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

For the quarterly period ended September 30, 2017

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 ☒ No ☐

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 ☒ No ☐

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

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

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

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

As of November 1, 2017, there were 22,764,294 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

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MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Midwest Holding Inc. and Subsidiaries
Consolidated Balance Sheets

		September 30, 2017				December 31, 2016
Assets		(unaudited)
Investments, available for sale, at fair value
Fixed maturities (amortized cost: $21,913,504 and $29,024,083, respectively)		$	21,245,220			$	27,738,939
Real estate, held for investment			508,698				517,729
Policy loans			439,585				412,583
Total investments			22,193,503				28,669,251
Cash and cash equivalents			677,436				661,545
Amounts recoverable from reinsurers			20,347,310				11,704,055
Interest due and accrued			228,949				312,054
Due premiums			623,673				670,989
Deferred acquisition costs, net			2,059,193				2,568,799
Value of business acquired, net			445,663				1,726,192
Intangible assets			700,000				700,000
Property and equipment, net			139,212				158,471
Other assets			124,396				95,773
Total assets		$	47,539,335			$	47,267,129
Liabilities and Stockholders' Equity
Liabilities:
Benefit reserves		$	24,901,354			$	24,606,543
Policy claims			385,161				565,148
Deposit-type contracts			17,746,293				16,012,567
Advance premiums			60,349				52,074
Coinsurance ceding commission deferred			326,569				-
Total policy liabilities			43,419,726				41,236,332
Accounts payable and accrued expenses			1,230,711				1,211,875
Surplus notes			550,000				550,000
Total liabilities			45,200,437				42,998,207
Commitments and Contingencies (See Note 8)
Stockholders' Equity:
Preferred stock, Series A, $0.001 par value. Liquidation preference $6.00 per share. Authorized 2,000,000 shares; issued and outstanding 74,159 shares as of September 30, 2017 and December 31, 2016.			74				74
Preferred stock, Series B, $0.001 par value. Liquidation preference $6.00 per share. Authorized 1,000,000 shares; issued and outstanding of 0 and 102,669 shares as of September 30, 2017 and December 31, 2016.			-				103
Common stock, $0.001 par value. Authorized 120,000,000 shares; issued and outstanding 22,764,294 shares as of September 30, 2017 and 22,558,956 as of December 31, 2016.			22,764				22,559
Additional paid-in capital			33,006,279				33,036,924
Accumulated deficit			(30,037,608	)			(27,533,447	)
Accumulated other comprehensive loss			(652,611	)			(1,257,291	)
Total stockholders' equity			2,338,898				4,268,922
Total liabilities and stockholders' equity		$	47,539,335			$	47,267,129

See Notes to Consolidated Financial Statements.

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

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Income:
Premiums		$	664,391			$	738,522			$	2,368,773			$	2,597,997
Investment income, net of expenses			244,343				219,778				749,176				634,684
Loss on equity method investment			-				(420,720	)			-				(420,720	)
Net realized gains on investments			26,671				121,578				45,680				67,834
Miscellaneous income			19,400				21,558				57,255				85,115
			954,805				680,716				3,220,884				2,964,910
Expenses:
Death and other benefits			152,280				213,351				717,874				621,469
Interest credited			175,542				195,566				628,923				548,555
Increase in benefit reserves			210,561				112,948				518,307				504,617
Amortization of deferred acquisition costs			25,295				122,788				318,149				270,515
Salaries and benefits			522,167				545,504				1,625,775				1,571,327
Other operating expenses			538,742				638,948				1,916,017				2,285,811
			1,624,587				1,829,105				5,725,045				5,802,294
Operating loss			(669,782	)			(1,148,389	)			(2,504,161	)			(2,837,384	)
Bargain purchase gain for business acquisition			-				1,326,526				-				1,326,526
(Loss) income before income taxes			(669,782	)			178,137				(2,504,161	)			(1,510,858	)
Income tax expense			-				-				-				-
Net (loss) income			(669,782	)			178,137				(2,504,161	)			(1,510,858	)
Comprehensive loss:
Unrealized losses on investments arising during period			110,695				84,298				650,360				1,014,216
Less: reclassification adjustment for net realized gains on investments			(26,671	)			(121,578	)			(45,680	)			(67,834	)
Other comprehensive income (loss)			84,024				(37,280	)			604,680				946,382
Comprehensive (loss) gain		$	(585,758	)		$	140,857			$	(1,899,481	)		$	(564,476	)
Net (loss) income per common share, basic and diluted		$	(0.03	)		$	0.01			$	(0.11	)		$	(0.07	)

See Notes to Consolidated Financial Statements.

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

		Nine Months ended September 30,
		2017				2016
Cash Flows from Operating Activities:
Net loss		$	(2,504,161	)		$	(1,510,858	)
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments			146,442				158,793
Depreciation and amortization			254,136				297,736
Deferred acquisition costs capitalized			(258,344	)			(110,918	)
Amortization of deferred acquisition costs			318,149				270,515
Net realized gains on investments			(45,680	)			(67,834	)
Bargain purchase gain for business acquired			-				(1,326,526	)
Loss on equity method investment			-				420,720
Deferred coinsurance ceding commission			326,569				-
Write-down of DAC and VOBA from coinsurance transaction			1,523,431				-
Changes in operating assets and liabilities:
Amounts recoverable from reinsurers			(8,643,255	)			403,076
Interest and dividends due and accrued			83,105				(43,640	)
Due premiums			47,316				(40,865	)
Policy liabilities			744,267				572,112
Other assets and liabilities			(9,787	)			575,047
Net cash used for operating activities			(8,017,812	)			(402,642	)
Cash Flows from Investing Activities:
Securities available for sale:
Purchases			(20,571,059	)			(15,744,683	)
Proceeds from sale or maturity			27,580,877				12,539,971
Securities held for sale:
Proceeds from sale or maturity			-				52,703
Net change in equity securities carried at cost:
Proceeds from sale			-				26,434
Sale of Capital Reserve Life Insurance Company			-				1,432,446
Acquisition of Northstar Financial Corporation			-				2,427,394
Net change in policy loans			(27,002	)			20,382
Net purchases of property and equipment			(31,128	)			(30,611	)
Net cash provided by investing activities			6,951,688				724,036
Cash Flows from Financing Activities:
Preferred stock dividend			(30,543	)			(45,220	)
Receipts on deposit-type contracts			1,873,323				1,786,850
Withdrawals on deposit-type contracts			(760,765	)			(865,329	)
Net cash provided by financing activities			1,082,015				876,301
Net increase in cash and cash equivalents			15,891				1,197,695
Cash and cash equivalents:
Beginning			661,545				1,192,336
Ending		$	677,436			$	2,390,031

Supplemental Cash Flow Information
(Unaudited)

		September 30, 2017				September 30, 2016
Supplemental Disclosure of Non-Cash Information
Converted Series B Preferred Stock			(103	)			-
Common stock issues from Converted B Preferred Stock			103				-
Measurement period adjustment on the First Wyoming acquisition			-				(905,806	)
Common stock issued on Northstar Acquisition			-				2,405,874
		$	-			$	1,500,068

See Notes to Consolidated Financial Statements.

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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 operating a financial services company. The Company is in the life insurance business and operates through its wholly owned subsidiary, American Life & Security Corp. (“American Life”). The Company has made several acquisitions of life insurance companies and related entities since 2008, all of which have been merged into the Company or into American Life.

Basis of presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions from the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the nine month period ended September 30, 2017, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017. Most of the Company’s liquid assets are held in an insurance subsidiary and under existing law, the subsidiary cannot make significant payments up to the parent company, which is the Company. Accordingly, unless the Company is able to raise substantial additional capital in the near term, its ability to continue as a going concern will be in jeopardy. Management has been seeking to raise additional capital in order to help fund the liquidity issues that the Company addresses, but cannot assure that such additional capital will be raised during the remainder of 2017.

The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required.

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance to transfer 100% of the risk related to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction was to provide statutory capital and surplus for American Life and has minimal effect on GAAP financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. American Life had more than one offer to assume this business. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liability to the policyholders; the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $9,003,663 as of September 30, 2017. We transferred $9,705,063 of GAAP net adjusted reserves to US Alliance for cash of $7,153,663 which was net of a ceding allowance of $1,850,000 which is treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life will cede $658,600 of annual GAAP revenues and $1,317,300 of statutory revenues. US Alliance assumes all responsibilities for incurred claims, surrenders and commission from the effective date. See Note 6.

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 consolidated financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in comprehensive loss.

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

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

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, 2017 or 2016.

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

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.

Short-term investments: Short-term investments are stated at cost and consist of certificates of deposit. At September 30, 2017 and December 31, 2016 the Company did not have any short-term investments.

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.

Cash: The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At September 30, 2017 and December 31, 2016, the Company had no cash equivalents.

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

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminated the $437,620 of DAC that was associated with the Great Plains Life block of business that was included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. The Company determined that no other events occurred in the nine months ended September 30, 2017 that suggest a review should be undertaken.

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

The following table provides information about deferred acquisition costs for the periods ended September 30, 2017 and December 31, 2016, respectively.

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.

Recoverability of value of business acquired is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company eliminated $1,085,811 of the unamortized VOBA associated with the Great Plains Life and First Wyoming Life blocks of business that were included in the Coinsurance Agreement between American Life and US Alliance effective September 30, 2017. The Company determined that no other events occurred in the nine months ended September 30, 2017 that suggest a review should be undertaken.

Property and equipment: Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $16,740 and $20,275 for the three months ended September 30, 2017 and 2016, respectively. Depreciation expense totaled $50,387 and $81,366 for the nine months ended September 30, 2017 and 2016, respectively. Accumulated depreciation net of disposals totaled $882,778 and $961,864 as of September 30, 2017 and December 31, 2016, respectively.

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

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. Management has determined that no such events occurred in the nine months ended September 30, 2017 that would indicate the carrying amounts may not be recoverable.

Reinsurance: In the normal course of business, the Company seeks to limit any single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of September 30, 2017 or December 31, 2016.

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

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.

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 2014. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at September 30, 2017 and December 31, 2016.

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 of the multi-benefit life insurance arrangement 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 income (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 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. At September 30, 2017 and December 31, 2016, the Company had 22,764,294 and 22,558,956 voting common shares issued and outstanding, respectively.

At December 31, 2016, the Company had 1,179 warrants outstanding. The warrants were exercisable through December 31, 2016 for 10 shares of voting common stock per warrant at an exercise price of $6.50 per share. No warrants were exercised during 2016 and are now expired.

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

The Class A preferred shares are non-cumulative, non-voting and convertible by the holder to voting common shares 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 Class A share is $0.001 with 2,000,000 shares authorized. At September 30, 2017 and December 31, 2016, the Company had 74,159 Class A preferred shares issued and outstanding.

The Class B preferred shares were non-cumulative, non-voting and convertible by the holder or the Company to voting common shares after May 1, 2017 at a rate of 2.0 common shares for each preferred share. The par value per preferred share was $0.001 with 1,000,000 shares authorized. The stated annual dividend rate on the Class B preferred shares was 7%. Dividends totaling $30,543 and $43,120 were paid as of September 30, 2017 and December 31, 2016, respectively. At December 31, 2016, the Company had 102,669 Class B preferred shares issued and outstanding. On June 15, 2017, the outstanding Class B preferred shares were converted to 205,338 voting common shares by the Company.

Loss per share attributable to the Company’s common stockholders were computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the three months ended September 30, 2017 and 2016 were 22,764,294 and 22,558,956 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2017 and 2016 were 22,763,542 and 21,312,581 shares, respectively.

Reclassification of certain prior period information: Reclassifications have been made on the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2016. These reclassifications do not impact the overall Net loss or Net loss per common share lines of the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2016.

New accounting standards: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326). Under the new guidance, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from an incurred loss to an expected credit loss. An allowance for the expected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an adjustment to the allowance can be made. The new standard becomes effective after December 15, 2019. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-1, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

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

Note 2. Acquisitions and Divestitures

On March 15, 2016, Midwest acquired Northstar Financial Corporation (“Northstar”), an inactive Minnesota corporation, pursuant to an Agreement and Plan of Merger dated December 18, 2015. Pursuant to this merger, Midwest exchanged 1.27 shares of its voting common stock for each share of Northstar common stock, or approximately 4,553,000 shares. The merger of Northstar was recorded as an asset acquisition. The assets (primarily cash) and liabilities of Northstar were recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date.

On October 27, 2015, Midwest acquired 100% of all of the outstanding shares that it did not previously own of First Wyoming Capital Corporation (“First Wyoming”), a Wyoming corporation, pursuant to an Agreement and Plan of Merger dated July 31, 2015 under which First Wyoming became a wholly-owned subsidiary of Midwest. Pursuant to the Merger Agreement, Midwest issued approximately 4,767,400 shares to the former shareholders of First Wyoming other than Midwest. The fair value of the Midwest shares exchanged to acquire 100% of the remaining outstanding shares of First Wyoming that it did not previously own was estimated by applying the income approach to be $905,806, which is different from our preliminary estimate of $1,811,612 as disclosed in Note 2 to the Consolidated Financial Statements in our 2015 10-K. This fair value measurement was based on significant inputs that are not observable in the market. Key assumptions include projected total income growth of between 3% and 16%, expected long term growth of 3%, a discount rate of 16.0%, and a terminal value based on earnings and a capitalization rate of 13.0%. Subsequent to the closing, First Wyoming merged into Midwest and on September 1, 2016 First Wyoming Life, the life insurance subsidiary of First Wyoming, merged into American Life.

The First Wyoming acquisition was accounted for under the acquisition method of accounting, which requires the consideration transferred and all assets and liabilities assumed to be recorded at fair value. Prior to the acquisition, Midwest held 22.1% of the outstanding shares of First Wyoming, which it had recorded in its financial statements under the equity method of accounting at a book value of $810,500 with a related accumulated other comprehensive loss of $30,410. The fair value of our previously held equity interest in First Wyoming was determined to be $221,430, resulting in a loss of $619,480 on the previously held equity interest. The preliminary fair value of our previously held equity interest in First Wyoming as disclosed in Note 2 to the Consolidated Financial Statements in our 2015 10-K was determined to be $642,150 resulting in a loss of $198,760, which was included in net investment income (loss) in the 2015 10-K consolidated statement of comprehensive income for the year ended December 31, 2015 and the remaining $420,720 was recognized in the period ended September 30, 2016 10-Q in loss on equity method investment on the consolidated statement of comprehensive income. The fair value of the previously held equity interest in First Wyoming was estimated by applying the income approach using significant inputs that are not observable in the market. Key assumptions include projected total income growth of between 3% and 13%, expected long term growth of 3%, a discount rate of 18.0%, a terminal value based on earnings and a capitalization rate of 13.0%, and adjustments due to lack of control that market participants would consider when estimating the fair value of the previously held equity interest in First Wyoming.

The following table summarizes the preliminary fair value of the consideration transferred and the preliminary fair value of First Wyoming assets acquired and liabilities assumed:

11

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

Recognized amounts of identifiable assets acquired and liabilities assumed:

All amounts related to the business combination are finalized and are no longer provisional. The transaction resulted in a bargain purchase gain of $2,231,104 and, of that amount, $904,578 was included in the bargain purchase gain for business acquisition line item in the consolidated statement of comprehensive income for the year ended December 31, 2015. The remaining $1,326,526 was included in the consolidated statement of comprehensive income for the period ended September 30, 2016. The bargain purchase gain was driven by the fact that as a standalone company, First Wyoming Life would have been required to significantly increase its administrative operations in Cheyenne, Wyoming, in the near future, the cost of which would be prohibitive to a small life insurance company such as First Wyoming Life.

Value of business acquired (“VOBA”) is being amortized on a straight-line basis over ten years which approximates the earnings pattern of the related policies.

On August 29, 2016, American Life sold its interest in its dormant subsidiary, Capital Reserve Life Insurance Company (“Capital Reserve”) to an unrelated third party for cash which approximated the statutory surplus of Capital Reserve, resulting in a net gain of approximately $26,000 including $50,000 cash above book value and unrealized gains on the fair market value of bonds becoming realized at the date of sale of $17,000 offset by the write-off of the VOBA of $40,714. This gain was included in the net realized gain (loss) on investments on the consolidated statement of comprehensive income.

12

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

Note 3. Investments

The cost or amortized cost and estimated fair value of investments classified as available-for-sale as of September 30, 2017 and December 31, 2016 are as follows:

		Cost or			Gross			Gross
		Amortized			Unrealized			Unrealized			Estimated
		Cost			Gains			Losses			Fair Value
September 30, 2017:
Fixed maturities:
U.S. government obligations		$	2,137,786		$	-		$	88,301		$	2,049,485
Mortgage-backed securities			1,411,144			-			38,053			1,373,091
States and political subdivisions -- general obligations			270,972			-			291			270,681
States and political subdivisions -- special revenue			25,376			-			36			25,340
Corporate			18,068,226			17,336			558,939			17,526,623
Total fixed maturities		$	21,913,504		$	17,336		$	685,620		$	21,245,220
December 31, 2016:
Fixed maturities:
U.S. government obligations		$	3,390,545		$	-		$	166,326		$	3,224,219
States and political subdivisions -- general obligations			383,730			732			3,067			381,395
States and political subdivisions -- special revenue			275,262			5,633			3,160			277,735
Corporate			24,974,546			16,232			1,135,188			23,855,590
Total fixed maturities		$	29,024,083		$	22,597		$	1,307,741		$	27,738,939

The Company has two securities that individually exceed 10% of the total of the state and political subdivisions categories as of September 30, 2017. The amortized cost, fair value, credit ratings, and description of each security is as follows:

		Amortized			Estimated
		Cost			Fair Value			Credit Rating
September 30, 2017:
Fixed maturities:
States and political subdivisions -- general obligations
Bellingham Wash		$	110,205		$	110,190		AA+
Longview Washington Refunding			160,767			160,491		Aa3
Total		$	270,972		$	270,681

13

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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, 2017 and December 31, 2016, 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, 2017									December 31, 2016
					Gross			Number					Gross			Number
		Estimated			Unrealized			of		Estimated			Unrealized			of
		Fair Value			Loss			Securities(1)		Fair Value			Loss			Securities(1)
Fixed Maturities:
Less than 12 months:
U.S. government obligations		$	265,625		$	12,304		3		$	3,224,219		$	166,326		17
Mortgage-backed securities			1,373,091			38,053		18			-			-		-
States and political subdivisions -- general obligations			270,681			291		2			271,093			3,067		2
States and political subdivisions -- special revenue			25,340			36		1			171,711			3,160		2
Corporate			9,104,046			203,490		39			19,737,965			935,545		112
Greater than 12 months:
U.S. government obligations			1,783,860			75,997		10			-			-		-
Corporate			7,231,941			355,449		42			2,558,275			199,643		12
Total fixed maturities		$	20,054,584		$	685,620		115		$	25,963,263		$	1,307,741		145

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

Based on our review of the securities in an unrealized loss position at September 30, 2017 and December 31, 2016, 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, 2017, 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, 2017, 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.

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2017 and December 31, 2016, these required deposits had a total amortized cost of $3,025,115 and $2,747,571 and fair values of $2,925,326 and $2,635,225, respectively.

14

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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, 2017 and 2016 are as follows:

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Fixed maturities		$	244,910			$	218,689			$	754,358			$	635,840
Other			16,083				16,488				48,701				49,025
			260,993				235,177				803,059				684,865
Less investment expenses			(16,650	)			(15,399	)			(53,883	)			(50,181	)
Investment income, net of expenses		$	244,343			$	219,778			$	749,176			$	634,684

Proceeds for the three months ended September 30, 2017 and 2016 from sales of investments classified as available-for-sale were $12,199,152 and $4,868,073, respectively. Gross gains of $85,406 and $96,696 and gross losses of $58,735 and $629 were realized on those sales during the three months ended September 30, 2017 and 2016, respectively. Proceeds for the nine months ended September 30, 2017 and 2016 from sales of investments classified as available-for-sale were $27,580,877 and $12,384,674, respectively. Gross gains of $172,941 and $166,349 and gross losses of $127,261 and $56,526 were realized on those sales during the nine months ended September 30, 2017 and 2016, respectively.

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.

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, 2017, 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.

15

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

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

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

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. These liabilities are categorized as Level 3 in the fair value hierarchy.

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 $286,263 and $261,971 in carrying value of the surplus notes as of September 30, 2017 and December 31, 2016, respectively. These liabilities are categorized as Level 3 in the fair value hierarchy.

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, 2017 and December 31, 2016.

					Significant
		Quoted			Other			Significant
		Markets			Inputs			Inputs			Fair
		(Level 1)			(Level 2)			(Level 3)			Value
September 30, 2017
Fixed maturities:
U.S. government obligations		$	-		$	2,049,485		$	-		$	2,049,485
Mortgage-backed securities			-			1,373,091			-			1,373,091
States and political subdivisions — general obligations			-			270,681			-			270,681
States and political subdivisions — special revenue			-			25,340			-			25,340
Corporate			-			17,526,623			-			17,526,623
Total fixed maturities		$	-		$	21,245,220		$	-		$	21,245,220
December 31, 2016
Fixed maturities:
U.S. government obligations		$	-		$	3,224,219		$	-		$	3,224,219
States and political subdivisions — general obligations			-			381,395			-			381,395
States and political subdivisions — special revenue			-			277,735			-			277,735
Corporate			-			23,855,590			-			23,855,590
Total fixed maturities		$	-		$	27,738,939		$	-		$	27,738,939

There were no transfers of financial instruments between any levels during the nine months ended September 30, 2017 or during the year ended December 31, 2016.

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.

16

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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, 2017 and December 31, 2016, respectively:

		September 30, 2017
					Fair Value Measurements Using
					Quoted Prices in
					Active Markets			Significant Other			Significant
					for Identical Assets			Observable			Unobservable
		Carrying			and Liabilities			Inputs			Inputs			Fair
		Amount			(Level 1)			(Level 2)			(Level 3)			Value
Assets:
Policy loans		$	439,585		$	-		$	-		$	439,585		$	439,585
Cash			677,436			677,436			-			-			677,436
Liabilities:
Policyholder deposits (Deposit-type contracts)			17,746,293			-			-			17,746,293			17,746,293
Surplus notes and accrued interest payable			836,263			-			-			836,263			836,263

		December 31, 2016
					Fair Value Measurements Using
					Quoted Prices in
					Active Markets			Significant Other			Significant
					for Identical Assets			Observable			Unobservable
		Carrying			and Liabilities			Inputs			Inputs			Fair
		Amount			(Level 1)			(Level 2)			(Level 3)			Value
Assets:
Policy loans		$	412,583		$	-		$	-		$	412,583		$	412,583
Cash			661,545			661,545			-			-			661,545
Liabilities:
Policyholder deposits (Investment-type contracts)			16,012,567			-			-			16,012,567			16,012,567
Surplus notes and accrued interest payable			811,971			-			-			808,602			808,602

Note 5. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2017 and December 31, 2016 are as follows:

		September 30, 2017				December 31, 2016
Deferred tax assets:
Loss carryforwards		$	9,253,959			$	9,705,974
Capitalized costs			532,528				667,264
Unrealized losses on investments			234,389				436,949
Benefit reserves			989,435				984,640
Total deferred tax assets			11,010,311				11,794,827
Less valuation allowance			(9,953,581	)			(10,170,638	)
Total deferred tax assets, net of valuation allowance			1,056,730				1,624,189
Deferred tax liabilities:
Policy acquisition costs			448,300				571,148
Due premiums			212,049				228,136
Value of business acquired			151,525				586,905
Intangible assets			238,000				238,000
Property and equipment			6,856				-
Total deferred tax liabilities			1,056,730				1,624,189
Net deferred tax assets		$	-			$	-

17

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

At September 30, 2017 and December 31, 2016, the Company recorded a valuation allowance of $9,953,581 and $10,170,638, 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, 2017, have expiration dates that range from 2024 through 2036.

There was no income tax expense for the three and nine months ended September 30, 2017 and 2016. 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,
		2017				2016				2017				2016
Computed expected income tax benefit		$	(227,726	)		$	60,566			$	(851,415	)		$	(513,692	)
Increase (reduction) in income taxes resulting from:
Meals, entertainment and political contributions			5,769				7,753				12,034				26,508
Adjustment to Prior Year NOL with 382 limitation			2,131,996				-				959,800				-
Other			(96,360	)			5,779				(105,922	)			30,845
			2,041,405				13,532				865,912				57,353
Tax benefit before valuation allowance			1,813,779				74,098				14,497				(456,339	)
Change in valuation allowance			(1,813,779	)			(74,098	)			(14,497	)			456,339
Net income tax expenses		$	-			$	-			$	-			$	-

Note 6. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 is as follows:

		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Statements of comprehensive income:
Premiums assumed		$	6,146		$	6,301		$	17,736		$	18,532
Premiums ceded			49,883			95,126			157,480			245,400
Benefits assumed			8,868			10,539			37,998			40,697
Benefits ceded			-			124,503			212,955			696,159
Commissions assumed			6			10			20			26
Commissions ceded			-			361			-			1,649

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, 2017:

										Recoverable on						Total Amount
				Recoverable			Recoverable			Benefit			Ceded			Recoverable
		AM Best		on Paid			on Unpaid			Reserves/Deposit-			Due			from
Reinsurer		Rating		Losses			Losses			type Contracts			Premiums			Reinsurer
Optimum Re Insurance Company		A-		$	-		$	12,480		$	173,705		$	-		$	186,185
Sagicor Life Insurance Company		A-			-			219,224			11,187,388			249,150			11,157,462
US Alliance Life and Security Company		NR			-			-			9,073,103			69,440			9,003,663
				$	-		$	231,704		$	20,434,196		$	318,590		$	20,347,310

18

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

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance to transfer 100% of the risk related to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction was to provide statutory capital and surplus for American Life and has minimal effect on GAAP financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. American Life had more than one offer to assume this business. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liability to the policyholders; the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $9,003,663 as of September 30, 2017. We transferred $9,705,063 of GAAP net adjusted reserves to US Alliance for cash of $7,153,663 which was net of a ceding allowance of $1,850,000 which is treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life will cede $658,600 of annual GAAP revenues and $1,317,300 of statutory revenues. US Alliance assumes all responsibilities for incurred claims, surrenders and commission from the effective date.

The ceding commission of $1,850,000 first reduced DAC of $437,620 and VOBA of $1,085,811 which had been held on our books from the Great Plains Life and First Wyoming Life acquisitions. The remaining $326,569 has been reflected as a deferred gain, which will be recognized into income over the expected duration of the Great Plains Life and First Wyoming Life’s blocks of business.

At September 30, 2017 and December 31, 2016, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to Sagicor were $11,157,462 and $11,446,342, respectively. American Life remains contingently liable on this ceded reinsurance should Sagicor be unable to meet their obligations.

The use of reinsurance does not relieve American Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, a separate contingency reserve may be established. At September 30, 2017 and December 31, 2016, 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 the nine months September 30, 2017 and the year ended December 31, 2016:

		Nine Months Ended				Year Ended
		September 30, 2017				December 31, 2016
Beginning balance		$	16,012,567			$	13,897,421
Deposits received			1,873,323				2,433,781
Investment earnings			628,923				776,541
Withdrawals			(760,765	)			(1,086,661	)
Contract charges			(7,755	)			(8,515	)
Ending balance		$	17,746,293			$	16,012,567

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. The remaining deposits, withdrawals and interest credited represent those for American Life’s direct business.

19

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

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 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.

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 executed an amendment to its lease for an additional 2,876 square feet of office space on October 23, 2015, which expired on May 31, 2017. Great Plains entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota, which expired on November 30, 2016. First Wyoming leased space in Cheyenne, Wyoming, which expired on August 31, 2016. Rent expense for the three months ended September 30, 2017 and 2016 was $55,968 and $65,933, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was $173,103 and $238,976, respectively. Future minimum lease payments for the remainder of 2017 and the subsequent years are as follows:

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 Nebraska Department of Insurance. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. First Wyoming Life and Great Plains Life merged into American Life as of September 1, 2016 and December 31, 2016, respectively. Capital Reserve was sold effective August 29, 2016. The September 30, 2016 numbers below have been restated to include the Great Plains Life balances into American Life to be consistent with the September 30, 2017 statutory statement filing. American Life’s statutory net loss for the nine months ending September 30, 2017 and 2016 was $1,435,954 and $1,517,384, respectively. Capital and surplus of American Life as of September 30, 2017 and December 31, 2016 was $3,633,784 and $3,817,844, respectively.

Note 10. Surplus Notes

The following provides a summary of the Company’s surplus notes along with issue dates, maturity dates, face amounts, and interest rates as of September 30, 2017:

20

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

Any payments and/or repayments must be approved by the Nebraska Department of Insurance. As of September 30, 2017, the Company has accrued $286,263 of interest expense under accounts payable and accrued expenses on the consolidated balance sheet. No payments were made in the nine months ended September 30, 2017, or during the year ended December 31, 2016. The surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes, a repayment cannot be made without the prior approval of the Nebraska insurance regulators.

Note 11. Related Party Transactions

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services were offered to American Life through February 28, 2017, and to non-consolidated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended September 30, 2017 and 2016 were $16,500 and $19,000, respectively. Fees earned during the nine months ended September 30, 2017 and 2016 were $49,500 and $47,000, respectively.

Note 12. Subsequent Events

All of the effects of subsequent events that provide additional evidence about conditions that existed at September 30, 2017, 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 and found no events to report.

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

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of September 30, 2017, compared with December 31, 2016, and the results of operations for the three and nine months ended September 30, 2017, compared with the corresponding periods in 2016 of Midwest Holding Inc. and its consolidated subsidiary. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part 1 – Item 1. Financial Statements”; our Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our 2016 Form 10-K.

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

Overview

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

We have incurred losses since inception that resulted primarily from costs incurred while raising capital and establishing and operating American Life and other entities. We expect to continue to incur operating losses until American Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

Management’s focus is on raising additional capital from outside investors. We cannot assure that additional capital will be raised, or if raised, on terms that will be economical to us. Such capital will further strengthen the Company and American Life and allow us to expand our writing of new business.

Critical Accounting Policies and Estimates

The Management’s Discussion and Analysis section included in our 2016 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the “Critical Accounting Policies and Estimates” discussed in our 2016 Form 10-K.

Consolidated Results of Operations – Three Months Ended September 30, 2017

The following discussion compares the results of the three months ended September 30, 2017 with the three months ended September 30, 2016. Unless the context indicates otherwise, the 2017 results are stated first followed by 2016 results.

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Net Loss: The increase in net loss was primarily due to the 2016 bargain purchase gain of $1,326,526 offset by the loss on equity method investment of $420,720 for the finalization of the accounting in the third quarter of 2016 for the acquisition of First Wyoming Capital Corporation which occurred on September 26, 2015. The decrease in premiums, realized gains, and increase in reserves also contributed to the increase in net loss. These were offset by higher investment income, lower death benefits, and decreases in salaries and operating expenses.

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

Premium revenue: Premium revenue decreased primarily due to our decision to reduce new life insurance policy sales to near zero in 2015 and 2016 in order to preserve the regulatory capital and surplus of American Life. The net effect is evident in the third quarter of 2017 and we expect it will be evident throughout the remainder of 2017. The third quarter of each year is lower than the other quarters due to timing of annual and bi-annual premiums. Harvest season affects our agent’s ability to initiate new sales.

American Life entered into a coinsurance transaction with US Alliance effective September 30, 2017 which transferred 100% of the risk of the Great Plains Life and First Wyoming Life blocks of business. This will reduce our premiums for the fourth quarter of 2017 by approximately $140,000 along with expenses related to those policies as noted below.

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

The increase in investment income was due primarily to the increased size of our bond portfolio. Management was more aggressive in investing excess cash during late 2016, resulting in larger invested assets and interest income in 2017. Policy loan interest and miscellaneous investment income is included in the “Other” line item above.

Net realized gains on investments: The decrease is due to the sale of bonds for the coinsurance transaction mentioned above. The sale of one bond incurred a loss of $32,000 and various other losses which were realized on the sale of bonds for the coinsurance transaction mentioned above. During the same period of 2016, we sold Capital Reserve to a third party for a gain of $26,000.

Miscellaneous income: Miscellaneous income decreased slightly due to the dropping of TPA services for one of our subsidiaries, offset by the sale of Capital Reserve in 2016 and the new TPA fee agreement for that company for two months of the quarter compared to three months in 2017. Management expects revenues for such agreement to be $38,000 in 2017. Fees earned during the three months ended September 30, 2017 and 2016 were $16,500 and $19,000, respectively.

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Expenses are summarized in the table below.

Death and other benefits: Death benefits decreased due to a decrease in our paid claims and surrenders. We expect life surrenders to drop significantly due to the coinsurance transaction on the Great Plains Life and First Wyoming Life blocks of business as mentioned above. Claims experience on our current underwritten block has been minimal. We maintain policy reserves to offset the effect of all claims. Claim expenses on our acquired block of business are largely offset by a release in policy reserves. We expect surrenders to decrease in the fourth quarter of 2017 due to the coinsurance agreement between American Life and US Alliance on the Great Plains Life and First Wyoming Life’s blocks of business.

Interest credited: The decrease was due to management’s decision to reduce existing interest rates from 5.75% to 4.00% effective September 1, 2017. The deposit-type contracts related to the Great Plains Life and First Wyoming Life coinsurance transaction will also decrease our interest credited going forward.

Increase in benefit reserves: The increase in benefit reserves reflects the decrease in surrenders. Great Plains Life had a significant number of policies surrendered in the same quarter of 2016 compared to 2017 which accounted for the majority of the increase. American Life’s overall persistency is 94% which is above industry average and better than the pricing model for the block. New business issued was up in late 2016 and 2017 which contributed to the increase along with the maturity of our in-force block of business.

American Life entered into a coinsurance transaction with US Alliance effective September 30, 2017 which transferred 100% of the risk of the Great Plains Life and First Wyoming Life blocks of business. This is expected to reduce our change in reserves by approximately $63,000 in the fourth quarter of 2017.

Amortization of deferred acquisition costs: The decrease was a primarily a result of fewer surrenders related to acquired blocks of business. This was offset slightly due to the new business written in late 2016 and the nine months of 2017 which increased the DAC amortization.

Salaries and benefits: The decrease was due to the personnel reduction gained from the synergies of merging the three life companies in the second half of 2016.

Other operating expenses: Other operating expenses decreased primarily due to the consulting expenses of $75,000, one-time expenses incurred in 2016 related to the Northstar and First Wyoming acquisitions and the redomestication of and merger of our former life subsidiaries of $16,000 and decrease in rent of $10,000. The decreases were a result of management’s efforts to reduce overall operating expenses.

Consolidated Results of Operations – Nine Months Ended September 30, 2017

The following discussion compares the results of the nine months ended September 30, 2017 with the nine months ended September 30, 2016. Unless the context indicates otherwise, the 2017 results are stated first followed by 2016 results.

Net Loss: The increase in net loss was primarily due to the 2016 bargain purchase gain of $1,326,526 offset by the loss on equity method investment of $420,720 for the finalization of the accounting in the third quarter of 2016 for the acquisition of First Wyoming Capital Corporation which occurred on September 26, 2015. The decrease in premiums, realized gains, and increase in reserves also contributed to the increase in net loss. These were offset by higher investment income, and decreases in operating expenses.

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

Premium revenue: Premium revenue decreased primarily due to our decision to reduce new life insurance policy sales to near zero in 2015 and 2016 in order to preserve the regulatory capital and surplus of American Life. The net effect is evident in the three quarters of 2017 and we expect it will be evident throughout the remainder of 2017. We expect to have limited production of new insurance business in 2017 with new sales resulting in $71,000 of new annual premium issued in 2017.

American Life entered into a coinsurance transaction with US Alliance effective September 30, 2017 which transferred 100% of the risk of the Great Plains Life and First Wyoming Life blocks of business. This will reduce our premiums for the fourth quarter of 2017 by approximately $140,000 along with expenses related to those policies as noted below.

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

The increase in investment income was due primarily to the increased size of our bond portfolio. Management was more aggressive in investing excess cash during late 2016, resulting in larger invested assets and interest income in 2017. Policy loan interest and miscellaneous investment income is included in the “Other” line item above. Due to the sale of bonds late in the third quarter of 2017 used in the coinsurance transaction mentioned above, we expect to see investment income decrease in the fourth quarter of 2017.

Net realized gains on investments: The decrease is due primarily due to the sale of one bond for a loss of $32,000 and other losses which were realized on the sale of bonds for the coinsurance transaction mentioned above.

Miscellaneous income: Miscellaneous income decreased due to repayment of one of our investments in 2016 for a gain of $32,000 offset by a slight increase in our TPA fees. We have two customers for whom we performed these services. We do not expect such services to be a significant source of future revenue. Fees earned during the nine months ended September 30, 2017 and 2016 were $49,500 and $47,000, respectively.

Expenses are summarized in the table below.

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Death and other benefits: Death benefits increased due to an increase in our paid claims. We expect death benefits to continue at current levels due to the age of a block of business we acquired several years ago. Claims experience on our current underwritten block has been minimal. We had only three large claims on American Life’s new business during the period, which net to us was $140,000. We maintain policy reserves to offset the effect of all claims. Claim expenses on our acquired block of business are largely offset by a release in policy reserves.

Interest credited: The increase was due to the increase in the annuity deposits. Management made the decision to decrease the credit rate on all in-force annuity deposits effective September 1, 2017. This action is expected to reduce expense by approximately $180,000 per year. We also expect interest credited to be reduced by the coinsurance transaction between American Life and US Alliance on the Great Plains Life and First Wyoming Life’s annuity blocks of business as mentioned above by approximately $272,000 per year.

Increase in benefit reserves: The slight increase in benefit reserves reflected the new business written in late 2016 and the nine months of 2017 and the maturity of our in-force block of business. American Life’s overall persistency is 94% which is above industry average and better than the pricing model for the block. We expect the increase in reserves to go down going forward as a result of the coinsurance transaction between American Life and US Alliance on the Great Plains Life and First Wyoming Life blocks of business.

Amortization of deferred acquisition costs: The increase was a result of the reduction in new business writing in late 2014 thru most of 2016 which resulted in lower capitalized expenses and lower amortization in 2016. We also began writing new business in late 2016 and the nine months of 2017 which increased the DAC amortization.

Salaries and benefits: The increase was due to a one-time recruitment fee and the increase in the vacation accrual. These increases were offset by personnel reductions.

Other operating expenses: Other operating expenses decreased primarily due to the one-time expenses incurred in 2016 related to the Northstar and First Wyoming acquisitions and the redomestication of and merger of our former life subsidiaries of $246,000, decrease in travel of $69,000 related to capital raising efforts, and decrease in rent expense of $66,000 due to termination of lease agreements. These were offset by the Nebraska Department of Insurance regulatory examination fees of $142,000. Management continues to look for opportunities to aggressively reduce operating expenses.

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, real estate held for investment, and policy loans. 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, 2017 and December 31, 2016.

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The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2017 and December 31, 2016.

Reflecting the quality of securities maintained by the Company, 96.9% and 97.6% of all fixed maturity securities were investment grade as of September 30, 2017 and December 31, 2016, respectively. Due to the low interest rate environment, the Company has invested in bonds with “A” or “BBB” ratings.

Market Risks of Financial Instruments

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

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

Credit Risk

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

Liquidity and Capital Resources

At September 30, 2017, the Company had cash and cash equivalents totaling $677,436. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for at least twelve months when combined with the liquidity associated with our investment portfolio. However, most of the Company’s liquid assets are held in an insurance subsidiary and under existing insurance law, the subsidiary cannot make significant payments up to the parent company, which is the Company. Accordingly, unless the Company is able to raise substantial additional capital in the near term, its ability to continue as a going concern will be in jeopardy. Management has been seeking to raise additional capital in order to help fund the liquidity issues that the Company addresses, but cannot assure that such additional capital will be raised during the remainder of 2017. The Company has based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect.

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The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required.

Effective September 30, 2017, American Life entered into an indemnity coinsurance transaction with US Alliance to transfer 100% of the risk related to the Great Plains Life and First Wyoming Life blocks of business. The purpose of this transaction was to provide statutory capital and surplus for American Life and has minimal effect on GAAP financials. We paid no commissions or brokerage fees for this transaction and the proceeds of the transaction were based upon valuations prepared by our third party actuary. American Life had more than one offer to assume this business. Under the indemnity coinsurance, US Alliance assumed certain liabilities and obligations. As we are not relieved of our legal liability to the policyholders; the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from US Alliance, which totaled $9,003,663 as of September 30, 2017. We transferred $9,705,063 of GAAP net adjusted reserves to US Alliance for cash of $7,153,663 which was net of a ceding allowance of $1,850,000 which is treated as an increase to surplus on a statutory basis. As a result of the transaction, in addition to the reserves, American Life will cede $658,600 of annual GAAP revenues and $1,317,300 of statutory revenues. US Alliance assumes all responsibilities for incurred claims, surrenders and commission from the effective date.

Our surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes a repayment cannot be made without the prior approval of the Nebraska regulators and they have not approved any repayment to date.

Since inception, our operations have been financed primarily through the sale of voting common stock and preferred stock. Our operations have generated significant operating losses since we were incorporated in 2003. We expect to continue to incur losses for at least the foreseeable future.

Aside from raising capital, which has funded the vast majority of our operations, 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 meet 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 in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our 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 for at least the next twelve months.

Net cash used by operating activities was $8,017,812 for the nine months ended September 30, 2017, which was comprised primarily of the coinsurance transaction between American Life and US Alliance Life of $8,643,255 which was offset by the coinsurance ceding commission of $1,850,000 and net loss of $2,504,161 partially offset by an increase in policy liabilities of $744,267. Net cash provided by investing activities was $6,951,688. The primary source of cash was from sales of available for sale securities for the coinsurance agreement between American Life and US Alliance. Offsetting this source of cash was our purchases of investments in available-for-sale securities and the purchase of property and equipment. Net cash provided by financing activities was $15,891. The primary source of cash was net receipts on deposit-type contracts, offset by dividends paid to Class B Preferred Stock shareholders.

Management’s focus is on raising additional capital from outside investors. We cannot assure that additional capital will be raised, or if raised, on terms that will be economical to us. Such capital will further strengthen the Company and American Life and allow us to expand our writing of new business.

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.

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Contractual Obligations

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

Management, (with the participation of our principal executive officer/principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2017. Based on this evaluation, our principal executive officer/principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Material Weakness Previously Identified

Refer to Item 9A of Part II of the 2016 Form 10-K for detail about a previously identified material weakness in the Company’s internal control over financial reporting over complex and non-routine transactions. The Company has implemented the following remediation steps to address this material weakness: (i) continual evaluation and enhancement of internal technical accounting capabilities, supported by the use of third-party advisors and consultants to assist with areas requiring specialized technical accounting expertise and (ii) enhanced awareness to identify complex technical accounting topics and early identification of situations which might require the use of third-party advisors and consultants. The Company’s management concluded that the material weaknesses have been remediated as of September 30, 2017.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 in response to Item 1A of Part I of such Form 10-K.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

*	Filed herewith.

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SIGNATURES

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

Dated: November 13, 2017

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