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 nine months ended September 30, 2019 and 2018. See
Note 7 to the condensed consolidated financial statements.
|
|
Three months ended September 30
(in thousands of dollars)
|
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
19,832
|
|
|
$
|
18,639
|
|
|
|
6
|
%
|
|
$
|
58,505
|
|
|
$
|
56,641
|
|
|
|
3
|
%
|
Net investment income
|
|
|
10,147
|
|
|
|
9,376
|
|
|
|
8
|
%
|
|
|
30,020
|
|
|
|
28,574
|
|
|
|
5
|
%
|
Gains (losses) on investments and other assets
|
|
|
(486
|
)
|
|
|
466
|
|
|
|
(204
|
%)
|
|
|
(615
|
)
|
|
|
22,786
|
|
|
|
(103
|
%)
|
Other
|
|
|
331
|
|
|
|
482
|
|
|
|
(31
|
%)
|
|
|
1,027
|
|
|
|
1,198
|
|
|
|
(14
|
%)
|
Total
|
|
$
|
29,824
|
|
|
$
|
28,963
|
|
|
|
3
|
%
|
|
$
|
88,937
|
|
|
$
|
109,199
|
|
|
|
(19
|
%)
|
Intersegment revenue
|
|
$
|
1,466
|
|
|
$
|
1,108
|
|
|
|
32
|
%
|
|
$
|
3,441
|
|
|
$
|
2,915
|
|
|
|
18
|
%
|
Earnings before income taxes
|
|
$
|
1,264
|
|
|
$
|
2,192
|
|
|
|
(42
|
%)
|
|
$
|
4,568
|
|
|
$
|
28,841
|
|
|
|
(84
|
%)
|
Intersegment revenues are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”).
Profitability in the three and nine months ended September 30, 2019
has 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 and
impairment losses on commercial real estate recognized in 2019.
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 nine months ended September 30, 2019
and 2018. See Note 7 to the condensed consolidated financial statements.
|
|
Three months ended September 30
(in thousands of dollars)
|
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortuary revenues
|
|
$
|
1,465
|
|
|
$
|
1,422
|
|
|
|
3
|
%
|
|
$
|
4,693
|
|
|
$
|
4,071
|
|
|
|
15
|
%
|
Cemetery revenues
|
|
|
2,061
|
|
|
|
2,225
|
|
|
|
(7
|
%)
|
|
|
6,512
|
|
|
|
6,359
|
|
|
|
2
|
%
|
Net investment income
|
|
|
112
|
|
|
|
56
|
|
|
|
100
|
%
|
|
|
388
|
|
|
|
194
|
|
|
|
100
|
%
|
Gains on investments and other assets
|
|
|
(101
|
)
|
|
|
245
|
|
|
|
(141
|
%)
|
|
|
752
|
|
|
|
2,331
|
|
|
|
(68
|
%)
|
Other
|
|
|
32
|
|
|
|
61
|
|
|
|
(48
|
%)
|
|
|
127
|
|
|
|
105
|
|
|
|
21
|
%
|
Total
|
|
$
|
3,569
|
|
|
$
|
4,009
|
|
|
|
(11
|
%)
|
|
$
|
12,472
|
|
|
$
|
13,060
|
|
|
|
(90
|
%)
|
Earnings before income taxes
|
|
$
|
213
|
|
|
$
|
782
|
|
|
|
(73
|
%)
|
|
$
|
2,422
|
|
|
$
|
3,714
|
|
|
|
(35
|
%)
|
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 $121,000
and $104,000 for the three months ended September 30, 2019 and 2018, respectively, and $384,000 and $413,000 for the nine months ended September 30, 2019 and 2018, respectively. Profitability in the nine months ended September 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 net investment income and cemetery and mortuary at-need sales 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 nine months ended September 30, 2019 and 2018, SecurityNational Mortgage originated 7,817 loans ($1,792,058,000 total
volume) and 7,953 loans ($1,169,071,000 total volume), respectively. For the nine months ended September 30, 2019 and 2018, EverLEND Mortgage originated 185 loans ($48,494,000 total volume) and 130 loans ($33,603,000 total volume), respectively.
The following table shows the condensed financial results of the mortgage operations for the three and nine months ended
September 30, 2019 and 2018. See Note 7 to the condensed consolidated financial statements.
|
|
Three months ended September 30
(in thousands of dollars)
|
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
|
2019
|
|
|
2018
|
|
|
% Increase (Decrease)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from loan originations
|
|
$
|
12,162
|
|
|
$
|
9,350
|
|
|
|
30
|
%
|
|
$
|
30,726
|
|
|
$
|
30,201
|
|
|
|
2
|
%
|
Secondary gains from investors
|
|
|
27,574
|
|
|
|
22,315
|
|
|
|
24
|
%
|
|
|
66,435
|
|
|
|
58,633
|
|
|
|
13
|
%
|
Net investment income
|
|
|
219
|
|
|
|
210
|
|
|
|
4
|
%
|
|
|
654
|
|
|
|
689
|
|
|
|
(5
|
%)
|
Gains on investments and other assets
|
|
|
67
|
|
|
|
311
|
|
|
|
(78
|
%)
|
|
|
123
|
|
|
|
255
|
|
|
|
(52
|
%)
|
Other
|
|
|
1,962
|
|
|
|
2,066
|
|
|
|
(5
|
%)
|
|
|
5,971
|
|
|
|
6,128
|
|
|
|
(3
|
%)
|
Total
|
|
$
|
41,984
|
|
|
$
|
34,252
|
|
|
|
23
|
%
|
|
$
|
103,909
|
|
|
$
|
95,906
|
|
|
|
8
|
%
|
Earnings before income taxes
|
|
$
|
3,283
|
|
|
$
|
(762
|
)
|
|
|
531
|
%
|
|
$
|
4,826
|
|
|
$
|
(4,994
|
)
|
|
|
197
|
%
|
Included in other revenues is service fee income. The increase in earnings for the nine months ended September 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 September 30, 2019 and December
31, 2018, the balances were $3,882,000 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 September 30, 2019 Compared to Three Months Ended September 30, 2018
Total revenues increased by $8,157,000, or 12.1%, to $75,380,000 for the three months ended September 30, 2019, from $67,223,000 for the comparable period
in 2018. Contributing to this increase in total revenues was a $8,071,000 increase in mortgage fee income, a $1,193,000 increase in insurance premiums and other considerations, and a $837,000 increase in net investment income. This increase in total
revenues was partially offset by a $1,542,000 decrease in gains on investments and other assets, a $283,000 decrease in other revenues, and a $120,000 decrease in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $1,193,000, or 6.4%, to $19,832,000 for the three months ended
September 30, 2019, from $18,639,000 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 $837,000, or 8.7%, to $10,478,000 for the three months ended September 30, 2019, from $9,641,000 for the comparable
period in 2018. This increase was primarily attributable to a $318,000 increase in mortgage loan interest, a $268,000 increase in insurance assignment income, a $135,000 increase in rental income from real estate held for investment, an $82,000
increase in fixed maturity securities income, a $29,000 decrease in investment expenses, a $28,000 increase in policy loan income, a $24,000 increase in interest on cash and cash equivalents, and a $10,000 increase in equity securities income. This
increase was partially offset by a $57,000 decrease in other investment income.
Net mortuary and cemetery sales decreased by $120,000, or 3.3%, to $3,526,000 for the three months ended September 30, 2019, from $3,646,000 for the
comparable period in 2018. This decrease was primarily due to a $236,000 decrease in cemetery preneed sales. This decrease was partially offset by a $43,000 increase in mortuary at-need sales and a $73,000 increase in cemetery at-need sales
Gains on investments and other assets decreased by $1,542,000, or 150.8%, to losses of $520,000 for the three months ended September 30, 2019, from gains
of $1,022,000 for the comparable period in 2018. This decrease in gains on investments and other assets was primarily due to an impairment loss of $791,000 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 during the second quarter 2019. The Company recognized an impairment loss of $1,867,000 in the second quarter 2019. The Company also obtained an independent
appraisal from an outside commercial real estate valuation firm during the third quarter 2019 which indicated an additional impairment loss. This decrease was also the result of a $462,000 decrease in gains on other assets and a $308,000 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 $19,000 increase in gains on fixed maturity securities.
Mortgage fee income increased by $8,071,000, or 25.5%, to $39,736,000, for the three months ended September 30, 2019, from $31,665,000 for the comparable
period in 2018. This increase was primarily due to a $5,259,000 increase in secondary gains from loans sold to third-party investors, an increase of $1,899,000 in the fair value of loans held for sale and loan commitments, an increase of $814,000 in
loan fees and interest income, and a $99,000 decrease in the provision for loan loss reserve.
Other revenues decreased by $283,000, or 10.8%, to $2,326,000 for the three months ended September 30, 2019, from $2,609,000 for the comparable period in
2018. This decrease was primarily attributable to a decrease in servicing fee revenue.
Total benefits and expenses were $70,620,000, or 93.7% of total revenues, for the three months ended September 30, 2019, as compared to $65,011,000, or
96.7% 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 $560,000 or 3.5%, to $16,555,000 for the
three months ended September 30, 2019, from $15,995,000 for the comparable period in 2018. This increase was primarily the result of a $1,322,000 increase in death benefits. This decrease was partially offset by a $706,000 decrease in future policy
benefits and a $56,000 decrease in surrender and other policy benefits.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $731,000, or 26.6%, to $3,477,000 for the three
months ended September 30, 2019, from $2,746,000 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 increased by $3,969,000, or 9.1%, to $47,808,000 for the three months ended September 30, 2019, from
$43,839,000 for the comparable period in 2018. This increase was primarily the result of a $3,095,000 increase in commissions and a $1,739,000 increase in other expenses. This increase was partially offset by a $787,000 decrease in personnel
expenses, a $185,000 decrease in costs related to funding mortgage loans, a $164,000 decrease in rent and rent related expenses, a $62,000 decrease in advertising expenses, and a $35,000 decrease in depreciation on property and equipment.
Interest expense increased by $223,000, or 12.0%, to $2,079,000 for the three months ended September 30, 2019, from $1,856,000 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 $126,000, or 21.8%, to $702,000 for the three months ended September 30, 2019, from
$576,000 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.
Nine months Ended September 30, 2019 Compared to Nine months Ended September 30, 2018
Total revenues decreased by $12,846,000, or 5.9%, to $205,319,000 for the nine months ended September 30, 2019, from $218,164,000 for the comparable period
in 2018. Contributing to this decrease in total revenues was a $25,111,000 decrease in gains on investments and other assets and a $305,000 decrease in other revenues. This decrease in total revenues was partially offset by a $8,327,000 increase in
mortgage fee income, a $1,864,000 increase in insurance premiums and other considerations, a $1,603,000 increase in net investment income, and a $776,000 increase in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $1,864,000, or 3.3%, to $58,505,000 for the nine months ended September 30, 2019, from $56,640,000
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 $1,603,000, or 5.4%, to $31,061,000 for the nine months ended September 30, 2019, from $29,458,000 for the comparable
period in 2018. This increase was primarily attributable to a $1,014,000 increase in insurance assignment income due to higher volume, a $907,000 decrease in investment expenses, and a $612,000 increase in interest on cash and cash equivalents due to
higher invested balances and slight increases in interest rates, a $74,000 decrease in fixed maturity securities income, a $51,000 increase in equity securities income, and a $12,000 increase in policy loan income. This increase was partially offset
by a $829,000 decrease in mortgage loan interest, a $158,000 decrease in rental income from real estate held for investment, and an $80,000 decrease in other investment income.
Net mortuary and cemetery sales increased by $776,000, or 7.4%, to $11,206,000 for the nine months ended September 30, 2019, from $10,430,000 for the
comparable period in 2018. This increase was primarily due to a $613,000 increase in mortuary at-need sales and a $288,000 increase in cemetery at-need sales, driven in large measure by the acquisition of Probst Family Funerals and Cremations and
Heber Valley Funeral Home. This increase was partially offset by a $135,000 decrease in cemetery preneed sales.
Gains on investments and other assets decreased by $25,111,000, or 99.0%, to $261,000 for the nine months ended September 30, 2019, from $25,372,000 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 and an
impairment loss of $2,658,000 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 and also obtained an independent
appraisal from an outside commercial real estate valuation firm. 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 a
$758,000 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 $445,000 increase in gains on fixed maturity securities and a $153,000 increase in gains on other assets.
Mortgage fee income increased by $8,327,000, or 9.4%, to $97,161,000, for the nine months ended September 30, 2019, from $88,834,000 for the comparable
period in 2018. This increase was primarily due to $7,802,000 increase in secondary gains on loans sold to third-party investors from increased lending volumes, a $1,149,000 increase in other loan fees and interest income, and a $496,000 decrease in
the provision for loan loss reserve. This increase was partially offset by a net decrease of $1,120,000 in the fair value of loans held for sale and loan commitments.
Other revenues decreased by $305,000, or 4.1%, to $7,125,000 for the nine months ended September 30, 2019, from $7,430,000 for the comparable period in
2018. This decrease was primarily attributable to a decrease in servicing fee revenue.
Total benefits and expenses were $193,503,000, or 94.2% of total revenues, for the nine months ended September 30, 2019, as compared to $190,603,000, or
87.4% 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 $741,000 or 1.5%, to $48,939,000 for the nine
months ended September 30, 2019, from $48,198,000 for the comparable period in 2018. This increase was primarily the result of a $1,685,000 increase in death benefits and a $68,000 increase in surrender and other policy benefits. This increase was
partially offset by a $1,012,000 decrease in future policy benefits.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,712,000, or 21.5%, to $9,679,000 for the nine
months ended September 30, 2019, from $7,967,000 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 $12,000, or 0.0%, to $127,487,000 for the nine months ended September 30, 2019, from $127,499,000
for the comparable period in 2018. This decrease was primarily the result of a $3,529,000 decrease in personnel expenses, a $316,000 decrease in costs related to funding mortgage loans, a $428,000 decrease in rent and rent related expenses, a
$132,000 decrease in depreciation on property and equipment, and a $81,000 decrease in advertising expenses. This decrease was partially offset by a $3,592,000 increase in other expenses from increased amortization of mortgage servicing rights and a
$882,000 increase in commissions. The decreases in personnel expenses are primarily a result of the efforts of the Mortgage segment to reduce costs and restructure internal processes.
Interest expense increased by $56,000, or 1.1%, to $5,353,000 for the nine months ended September 30, 2019, from $5,297,000 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 $403,000, or 24.6%, to $2,045,000 for the nine months ended September 30, 2019, from
$1,642,000 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 nine months ended September 30, 2019 and 2018, the Company's operations used cash of $62,866,000 and $10,251,000, 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 $239,647,000 and $231,976,000 as of September 30,
2019 and December 31, 2018, respectively. This represents 39.2% and 38.9% of the total investments as of September 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 September 30, 2019, 2.99% (or $7,160,000) 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 September 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 $442,107,000 as of September 30, 2019, as compared to
$359,172,000 as of December 31, 2018. Stockholders’ equity as a percent of total capitalization was 41.0% and 47.8% as of September 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 September 30, 2019, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $57,269,000. The life insurance
subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.