All such forward-looking statements speak only as of the date of this Form 10-K. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Midwest Holding Inc., a Nebraska corporation, (“we”, “us”, “our”, “Midwest”, the “Company” or the “Registrant”) was formed on October 31, 2003 for the primary purpose of becoming a financial services holding company. We presently conduct our business through our primary life insurance subsidiary, American Life & Security Corp. (“American Life”). On August 5, 2014, Great Plains Financial (“Great Plains”) was acquired by us. Its wholly owned subsidiary, Great Plains Life Assurance Company (“Great Plains Life”) became a subsidiary of Midwest and then became a wholly owned subsidiary of American Life through a capital contribution from us. First Wyoming Capital Corporation (“First Wyoming”) was acquired by us on October 27, 2015. First Wyoming Life Insurance Company (“First Wyoming Life”) became a subsidiary of Midwest with an ownership interest of 99.9%. We are currently seeking to redomesticate First Wyoming Life and Great Plains Life in Nebraska contingent on regulatory approval.
On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life. Capital and surplus of Capital Reserve as of December 31, 2015 and 2014 was $1.5 million and $1.3 million, respectively. Capital Reserve is presently a dormant company and it incurred a $77,720 and $123,940 net loss for the years ended December 31, 2015 and 2014, respectively. We have entered into an agreement to sell Capital Reserve for its net book value to an unaffiliated third party and we expect the sale to close in early to mid 2016.
In February, 2011, we completed an offering of 1,554,320 shares of voting common stock to existing shareholders who were residents of the State of Nebraska for gross proceeds of approximately $7.7 million. Net proceeds were used to fund the acquisition of Old Reliance Insurance Company as described below, to further capitalize our insurance operations, for working capital and general corporate purposes.
In August 2011, we acquired a controlling interest ownership of Hot Dot, Inc. (“Hot Dot”), a startup company formed to develop, manufacture, and market the Hot Dot Alert Patch, a body heat sensor. The operating results of Hot Dot were consolidated with those of ours, due to our control of Hot Dot’s board of directors. On September 12, 2012, Hot Dot repurchased 1,000,000 shares of its common stock from us for $750,000. As a result, we ceased to have a controlling financial interest in Hot Dot and we deconsolidated it in our financial statements on that date. In October 2014, Hot Dot repurchased our 1,500,000 remaining Hot Dot shares for $775,000.
We commenced third party administrative (“TPA”) services in 2012 as an additional revenue source. These agreements, for various levels of administrative services on behalf of each client, generate fee income for us. Services provided vary based on the respective needs of the client 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.
In October 2013, we completed a private placement offering under Regulation D of the Securities Act of 1933 of Units, with each Unit consisting of 50 shares of voting common stock and one detachable warrant to purchase ten shares of common stock at an exercise price of $6.50 per share exercisable through December 31, 2016 for gross proceeds of $353,700. A total of 58,950 shares of voting common stock and 1,179 warrants were sold in the offering. Net proceeds were used for general corporate purposes.
On October 27, 2015, we acquired First Wyoming Capital Corporation, a Wyoming corporation (“First Wyoming”) pursuant to an Agreement and Plan of Merger dated July 31, 2015 by exchanging 1.37 shares of our voting common stock for each share of First Wyoming common stock, or approximately 4,767,000 shares. Subsequent to the closing, First Wyoming was merged into us.
Our accounting and reporting policies are in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
We compared the carrying value of our identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 2015, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.
In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. We generally strive to diversify our 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 our primary liability under the policies written. Therefore, we regularly evaluate the financial condition of our reinsurers including their activities with respect to claim settlement practices and commutations, and establish allowances for uncollectible reinsurance recoverable as appropriate.
Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below. Unless the context requires otherwise, all references compare 2015 to 2014.
Net realized (losses) gains on investments: This increase was primarily due to the change in bond prices during 2015. In 2014, we recognized $90,812 and $251,102 gains on the divestments of Northern Plains and Hot Dot, respectively.
Investment income, net of expenses: The components of net investment income (loss) for 2015 and 2014 are as follows:
Salaries and benefits: The decrease primarily relates to marketing-related salaries transitioned to commission in January 2015 and the efficiencies gained from the acquisition of Great Plains as well as staff reductions.
Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities, with smaller holdings in equity securities, real estate, held for investment, mortgage loans on real estate, held for investment, policy loans, and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.
Reflecting the high quality of securities maintained by us, 98.8% and 99.4% of all fixed maturity securities were investment grade as of December 31, 2015 and 2014, respectively. Due to the low interest rate environment, we have invested in bonds with “A” or “BBB” ratings
The company is exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertain associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. The Company manages its credit risks through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management.
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 pay future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will 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 2016.
Net cash used by operating activities was $1,200,764 for 2015, which was comprised primarily of the net loss of $2,518,029 partially offset by an increase in policy liability of $1,185,036. Net cash used in investing activities was $2,000,954. The primary source of cash was from sales of available for sale securities, capital contribution to Capital Reserve, acquisition of First Wyoming Capital, and the sale of the remaining mortgage loans. Offsetting this source of cash was our purchases of investments in available-for-sale securities, the net change in policy loans and the purchase of property and equipment. Net cash provided by financing activities was $2,084,007. The primary source of cash was receipts on deposit-type contracts, offset by dividends paid to Class B Preferred Stock shareholders.
At December 31, 2015, we had cash and cash equivalents totaling $1,192,336. We believe that our existing cash and cash equivalents, with the cash injection due to the Northstar asset acquisition in March 2016, will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2015. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than they currently expect. The growth of our insurance subsidiaries is uncertain and will require additional capital in seeking to grow them.