On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst
Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City. For the year ended December 31, 2018, Probst
Family Funerals and Heber Valley Funeral Home had combined revenues of $1,055,634 and a combined net pre-tax income of $179,613. As of December 31, 2018, Probst Family Funerals and Heber Valley Funeral Home had combined assets of $1,161,029 and a
combined total equity of $18,052.
Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, by and among SN Probst, a wholly owned subsidiary of Memorial Mortuary, and Probst Family
Funerals, Heber Valley Funeral Home, Joe T. Probst, Clinton Wayne Probst, Calle J. Probst, and Marsha L. Probst, Memorial Mortuary, through its wholly owned subsidiary SN Probst, paid a net purchase price of $3,315,647 for the business and assets of
Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback. At the closing, Probst Funeral Homes and Heber Valley Funeral Home paid off the $907,407 principal balance and $4,340 in interest on a loan at Zions Bank that was
secured by the Heber Valley Funeral Home. Also, at the closing, Probst Funeral Homes and Heber Valley Funeral Home paid off the $157,148 loan with Utah Community Credit Union and the $32,987 line of credit with Zions Bank.
The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:
The estimated fair values of buildings, land and warehouses included in property and equipment are based on independent appraisals using a sales comparison approach which are
considered to be Level 3 under the fair value hierarchy. The Company determined that the estimated fair value of the remaining assets and liabilities acquired approximated their book values.
On June 1, 2018, the Company completed a stock purchase transaction with Beta Capital Corp. ("Beta Capital") and Ronald D. Maxson ("Maxson"), the sole owner of all the outstanding
shares of common stock of Beta Capital, to purchase all of the outstanding shares of common stock of Beta Capital. Beta Capital is engaged in the operation of a factoring business with the principal purpose of providing funding for funeral homes and
mortuaries.
Under the terms of the transaction, as set forth in the Stock Purchase Agreement dated June 1, 2018, by and among the Company, Beta Capital and Maxson, the Company paid Maxson the
purchase consideration at the closing of the transaction equal to the sum of (i) $890,000 in cash plus (ii) the accounts receivable value of $2,515,783, representing the total amount of the Company's outstanding receivables as of the closing date of
June 1, 2018, for a total closing payment of $3,405,783. From the $3,405,783 closing payment, a holdback amount equal to $175,000 was deposited into an interest bearing escrow account to be held for a period of eighteen months from the closing date
to pay off any uncollected accounts receivable and other liabilities of Beta Capital as of the closing date.
The estimated fair values of the assets acquired as of the date of acquisition were as follows:
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company’s operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the
Company’s funeral plan policies and traditional whole life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans.
Insurance Operations
The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places
specific marketing emphasis on funeral plans through pre-need planning.
A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that is less
competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these
policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified
underwriting practices that result in higher mortality costs.
The following table shows the condensed financial results of the insurance operations for three and six months ended June 30, 2019 and 2018. See Note 7 to the condensed consolidated financial
statements.
|
|
Three months ended June 30
(in thousands of dollars)
|
|
|
Six months ended June 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
19,645
|
|
|
$
|
19,191
|
|
|
|
2
|
%
|
|
$
|
38,672
|
|
|
$
|
38,002
|
|
|
|
2
|
%
|
Net investment income
|
|
|
10,119
|
|
|
|
9,416
|
|
|
|
7
|
%
|
|
|
19,872
|
|
|
|
19,199
|
|
|
|
4
|
%
|
Gains (losses) on investments and other assets
|
|
|
(1,471
|
)
|
|
|
460
|
|
|
|
(420
|
%)
|
|
|
(128
|
)
|
|
|
22,320
|
|
|
|
(101
|
%)
|
Other
|
|
|
314
|
|
|
|
304
|
|
|
|
3
|
%
|
|
|
696
|
|
|
|
716
|
|
|
|
(3
|
%)
|
Total
|
|
$
|
28,607
|
|
|
$
|
29,371
|
|
|
|
(3
|
%)
|
|
$
|
59,112
|
|
|
$
|
80,237
|
|
|
|
(26
|
%)
|
Intersegment revenue
|
|
$
|
1,080
|
|
|
$
|
988
|
|
|
|
9
|
%
|
|
$
|
1,976
|
|
|
$
|
1,807
|
|
|
|
9
|
%
|
Earnings before income taxes
|
|
$
|
1,219
|
|
|
$
|
2,937
|
|
|
|
(58
|
%)
|
|
$
|
3,304
|
|
|
$
|
26,649
|
|
|
|
(88
|
%)
|
Intersegment revenues are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability in the three and six months
ended June 30, 2019
had decreased due to the $22,252,000 gain that was realized on the sale of Dry Creek at East Village Apartments in the first quarter of 2018.
Cemetery and Mortuary Operations
The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in
San Diego County, California. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and
services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.
The following table shows the condensed financial results of the cemetery and mortuary operations for the three and six months ended June 30, 2019 and 2018. See Note 7 to the condensed consolidated
financial statements.
|
|
Three months ended June 30
(in thousands of dollars)
|
|
|
Six months ended June 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortuary revenues
|
|
$
|
1,595
|
|
|
$
|
1,268
|
|
|
|
26
|
%
|
|
$
|
3,228
|
|
|
$
|
2,659
|
|
|
|
21
|
%
|
Cemetery revenues
|
|
|
2,405
|
|
|
|
2,283
|
|
|
|
5
|
%
|
|
|
4,451
|
|
|
|
4,125
|
|
|
|
8
|
%
|
Net investment income
|
|
|
163
|
|
|
|
56
|
|
|
|
191
|
%
|
|
|
275
|
|
|
|
138
|
|
|
|
99
|
%
|
Gains on investments and other assets
|
|
|
355
|
|
|
|
1,676
|
|
|
|
(79
|
%)
|
|
|
853
|
|
|
|
2,085
|
|
|
|
(59
|
%)
|
Other
|
|
|
25
|
|
|
|
(2
|
)
|
|
|
(1350
|
%)
|
|
|
95
|
|
|
|
44
|
|
|
|
116
|
%
|
Total
|
|
$
|
4,543
|
|
|
$
|
5,281
|
|
|
|
(14
|
%)
|
|
$
|
8,902
|
|
|
$
|
9,051
|
|
|
|
(2
|
%)
|
Earnings before income taxes
|
|
$
|
1,024
|
|
|
$
|
2,071
|
|
|
|
(51
|
%)
|
|
$
|
2,209
|
|
|
$
|
2,932
|
|
|
|
(25
|
%)
|
Included in Net investment income was rental income from residential and commercial properties purchased from Security National Life. Memorial Estates purchased these properties from financing
provided by Security National Life. The rental income is offset by property insurance, taxes, maintenance expenses and depreciation. Memorial Estates has recorded depreciation on these properties of $129,000 and $155,000 for the three months ended
June 30, 2019 and 2018, respectively, and $263,000 and $309,000 for the six months ended June 30, 2019 and 2018, respectively. Profitability in the six months ended June 30, 2019 has decreased due to a realized gain recognized on the sale of assets
of Deseret Mortuary in 2018. This decrease was partially offset by increases in cemetery preneed sales and mortuary and cemetery at-need sales in 2019.
Mortgage Operations
The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company (formerly known as Green Street Mortgage Services, Inc.), are mortgage lenders incorporated under the
laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the
event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the
Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life and unaffiliated financial institutions.
The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase
the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage.
SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 12% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.
For the six months ended June 30, 2019 and 2018, SecurityNational Mortgage originated 4,605 loans ($1,021,464,000 total volume) and 5,183 loans ($1,072,863,000 total
volume), respectively. For the six months ended June 30, 2019 and 2018, EverLEND Mortgage originated 110 loans ($28,792,000 total volume) and 80 loans ($22,510,000 total volume), respectively.
The following table shows the condensed financial results of the mortgage operations for the three and six months ended June 30, 2019 and 2018. See Note 7 to the
condensed consolidated financial statements.
|
|
Three months ended June 30
(in thousands of dollars)
|
|
|
Six months ended June 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase
(Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from loan originations
|
|
$
|
11,745
|
|
|
$
|
9,943
|
|
|
|
18
|
%
|
|
$
|
18,840
|
|
|
$
|
20,851
|
|
|
|
(10
|
%)
|
Secondary gains from investors
|
|
|
21,201
|
|
|
|
21,766
|
|
|
|
(3
|
%)
|
|
|
38,585
|
|
|
|
36,318
|
|
|
|
6
|
%
|
Net investment income
|
|
|
259
|
|
|
|
271
|
|
|
|
(4
|
%)
|
|
|
435
|
|
|
|
479
|
|
|
|
(9
|
%)
|
Gains on investments and other assets
|
|
|
91
|
|
|
|
192
|
|
|
|
(53
|
%)
|
|
|
56
|
|
|
|
(56
|
)
|
|
|
200
|
%
|
Other
|
|
|
1,999
|
|
|
|
2,042
|
|
|
|
(2
|
%)
|
|
|
4,008
|
|
|
|
4,061
|
|
|
|
(1
|
%)
|
Total
|
|
$
|
35,295
|
|
|
$
|
34,214
|
|
|
|
3
|
%
|
|
$
|
61,924
|
|
|
$
|
61,653
|
|
|
|
0
|
%
|
Earnings before income taxes
|
|
$
|
2,381
|
|
|
$
|
(846
|
)
|
|
|
381
|
%
|
|
$
|
1,543
|
|
|
$
|
(4,232
|
)
|
|
|
136
|
%
|
Included in other revenues is service fee income. The increase in earnings for the six months ended June 30, 2019 was due to the efforts to reduce costs and restructure internal processes.
Mortgage Loan Loss Settlements
Future mortgage loan losses can be extremely difficult to estimate. However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to
estimate its potential losses on mortgage loans sold. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of June 30, 2019 and December 31, 2018, the balances were $3,712,000 and
$3,605,000, respectively.
Mortgage Loan Loss Litigation
For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.
Consolidation
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Total revenues decreased by $420,000, or 0.6%, to $68,445,000 for the three months ended June 30, 2019, from $68,865,000 for the comparable period in 2018. Contributing to this decrease in total
revenues was a $3,354,000 decrease in gains on investments and other assets and a $6,000 decrease in other revenues. This decrease in total revenues was partially offset by a $1,237,000 increase in mortgage fee income, a $799,000 increase in net
investment income, a $454,000 increase in insurance premiums and other considerations, and a $450,000 increase in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $454,000, or 2.4%, to $19,645,000 for the three months ended June 30, 2019, from $19,191,000 for the comparable
period in 2018. This increase was primarily due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.
Net investment income increased by $799,000, or 8.2%, to $10,541,000 for the three months ended June 30, 2019, from $9,742,000 for the comparable period in 2018. This increase was primarily
attributable to a $474,000 increase in rental income from real estate held for investment, a $395,000 increase in insurance assignment income, a $226,000 increase in interest on cash and cash equivalents, a $37,000 decrease in investment expenses, a
$21,000 increase in equity securities income, and an $18,000 increase in fixed maturity securities income. This increase was partially offset by a $346,000 decrease in mortgage loan interest, and a $24,000 decrease in other investment income.
Net mortuary and cemetery sales increased by $450,000, or 12.7%, to $4,001,000 for the three months ended June 30, 2019, from $3,551,000 for the comparable period in 2018. This increase was primarily
due to a $328,000 increase in mortuary at-need sales and a $232,000 increase in cemetery at-need sales. The increase was partially offset by a $110,000 decrease in cemetery preneed sales.
Gains on investments and other assets decreased by $3,354,000, or 144.1%, to losses of $1,026,000 for the three months ended June 30, 2019, from gains of $2,328,000 for the comparable period in 2018.
This decrease in gains on investments and other assets was primarily due to an impairment loss of $1,867,000 recognized on a commercial real estate property held for investment. The Company elected to conduct a review of the property’s value after it
received an unsolicited offer to buy. This decrease was also the result of a realized gain of $1,556,000 recognized in the second quarter of 2018 on the sale of assets of Deseret Mortuary, and a $64,000 decrease in gains on equity securities mostly
attributable to decreases in the fair value of these equity securities. Due to the adoption of Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018, these changes in fair value are now recognized in earnings instead of other comprehensive
income. This decrease in gains on investments and other assets was partially offset by a $95,000 decrease in losses on fixed maturity securities and a $38,000 increase in gains on other assets.
Mortgage fee income increased by $1,237,000, or 3.9%, to $32,946,000, for the three months ended June 30, 2019, from $31,709,000 for the comparable period in 2018. This increase was primarily due to
an increase of $884,000 in loan fees and interest income, an increase of $768,000 in the fair value of loans held for sale and loan commitments, and a $150,000 decrease in the provision for loan loss reserve. This increase was partially offset by a
$565,000 decrease in secondary gains from loans sold to third-party investors.
Other revenues decreased by $6,000, or 0.3%, to $2,338,000 for the three months ended June 30, 2019, from $2,344,000 for the comparable period in 2018. This decrease was primarily attributable to a
decrease in servicing fee revenue.
Total benefits and expenses were $63,821,000, or 93.2% of total revenues, for the three months ended June 30, 2019, as compared to $64,703,000, or 94.0% of total revenues, for the comparable period
in 2018.
Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $511,000 or 3.2%, to $15,689,000 for the three months ended June 30, 2019, from
$16,200,000 for the comparable period in 2018. This decrease was primarily the result of a $106,000 decrease in death benefits and a $473,000 decrease in future policy benefits. This decrease was partially offset by a $68,000 increase in surrender
and other policy benefits.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $963,000, or 45.6%, to $3,073,000 for the three months ended June 30, 2019, from $2,110,000
for the comparable period in 2018. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.
Selling, general and administrative expenses decreased by $1,576,000, or 3.6%, to $42,586,000 for the three months ended June 30, 2019, from $44,162,000 for the comparable period in 2018. This
decrease was primarily the result of a $1,206,000 decrease in personnel expenses, a $606,000 decrease in commissions, a $486,000 decrease in costs related to funding mortgage loans, a $205,000 decrease in rent and rent related expenses, a $69,000
decrease in depreciation on property and equipment, and a $22,000 decrease in advertising expenses. This decrease was partially offset by a $1,018,000 increase in other expenses. The decreases in commissions and personnel expenses are primarily a
result of the efforts of the Mortgage segment to reduce costs and restructure internal processes.
Interest expense increased by $103,000, or 6.1%, to $1,783,000 for the three months ended June 30, 2019, from $1,680,000 for the comparable period in 2018. This increase was primarily due to an
increase in interest expense on bank loans for real estate held for investment.
Cost of goods and services sold-mortuaries and cemeteries increased by $140,000, or 25.5%, to $690,000 for the three months ended June 30, 2019, from $550,000 for the comparable period in 2018. This
increase was primarily due to increases in both mortuary and cemetery at-need sales and cemetery preneed sales.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Total revenues decreased by $21,002,000, or 13.9%, to $129,939,000 for the six months ended June 30, 2019, from $150,941,000 for the comparable period in 2018. Contributing to this decrease in total
revenues was a $23,568,000 decrease in gains on investments and other assets and a $22,000 decrease in other revenues. This decrease in total revenues was partially offset by a $895,000 increase in net mortuary and cemetery sales, a $766,000 increase
in net investment income, a $671,000 increase in insurance premiums and other considerations, and a $256,000 increase in mortgage fee income.
Insurance premiums and other considerations increased by $671,000, or 1.8%, to $38,672,000 for the six months ended June 30, 2019, from $38,001,000 for the comparable period in 2018. This increase
was primarily due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.
Net investment income increased by $766,000, or 3.9%, to $20,582,000 for the six months ended June 30, 2019, from $19,816,000 for the comparable period in 2018. This increase was primarily
attributable to an $878,000 decrease in investment expenses, a $746,000 increase in insurance assignment income due to higher volume, a $588,000 increase interest on cash and cash equivalents due to higher invested balances and slight increases in
interest rates, and a $41,000 increase in equity securities income. This increase was partially offset by a $1,147,000 decrease in mortgage loan interest, a $293,000 decrease in rental income from real estate held for investment, a $23,000 decrease
in other investment income, a $16,000 decrease in policy loan income, and an $8,000 decrease in fixed maturity securities income.
Net mortuary and cemetery sales increased by $895,000, or 13.2%, to $7,679,000 for the six months ended June 30, 2019, from $6,784,000 for the comparable period in 2018. This increase was primarily
due to a $578,000 increase in mortuary at-need sales, a $216,000 increase in cemetery at-need sales, and a $101,000 increase in cemetery preneed sales, driven in large measure by the acquisition of Probst Family Funerals and Cremations and Heber
Valley Funeral Home.
Gains on investments and other assets decreased by $23,568,000, or 96.8%, to $781,000 for the six months ended June 30, 2019, from $24,349,000 for the comparable period in 2018. This decrease in
gains on investments and other assets was primarily attributable to the $22,252,000 gain that was realized on the sale of Dry Creek at East Village Apartments in the first quarter of 2018, an impairment loss of $1,867,000 recognized on a commercial
real estate property held for investment. The Company elected to conduct a review of the property’s value after it received an unsolicited offer to buy. This decrease was also the result of a $1,556,000 gain that was realized on the sale of assets of
Deseret Mortuary in the second quarter of 2018. This decrease was partially offset by and a $1,066,000 increase in gains on equity securities mostly attributable to increases in the fair value of these securities. Due to the adoption of Accounting
Standards Update (“ASU”) 2016-01 on January 1, 2018, these changes in fair value are now recognized in earnings instead of other comprehensive income. This decrease was also partially offset by a $426,000 decrease in losses on fixed maturity
securities and a $615,000 increase in gains on other assets.
Mortgage fee income increased by $256,000, or 0.4%, to $57,425,000, for the six months ended June 30, 2019, from $57,169,000 for the comparable period in 2018. This increase was primarily due to
$2,267,000 increase in secondary gains on loans sold to third-party investors, a $398,000 decrease in the provision for loan loss reserve, and a $48,000 increase in other loan fees and interest income. This increase was partially offset by a net
decrease of $2,457,000 in the fair value of loans held for sale and loan commitments.
Other revenues decreased by $22,000, or 0.5%, to $4,799,000 for the six months ended June 31, 2019, from $4,821,000 for the comparable period in 2018. This increase was primarily attributable to an
increase in the cemetery and mortuary segment primarily due to the acquisition of Probst Family Funerals and Cremations and Heber Valley Funeral Home. This was partially offset by a decrease in servicing fee revenue.
Total benefits and expenses were $122,883,000, or 94.6% of total revenues, for the six months ended June 30, 2019, as compared to $125,592,000, or 83.2% of total revenues, for the comparable period
in 2018.
Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $181,000 or 0.6%, to $32,384,000 for the six months ended June 30, 2019, from $32,203,000
for the comparable period in 2018. This increase was primarily the result of a $364,000 increase in death benefits and a $124,000 increase in surrender and other policy benefits. This increase was partially offset by a $307,000 decrease in future
policy benefits.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $981,000, or 18.8%, to $6,202,000 for the six months ended June 30, 2019, from $5,221,000
for the comparable period in 2018. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.
Selling, general and administrative expenses decreased by $3,981,000, or 4.8%, to $79,679,000 for the six months ended June 30, 2019, from $83,660,000 for the comparable period in 2018. This decrease
was primarily the result of a $2,742,000 decrease in personnel expenses, a $2,213,000 decrease in commissions, a $500,000 decrease in costs related to funding mortgage loans, a $264,000 decrease in rent and rent related expenses, a $96,000 decrease
in depreciation on property and equipment, and a $19,000 decrease in advertising expenses. This decrease was partially offset by a $1,853,000 increase in other expenses. The decreases in commissions and personnel expenses are primarily a result of
the efforts of the Mortgage segment to reduce costs and restructure internal processes.
Interest expense decreased by $167,000, or 4.9%, to $3,274,000 for the six months ended June 30, 2019, from $3,441,000 for the comparable period in 2018. This decrease was primarily due to a decrease
in interest expense on bank loans for real estate held for investment due to the sale of the Dry Creek Apartments at East Village in the first quarter 2018 and a decrease in interest expense on warehouse lines.
Cost of goods and services sold-mortuaries and cemeteries increased by $278,000, or 26.0%, to $1,344,000 for the six months ended June 30, 2019, from $1,066,000 for the comparable period in 2018.
This increase was primarily due to increases in both mortuary and cemetery at-need sales and cemetery preneed sales.
Liquidity and Capital Resources
The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary
business, from interest and dividends on invested assets, and from the proceeds from the maturity of held to maturity investments or sale of other investments. The mortgage subsidiaries realize cash flow from fees generated by originating and
refinancing mortgage loans, and fees earned from mortgage loans held for sale that are sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which
generally are long-term and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, and debt service, and to meet current operating expenses.
During the six months ended June 30, 2019 and 2018, the Company's operations used cash of $40,726,000 and $27,787,000, respectively. This increase was due primarily to originations of mortgage loans
held for sale.
The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life
insurance that will pay the costs and expenses incurred at the time of a person’s death. A person generally will keep these policies in force and will not surrender them prior to a person’s death. Because of the long-term nature of these liabilities,
the Company is able to hold to maturity its bonds, real estate, and mortgage loans, thus reducing the risk of having to liquidate these long-term investments as a result of any sudden changes in their fair values.
The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the
portfolio to help in this timing. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products. The Company’s investment philosophy is intended to provide a rate of
return that will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.
The Company’s investment policy is to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans on a short-term basis before selling the loans
to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $222,721,000 and $231,976,000 as of June 30, 2019 and December 31, 2018, respectively. This
represents 37.7% and 38.9% of the total investments as of June 30, 2019 and December 31, 2018, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this
rating system, there are nine categories used for rating bonds. At June 30, 2019, 3.59% (or $7,990,000) and at December 31, 2018, 3.6% (or $8,413,000) of the Company’s total bond investments were invested in bonds in rating categories three through
nine, which were considered non‑investment grade.
The Company has classified its fixed income securities as held to maturity. Notwithstanding, business conditions may develop in the future which may indicate a need for a higher level of liquidity in
the investment portfolio. In that event, the Company believes it could sell short-term investment grade securities before liquidating higher yielding longer-term securities.
The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and
business risk. At June 30, 2019 and December 31, 2018, the life insurance subsidiaries were in compliance with the regulatory criteria.
The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $393,945,000 as of June 30, 2019, as compared to $359,172,000 as of December 31, 2018. Stockholders’
equity as a percent of total capitalization was 45.1% and 47.8% as of June 30, 2019 and December 31, 2018, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2018 was 9.9% as compared to a rate of 10.6% for 2017. The 2019 lapse
rate to date has been approximately the same as 2018.
At June 30, 2019, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $56,591,000. The life insurance subsidiaries cannot pay a dividend to its parent company
without approval of state insurance regulatory authorities.