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Hello and welcome to today’s Midwest Holdings First Quarter 2022 Earnings Call. My name is Bailey. And I will be your moderator for today’s call. [Operator Instructions]
I would now like to pass the conference over to Tom Bumbolow, Head of Business Development and Distribution. Tom, please go ahead.
Good morning. And welcome to Midwest Holdings first quarter 2022 earnings call. This is Tom Bumbolow, Head of Business Development and Distribution here at Midwest.
Joining me for today's presentation will be our CEO, Georgette Nicholas.
Yesterday evening Midwest issued its Q1 2022 earnings release announcing our financial results. During today's call, we will reference this announcement, a copy of which may be found on the Investor Relations page of our website at ir.midwestholding.com.
While this call will reflect items discussed within that document, for more comprehensive information about our financial performance, we also encourage you to read through our Q1 2022 Form 10-Q and 2021 Form 10-K which has both been filed with the Securities and Exchange Commission.
Before we begin, I will remind you that matters from today's call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. These forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur.
Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our Q1 2022 Form 10-Q and 2021 Form 10-K where you will see a discussion of factors that could cause the company's actual results to differ materially from the statements.
A replay of this conference call will be available on our website under the Investor Relations section.
I would also like to remind you that during the call, we will discuss some non-GAAP measures in addressing Midwest's performance. You could find the reconciliation of those historical measures to the nearest comparable GAAP measures in our earnings release and in our Q1 2022 Form 10-Q and 2021 Form 10-K.
Now I'll turn the call over to Georgette Nicholas to share our results.
Thanks, Tom. Welcome to Midwest's first quarter 2022 earnings call. We appreciate you joining for an update on the company's progress. Today, I'll cover strategic focus and opportunity for growth, the financial results of the first quarter and the trends driving the business forward.
During the first quarter, we took action to position the company for further growth relating to pricing, product and investing in technology and foundational capabilities. We saw encouraging trends in premiums written at the end of the first quarter and into the second quarter. We are benefiting from movements in interest rates in our investment portfolio along with the capabilities we have been developing and saw our service fee revenue continue to grow. Overall, the first quarter has provided a base for us to continue to expand on.
Our growth opportunities are substantial and our focus on the key drivers of the business positions us for strong results now and longer term.
Strategically, we're working to capitalize on a growing market, aided by demographics, by distinguishing ourselves in product, industry indices and technology. We can be nimble and quick without the legacy business and technology that encumbers others. We're working to invest and leverage modern technology to enhance processes that improve the efficiency and effectiveness of the agent and customer experience. And we're working to create and use reinsurance structures, including our including our captive reinsurer, to mitigate risk and provide capital support for which interest and demand is strong from our partners.
And finally, we continue to provide management services around investing assets in those reinsurance structures and leveraging core capabilities to support the administration of those vehicles.
Midwest is designed to be a services oriented company, generating recurring fee revenue with a business model, supported by capital and reinsurance that allows us to provide best-in-class products for our customers. We combine a flexible capital model with a long-term outlook, allowing us to maintain stability while we quickly meet the changing demands of our customers and the marketplace. The result is striving for higher returns for our shareholders over time, compared to the traditional insurance model.
Turning to results for the first quarter of 2022, we reported GAAP net income of $187,000 compared to a net loss of $1.6 million reported in last year's first quarter. Driving this improvement was an increase in total revenue, which reached $2.6 million in the quarter compared with negative total revenue of $614,000 reported in the prior year first quarter. This increase results from increased investment income along with increased feeding commission, amortization and service fee revenue.
Overall, GAAP reported expenses were held by negative interest credited due to the fall in value of the options embedded in our liabilities and the increase in the mark-to-market value of our options allowance.
We did see an increase in salaries and benefits and other operating expenses excluding the option mark, as we continue to build the business and processes and work on technology initiatives. Salaries and benefits were $4.3 million for the quarter up from $2.9 million in the prior years’ first quarter.
As we grow managing expenses continues to be an area of focus and balance. We will continue to take steps to bring costs in line as the year progresses.
Overall, annuity direct written premiums on a statutory accounting basis for the first quarter of 2022 were $98.1 million compared to a $104.2 million at the fourth quarter of 2021 and $123.7 million in the first quarter of 2021. We continue to see intense competition in the market for annuities with aggressive pricing and potential new competitors expected to enter the market. We have been taking actions to maintain our competitive position. There was a slow start in the first quarter of 2022, but we are seeing the positive results of these actions and encouraging trends as we move into the second quarter.
State expansion efforts remain the priority we have active applications and process and anticipate additional filings this quarter and expect to have more to say on this later in the year.
Ceded premium with $40.1 million in 2022's first quarter or 40.9% compared to $47.5 million or 38.4% in the first quarter of last year. Overall, we received $2.4 million in ceding [indiscernible] 2022 compared to $2.9 million in the first quarter of 2021. For GAAP purposes, ceded commission is deferred and earned over the life of the policies. As of March 31, there was $30 million on the balance sheet under deferred gain on co-insurance transactions, which will be recognized in revenue over time.
Our invested asset base continues to grow at $1.1 billion as of March 31, up from $976 million at year end. Overall, we're benefiting from core capabilities developed to source alternative assets in the areas of private credit, commercial mortgages and structured products, which is producing an overall portfolio yield of approximately 5.5%.
We are reaffirming guidance for 2022 based on our current view of the business in the market. Anticipated premiums written are expected to be in the range of $500 million to $600 million influenced by state expansion, IMO expansion, reallocated personnel, and other initiatives. The goal is to cede, on average, approximately 70% to 90% of the premium in the year to generate ceded commission fees and manage capital.
Demand from our partners is strong and we have capacity in place to cover anticipated written premium through existing reinsurers that have the potential to grow along with potential transactions in the pipeline.
We are working to bring general and administrative expenses on a management basis, a non-GAAP measure, to be approximately $27 million to $28 million for the full year 2022.
I want to take a moment to address the leadership transition on the finance team. As noted in our press release, Daniel Maloney will be joining Midwest as the Executive Vice President of Accounting and Finance on May 23. Dan is a CPA with more than 30 years of experience in the insurance industry at companies including Players Health, Horace Mann, American Fidelity, and AIG. He also has a background in public accounting and has worked in various roles related to SEC reporting, statutory reporting, and controllership. We are very excited to have Dan join Midwest and we believe he is a strong addition to our team.
We also disclosed in our press release that Eric Berg will be stepping down as Senior Vice President and Chief Financial Officer, effective immediately. This was a mutual decision that Midwest and Eric felt was in the best interest of both parties. There was no disagreement relating to our accounting, strategy, management, operations, policies, regulatory matters, or practices financial or otherwise. And we wish Eric well, as he moves forward.
Finally, we acknowledge that the stock price has been under pressure as we've transitioned through the last few months. The value of the business is not being reflected by the market. The continued performance of the business, actions being taken and the potential for growth continues to build value in the platform.
As we move forward, our opportunity is strong and the team at Midwest is committed to positioning the business for continued growth.
Now I'll open it up for questions.
Thank you. [Operator Instructions] The first question today comes from Matthew Carletti from JMP Securities. Matthew, please go ahead, your line is now open.
Hey, thanks. Good morning. Georgette I was hoping you could provide us a little more color on, you reiterated your guidance for top line production and talk a little bit about some of the things you're seeing, but could you dive a little further into, as we go across the remaining three quarters of the year, kind of how we should expect the cadence of that to play out and particularly how much state expansion plays into that? And kind of how much maybe changes in the market that you are seeing, that you referenced kind of late in the quarter and into Q2 may influence that?
Sure. Good morning, Matt. Thanks for the question. I think as we think about the top line, we expected first quarter to be somewhat consistent with fourth quarter and the trends that we saw there. So no surprise that we came in about $98 million for the quarter. During that quarter though, we took quite a bit of action around pricing ensuring that we were staying in a competitive position. We also did a number of things around allocating resources and focus on our distribution partners just to, again, be more active, ensure our name and brand is getting out there. And then continued on the path of state expansion.
We've not really built a lot of state expansion into that premium. We've got a couple of applications in process and we think those will be forthcoming. So that's kind of the back half of the year.
I think what our expectation is, is that it will continue to grow as the year goes on. Again, our big challenge is making sure that we're staying competitive from a pricing perspective. And we think, again that we have a little bit of an edge there with our asset capabilities and what we're seeing with movement in rates to be able to continue to match that along with our reinsurance capacity.
So, we believe that we can grow premium as the year goes on. So I would expect Q2 to see, again, some growth given the encouraging trends that we saw coming out of the first quarter and then that to continue to grow as the year progresses.
Okay, great. And then one more, if I can just on your guidance for ceding 70% to 90% as kind of the production, and obviously it looks like you are warehousing a bit at the moment. Can you talk a little bit about kind of ideal size or how you think about that warehousing before kind of sending it out and kind of getting to the overall average for the year?
Yes, I think again, as we look at this, the ceding percentage, it really is about making sure that we're building the capacity, to in our existing reinsurers and potential new ones, we have a transaction in the pipeline and potential others in the back half of the year. It's really about ensuring that we have the capacity to cover that from a capital perspective. And, I think, as we've seen the warehousing that was kind of the first time we did that with SRC1 in ORIX and that's been a successful transaction. So I think as we are growing our own capabilities, we're finding that growing the size is important. It allows us to be thoughtful about cost, but also ensure that we have capacity in place.
So I would expect us to see maybe not as many numbers of transactions, but size a little bit bigger. I think again for us it's really then about managing capacity and ensuring that we're also thinking about revenue streams from a ceding commission perspective and what we can invest in.
So, I think we feel very good about the low end of that range. And we've been kind of running around 50, we think with some of what we have in the pipeline that that will increase. I think the 90 becomes really a strategic discussion about timing of warehousing and growing them to a size that makes sense for us to kind of execute in the market.
Okay. That makes sense. Thank you very much for the answers.
No, thanks, Matt.
Thank you. The next question today comes from John Barnidge from Piper Sandler. John, please go ahead your line is now open.
Thank you. Service fee revenue rose to $1.1 million from $438,000 a year ago. Are there any one time items there or is that a run rate number we should be thinking about?
No, thanks John. Good morning. I think service fee revenue continues to be strong for us. Some of that is recurring as assets under management continue to grow. And as we noted, we continue to see that which is encouraging and that's generating a nice revenue stream. I think in addition to that there is some kind of, I guess, trials, I would say, that we've been looking at around the fees – somebody is. And really that relates to we've been building quite a bit of capability in the team around structure transactions, private credit, and we've been able to really begin to leverage some of those capabilities to source assets or structure, investment vehicles where we were able to generate additional fees with our reinsurers to support that.
So we think that's potential to continue to grow that revenue stream. But the main kind of focus in that line is assets under management growth.
Okay, great. Thank you very much for that Georgette. And then another follow-up, your mortgage loans in your balance sheet, are these hard money loans, are they commercial and what's the typical yield please?
Yes, again, they vary, but a lot of them are commercial based as we think about getting the quality of those, right. A lot of low loan-to-value supported by strong rental collateral or collateral that's again, supported by rental vehicles feel good about the partners. So again, long established history and ensuring that again, the credit quality is strong. We certainly go through a process of stressing that and ensuring that again, we understand the volatility potential around that and what's happening in the markets that they are located.
So we are looking to ensure that we're diversifying those assets and the geography around those, as well as the type of again, commercial vehicle that they may be in. So I think as we kind of look at return, that's probably running somewhere in 6.5% to 7% sometimes higher, depending again, on the structure.
Okay. That's fantastic. And maybe one more. Can you maybe talk about how much total capital is back in the reinsurance sales please?
Yes. So I think again, if you look at the retained portion of the book if we look at – that's disclosed in the Q and the K you can see again that some of the assets that we're holding for the reinsurers, right and we're managing that taking fees for it. So as we look at that, just finding my page here with me, there is a good portion again, that's kind of supporting that. So we've kind of got about $598 million, right in funds withheld and Mod Co. accounts that are supporting those reinsurance transactions. And then there is also trust accounts behind that that would support that.
So, well, capitalized vehicles.
That's fantastic. Thank you, Georgette.
Thanks, John.
Thank you. [Operator Instructions] We have a follow-up question from John Barnidge from Piper Sandler. John, please go ahead.
Thank you very much. You had 75% roughly FIA sales composition in the first quarter. Then you talked about intense competition with expectations for new entrants, I noted in your script. So how should we think about the composition of sales between FIA’s and MYGA's prospectively in the balance of the year? Thank you.
Thanks, John for the follow-up. Yes, I think, our target is to maintain that consistent kind of view of where we were for 2021, which is similar 75%-25%. I think we are seeing some dynamics in the market around pricing, which may move that slightly, but we would expect that to be somewhat consistent given our distribution and where we're seeing activity. I think for us obviously we tend to lean towards the MYGA in some cases with the reinsurance and that's a piece of it, but we would expect that to be somewhat consistent given the market dynamics at the moment.
Thank you.
Thanks.
Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference over to Georgette Nicholas for closing remarks.
Thank you. Thanks for joining us. And appreciate your interest in Midwest and look forward to talking with you again soon. Have a great day.
That concludes the Midwest Holding first quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.