The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the financial condition of the Company as of March 31, 2021, compared with December 31, 2020, and the results of operations for the three months ended March 31, 2021, compared with corresponding period in 2020 of Midwest Holding Inc. and its consolidated subsidiaries. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes to the Consolidated Financial Statements ("Notes") presented in "Part 1 - Item 1. Financial Statements" of this Report and our Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K"), including the sections entitled "Part I - Item 1A. Risk Factors," and "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning new products or services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "hopes," "estimates," "projects," "intends," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, many of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Item 1A. Risk Factors" of our 2020 Form 10-K and below in Part III - Other Information - Item 1A Risk Factors.

All such forward-looking statements speak only as of the date of this report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statements are based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We operate our business primarily through three subsidiaries, American Life, 1505 Capital, and Seneca Re. American Life is licensed to sell, underwrite, and market life insurance and annuity products in 21 states and the District of Columbia and has pending applications in additional states. We also provide insurance company administrative services through a division known as "m.pas" that was formed in 2019. 1505 Capital provides investment advisory and related asset management services. Seneca Re reinsures various types of the life insurance risks through one or more single purposes entities or "cells."

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

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

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



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

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

On August 10, 2020, Midwest filed Articles of Amendment of Amended and Restated Articles of Incorporation ("Amendment") that changed the total number of shares it is authorized to issue to 22,000,000 shares of common stock, of which 20,000,000 were designated as voting common stock with a par value of $0.001 per share and 2,000,000 shares were designated as non-voting common stock with a par value of $0.001 per share. The Amendment also provides for 2,000,000 shares of authorized preferred stock with a par value of $0.001 per share. The Amendment provided that upon effectiveness, each 500 shares of common stock either issued or outstanding would be converted into one share of voting common stock through a reverse stock split. The Amendment was effective as of August 27, 2020. Fractional shares were not issued in connection with the reverse stock split but were paid in cash. The Company paid approximately $175,000 for those fractional shares and is now holding treasury stock represented by that amount.

Outstanding shares as of March 31, 2021 and December 31, 2020 were 3,737,564.

All prior periods disclosed in this 10-Q have been restated to reflect the reverse stock split per share amounts.

On December 21, 2020, Midwest completed a public offering of 1,000,000 shares of its voting common stock offered by the Company at a price to the public of $70.00 per share. On December 17, 2020, Midwest voting common stock was listed on the Nasdaq Capital Market under the ticker symbol "MDWT." The aggregate net proceeds to the Company were approximately $64.4 million, after deducting underwriting discounts and commissions.

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







COVID-19

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

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

Unrealized Losses; Embedded Derivatives

American Life has agreements with several third-party reinsurers that have funds withheld ("FW") and modified coinsurance ("Modco") coinsurance provisions under which the assets related to the reinsured business are maintained by American Life as collateral; however, ownership of the assets and the total return on the asset portfolios belong to the third-party reinsurers. Under GAAP, this arrangement is considered an embedded derivative as discussed in "Note 5 - Derivative Instruments" to our Consolidated Financial Statements. As a result of price increases in 2021 and late 2020, assets carried as investments on American Life's financial statements for the third-party reinsurers contained unrealized gains of approximately $2.5 million as of March 31, 2021 compared to unrealized losses of approximately $23.2 million as of March 31, 2020. The terms of the contracts with the third-party reinsurers provide that unrealized gains on the portfolios accrue to the third-party



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

Critical Accounting Policies and Estimates

Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K ("2020 Form 10-K MD&A") contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the "Critical Accounting Policies and Estimates" discussed in our 2020 Form 10-K MD&A.

Net (Loss) Income

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

1. Total (losses) revenue drivers:






    There are three components associated with our FIA products:  1) the fair
    market value of the derivative asset entered into in order to mitigate the
    fluctuation of the embedded liability on our policyholder contracts, 2) the
    change in the fair market value of the embedded liability, and 3) the option
    allowance related to our third-party reinsurers that are marked to market at

a) the end of the period. As of March 31, 2021, the change in the market value of


    the option derivatives decreased resulting in a realized loss of $6.3 million.
    The decrease in the embedded liability resulted in a decrease in our interest
    credited of $2.3 million.  The third component resulted in a gain resulting
    from the mark-to-market gain of $4.1 million on our options allowance with the
    third-party reinsurers presented in other operating expenses.




    American Life has treaties with several third-party reinsurers that have funds
    withheld and modified coinsurance provisions. Under those provisions, the
    assets backing the treaties are maintained by American Life as collateral but
    the assets and total returns or losses on the asset portfolios belong to the
    third-party reinsurers. Under GAAP this arrangement is considered an embedded
    derivative as discussed in Note 5. As a result of the changes in the market
    prices, the assets held on behalf of the third-party reinsurers had unrealized

b) gains of approximately $2.5 million and unrealized losses of $23.2 million,


    respectively. The terms of the contracts with the third-party reinsurers
    provide that unrealized gains or losses on the asset portfolios accrue to the
    third-party reinsurers. We account for the change in unrealized gains or
    losses related to the third-party reinsurers by recording equivalent realized
    gains or losses on our Consolidated Statements of Comprehensive Loss. We
    recorded the decrease in the unrealized gains since December 31, 2020 as a
    realized gain of $400,000 compared to a realized gain of $23.2 million during
    the first quarter of 2020.




 2. Expense drivers

As mentioned above in 1.a., the decrease in interest credited and general

a) operating expenses related to the embedded derivatives in our FIA products of

$2.3 million and the mark-to-market option allowance gain of $4.1 million was
    offset by our losses on our derivative assets.

b) Increase of $2.1 million in salaries and benefits due to increasing our


    personnel to service our new business growth.






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