014:

Fixed maturities:

U.S. government obligations

3,666,396

116,106

31,347

3,751,155

States and political subdivisions —

general obligations

1,061,349

3,633

41,027

1,023,955

States and political subdivisions —

special revenue

1,373,949

2,270

42,726

1,333,493

Corporate

10,729,900

2,023

438,164

10,293,759

Total fixed maturities

16,831,594

124,032

553,264

16,402,362

Equity securities:

Preferred corporate stock

75,000

—

75,000

Total equity securities

75,000

—

75,000

Total

16,906,594

124,032

553,264

16,477,362

Cost or

Gross

Amortized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

December 31, 2013:

Fixed maturities:

U.S. government obligations

2,483,199

23,398

43,502

2,463,095

States and political subdivisions —

general obligations

1,147,325

—

107,030

1,040,295

States and political subdivisions —

special revenue

1,573,336

—

118,944

1,454,392

Corporate

9,728,599

2,378

498,052

9,232,925

Total fixed maturities

14,932,459

25,776

767,528

14,190,707

Equity securities:

Preferred corporate stock

75,000

—

75,000

Total equity securities

75,000

—

75,000

Total

15,007,459

25,776

767,528

14,265,707

The Company has one security that individually exceeds 10% of the total of the state and political subdivisions categories as of September 30, 2014. The amortized cost, fair value, credit ratings, and description of the security is as follows:

	Amortized		Estimated Fair
	Cost		Value		Credit Rating
September 30, 2014:
Fixed maturities:
States and political subdivisions — general obligations
Maricopa County Arizona School District No. 31	$	339,542	$	333,435	AA-

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The following table summarizes, for all securities in an unrealized loss position at September 30, 2014 and December 31, 2013, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.

September 30, 2014

December 31, 2013

Gross

Number

Gross

Number

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Loss

Securities

Fair Value

Loss

Securities

Fixed Maturities:

Less than 12 months:

U.S. government obligations

1,397,023

31,347

578,914

43,502

States and political subdivisions —

general obligations

155,678

2,339

320,416

32,506

States and political subdivisions —

special revenue

291,059

7,288

653,897

56,717

Corporate

6,961,411

338,358

7,998,855

498,052

Greater than 12 months:

States and political subdivisions —

general obligations

702,267

38,688

719,879

74,524

States and political subdivisions —

special revenue

868,534

35,438

800,495

62,227

Corporate

2,509,357

99,806

—

Total fixed maturities

12,885,329

553,264

11,072,456

767,528

103

Based on our review of the securities in an unrealized loss position at September 30, 2014 and December 31, 2013, no other-than-temporary impairments were deemed necessary. Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2014, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

The amortized cost and estimated fair value of fixed maturities at September 30, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	407,410	$	408,189
Due after one year through five years		2,298,542		2,317,944
Due after five years through ten years		8,991,984		8,781,246
Due after ten years		5,133,658		4,894,983
	$	16,831,594	$	16,402,362

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2014 and December 31, 2013, these required deposits had a total amortized cost of $3,047,707 and $2,967,441 and fair values of $3,110,973 and $2,912,017, respectively.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The components of net investment income for the three and nine months ended September 30, 2014 and 2013 are as follows:

Three months ended September 30,

Nine months ended September 30,

2014

2013

2014

2013

Fixed maturities

114,332

90,988

275,519

280,084

Equity securities

—

4,104

—

22,884

Cash and short-term investments

603

6,724

2,306

14,131

Equity in the net (loss) income of unconsolidated

subsidiaries

(88,595

)

—

(242,696

)

61,557

Other

30,644

22,435

65,372

70,932

56,984

124,251

100,501

449,588

Less: investment expenses

(11,584

)

(10,992

)

(39,887

)

(36,022

)

45,400

113,259

60,614

413,566

Proceeds for the three months ended September 30, 2014 and 2013 from sales of investments classified as available-for-sale were $1,886,156 and $1,403,410, respectively. Gross gains of $19,167 and $10,998 and gross losses of $5,238 and $96,115 were realized on those sales during the three months ended September 30, 2014 and 2013, respectively. Proceeds for the nine months ended September 30, 2014 and 2013 from sales of investments classified as available-for-sale were $7,447,297 and $6,004,022, respectively. Gross gains of $40,807 and $103,162 and gross losses of $32,539 and $96,115 were realized on those sales during the nine months ended September 30, 2014 and 2013, respectively.

During the three month period ending September 30, 2014, Midwest sold its investment in an equity security, at cost, back to the company for a net gain of $90,812.

As of September 30, 2014, no mortgage loans were in a delinquent status and all interest on mortgage loans was current. The following table summarizes the activity in the mortgage loans on real estate, held for investment account for the periods ended September 30, 2014 and December 31, 2013.

	Nine months ended			Year ended
	September 30, 2014			December 31, 2013
Balance at beginning of period	$	665,569		$	677,011
Proceeds from payments on mortgage loans on real estate, held for investment		(7,359	)		(11,442	)
Balance at end of period	$	658,210		$	665,569

Note 4. 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.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

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.

Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended September 30, 2014, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.

Equity securities, available for sale: Equity securities consist principally of preferred stock of publicly traded companies. The fair values of a portion of our preferred equity securities are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy.

Equity method investments: The fair values of equity method investments approximate carrying value and are comprised of the Company’s investments in First Wyoming Capital Corporation (First Wyoming) and Hot Dot. These securities have no active trading and the fair value for these securities is not readily determinable. Therefore, these investments have been omitted from the fair value disclosure tables.

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

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value. Policy loans are categorized as Level 3 in the fair value hierarchy.

Notes Receivable: Fair values for short-term notes receivable approximate carrying value. The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the origination of the loan and its expected repayment. These receivables are categorized as Level 3 in the fair value hierarchy.

Mortgage loans on real estate, held for investment: The fair values of mortgage loans on real estate, held for investment are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans are categorized as Level 3 in the fair value hierarchy.

Investment-type contracts: The fair value for direct and assumed liabilities under investment-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. Liabilities under investment-type insurance contracts that are wholly ceded by Capital Reserve to a non-affiliated reinsurer are carried at cash surrender value which approximates fair value. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. These liabilities are categorized as Level 3 in the fair value hierarchy.

Surplus notes: The fair value for surplus notes is calculated using a discounted cash flow approach. Cash flows are projected utilizing scheduled repayments and discounted to the valuation date using market rates currently available for debt with similar remaining maturities. These notes are structured such that all interest is paid at maturity. In the following fair value tables, the Company has included accrued interest expense, which is recorded in the accounts payable and accrued expenses, of approximately $189,000 and $164,000 in carrying value of the surplus notes as of September 30, 2014 and December 31, 2013, respectively. These liabilities are categorized as Level 3 in the fair value hierarchy.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.

Significant

Quoted

Other

Significant

in Active

Observable

Unobservable

Estimated

Markets

Inputs

Fair

(Level 1)

(Level 2)

(Level 3)

Value

September 30, 2014

Fixed maturities:

U.S. government obligations

—

3,751,155

—

3,751,155

States and political subdivisions — general

obligations

—

1,023,955

—

1,023,955

States and political subdivisions — special

revenue

—

1,333,493

—

1,333,493

Corporate

—

10,293,759

—

10,293,759

Total fixed maturities

—

16,402,362

—

16,402,362

Equity securities:

Preferred corporate stock

—

75,000

—

75,000

Total equity securities

—

75,000

—

75,000

Total

—

16,477,362

—

16,477,362

December 31, 2013

Fixed maturities:

U.S. government obligations

—

2,463,095

—

2,463,095

States and political subdivisions — general

obligations

—

1,040,295

—

1,040,295

States and political subdivisions — special

revenue

—

1,454,392

—

1,454,392

Corporate

—

9,232,925

—

9,232,925

Total fixed maturities

—

14,190,707

—

14,190,707

Equity securities:

Preferred corporate stock

—

75,000

—

75,000

Total equity securities

—

75,000

—

75,000

Total

—

14,265,707

—

14,265,707

There were no transfers of financial instruments between Level 1 and Level 2 during the nine months ended September 30, 2014 or 2013.

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. Equity securities carried at cost are privately placed common stocks for several recently formed holding companies organized for the purpose of forming life insurance subsidiaries. These common stocks are recorded using the cost basis of accounting. These securities have no active trading and the fair value for these securities is not readily determinable. The Company does not control these entities economically, and therefore does not consolidate these entities.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of September 30, 2014 and December 31, 2013, respectively:

September 30, 2014

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Assets and

Observable

Unobservable

Carrying

Liabilities

Inputs

Fair

Amount

(Level 1)

(Level 2)

(Level 3)

Value

Assets:

Mortgage loans on real estate, held for

investment

658,210

—

670,422

Policy loans

505,614

—

505,614

Short-term investments

1,064,980

—

1,064,980

Cash and cash equivalents

2,451,805

—

2,451,805

Liabilities:

Policyholder deposits

(Investment-type contracts)

15,972,961

—

15,972,961

Surplus Notes and Accrued

Interest Payable

739,000

—

730,072

December 31, 2013

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Assets and

Observable

Unobservable

Carrying

Liabilities

Inputs

Fair

Amount

(Level 1)

(Level 2)

(Level 3)

Value

Assets:

Mortgage loans on real estate, held

for investment

665,569

—

690,591

Policy loans

369,513

—

369,513

Notes receivable

27,383

—

27,383

Short-term investments

1,180,314

—

1,180,314

Cash and cash equivalents

3,377,978

—

3,377,978

Liabilities:

Policyholder deposits (Investment-

type contracts)

14,739,655

—

14,739,655

Surplus Notes and Accrued

Interest Payable

714,000

—

704,192

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Note 5. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2014 and December 31, 2013 are as follows:

	September 30, 2014			December 31, 2013
Deferred tax assets:
Loss carryforwards	$	7,523,710		$	6,594,919
Capitalized costs		802,000			821,248
Unrealized losses on investments		157,324			252,196
Benefit reserves		1,246,670			1,235,692
Total deferred tax assets		9,729,704			8,904,055
Less valuation allowance		(8,015,129	)		(7,132,984	)
Total deferred tax assets, net of valuation allowance		1,714,575			1,771,071
Deferred tax liabilities:
Policy acquisition costs		973,433			978,902
Due premiums		210,981			222,067
Value of business acquired		254,751			279,402
Intangible assets		238,000			238,000
Property and equipment		37,400			52,700
Total deferred tax liabilities		1,714,575			1,771,071
Net deferred tax assets	$	—		$	—

At September 30, 2014 and December 31, 2013, the Company recorded a valuation allowance of $8,015,129 and $7,132,984, 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.

Loss carryforwards for tax purposes as of September 30, 2013, have expiration dates that range from 2024 through 2029.

There was no income tax expense for the three or nine months ended September 30, 2014 and 2013. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34% to pretax income, as a result of the following:

Three months ended September 30,

Nine months ended September 30,

2014

2013

2014

2013

Computed expected income tax benefit

(144,621

)

(123,891

)

(923,615

)

(481,476

)

Increase (reduction) in income taxes resulting from:

Meals, entertainment and political contributions

9,939

5,515

23,865

22,062

Dividends received deduction

—

(4,472

)

Noncontrolling interests

7,401

142,910

10,567

89,772

Other

(126,363

)

(55,469

)

(87,864

)

(45,015

)

(109,023

)

92,956

(53,402

)

62,347

Tax benefit before valuation allowance

(253,644

)

(30,935

)

(977,017

)

(419,129

)

Change in valuation allowance

253,644

30,935

977,017

419,129

Net income tax expense

—

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Note 6. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 is as follows:

September 30, 2014

December 31, 2013

Balance sheets:

Benefit and claim reserves assumed

2,744,915

2,814,704

Benefit and claim reserves ceded

29,484,226

30,660,618

Three months ended September 30,

Nine months ended September 30,

2014

2013

2014

2013

Statements of comprehensive income:

Premiums assumed

6,504

7,236

21,777

23,023

Premiums ceded

76,886

102,825

272,370

280,261

Benefits assumed

1,198

10,335

55,592

41,901

Benefits ceded

373,581

210,378

808,667

591,112

Commissions assumed

Commissions ceded

1,510

3,257

5,037

1,175

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer along with the A.M. Best credit rating as of September 30, 2014:

Recoverable on

Total Amount

Recoverable

Benefit

Ceded

Recoverable

AM Best

on Paid

on Unpaid

Reserves/Deposit-

Due

from

Reinsurer

Rating

Losses

type Contracts

Premiums

Reinsurer

Security National Life Insurance Company

—

90,059

16,585,710

68,078

16,607,691

Optimum Re Insurance Company

A–

—

19,008

464,031

—

483,039

Sagicor Life Insurance Company

A–

—

556,520

12,058,232

221,256

12,393,496

665,587

29,107,973

289,334

29,484,226

Capital Reserve has a 100% coinsurance agreement with SNL whereby 100% of the business written by Capital Reserve is ceded to SNL. At September 30, 2014 and December 31, 2013, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by Capital Reserve to SNL were $16,607,691 and $17,294,342, respectively. Capital Reserve remains contingently liable on this ceded reinsurance should SNL be unable to meet their obligations.

During 1999, Old Reliance entered into a 75% coinsurance agreement with Sagicor Life (Sagicor) whereby 75% of the business written by Old Reliance is ceded to Sagicor. During 2000, Old Reliance coinsured the remaining 25% with Sagicor. At September 30, 2014 and December 31, 2013, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by Old Reliance to Sagicor were $12,393,496 and $12,883,237, respectively. Old Reliance remains contingently liable on this ceded reinsurance should Sagicor be unable to meet their obligations.

The use of reinsurance does not relieve the Company 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. No reinsurer of business ceded by the Company has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business. At September 30, 2014, the Company had over 98% of its reinsurance recoverable amounts concentrated with two reinsurers, Sagicor and SNL. SNL, who is not rated by A.M. Best, accounted for $16.6 million of net reinsurance recoverable.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

The Company 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 the Company believes that any reinsurer would not be able to satisfy its obligations with the Company, a separate contingency reserve may be established. At September 30, 2014 and December 31, 2013, no contingency reserve was established.

Note 7. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for periods ended September 30, 2014 and December 31, 2013:

	Nine Months Ended			Year Ended
	September 30, 2014			December 31, 2013
Beginning balance	$	14,739,655		$	12,865,671
Change in deposit-type contracts assumed from SNL		(69,226	)		(66,572	)
Change in deposit-type contracts fully ceded by Capital Reserve		(410,404	)		(683,070	)
Deposits received		1,705,351			2,636,959
Investment earnings		299,797			253,189
Withdrawals, net		(292,210	)		(266,522	)
Ending balance	$	15,972,961		$	14,739,655

Under the terms of American Life’s coinsurance agreement with SNL, American Life assumes certain deposit-type contract obligations, as shown in the table above. Additionally, Capital Reserve cedes 100% of its direct business to SNL. Accordingly, this amount is presented within the corresponding single line above. The remaining deposits, withdrawals and interest credited represent those for American Life’s direct business.

Note 8. Commitments and Contingencies

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, the SEC, 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. The issues involved in information requests and regulatory matters vary widely. The Company cooperates in these inquiries.

In accordance with U.S. GAAP, the Company establishes an accrued liability for litigation and regulatory matters when the future event is probable and its impact can be reasonably estimated. The initial reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure. There were no such liabilities accrued as of September 30, 2014 or December 31, 2013.

Midwest Holding Inc. and Subsidiaries
Notes to Consolidated Financial Statements – Continued

Office Lease: The Company leases office space in Lincoln, Nebraska under an agreement executed October 17, 2013 that expires on January 31, 2024. The Company also subleases office space for a satellite office in Kearney, Nebraska, which was executed on June 11, 2012 and expires on May 1, 2015. In addition, the Company entered into a lease agreement in March 2014 for office space in Lincoln, Nebraska with a one year term expiring on March 31, 2015. Great Plains Financial entered into a lease on May 1, 2011 for office space in Pierre, South Dakota, which expired on April 30, 2014. Great Plains also entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota, which expires on November 30, 2016. Rent expense for the three months ended September 30, 2014 and 2013 was $53,147 and $41,932, respectively. Rent expense for the nine months ended September 30, 2014 and 2013 was $164,103 and $130,211, respectively. Future minimum payments are as follows:

2014	$	43,744
2015		148,772
2016		137,088
2017		133,603
2018		136,557
Later years		771,222
Total	$	1,370,986

Note 9. Statutory Net Income and Surplus

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Arizona Department of Insurance. Likewise, Capital Reserve and Great Plains Life are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Missouri and South Dakota Departments of Insurance, respectively. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. The following table summarizes the statutory net loss and statutory capital and surplus of American Life, Capital Reserve, and Great Plains Life for the nine months ended September 30, 2014 and 2013 and for the periods ended September 30, 2014 and December 31, 2013.

	Statutory Capital and Surplus as of
	September 30, 2014			December 31, 2013
American Life	$	3,283,914		$	1,840,429
Capital Reserve	$	1,394,094		$	1,302,814
Great Plains Life	$	1,999,869		$	2,158,481

	Statutory Net Income (Loss) for the nine months ended September 30,
	2014			2013
American Life	$	(1,075,549	)	$	375,261
Capital Reserve	$	(109,226	)	$	(76,317	)
Great Plains Life	$	(210,886	)	$	(185,403	)

Note 10. Surplus Notes

The following table provides a summary of the Company’s surplus notes along with issue dates, maturity dates, face amounts, and interest rates as of September 30, 2014:

Creditor	Issue Date	Maturity Date	Face Amount	Interest Rate
David G. Elmore	September 1, 2006	September 1, 2016	250,000	7%
David G. Elmore	August 4, 2011	August 1, 2016	300,000	5%

Any payments and/or repayments must be approved by the Arizona Department of Insurance. As of September 30, 2014, the Company has accrued $188,741 of interest expense under accounts payable and accrued expenses on the consolidated balance sheet. During the first quarter of 2013, the repayment of the interest and principal on a portion of the surplus notes was approved by the Arizona Department of Insurance. On January 4, 2013, the Company paid down $100,000 of principal and approximately $7,000 of accrued interest.

Note 11. Related Party Transactions

American Life previously had a general agent contract with a corporation owned by an officer of Midwest. The agreement, which was approved by the Board of Directors of Midwest and American Life, specifies that the corporation, a licensed insurance agency, shall receive an override commission on business written in exchange for managing the Company’s marketing. In addition, the agency must pay for all sales conventions, contests, prizes, awards and training seminars. Total payments made by American Life during the three months ended September 30, 2014 and 2013 were $6,132 and $5,867, respectively. Total payments made by American Life during the nine months ended September 30, 2014 and 2013 were $16,636 and $20,416, respectively. This agreement was terminated in October 2011; however override payments are still being made for renewal business pursuant to the agreement.

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended September 30, 2014 and 2013 amounted to $67,008 and $68,694, respectively. Fees earned during the nine months ended September 30, 2014 and 2013 amounted to $227,260 and $166,702, respectively.

Note 12. Subsequent Events

All of the effects of subsequent events that provide additional evidence about conditions that existed at September 30, 2014, including the estimates inherent in the process of preparing consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated financial statements but arose after, but before the consolidated financial statements were available to be issued. In some cases, non recognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.

The Company has evaluated subsequent events through the date that the consolidated financial statements were issued. The Company dissolved the TPA agreement with Northern Plains Capital Corporation effective October 31, 2014. The Company is also in the process of divesting their interest in Hot Dot and this transaction is expected to close before the end of 2014.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes appearing elsewhere in this report.

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "hopes," "estimates," "projects," "intends," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2013, along with any supplements in Part II below.

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

Overview

Midwest was formed on October 31, 2003 for the primary purpose of becoming a financial services holding company. We presently conduct our business through our wholly owned subsidiary; American Life & Security Corp. Capital Reserve Life Insurance Company of Jefferson City, Missouri is a dormant, wholly owned subsidiary of American Life. Great Plains Life Assurance Company is a wholly owned subsidiary of American Life. Security Capital LLC is a wholly owned subsidiary of Midwest. Great Plains Financial LLC is a wholly owned subsidiary of Midwest.

The Company was a development stage company until American Life commenced insurance operations in 2009. We have incurred significant net losses since inception in 2003 totaling approximately $20.1 million through September 30, 2014. These losses have resulted primarily from costs incurred while raising capital and establishing American Life. We expect to continue to incur operating losses until we achieve a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

During the first quarter of 2012, the Company purchased additional shares of Great Plains Financial. As a result of the increased ownership, the Company changed its method of carrying the investment from cost to equity. During the third quarter of 2012, the Company began providing TPA services to Great Plains Financial and Great Plains Financials’ wholly owned subsidiary, Great Plains Life Assurance Company (Great Plains Life). At the end of the third quarter of 2012, Mark Oliver, our Chief Executive Officer and a member of our Board of Directors, was assigned to serve as President of the Company in addition to his role as Executive Vice President, CEO, and CFO of Great Plains Financial. During the fourth quarter of 2012, the Company purchased additional shares of Great Plains Financial, which increased our ownership to 24.5% as of December 31, 2012. As a result our CEO, Mark Oliver, and our, Chairman, Rick Meyer, being named CEO and Chairman, respectively, of Great Plains Financial and our ability to significantly influence the operations of Great Plains Financial, the Company began consolidating Great Plains Financial on October 1, 2012. Additionally, pursuant to South Dakota law, Great Plains Financial common stock has cumulative voting features which allow the company to exert significantly more than influence than its ownership percentage would normally allow. An additional purchase of shares in the first quarter of 2013 increased our ownership of Great Plains Financial to 25.7% through August 4, 2014.

In 2013, we completed a private placement of our voting common stock, selling units consisting of 50 shares of common stock and one detachable warrant to purchase 10 shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016 for gross proceeds of $353,700.

We entered into Exchange Agreements with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their stockholders (other than those shares already held by us.) Under the Exchange Agreement with Great Plains, the Great Plains shareholders received approximately 1.298 shares of Midwest voting common stock for each share of Great Plains common stock held by the shareholders. Fractional shares were rounded up to the nearest whole share of Midwest voting common stock. Shareholders who perfect dissenters’ rights under South Dakota law received cash in lieu of Midwest voting common stock. Under the Exchange Agreement with Security Capital, the Security Capital shareholders received approximately 0.161 shares of Midwest voting common stock for each share of Security Capital common stock held by the shareholders. Fractional shares were rounded up to the nearest whole share of Midwest voting common stock.

The Exchange Agreements required the approval of the shareholders of both Great Plains and Security Capital. We filed a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (SEC) pursuant to which we are registered 4,120,261 shares of our voting common stock, which we believe is the maximum number of our shares that will be issuable in connection with both Exchange Agreements. The Registration Statement also contained proxy statement materials which solicit the approval of the shareholders of Great Plains and Security Capital. An amended Registration Statement was filed with the SEC on May 8, 2014 and was declared effective on May 12, 2014. The Exchange Agreement was approved by the shareholders of each of Great Plains and Security Capital at special shareholders’ meetings held on June 30, 2014 and July 1, 2014, respectively. The Exchange Agreement was consummated on July 21, 2014.

On August 5, 2014, Great Plains and Security Capital were merged into Midwest Holding Inc. Great Plains Financials’ wholly owned subsidiary, Great Plains Life Assurance Company, along with any remaining assets of Great Plains Financial and Security Capital were transferred via a dividend to Midwest. The dividend income and expense were eliminated in consolidation. Great Plains Life Assurance was contributed to American Life Insurance & Security Corp via a surplus contribution and became a wholly owned subsidiary of American Life.

Critical Accounting Policies and Estimates

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. Preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of the Company’s accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of the results of operations and financial position. A detailed discussion of significant accounting policies is provided in Note 1 — Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Valuation of Investments

The Company’s principal investments are in fixed maturity and equity securities. Fixed maturity and equity securities, which are classified as available for sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in other comprehensive income (loss). The Company utilizes external independent third-party pricing services to determine its fair values on investment securities available for sale. The Company has routines, processes, and controls in place to review prices received from service providers for reasonableness and unusual fluctuations. In the event that a price is not available from a third-party pricing service, the Company pursues external pricing from brokers. Generally, the Company pursues and utilizes only one broker quote per security. In doing so, the Company solicits only brokers which have previously demonstrated knowledge and experience of the subject security.

Each quarter, the Company evaluates the prices received from third-party security pricing services to ensure that the prices represent a reasonable estimate of the fair value within the macro-economic environment, sector factors, and overall pricing trends and expectations. The Company corroborates and validates the primary pricing sources through a variety of procedures that include but are not limited to comparison to additional independent third-party pricing services or brokers, where possible; a review of third-party pricing service methodologies; back testing; and comparison of prices to actual trades for specific securities where observable data exists. In addition, the Company analyzes the primary third-party pricing service’s methodologies and related inputs and also evaluates the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy. Finally, the Company also performs additional evaluations when individual prices fall outside tolerance levels for prices received from third-party pricing services.

Additionally, the Company has investments in development stage entities. These equity securities approximate carrying value and are invested in privately-held life insurance companies. These securities have no active trading. The fair value for these securities is determined through the use of unobservable assumptions about market participants. These companies are regularly bringing new investors into their entities at or above the prices paid by the Company. Accordingly, the Company has asserted that a willing market participant would purchase the security for the same price as the Company paid until such time as the development stage company commences operations.

The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. The Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, financial condition of the issuer, projected cash flows, issuer credit ratings and whether 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 the recovery of the amortized 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 income statement as an other-than-temporary 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 other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the statements of comprehensive income and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.

Deferred Acquisition Costs

Incremental direct costs 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, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

Value of Business Acquired

Value of business acquired (VOBA) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon management’s current view of future events. VOBA is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. Management’s view primarily reflects Company experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect the amortization of VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted. If it is determined that it is appropriate to change the assumptions related to future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain assumptions, such as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple assumptions. The VOBA balance is immediately impacted by any assumption changes, with the change reflected through the statements of comprehensive income as an unlocking adjustment in the amount of VOBA amortized. These adjustments can be positive or negative with adjustments reducing amortization limited to amounts previously deferred plus interest accrued through the date of the adjustment.

In addition, the Company may consider refinements in estimates due to improved capabilities resulting from administrative or actuarial system upgrades. The Company considers such enhancements to determine whether and to what extent they are associated with prior periods or simply improvements in the projection of future expected gross profits due to improved functionality. To the extent they represent such improvements; these items are applied to the appropriate financial statement line items in a manner similar to unlocking adjustments.

VOBA is also reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. If it is determined from emerging experience that the premium margins or gross profits are less than unamortized deferred acquisition costs, then the asset will be adjusted downward with the adjustment recorded as an expense in the current period.

Goodwill and Intangibles

Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.

The Company elected to forgo the qualitative impairment analysis and performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2013, the fair value of the Company’s reporting units exceeded the carrying value of the net assets assigned to that unit and the Company was not required to perform further testing for impairment. Management's determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations, peer company price to earnings multiples, and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.

Reinsurance

In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate.

Future Policy Benefits

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.

Income Taxes

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 they believe are more-likely-than not that the benefit will not to be realized.

Recognition of Revenues

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

Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies 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, 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.

Amounts received under our multi-benefit policy form are allocated to the life insurance portion of the multi-benefit life insurance arrangement and the annuity portion based upon the signed policy.

New Accounting Standards

A detailed discussion of new accounting standards is provided in Note 1 — Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Premium Revenue

When American Life commenced operations in September 2009, we began to receive premium income from the sales of life insurance. Capital Reserve, acquired in 2010, has had minimal impact on operations as it has no premium income or related expenses. Premium writings slowed in late 2013 and through May 2014, as the companies obtained regulatory approval for a new series of ordinary life products in March and May 2014. Management expects the premium writings in American Life and Great Plains to increase in the next few years, as the new products are introduced to the marketplace. American Life began sales in May 2014 and initial results are encouraging, and as assets and policy reserves grow, management expects investment income to grow also.

Consolidated Results of Operations – Three Months Ended September 30

Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the three ended September 30, 2014 and 2013 are summarized in the table below.

	Three months ended September 30,
	2014		2013
Income:
Premiums	$	942,162	$	916,087
Investment income, net of expenses		45,400		113,259
Net realized gains on investments		104,741		(85,117	)
Miscellaneous income		87,413		68,694
	$	1,179,716	$	1,012,923

Premium revenue: Premium revenue in the three months ended September 30, 2014 was $942,162 compared to $916,087 in the three months ended September 30, 2013. The Company recognizes 100% of the first year payments received for its traditional life insurance products as earned premiums when due. In subsequent years, 50% of the payments received are applied toward the traditional life insurance premium. The other 50% of the payments received are applied towards the annuity premium which is recognized as deposits to policyholder account balances and included in future insurance policy benefits. Premiums on the Company's other insurance products are recognized as earned when due. No signification changes to mention.

Investment income, net of expenses: The components of net investment income for the three months ended September 30, 2014 and 2013 are as follows:

	Three months ended September 30,
	2014			2013
Fixed maturities	$	114,332		$	90,988
Equity securities		—			4,104
Cash and short-term investments		603			6,724
Equity in the net (loss) income of unconsolidated
subsidiaries		(88,595	)		—
Other		30,644			22,435
		56,984			124,251
Less: investment expenses		(11,584	)		(10,992	)
	$	45,400		$	113,259

Investment income, net of expenses was $45,400 in the three months ended September 30, 2014 compared to $113,259 in the three months ended September 30, 2013. The decrease for the three months ended September 30, 2014 is primarily due to losses on equity method investments incurred in both First Wyoming and Hot Dot. Interest from mortgage loans on real estate, income from real estate investments, policy loan interest, and miscellaneous investment income is included in the "Other" line item above.

Net realized gains on investments: Net realized gains on investments in the three months ended September 30, 2014 were $104,741 compared to $85,117 in the three months ended September 30, 2013. Great Plains Financial and Security Capital each had an investment in Northern Plains Capital Corporation. Midwest Holding acquired those investments after the merger in August 2014. The Company sold these investments in Northern Plains which accounted for $90,812 of realized gains for the three months ending September 30, 2014.

Miscellaneous income: Miscellaneous income in the three months ended September 30, 2014 was $87,413 compared to $68,694 in the three months ended September 30, 2013. The increase in miscellaneous income is attributable to third-party administration fee income due to higher fees from existing companies under terms of the service agreements.

Expenses for the three months ended September 30, 2014 and 2013 are summarized in the table below.

	Three months ended September 30,
	2014		2013
Expenses:
Death and other benefits	$	188,219	$	172,934
Increase in benefit reserves		419,087		201,578
Amortization of deferred acquisition costs		141,196		271,022
Salaries and benefits		637,761		380,762
Other operating expenses		679,725		476,445
	$	2,065,988	$	1,502,741

Death and other benefits: Death and other policy benefits were $188,219 in the three months ended September 30, 2014 compared to $172,934 in the three months ended September 30, 2013. No significant death claims to call out.

Increase in benefit reserves: The increase in benefit reserves was $419,087 in the three months ended September 30, 2014 compared to $201,578 in the three months ended September 30, 2013. The increase in benefit reserves reflects an increase in new business and the maturity of the Company's in-force block of business as well as the effect of the structure of the initial life insurance policy sold by American Life and Great Plains. In the first year, 100% of the premium is related to the life insurance portion of the policy. In years two and thereafter, half of every premium goes towards the annuity benefit, which causes a dollar-for-dollar increase in reserves.

Amortization of deferred acquisition costs: Incremental direct costs 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, are capitalized and amortized over the life of the premiums produced. The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses. In accordance with accounting principles generally accepted in the United States of America (GAAP), these costs are capitalized and amortized over the life of the premiums produced. The amortization of such costs was $141,196 in the three months ended September 30, 2014, compared to $271,022 in the three months ended September 30, 2013. The decrease in amortization for the three months ended September 30, 2014 results from a decline in new business the first half of 2014. This amortization will start to increase as the new business continues to grow.

Salaries and benefits: Salaries and benefits were $637,761 in the three months ended September 30, 2014 compared to $380,762 in the three months ended September 30, 2013. The increase in the three months of 2014 compared to the same period in 2013 relates to new hires assigned to the Company's marketing activities. Management expects these marketing-related salaries will transition to commission over the next 180 days.

Other expenses: Other expenses (general administrative expenses, licenses and fees, and other expenses) were $679,725 in the three months ended September 30, 2014 compared to $476,445 in the three months ended September 30, 2013. This increase is due, in part, to additional legal expenses from the Great Plains merger into the Company and remaining state examination expense from the 2013 year-end exam. These expenses are not expected to occur in future periods.

Net loss: Net loss was ($886,272) for the three months ended September 30, 2014, compared to a net loss of ($489,818) for the three months ended September 30, 2013. The loss in the third quarter of 2104 compared to the loss incurred in the same time period in 2013 primarily due to the costs associated with the state examinations, the merger of Great Plains, and new hires assigned to the Company's marketing activities.

Loss attributable to noncontrolling interests: Midwest owned approximately 60.2% of the capital stock of Security Capital, and approximately 25.7% of Great Plains Financial through August 5, 2014. Great Plains Financial was merged into Midwest Holding during the three months ended September 30, 2014. The loss of ($25,085) through the merger date of August 5, 2014 is down compared to the loss of ($125,432) for the full three months ended September 30, 2013.

Net loss attributable to Midwest Holding Inc.: Net loss attributable to Midwest Holding Inc. was ($861,187) for the three months ended September 30, 2014 compared to a net loss of ($364,386) for the three months ended September 30, 2013. The increase in the net loss for the three months ended September 30, 2014 compared to same period in 2013 was primarily attributable to the costs associated with the state examinations, the merger of Great Plains, and new hires assigned to the Company’s marketing activities.

Consolidated Results of Operations – Nine Months Ended September 30

Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the nine months ended September 30, 2014 and 2013 are summarized in the table below.

	Nine months ended September 30,
	2014		2013
Income:
Premiums	$	2,915,450	$	3,121,040
Investment income, net of expenses		60,614		413,566
Net realized gains on investments		99,080		7,047
Miscellaneous income		249,455		166,702
	$	3,324,599	$	3,708,355

Premium revenue: Premium revenue in the nine months ended September 30, 2014 was $2,915,450 compared to $3,121,040 in the nine months ended September 30, 2013. Production of new life premium was slower in the first nine months of 2014 compared to the first nine months of 2013 because of a delay in obtaining regulatory approval of American Life's and Great Plain's new life insurance products as discussed above, as well as changes in field management in Great Plains; additionally, because of the delays, new agent recruiting was dramatically reduced. Such efforts resumed in the second quarter of 2014 and management expects to continue an emphasis on recruiting throughout the remainder of 2014. Management believes these slowdowns are temporary and expects production to increase in 2014 as management continues to introduce the newly developed life products to the marketplace.

Investment income, net of expenses: The components of net investment income for the nine months ended September 30, 2014 and 2013 are as follows:

	Nine months ended September 30,
	2014			2013
Fixed maturities	$	275,519		$	280,084
Equity securities		—			22,884
Cash and short-term investments		2,306			14,131
Equity in the net (loss) income of unconsolidated
subsidiaries		(242,696	)		61,557
Other		65,372			70,932
		100,501			449,588
Less: investment expenses		(39,887	)		(36,022	)
	$	60,614		$	413,566

Investment income, net of expenses was $60,614 in the nine months ended September 30, 2014 compared to $413,566 in the nine months ended September 30, 2013. The decrease for the nine months ended September 30, 2014 is primarily due to losses on equity method investments incurred in both First Wyoming and Hot Dot. Interest from mortgage loans on real estate, income from real estate investments, policy loan interest, and miscellaneous investment income is included in the "Other" line item above.

Net realized gains on investments: Net realized gains on investments in the nine months ended September 30, 2014 was $99,080 compared to net realized gains on investments of $7,047 in the nine months ended September 30, 2013. The Company sold these investments in Northern Plains which accounted for $90,812 of realized gains for the nine months ending September 30, 2014.

Miscellaneous income: Miscellaneous income in the nine months ended September 30, 2014 was $249,455 compared to $166,702 in the nine months ended September 30, 2013. The increase in miscellaneous income is attributable to third-party administration fee income earned in 2014 as the Company began providing services to additional companies during the second quarter of 2013 and received higher fees from existing companies under terms of the service agreements.

Expenses for the nine months ended September 30, 2014 and 2013 are summarized in the table below.

	Nine months ended September 30,
	2014		2013
Expenses:
Death and other benefits	$	873,448	$	490,122
Increase in benefit reserves		795,600		895,972
Amortization of deferred acquisition costs		467,290		723,258
Salaries and benefits		1,782,497		1,456,315
Other operating expenses		2,583,196		1,821,333
	$	6,502,031	$	5,387,000

Death and other benefits: Death and other policy benefits were $873,448 in the nine months ended September 30, 2014 compared to $490,122 in the nine months ended September 30, 2013. The increase in claims is primarily related to the settlement of litigation on one policy issued by Old Reliance. The settlement amount was $205,000 and related to a lawsuit regarding the payment of benefits on a policy where death occurred during the two-year contestable period. Additionally, Great Plains incurred a maximum loss claim during the first half of 2014, one of its first.

Increase in benefit reserves: The decrease in benefit reserves was $795,600 in the nine months ended September 30, 2014 compared to $895,972 in the nine months ended September 30, 2013. The decrease in benefit reserves reflects the decline in new business during the first nine months of 2014 which was partially offset by the maturity of the Company's in-force block of business as well as the effect of the structure of the initial life insurance policy sold by American Life and Great Plains as mentioned above.

Amortization of deferred acquisition costs: The amortization of such costs was $467,290 in the nine months ended September 30, 2014, compared to $723,258 in the nine months ended September 30, 2013. The decrease in amortization for the nine months ended September 30, 2014 results from a decline in new business.

Salaries and benefits: Salaries and benefits were $1,782,497 in the nine months ended September 30, 2014 compared to $1,456,315 in the nine months ended September 30, 2013. The increase in the nine months of 2014 relates to new hires assigned to the Company's marketing activities. Management expects these marketing-related salaries will transition to commission over the next 180 days.

Other expenses: Other expenses were $2,583,196 in the nine months ended September 30, 2014 compared to $1,821,333 in the nine months ended September 30, 2013. Other operating expenses increased during the first nine months of 2014 due to higher professional fees of $167,000 associated with the filing of Form S-4 related to the Exchange Agreement with Great Plains and Security Capital as well as fees of $249,000 related to routine regulatory examinations that were conducted by agencies from the states of Arizona, Missouri, and Wyoming as required by state statutes.

Net Loss: Net loss was ($3,177,432) for the nine months ended September 30, 2014, compared to a net loss of ($1,678,645) for the nine months ended September 30, 2013. The increase in the net loss year-to-date was primarily attributable to lower revenue, including a decline in premium revenue, and by the costs associated with the Exchange Agreement and State examinations; both of the expenses should sharply decline during the remainder of 2014. These decreases were partially offset by the sale of the Company’s investment in Northern Plains.

Loss attributable to noncontrolling interests: Midwest owned approximately 60.2% of the capital stock of Security Capital, and approximately 25.7% of Great Plains Financial through August 5, 2014. Great Plains Financial was merged into Midwest Holding during the three months ended September 30, 2014. The loss of ($460,919) recorded through the merger date of August 5, 2014, compared to the loss of ($262,540) for the period ending September 30, 2014 represents an increased loss incurred by Great Plains Financial Corporation.

Net loss attributable to Midwest Holding Inc.: Net loss attributable to Midwest Holding Inc. was ($2,716,573) for the nine months ended September 30, 2014 compared to a net loss of ($1,416,105) for the nine months ended September 30, 2013. The increase in the net loss for the nine months ended September 30, 2014 compared to same period in 2013 was primarily attributable to lower revenue, particularly a decline in premium revenue and significant expenses related to the Exchange Agreement and the State insurance examinations.

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, with smaller holdings in equity securities, real estate, held for investment, mortgage loans on real estate, held for investment, policy loans, and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2014 and December 31, 2013.

	September 30, 2014				December 31, 2013
	Carrying		Percent of		Carrying		Percent of
	Value		Total		Value		Total
Fixed maturity securities:
U.S. government obligations	$	3,751,155	15.9	%	$	2,463,095	10.5	%
States and political subdivisions — general
obligations		1,023,955	4.4			1,040,295	4.4
States and political subdivisions — special revenue		1,333,493	5.7			1,454,392	6.2
Corporate		10,293,759	43.8			9,232,925	39.2
Total fixed maturity securities		16,402,362	69.8			14,190,707	60.3
Equity securities:
Preferred corporate stock		75,000	0.3			75,000	0.3
Total equity securities		75,000	0.3			75,000	0.3
Cash and cash equivalents		2,451,805	10.4			3,377,978	14.4
Equity method investments		1,579,173	6.7			1,800,859	7.7
Equity securities, at cost		248,633	1.1			1,273,938	5.4
Short-term investments		1,064,980	4.5			1,180,314	5.0
Other investments:
Mortgage loans on real estate, held for investment		658,210	2.8			665,569	2.8
Real estate, held for investment		544,819	2.3			553,849	2.4
Policy loans		505,614	2.1			369,513	1.6
Notes receivable		—	—			27,383	0.1
Total	$	23,530,596	100	%	$	23,515,110	100	%

Increases in fixed maturity securities primarily result from additional purchases during the nine months of 2014.

American Life had four mortgage loans that had a stated maturity of December 31, 2013. Management verbally extended the loans to consider a request by the borrower to significantly extend the maturity date. In May 2014, the Company notified the borrower it would not make a long-term extension and called the loans as of September 30, 2014. The sale one of the properties occurred in October 2014. The three remaining underlying properties are in the process of being sold and management has agreed to a temporary extension through November 30, 2014. All principal and interest payments are current.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2014 and December 31, 2013.

September 30, 2014

December 31, 2013

Carrying

Percent of

Carrying

Percent of

Value

Total

Value

Total

AAA and U.S. Government

3,964,005

24.1

2,557,644

18.0

1,582,411

9.7

1,745,616

12.3

7,973,859

48.6

7,526,873

53.0

BBB

2,779,054

17.0

2,260,155

15.9

Total investment grade

16,299,329

99.4

14,090,288

99.2

BB and other

103,033

0.6

100,419

0.8

Total

16,402,362

100

14,190,707

100

Reflecting the high quality of securities maintained by the Company, 99.4% and 99.2% of all fixed maturity securities were investment grade as of September 30, 2014 and December 31, 2013, respectively. Due to the low interest rate environment, the Company has invested in bonds with “BBB” ratings or greater. Recently, as opportunities present themselves, lower-rated bonds have been disposed of and replaced with more-highly rated instruments.

Market Risks of Financial Instruments

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

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs.

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

Credit Risk

The Company is 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. The Company manages its credit risk through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management.

Liquidity and Capital Resources

Since inception, the Company’s operations have been financed primarily through the sale of voting common stock and preferred stock. The operations have not been profitable and have generated significant operating losses since the Company was incorporated in 2003.

Premium income, deposits to policyholder account balances, and investment income are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to pay future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. The Company’s investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.

Net cash used in operating activities was $1,388,280 for the nine months ended September 30, 2014. The primary sources of cash from operating activities were from premium receipts, collection amounts due from reinsurers and net investment income. The primary uses of cash from operating activities were from payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $1,041,382 for the nine months ended September 30, 2014. The primary source of cash was from sales of available for sale securities and the proceeds from the sale of our investment in Northern Plains Capital Corporation. Offsetting this source of cash was the Company’s investments in available for sale securities and the purchase of property and equipment. Net cash provided by financing activities was $1,503,489 for the nine months ended September 30, 2014. The primary sources of cash were the net proceeds from the sale of preferred stock in the Company’s private placement offering and receipts on deposit type contracts.

At September 30, 2014, the Company had cash and cash equivalents totaling $2,451,805. The Company believes that its existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for at least twelve months. The Company has based this estimate upon assumptions that may prove to be wrong and the Company could use its capital resources sooner than they currently expect. The growth of our insurance subsidiaries is uncertain and will require additional capital if they continue to grow.

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. The Company attempts, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

As required by Exchange Act Rule 13a-15(b), management of the Company, including the Chief Executive Officer and the Vice President and Controller, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based upon an evaluation at the end of the period, the Chief Executive Officer and the Vice President and Controller concluded that disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the Exchange Act.

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 in response to Item 1A of Part I of such Form 10-K.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

EXHIBIT
NUMBER		DESCRIPTION
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS **		XBRL Instance Document.

101.SCH **		XBRL Taxonomy Extension Schema Document.

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB **		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document.

____________________

*	Filed herewith.
**	Furnished herewith.

SIGNATURES

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

Dated: November 14, 2014

	MIDWEST HOLDING INC.

	By:	/s/ Mark A. Oliver
	Name:	Mark A. Oliver
	Title:	Chief Executive Officer
		(Principal Executive Officer,
		Principal Financial Officer, and
		Principal Accounting Officer)

MIDWEST HOLDING INC. - FORM 10-Q - November 14, 2014

Attached files

MIDWEST HOLDING INC. Reports