Company Quick10K Filing
Quick10K
Federal Life Group
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
8-K 2019-03-25 Exhibits
PUK Prudential PLC 85,156
PRU Prudential Financial 31,826
RGA Reinsurance Group of America 9,490
PRI Primerica 4,926
BHF Brighthouse Financial 4,013
GNW Genworth Financial 2,250
FFG FBL Financial Group 1,336
IHC Independence Holding 565
ATH Athene Holding 0
NWLI National Western Life Group 0
FLF 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4: Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1.A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 flf-ex311_282.htm
EX-31.2 flf-ex312_281.htm
EX-32.1 flf-ex321_279.htm
EX-32.2 flf-ex322_280.htm

Federal Life Group Earnings 2019-03-31

FLF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 flf-10q_20190331.htm 10-Q flf-10q_20190331.htm

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from                      to                     

Commission File Number: 001-38718

 

Federal Life Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

82-4944172

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3750 West Deerfield Road

Riverwoods, Illinois 60015

(Address of principal executive offices, including zip code)

(847) 520-1900

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $.01

FLFG

OTC Pink Open Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 revised 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 in Rule 12b-2 of the Exchange Act).    Yes      No  

APPLICABLE TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of May 20, 2019, there were 3,530,250 shares of the registrant’s common stock, $.01 par value, outstanding.

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

PART I – FINANCIAL INFORMATION

 

1

Item 1. Financial Statements

 

1

CONSOLIDATED BALANCE SHEETS

 

1

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

2

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

3

CONSOLIDATED STATEMENT OF CASH FLOWS

 

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5

1.  Organization and Basis of Presentation

 

5

2.  Summary of Significant Accounting Policies

 

6

3.  Recent Accounting Pronouncements

 

6

4.  Investments and Related Income

 

8

5.  Derivative Instruments

 

11

6.  Fair Value of Financial Instruments

 

11

7.  Accumulated Other Comprehensive Income

 

15

8.  Income Taxes

 

15

9.  Commitments and Contingent Liabilities

 

16

10.  Debt and Federal Home Loan Bank Advances

 

16

11.  Related Party Transactions

 

16

12.  Earnings Per Share

 

17

13.  Subsequent Events

 

17

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

 

18

Item 4: Controls and Procedures

 

25

 

 

PART II – OTHER INFORMATION

 

27

Item 1. Legal Proceedings

 

27

Item 1.A. Risk Factors

 

27

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

 

27

Item 3. Default Upon Senior Securities

 

27

Item 4. Mine Safety Disclosures

 

27

Item 5. Other Information

 

27

Item 6. Exhibits

 

28

 

 

SIGNATURE

 

29

 

 

 

 


Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL LIFE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale, at fair value (amortized cost: 2019,

  $192,573; 2018, $187,035)

 

$

195,753

 

 

$

184,475

 

Equity securities, at fair value

 

 

3,806

 

 

 

6,004

 

Policy loans

 

 

9,488

 

 

 

9,581

 

Other invested assets

 

 

536

 

 

 

202

 

Total investments

 

 

209,583

 

 

 

200,262

 

Cash and cash equivalents

 

 

29,842

 

 

 

33,252

 

Real estate, property and equipment, net

 

 

2,093

 

 

 

2,130

 

Accrued investment income

 

 

2,069

 

 

 

1,908

 

Accounts receivable

 

 

527

 

 

 

498

 

Reinsurance recoverables

 

 

3,521

 

 

 

3,556

 

Prepaid reinsurance premiums

 

 

1,467

 

 

 

1,418

 

Deferred policy acquisition costs, net

 

 

12,832

 

 

 

13,533

 

Deferred sales inducement costs, net

 

 

1,415

 

 

 

1,348

 

Deferred tax asset, net

 

 

 

 

 

492

 

Other assets

 

 

608

 

 

 

511

 

Separate account asset

 

 

22,922

 

 

 

20,819

 

Total Assets

 

$

286,879

 

 

$

279,727

 

Liabilities

 

 

 

 

 

 

 

 

Policy liabilities and accruals:

 

 

 

 

 

 

 

 

Policyholder account balance

 

$

117,995

 

 

$

116,298

 

Future life policy benefits

 

 

71,444

 

 

 

71,992

 

Future accident and health policy benefits

 

 

355

 

 

 

345

 

Reserve for deposit type contracts

 

 

10,504

 

 

 

10,587

 

Other policyholder funds

 

 

998

 

 

 

1,398

 

Unearned revenue

 

 

1,342

 

 

 

1,367

 

Deferred reinsurance settlements

 

 

2,563

 

 

 

2,641

 

Deferred tax liability, net

 

 

79

 

 

 

 

Other liabilities

 

 

1,513

 

 

 

1,360

 

Separate account liability

 

 

22,922

 

 

 

20,819

 

Total Liabilities

 

 

229,715

 

 

 

226,807

 

Equity

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share, 4,010,250 shares authorized; issued and

   outstanding:

 

 

 

 

 

 

 

 

2019 - 3,530,250

 

 

 

 

 

 

 

 

2018 - 3,530,150

 

 

35

 

 

 

35

 

Additional paid-in capital

 

 

33,110

 

 

 

33,076

 

Retained earnings

 

 

22,796

 

 

 

21,774

 

Accumulated other comprehensive income (loss)

 

 

1,223

 

 

 

(1,965

)

Total Equity

 

 

57,164

 

 

 

52,920

 

Total Liabilities and Equity

 

$

286,879

 

 

$

279,727

 

 

See accompanying notes to unaudited consolidated financial statements

1


Table of Contents

 

FEDERAL LIFE GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Insurance revenues

 

$

2,120

 

 

$

2,744

 

Net investment income

 

 

2,201

 

 

 

2,107

 

Net investment gains

 

 

574

 

 

 

90

 

Other revenues

 

 

26

 

 

 

49

 

Total Revenues

 

 

4,921

 

 

 

4,990

 

Benefits and expenses

 

 

 

 

 

 

 

 

Policyholder benefits

 

 

1,954

 

 

 

3,095

 

Interest credit to policyholders

 

 

70

 

 

 

(48

)

Operating costs and expenses

 

 

2,459

 

 

 

2,241

 

Amortization of deferred acquisition and sales inducement costs

 

 

371

 

 

 

374

 

Taxes, licenses and fees

 

 

189

 

 

 

197

 

Dividends to policyholders

 

 

18

 

 

 

18

 

Total Benefits and Expenses

 

 

5,061

 

 

 

5,877

 

Net loss before taxes

 

 

(140

)

 

 

(887

)

Tax expense (benefit)

 

 

(2

)

 

 

3

 

Net loss

 

$

(138

)

 

$

(890

)

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period (net of tax)

 

 

4,997

 

 

 

(4,847

)

Adjustment to deferred acquisition costs (net of tax)

 

 

(649

)

 

 

582

 

Other Comprehensive Income (Loss)

 

 

4,348

 

 

 

(4,265

)

Comprehensive Gain (Loss)

 

$

4,210

 

 

$

(5,155

)

 

Earnings per common share for the periods (Note 12):

 

Three months

ended March 31,

 

 

Pro forma for the

three months

ended March 31,

 

 

 

2019

 

 

2018

 

Basic loss per common share

 

$

(0.04

)

 

$

(0.25

)

Diluted loss per common share

 

$

(0.04

)

 

$

(0.25

)

 

See accompanying notes to unaudited consolidated financial statements

 

2


Table of Contents

 

FEDERAL LIFE GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share and per share data)

(Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Other

Comprehensive

Income (Loss)

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

 

 

(Dollars in thousands)

 

Balance, December 31, 2017

 

 

 

 

$

 

 

$

 

 

$

4,757

 

 

$

26,600

 

 

$

31,357

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(890

)

 

 

(890

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(4,265

)

 

 

 

 

 

(4,265

)

Balance, March 31, 2018

 

 

 

 

$

 

 

$

 

 

$

492

 

 

$

25,710

 

 

$

26,202

 

 

Balance, December 31, 2018

 

 

3,530,150

 

 

$

35

 

 

$

33,076

 

 

$

(1,965

)

 

$

21,774

 

 

$

52,920

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(138

)

 

 

(138

)

Paid in capital

 

 

100

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

34

 

Cumulative net effect of adoption of

   new accounting principle

 

 

 

 

 

 

 

 

 

 

 

(1,160

)

 

 

1,160

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

4,348

 

 

 

 

 

 

4,348

 

Balance, March 31, 2019

 

 

3,530,250

 

 

$

35

 

 

$

33,110

 

 

$

1,223

 

 

$

22,796

 

 

$

57,164

 

 

See accompanying notes to unaudited consolidated financial statements

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Table of Contents

 

FEDERAL LIFE GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(138

)

 

$

(890

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Investment gains, net

 

 

(574

)

 

 

(90

)

Amortization on investments

 

 

(11

)

 

 

(21

)

Depreciation

 

 

47

 

 

 

68

 

Stock-based compensation

 

 

145

 

 

 

 

Deferred insurance acquisition costs

 

 

(482

)

 

 

(506

)

Deferred sales inducement costs

 

 

(76

)

 

 

(99

)

Interest and amortization of deferred acquisition and sales inducement costs

 

 

371

 

 

 

374

 

Change in value of derivatives and other

 

 

(314

)

 

 

101

 

Change in accrued investment income

 

 

(162

)

 

 

(25

)

Change in receivables

 

 

(29

)

 

 

(654

)

Change in reinsurance recoverable

 

 

35

 

 

 

75

 

Change in prepaid reinsurance premiums

 

 

(49

)

 

 

(46

)

Change in policy benefits

 

 

(937

)

 

 

(146

)

Change in unearned revenue

 

 

(25

)

 

 

(36

)

Change in deferred reinsurance settlements

 

 

(77

)

 

 

(75

)

Change in other

 

 

(57

)

 

 

45

 

Net cash used in operating activities

 

 

(2,333

)

 

 

(1,925

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from investments sold or matured:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

3,768

 

 

 

5,614

 

Equity securities

 

 

2,827

 

 

 

 

Derivatives

 

 

77

 

 

 

128

 

Policy loans

 

 

94

 

 

 

102

 

Costs of investments purchased:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

(9,286

)

 

 

(6,093

)

Equity securities

 

 

(35

)

 

 

 

Derivatives

 

 

(127

)

 

 

(111

)

Real estate additions

 

 

(1

)

 

 

(19

)

Purchase of property and equipment

 

 

(9

)

 

 

(24

)

Net cash used in investing activities

 

 

(2,692

)

 

 

(403

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Policyholder account balances:

 

 

 

 

 

 

 

 

Deposits

 

 

3,321

 

 

 

4,459

 

Withdrawals

 

 

(1,707

)

 

 

(2,417

)

Net proceeds received from issuance of shares of common stock

 

 

1

 

 

 

 

Net cash provided by financing activities

 

 

1,615

 

 

 

2,042

 

Net decrease in cash

 

 

(3,410

)

 

 

(286

)

Cash, beginning of period

 

 

33,252

 

 

 

4,085

 

Cash, end of period

 

$

29,842

 

 

$

3,799

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Supplemental non-cash activity:

 

 

 

 

 

 

 

 

Deferral of sales inducements

 

$

76

 

 

$

99

 

 

See accompanying notes to unaudited consolidated financial statements

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Table of Contents

 

FEDERAL LIFE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

1.

Organization and Basis of Presentation

Federal Life Group, Inc. (“FLG”, “we”, “us”, “our” or the “Company”) is a Pennsylvania corporation organized to be the stock holding company for Federal Life Mutual Holding Company and its subsidiaries (the “Predecessor”) following the 2018 conversion of Federal Life Mutual Holding Company from mutual to stock form (the “Conversion”). Federal Life Mutual Holding Company was subsequently renamed Federal Life Holding Company after the Conversion. Prior to the Conversion, FLG was not engaged in any significant operations and did not have any assets or liabilities. After the Conversion, which was completed on December 11, 2018, when FLG issued 3,530,150 shares at $10.00 per share for gross proceeds of $35.3 million, FLG’s primary assets are the outstanding capital stock of the Predecessor and a portion of the net proceeds of the Company’s initial public offering (“IPO”), which was completed on December 11, 2018. Prior to the Conversion, FLG was a direct, wholly-owned subsidiary of the Predecessor. Following the Conversion, the Company reorganized its corporate structure so that the Predecessor is a direct, wholly owned subsidiary of FLG. FLG now contains the accounts of its Predecessor and those accounts are now consolidated with those of FLG within the accompanying financial statements. The reorganization is considered a transaction between entities that are under common control. As a result, the consolidated financial statements prior to the IPO and the reorganization have been presented at their historical amounts.

The accompanying consolidated financial statements include the accounts of FLG and its subsidiaries, Federal Life Holding Company; FEDHO Holding Company (“FEDHO”); Federal Life Insurance Company (“Federal Life”); FED Mutual Financial Services, Inc. (“FED Mutual”); and Americana Realty Company (“Americana”). Additionally, the IPO described above resulted in a change in control according to Business Combinations (Topic 805), however, the Company elected not to apply push down accounting. Accordingly, the consolidated financial statements are presented at the Company’s historical carrying amounts. All intercompany transactions and balances have been eliminated in consolidation.

Federal Life, a subsidiary of Federal Life Holding Company, completed a reorganization in 2016 in which it converted from a mutual to a stock insurance company within a newly created mutual holding company structure. As part of this reorganization, Federal Life Mutual Holding Company was formed as an Illinois mutual insurance holding company and Federal Life continued its existence as an Illinois stock life insurance company. All of the shares of Federal Life were issued to FEDHO, an intermediate holding company that, in turn, is a wholly-owned subsidiary of the Federal Life Holding Company. Federal Life has two wholly-owned non-insurance subsidiaries, Americana and FED Mutual, discussed further below.

Federal Life’s in force business is primarily comprised of traditional life policies (term insurance, whole life insurance, non-medical health insurance, and group life insurance), interest sensitive contracts, and fixed deferred annuity contracts. Federal Life primarily sells its interest sensitive life, whole life, term life, fixed and indexed annuities through a network of independent agents. Federal Life is licensed to sell new business in the District of Columbia and all states except Maine, Massachusetts, New Hampshire, New York and Vermont. Although Federal Life is licensed to sell products in 45 states, its primary markets are Illinois, Michigan, Ohio, California, Florida, Texas, and Wisconsin.

Americana owns mineral rights in Arkansas, Georgia, Oklahoma and Texas. Americana earns royalty revenues from energy producers that are under agreement to drill for and produce oil and gas products on properties where Americana owns mineral rights.

FED Mutual is a FINRA licensed broker/dealer that was established to distribute Federal Life’s variable annuity products.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. The December 31, 2018 consolidated balance sheet data was derived from audited consolidated financial statements for the year ended December 31, 2018, which include all disclosures required by GAAP.

5


Table of Contents

 

For further information related to a description of areas of judgement and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 10-K”).

Investor Information

Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and any amendments may be found on our website at ir.federallife.com as soon as reasonably practicable after such reports are filed with the SEC. In addition, we have available on our website our: (i) compliance reporting policy; (ii) code of ethics; (iii) audit committee charter; (iv) compensation committee charter and (v) nominating committee charter. The information incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.

2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most significant estimates include those used in determining the capitalization and amortization of deferred policy acquisition costs (“DAC”), the valuation of investments, future policy benefits (traditional life contracts, immediate annuities, supplemental contracts with life contingencies, and accident and health), the fair value of stock-based compensation awards, and the provision for income taxes. Actual results could differ from those estimates.

Emerging Growth Company

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “Jobs Act”). As an emerging growth company, the Company utilizes the extended transition period provided in the Securities Act of 1933 for complying with new or revised accounting standards. Under this accommodation, the Company may early adopt a new or revised accounting standard only if early adoption is permitted by the standard. Changes in accounting principles issued but not yet adopted described below reflect the Company’s status as an Emerging Growth Company and the extended adoption period allowed for such companies.

Smaller Reporting Company

Additionally, the Company qualifies as a “smaller reporting company” as defined by Item 10(f)(1) of Regulation S-K. In some instances, this permits the Company to provide scaled disclosures under Regulation S-K and Regulation S-X.

Investments

Realized capital gains and losses on sales of investments include fixed maturity securities with calls and prepayments and are determined on the basis of specific security identification.

Equity securities are carried at fair value. Beginning with the adoption of Accounting Standards Update (“ASU”) No. 2016-01 on January 1, 2019, changes in the fair value of equity securities are recognized through net income. Prior to January 1, 2019, unrealized gains or losses were recorded in accumulated other comprehensive income (loss) (“AOCI”). Additionally, in connection with the adoption of ASU No. 2016-01, effective January 1, 2019, the Company has reclassified its investment in Federal Home Loan Bank (“FHLB”) common stock from equity securities to other invested assets. These investments are carried at redemption value. The carrying value of these investments at December 31, 2018 was $10,000.

3.

Recent Accounting Pronouncements

Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-09, “Compensation - Stock Compensation”: Improvements to Employee Shared-Based Payment Accounting.  The aspects of accounting guidance affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU was effective for annual reporting periods beginning after December 15, 2017. The Company adopted this ASU in the fourth quarter of fiscal 2018 upon the issuance of restricted stock and stock options to our employees. The adoption of the ASU did not have an impact on our financial statements as we did not previously have stock compensation. The Company has elected to account for forfeitures when they occur.

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In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate described in the “Income Tax Reform” section below is recorded. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the Tax Act is recognized. The Company early adopted ASU No. 2018-02 effective December 31, 2017 using the portfolio method, which resulted in the reclassification of $805,000 of stranded tax effects from AOCI to retained earnings within the Company’s consolidated financial statements.

In May 2014, the FASB issued an ASU 2014-09 “Revenue from Contracts with Customers,” related to revenue arising from contracts with customers. This ASU, which replaces most current revenue recognition guidance, including industry specific guidance, prescribes that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this ASU on January 1, 2019. The adoption of this ASU had no impact on our consolidated financial statements as revenues related to insurance contracts and investment contracts are excluded from its scope.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to the classification and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. ASU No. 2016-01 is effective for non-public companies for annual periods beginning after December 15, 2018. We adopted this guidance effective January 1, 2019 with no material impact to our consolidated financial statements. Changes in fair value of equity securities, previously recognized through other comprehensive income (loss), are now recognized in net investment gains. We also recorded a cumulative effect adjustment to increase retained earnings by $1,160,000, net of tax, as of January 1, 2019 for unrealized gains previously recognized in AOCI. For additional information, please see Note 7.

Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02 “Leases”, that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors is mainly unchanged. This ASU is effective January 1, 2020. At this time, we do not believe the adoption of ASU No. 2016-02 will have an impact on the Company’s consolidated financial statements, as we do not have any material leases.

In August 2018, the FASB issued ASU No. 2018-12, “Targeted Improvements to the Accounting for Long-Duration Contracts,” which revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ (“MRB”) and requiring all contract features meeting the definition of an MRB to be measured at fair value, simplifying the method used to amortize DAC and deferred sales inducement costs (“DSIC”) to a constant basis over the expected term of the related contracts rather than based on gross profits and enhancing disclosure requirements. ASU is effective on January 1, 2022, the transition date (the remeasurement date) is January 1, 2020. Early adoption of this ASU is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities,” which changes the recognition and presentation requirements of hedge accounting. ASU No. 2017-12 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The adoption of ASU No. 2017- 12 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs: Premium Amortization of Purchased Callable Debt Securities,” which requires that certain premiums on callable debt securities be amortized to the earliest call date. ASU No. 2017-08 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

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In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses: Measurement of Credit Losses of Financial Instruments,” which provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposure. The model requires an entity to estimate lifetime credit losses related to such assets and exposure based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also modifies the current other-than- temporary impairment guidance for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment and replaces existing guidance for purchased credit deteriorated loans and debt securities. ASU No. 2016-13 is effective for annual reporting periods beginning after December 15, 2020 with early adoption permitted for annual periods beginning after December 15, 2018. The Company is currently assessing the impact of the guidance on its consolidated financial statements.

4.Investments and Related Income

The Company’s principal investments are in fixed income securities, equity securities, and policy loans.

The following table presents the amortized cost, gross unrealized gains (losses) and fair value of the Company’s fixed maturity securities as of March 31, 2019 and December 31, 2018. Equity securities were removed from this table upon adoption of ASU No. 2016-01 at January 1, 2019.

 

 

 

March 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

U.S. government

 

$

4,060

 

 

$

136

 

 

$

(92

)

 

$

4,104

 

States, political subdivisions, other

 

 

33,699

 

 

 

778

 

 

 

(90

)

 

 

34,387

 

Corporate

 

 

109,523

 

 

 

2,211

 

 

 

(749

)

 

 

110,985

 

Residential mortgage-backed securities

 

 

39,703

 

 

 

990

 

 

 

(92

)

 

 

40,601

 

Commercial mortgage-backed securities

 

 

5,588

 

 

 

137

 

 

 

(49

)

 

 

5,676

 

Total fixed maturity securities

 

$

192,573

 

 

$

4,252

 

 

$

(1,072

)

 

$

195,753

 

 

 

 

December 31, 2018

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

U.S. government

 

$

4,063

 

 

$

142

 

 

$

(148

)

 

$

4,057

 

States, political subdivisions, other

 

 

30,881

 

 

 

472

 

 

 

(364

)

 

 

30,989

 

Corporate

 

 

108,664

 

 

 

617

 

 

 

(2,995

)

 

 

106,286

 

Residential mortgage-backed securities

 

 

37,755

 

 

 

455

 

 

 

(688

)

 

 

37,522

 

Commercial mortgage-backed securities

 

 

5,672

 

 

 

73

 

 

 

(124

)

 

 

5,621

 

Total fixed maturity securities

 

 

187,035

 

 

 

1,759

 

 

 

(4,319

)

 

 

184,475

 

Equity securities

 

 

4,514

 

 

 

1,528

 

 

 

(38

)

 

 

6,004

 

Total fixed maturity and equity securities

 

$

191,549

 

 

$

3,287

 

 

$

(4,357

)

 

$

190,479

 

 

The scheduled maturities for fixed income securities as of March 31, 2019 and December 31, 2018 are as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

 

(Dollars in thousands)

 

Due in one year or less

 

$

6,699

 

 

$

6,795

 

 

$

5,998

 

 

$

6,041

 

Due after one year through five years

 

 

34,683

 

 

 

35,506

 

 

 

37,917

 

 

 

38,032

 

Due after five years through ten years

 

 

77,014

 

 

 

77,945

 

 

 

74,274

 

 

 

72,209

 

Due after ten years

 

 

28,886

 

 

 

29,230

 

 

 

25,419

 

 

 

25,050

 

Mortgage-backed securities

 

 

45,291

 

 

 

46,277

 

 

 

43,427

 

 

 

43,143

 

Total

 

$

192,573

 

 

$

195,753

 

 

$

187,035

 

 

$

184,475

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.

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The following table presents the sources of investment proceeds and the related gross realized investment gains (losses) for the three month periods ended March 31, 2019 and March 31, 2018, respectively:

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

 

Fixed

 

 

Equity

 

 

Derivative

 

 

 

Maturities

 

 

Securities

 

 

Instruments

 

 

 

(Dollars in thousands)

 

Proceeds from sales or maturities

 

$

3,768

 

 

$

2,827

 

 

$

77

 

Gross gains from sales or maturities

 

 

11

 

 

 

715

 

 

 

107

 

Gross losses from sales or maturities

 

 

(2

)

 

 

(12

)

 

 

(140

)

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

 

Fixed

 

 

Equity

 

 

Derivative

 

 

 

Maturities

 

 

Securities

 

 

Instruments

 

 

 

(Dollars in thousands)

 

Proceeds from sales or maturities

 

$

5,614

 

 

$

 

 

$

128

 

Gross gains from sales or maturities

 

 

48

 

 

 

 

 

 

226

 

Gross losses from sales or maturities

 

 

(33

)

 

 

 

 

 

(151

)

For the three month period ended March 31, 2019, the Company also recognized $105,000 of unrealized losses on equity securities in net investment gains in accordance with the adoption of ASU 2016-01.

For the three month periods ended March 31, 2019 and March 31, 2018 the Company did not recognize any impairment losses.  

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made a decision to sell or whether it is probable that the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets any of these criteria, the security’s decline in fair value is deemed other than temporary and is recorded in earnings.

If the Company has not made the decision to sell the fixed income security and it is not more likely than not that the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value calculated by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, with the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss deemed to be related to other factors and recognized in AOCI.

The Company’s portfolio monitoring process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost for fixed income securities and cost for equity securities is below established thresholds, and also includes the monitoring of other criteria such as ratings, ratings downgrades or payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition of the issue or issuer and its future earnings potential. Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities, or cost for equity securities; 2) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and 3) the specific reasons that a security is in a significant unrealized loss position, including overall market conditions which could affect liquidity.

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The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018. Equity securities were removed from this table upon adoption of ASU No. 2016-01 at January 1, 2019.

 

March 31, 2019

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Description of securities

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

 

(Dollars in thousands)

 

U.S. government

 

$

 

 

$

 

 

$

2,960

 

 

$

(92

)

 

$

2,960

 

 

$

(92

)

States, political subdivisions, other

 

 

3,045

 

 

 

(8

)

 

 

5,619

 

 

 

(82

)

 

 

8,664

 

 

 

(90

)

Corporate

 

 

4,990

 

 

 

(46

)

 

 

25,724

 

 

 

(703

)

 

 

30,714

 

 

 

(749

)

Residential mortgage-backed

   securities

 

 

 

 

 

 

 

 

10,164

 

 

 

(92

)

 

 

10,164

 

 

 

(92

)

Commercial mortgage-backed

   securities

 

 

50

 

 

 

(2

)

 

 

2,474

 

 

 

(47

)

 

 

2,524

 

 

 

(49

)

Total

 

$

8,085

 

 

$

(56

)

 

$

46,941

 

 

$

(1,016

)

 

$

55,026

 

 

$

(1,072

)

 

December 31, 2018

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Description of securities

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

 

(Dollars in thousands)

 

U.S. government

 

$

 

 

$

 

 

$

2,907

 

 

$

(148

)

 

$

2,907

 

 

$

(148

)

States, political subdivisions, other

 

 

6,106

 

 

 

(103

)

 

 

9,339

 

 

 

(261

)

 

 

15,445

 

 

 

(364

)

Corporate

 

 

49,193

 

 

 

(1,886