very-10q_20190630.htm

 

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 June 30, 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 001-38945

 

VERICITY, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

46-2348863

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8700 W. Bryn Mawr Avenue, Suite 900S, Chicago Illinois

 

60631

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (312) 288-0073

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

 

Title of each class

 

Trading Symbol

 

Name on each exchange on which registered

Common Stock, Par Value $0.001 per share

 

VERY

 

NASDAQ Capital Market

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 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 

The number of shares of Registrant’s Common Stock outstanding as of August 08, 2019 was 14,875,000.

 

 


Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

PART I –

 

Financial Information

 

1

Item 1.

 

 

 

 

 

 

Interim Condensed Consolidated Balance Sheets

 

1

 

 

Interim Condensed Consolidated Statements of Operations

 

2

 

 

Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

 

3

 

 

Interim Condensed Consolidated Statements of Changes in Equity

 

4

 

 

Interim Condensed Consolidated Statements of Cash Flows

 

5

 

 

Notes the Interim Condensed Consolidated Financial Statements

 

6

 

 

 

Note 1 – Summary of Significant Accounting Policies

 

6

 

 

 

Note 2 – Investments

 

9

 

 

 

Note 3 – Policy Liabilities

 

13

 

 

 

Note 4 – Reinsurance

 

14

 

 

 

Note 5 – Closed Block

 

14

 

 

 

Note 6 – Commitments and Contingencies

 

16

 

 

 

Note 7 – Assets and Liabilities Measured at Fair Value

 

17

 

 

 

Note 8 – Long and Short-term Debt

 

21

 

 

 

Note 9 – Accumulated Other Comprehensive Income (Loss)

 

21

 

 

 

Note 10 – Business Segments

 

21

 

 

 

Note 11 – Subsequent Events

 

23

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

PART II –

 

Other Information

 

37

Item 1.

 

Legal Proceedings

 

37

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3.

 

Default upon Senior Securities

 

38

Item 4.

 

Mine Safety Disclosures

 

38

Item 5.

 

Other Information

 

38

Item 6.

 

Exhibits

 

39

Signature

 

 

 

40

 

 


Part 1. Financial Information

Item I. Financial Statements

Members Mutual Holding Company

Interim Condensed Consolidated Balance Sheets

(dollars in thousands)

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS:

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities – available-for-sale – at fair value (amortized cost; $297,360

   and $304,303)

 

$

314,856

 

 

$

306,586

 

Equity securities – available-for-sale – at fair value (cost; $104 and $99)

 

 

104

 

 

 

99

 

Equity securities – trading – at fair value (cost; $6,416 and $6,328)

 

 

5,682

 

 

 

4,823

 

Mortgage loans (net of valuation allowances of $62 and $236)

 

 

54,297

 

 

 

50,830

 

Limited partnership interests

 

 

13

 

 

 

118

 

Policyholder loans

 

 

5,708

 

 

 

5,623

 

Total investments

 

 

380,660

 

 

 

368,079

 

Cash and cash equivalents

 

 

14,254

 

 

 

20,984

 

Accrued investment income

 

 

2,726

 

 

 

2,985

 

Reinsurance recoverable

 

 

134,861

 

 

 

136,601

 

Deferred policy acquisition costs

 

 

85,231

 

 

 

84,567

 

Commissions and agent balances (net of allowances of $466 and $562)

 

 

13,268

 

 

 

1,864

 

Intangible assets

 

 

1,675

 

 

 

1,716

 

Deferred income tax assets, net

 

 

8,104

 

 

 

10,663

 

Other assets

 

 

32,742

 

 

 

27,511

 

Total assets

 

 

673,521

 

 

 

654,970

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

 

327,811

 

 

 

320,397

 

Policyholder account balances

 

 

90,186

 

 

 

93,051

 

Other policyholder liabilities

 

 

23,292

 

 

 

25,738

 

Policy dividend obligations

 

 

11,155

 

 

 

9,383

 

Reinsurance liabilities and payables

 

 

5,377

 

 

 

6,167

 

Long-term debt

 

 

13,542

 

 

 

10,294

 

Short-term debt

 

 

3,633

 

 

 

3,072

 

Other liabilities

 

 

17,291

 

 

 

14,678

 

Total liabilities

 

 

492,287

 

 

 

482,780

 

Commitments and contingencies

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Retained earnings

 

 

174,296

 

 

 

174,558

 

Accumulated other comprehensive income (loss)

 

 

6,938

 

 

 

(2,368

)

Total equity

 

 

181,234

 

 

 

172,190

 

Total liabilities and equity

 

$

673,521

 

 

$

654,970

 

 

See notes to interim condensed consolidated financial statements

1


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Operations

(dollars in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

25,791

 

 

$

22,089

 

 

$

48,880

 

 

$

43,101

 

Net investment income

 

 

3,682

 

 

 

3,720

 

 

 

7,501

 

 

 

7,464

 

Sales and other net realized investment (losses) gains

 

 

(99

)

 

 

682

 

 

 

949

 

 

 

121

 

Earned commissions

 

 

5,149

 

 

 

3,360

 

 

 

8,895

 

 

 

6,695

 

Insurance lead sales

 

 

1,444

 

 

 

2,123

 

 

 

2,879

 

 

 

4,305

 

Other income

 

 

87

 

 

 

44

 

 

 

142

 

 

 

157

 

Total revenue

 

 

36,054

 

 

 

32,018

 

 

 

69,246

 

 

 

61,843

 

BENEFITS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

16,085

 

 

 

13,540

 

 

 

32,330

 

 

 

26,591

 

Interest credited to policyholder account balances

 

 

837

 

 

 

867

 

 

 

1,638

 

 

 

1,789

 

Operating costs and expenses

 

 

18,357

 

 

 

18,132

 

 

 

37,263

 

 

 

35,026

 

Amortization of deferred policy acquisition costs

 

 

3,383

 

 

 

2,791

 

 

 

6,522

 

 

 

5,616

 

Other expenses

 

 

20

 

 

 

41

 

 

 

42

 

 

 

83

 

Total benefits and expenses

 

 

38,682

 

 

 

35,371

 

 

 

77,795

 

 

 

69,105

 

(Loss) income from operations before income tax

 

 

(2,628

)

 

 

(3,353

)

 

 

(8,549

)

 

 

(7,262

)

Income tax (benefit) expense

 

 

(30

)

 

 

(220

)

 

 

284

 

 

 

(863

)

Net (loss) income

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

 

See notes to interim condensed consolidated financial statements

2


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net (loss) income

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on investments (net of tax $1,225,

   ($701) and $2,474, ($2,080))

 

 

4,608

 

 

 

(2,636

)

 

 

9,306

 

 

 

(7,824

)

Total comprehensive income (loss) (net of tax $1,225,

   ($701) and $2,474, ($2,080))

 

 

4,608

 

 

 

(2,636

)

 

 

9,306

 

 

 

(7,824

)

Total comprehensive income (loss)

 

$

2,010

 

 

$

(5,769

)

 

$

473

 

 

$

(14,223

)

 

See notes to interim condensed consolidated financial statements

3


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Changes in Equity

(dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

RETAINED EARNINGS:

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

174,558

 

 

$

188,405

 

Cumulative effect adjustment from changes in accounting guidance, net of tax

 

 

8,571

 

 

 

 

Balance after adjustments – beginning of period

 

 

183,129

 

 

 

188,405

 

Net (loss) income attributable to the Company

 

 

(8,833

)

 

 

(6,399

)

Balance – end of period

 

 

174,296

 

 

 

182,006

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Balance – beginning of period

 

 

(2,368

)

 

 

7,798

 

Other comprehensive income (loss) attributable to the Company

 

 

9,306

 

 

 

(7,824

)

Balance – end of period

 

 

6,938

 

 

 

(26

)

Total equity

 

$

181,234

 

 

$

181,980

 

 

See notes to interim condensed consolidated financial statements

4


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(8,833

)

 

$

(6,399

)

Adjustments to reconcile net (loss) to net cash provided (used) by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization and other non-cash items

 

 

921

 

 

 

634

 

Interest credited to policyholder account balances

 

 

1,638

 

 

 

1,789

 

Deferred income tax

 

 

85

 

 

 

(888

)

Realized investment gains

 

 

(949

)

 

 

(121

)

Interest expense

 

 

446

 

 

 

169

 

Change in:

 

 

 

 

 

 

 

 

Trading securities

 

 

(216

)

 

 

(157

)

Accrued investment income

 

 

258

 

 

 

230

 

Reinsurance recoverable

 

 

1,740

 

 

 

4,382

 

Deferred policy acquisition costs

 

 

(665

)

 

 

(1,560

)

Commissions and agent balances

 

 

(2,834

)

 

 

639

 

Other assets

 

 

(3,672

)

 

 

(572

)

Insurance liabilities

 

 

3,309

 

 

 

(859

)

Other liabilities

 

 

1,823

 

 

 

(4,061

)

Net cash (used) provided by operating activities

 

 

(6,949

)

 

 

(6,774

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Sales, maturities and repayments of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

60,356

 

 

 

45,194

 

Equity securities

 

 

 

 

 

10

 

Limited partnerships

 

 

138

 

 

 

780

 

Mortgage loans

 

 

1,215

 

 

 

2,735

 

Purchases of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

(53,467

)

 

 

(39,216

)

Limited partnerships

 

 

(38

)

 

 

 

Mortgage loans

 

 

(4,508

)

 

 

(5,930

)

Change in policyholder loans, net

 

 

(86

)

 

 

304

 

Other investments, net

 

 

(2,336

)

 

 

(2,529

)

Net cash provided (used) by investing activities

 

 

1,274

 

 

 

1,348

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

6,845

 

 

 

9,343

 

Repayment of debt

 

 

(3,482

)

 

 

(1,904

)

Deposits to policyholder account balances

 

 

240

 

 

 

280

 

Withdrawals from policyholder account balances

 

 

(4,658

)

 

 

(3,954

)

Net cash (used) provided by financing activities

 

 

(1,055

)

 

 

3,765

 

Net (decrease) in cash and cash equivalents

 

 

(6,730

)

 

 

(1,661

)

Cash and cash equivalents – beginning of period

 

 

20,984

 

 

 

11,766

 

Cash and cash equivalents – end of period

 

$

14,254

 

 

$

10,105

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

 

 

 

Cumulative effect adjustment from changes in accounting guidance, net of tax

 

$

8,571

 

 

$

 

 

See notes to interim condensed consolidated financial statements

5


Members Mutual Holding Company

Notes to Interim Condensed Consolidated Financial Statements

(dollars in thousands)

Note 1 – Summary of Significant Accounting Policies

Description of Business

Vericity, Inc. is a Delaware corporation organized to be the stock holding company for Members Mutual Holding Company (Members Mutual) and its subsidiaries. On August 7, 2019, Vericity Inc. completed the initial public offering of 14,875,000 shares of its common stock at a price of $10.00 per share (the IPO). The IPO was conducted in connection with the conversion of Members Mutual from mutual to stock form and the acquisition by Vericity Inc. of all of the capital stock of Members Mutual following its conversion to stock form after its plan of conversion and amended and restated articles of incorporation were approved at a special meeting of eligible members on August 6, 2019 (the Conversion). As a result of the Conversion, Vericity Inc. became the holding company for converted Members Mutual and its indirect subsidiaries, including Fidelity Life Association and Efinancial, LLC.

Members Mutual is an Illinois‑domiciled mutual insurance holding company. Members Mutual was formed in 2007 in connection with the conversion of Fidelity Life Association, a Legal Reserve Life Insurance Company (Fidelity Life), from a mutual insurance company into a stock insurance company. The members’ interests in Fidelity Life were transferred to Members Mutual as part of the reorganization.  In addition, Fidelity LifeCorp, Inc. (Fidelity LifeCorp), a Delaware general business corporation, was formed as part of the reorganization.  In 2011, the name of Fidelity LifeCorp was changed to LifeStory Interactive, Inc.  In 2014, the name of LifeStory Interactive, Inc. was changed to Vericity Holdings, Inc. (Vericity). The aforementioned companies are collectively referred to as the “Company.”

Members Mutual and Vericity operate as holding companies and currently have no other business operations.  Fidelity Life is an Illinois‑domiciled life insurance company that was founded in 1896.  Fidelity Life markets life insurance products through independent and affiliated distributors and is licensed in the District of Columbia and all states, except New York and Wyoming.  Efinancial, LLC (Efinancial) markets life and other products for non‑affiliated insurance companies and sells life products for Fidelity Life.

The accompanying interim condensed consolidated financial statements present the accounts of Members Mutual and subsidiaries for the three and six months ended June 30, 2019 and June 30, 2018 and at June 30, 2019 and December 31, 2018. These interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report for the year ended December 31, 2018. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Basis of Presentation 

These interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The unaudited interim condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2018, and notes thereto, included in this registration statement.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The more significant estimates employed in the preparation of the interim condensed consolidated financial statements include the determination of the valuation of investments in fixed maturities and equity securities, investment impairments, the valuation of deferred tax assets, future policy benefits and other policyholder liabilities.  

 

6


Revenue Recognition

We adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 606”) on January 1, 2019. The majority of our revenue-generating arrangements are premiums received from insurance contracts and therefore are excluded from the scope of ASU 606. Life and health insurance contract premiums are recognized as income when due from policyholders. Deposits on deposit-type contracts are entered directly as a liability when cash is received.

 

Commission revenue from the sale of insurance products by Efinancial is recognized once the insurance policy is issued by the insurance company and accepted by the customer (policy placement) and recorded as commission receivable, net of any advances received. Provision is made for commission revenue that, based on experience, will ultimately not be earned due to the customer discontinuing the underlying insurance policy. Commission revenue that Efinancial earns from the sale of insurance products where Efinancial acts as the general agent (wholesale distribution) is recorded net of related commission expense paid to the writing agency.

 

Our primary revenue-generating arrangements that are within the scope of ASU 606 are our brokerage arrangements with third parties. In these arrangements, our customer is the insurance carrier and we have a single performance obligation to place a policy for the insurance carrier. Our performance obligation is satisfied at the point in time when the policy is placed, which is the point in time when the customer obtains control over the policy and has the right to use and obtain the benefits from the policy. In these arrangements, depending on the number of years the policy is in force, a significant majority of our consideration is received in the first year. In addition to the first-year consideration, depending on the specific carrier and product involved, we may also be entitled to renewal commissions over the period of time the policy remains in force. Our consideration is variable based on the amount of time we estimate a policy will remain in force. We estimate the amount of variable consideration that we expect to receive based on our historical experience or carrier experience to the extent available, industry data and our expectations as to future persistency rates. Additionally, we consider application of the constraint and only recognize the amount of variable consideration that we believe is probable to be received and will not be subject to a significant revenue reversal. We monitor and update this estimate at each reporting date.

 

Because we recognize revenue prior to being entitled to the payment for these renewal commissions, we recognize a contract asset; however, we have determined that the amount of our contract asset is immaterial. Additionally, because our brokerage arrangements consist of a single performance obligation that is satisfied at the point in time that policies are placed, we do not have any remaining performance obligations in our contracts with customers. We have evaluated our arrangements and concluded that none of our brokerage arrangements include a significant financing component, and therefore do not adjust revenue for the time value of money. We have determined that any contract costs (e.g., costs to obtain or costs to fulfill) related to our brokerage arrangements are immaterial.

 

Our Chief Operating Decision Maker makes decisions by analyzing our segment information, which is included in Note 10. For internal decision-making purposes and external reporting purposes, we do not disaggregate revenue beyond our segment information and believe that any further disaggregation is immaterial.

 

Insurance lead sales include the sale of potential life insurance customer leads to outside parties including agencies and unaffiliated insurers. Sales of leads are recorded at the time the lead data is transferred to the customer and recorded as a receivable, net of allowance for returns.

Accounting Standards Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The guidance is effective for interim and annual periods beginning after December 15, 2017. The core principle of the updated guidance is that an entity should recognize revenue when it transfers 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.  The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance.  The Company adopted the new revenue guidance effective January 1, 2019 using the modified retrospective approach.

7


The cumulative effect changes to the Interim Condensed Consolidated Balance Sheet for the adoption of the updated guidance on January 1, 2019 were as follows:

 

 

 

Balance at

December 31,

 

 

Adoption

Adjustment

 

 

Balance at

January 1,

 

ASSETS:

 

2018

 

 

Topic 606

 

 

2019

 

Commissions and agent balances

 

$

1,864

 

 

$

8,571

 

 

$

10,435

 

Deferred income tax assets, net

 

 

10,663

 

 

 

 

 

 

10,663

 

Retained earnings

 

 

174,558

 

 

 

8,571

 

 

 

183,129

 

 

The impact of adoption on the Interim Condensed Consolidated Statement of Operations and Balance Sheet as of June 30, 2019 and for the three and six months ended June 30, 2019 was as follows:

 

 

 

Three Months Ended June 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

5,053

 

 

$

96

 

 

$

5,149

 

Total revenue

 

 

35,958

 

 

 

96

 

 

 

36,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

 

(2,724

)

 

 

96

 

 

 

(2,628

)

Income tax (benefit) expense

 

 

(30

)

 

 

 

 

 

(30

)

Net (loss) income

 

 

(2,694

)

 

 

96

 

 

 

(2,598

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

8,696

 

 

$

199

 

 

$

8,895

 

Total revenue

 

 

69,047

 

 

 

199

 

 

 

69,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

 

(8,748

)

 

 

199

 

 

 

(8,549

)

Income tax expense (benefit)

 

 

284

 

 

 

 

 

 

284

 

Net (loss) income

 

 

(9,032

)

 

 

199

 

 

 

(8,833

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

ASSETS:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Commissions and agent balances

 

$

13,069

 

 

$

199

 

 

$

13,268

 

Deferred income tax assets, net

 

 

8,104

 

 

 

 

 

 

8,104

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

174,097

 

 

 

199

 

 

 

174,296

 

 

In January  2016, the FASB issued ASU No. 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance requires changes to the current financial instruments reporting model and is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company expects that the primary effects of the new guidance will be around the accounting for equity investments. All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for changes in fair value reported in other comprehensive income (loss) for equity securities with readily determinable fair values. Under the new guidance, changes in the fair value of equity securities will be reported as net realized investment gains (losses) in the Company's consolidated statement of operations. There is no impact to the Company’s results of operations or financial position as the Company holds no investment positions in this category.

 

8


Note 2 Investments

The Company continuously monitors its investment strategies and individual holdings with consideration of current and projected market conditions, the composition of the Company’s liabilities, projected liquidity and capital investment needs, and compliance with investment policies and state regulatory guidelines.

Available‑for‑Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses, fair value, and Other Than Temporary Impairments (OTTI) loss included in Accumulated Other Comprehensive Income (AOCI) of fixed maturities and equity securities available-for-sale are as follows:

 

 

 

June 30, 2019

 

Fixed maturities, available-for-sale

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

OTTI

Losses

 

U.S. government and agencies

 

$

15,823

 

 

$

1,840

 

 

$

 

 

$

17,663

 

 

$

 

U.S. agency mortgage-backed

 

 

40,960

 

 

 

770

 

 

 

(98

)

 

 

41,632

 

 

 

 

State and political subdivisions

 

 

18,658

 

 

 

1,616

 

 

 

 

 

 

20,274

 

 

 

 

Corporate and miscellaneous

 

 

134,253

 

 

 

12,727

 

 

 

(754

)

 

 

146,226

 

 

 

 

Foreign government

 

 

131

 

 

 

28

 

 

 

 

 

 

159

 

 

 

 

Residential mortgage-backed securities

 

 

7,241

 

 

 

497

 

 

 

(9

)

 

 

7,729

 

 

 

(266

)

Commercial mortgage-backed securities

 

 

18,922

 

 

 

787

 

 

 

(11

)

 

 

19,698

 

 

 

 

Asset-backed securities

 

 

61,372

 

 

 

398

 

 

 

(295

)

 

 

61,475

 

 

 

 

Total fixed maturities, available-for-sale

 

$

297,360

 

 

$

18,663

 

 

$

(1,167

)

 

$

314,856

 

 

$

(266

)

 

 

 

December 31, 2018

 

Fixed maturities, available-for-sale

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

OTTI

Losses

 

U.S. government and agencies

 

$

11,459

 

 

$

1,181

 

 

$

(129

)

 

$

12,511

 

 

$

 

U.S. agency mortgage-backed

 

 

32,811

 

 

 

332

 

 

 

(562

)

 

 

32,581

 

 

 

 

State and political subdivisions

 

 

23,334

 

 

 

694

 

 

 

(117

)

 

 

23,911

 

 

 

 

Corporate and miscellaneous

 

 

155,372

 

 

 

5,972

 

 

 

(4,428

)

 

 

156,916

 

 

 

 

Foreign government

 

 

131

 

 

 

11

 

 

 

 

 

 

142

 

 

 

 

Residential mortgage-backed securities

 

 

9,786

 

 

 

374

 

 

 

(75

)

 

 

10,085

 

 

 

(269

)

Commercial mortgage-backed securities

 

 

16,409

 

 

 

56

 

 

 

(313

)

 

 

16,152

 

 

 

 

Asset-backed securities

 

 

55,001

 

 

 

117

 

 

 

(830

)

 

 

54,288

 

 

 

 

Total fixed maturities, available-for-sale

 

$

304,303

 

 

$

8,737

 

 

$

(6,454

)

 

$

306,586

 

 

$

(269

)

 

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed and asset-backed securities may be substantially shorter than their contractual maturity because they may require monthly principal installments and such loans may prepay principal. The amortized cost and fair value of fixed maturities available-for-sale by contractual maturity, are presented in the following table:

 

 

 

June 30, 2019

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Due in one year or less

 

$

10,025

 

 

$

10,154

 

Due after one year through five years

 

 

38,183

 

 

 

39,930

 

Due after five years through ten years

 

 

29,703

 

 

 

31,533

 

Due after ten years

 

 

90,772

 

 

 

102,520

 

Securities not due at a single maturity date — primarily mortgage and

   asset-backed securities

 

 

128,677

 

 

 

130,719

 

Total fixed maturities, available-for-sale

 

$

297,360

 

 

$

314,856

 

 

Fixed maturities with a carrying value of $4,960 and $4,273 were on deposit with governmental authorities as required by law at June 30, 2019 and December 31, 2018, respectively.

9


The Company’s fixed maturities portfolio was primarily composed of investment grade securities, defined as a security having a rating of Aaa, Aa, A, or Baa from Moody’s, AAA, AA, A, or BBB from Standard & Poor’s, or National Association of Insurance Commissioners (NAIC) rating of NAIC 1 or NAIC 2.  Investment grade securities comprised 97.9% and 94.0% of the Company’s total fixed maturities portfolio at June 30, 2019 and December 31, 2018, respectively.

Mortgage Loans

The Company makes investments in commercial mortgage loans. The Company, along with other investors, owns a pro rata share of each loan. The Company participates in 32 such investment instruments with ownership shares ranging from 3.1% to 30.0% of the trust at June 30, 2019. The Company owns a share of 297 mortgage loans with a loan average balance of $183 and a maximum exposure related to any single loan of $555. Mortgage loan holdings are diversified by geography and property type as follows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Gross Carrying

Value

 

 

% of Total

 

 

Gross Carrying

Value

 

 

% of Total

 

Property Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

17,441

 

 

 

32.1

%

 

$

16,081

 

 

 

31.5

%

Office

 

 

13,143

 

 

 

24.2

%

 

 

12,446

 

 

 

24.4

%

Industrial

 

 

8,712

 

 

 

16.0

%

 

 

7,742

 

 

 

15.2

%

Mixed use

 

 

6,352

 

 

 

11.7

%

 

 

6,526

 

 

 

12.8

%

Apartments

 

 

4,265

 

 

 

7.8

%

 

 

4,118

 

 

 

8.1

%

Medical office

 

 

3,220

 

 

 

5.9

%

 

 

2,905

 

 

 

5.7

%

Other

 

 

1,226

 

 

 

2.3

%

 

 

1,248

 

 

 

2.3

%

Gross carrying value of mortgage loans

 

 

54,359

 

 

 

100.0

%

 

 

51,066