very-10q_20190930.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 September 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 November 14, 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

 

10

 

 

 

Note 3 – Policy Liabilities

 

15

 

 

 

Note 4 – Reinsurance

 

15

 

 

 

Note 5 – Executive Compensation

 

15

 

 

 

Note 6 – Closed Block

 

16

 

 

 

Note 7 – Commitments and Contingencies

 

18

 

 

 

Note 8 – Assets and Liabilities Measured at Fair Value

 

19

 

 

 

Note 9 – Long and Short-term Debt

 

23

 

 

 

Note 10 – Accumulated Other Comprehensive Income (Loss)

 

23

 

 

 

Note 11 – Business Segments

 

23

 

 

 

Note 12 – Subsequent Events

 

25

 

 

 

 

 

 

Item 2.

 

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

 

26

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

PART II –

 

Other Information

 

40

Item 1.

 

Legal Proceedings

 

40

Item 1A.

 

Risk Factors

 

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 3.

 

Default upon Senior Securities

 

40

Item 4.

 

Mine Safety Disclosures

 

40

Item 5.

 

Other Information

 

40

Item 6.

 

Exhibits

 

41

Signature

 

 

 

42

 

 


Part 1. Financial Information

Item I. Financial Statements

Vericity, Inc.

Interim Condensed Consolidated Balance Sheets

(dollars in thousands)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS:

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities – available-for-sale – at fair value (amortized cost; $301,130

   and $304,303)

 

$

323,727

 

 

$

306,586

 

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

 

 

104

 

 

 

99

 

Equity securities – trading – at fair value (cost; $6,223 and $6,328)

 

 

5,298

 

 

 

4,823

 

Short-term investments - at fair value (amortized cost; $71,190 and $0)

 

 

71,204

 

 

 

 

Mortgage loans (net of valuation allowances of $53 and $236)

 

 

53,112

 

 

 

50,830

 

Limited partnership interests

 

 

 

 

 

118

 

Policyholder loans

 

 

5,874

 

 

 

5,623

 

Total investments

 

 

459,319

 

 

 

368,079

 

Cash and cash equivalents

 

 

79,589

 

 

 

20,984

 

Accrued investment income

 

 

2,592

 

 

 

2,985

 

Reinsurance recoverable

 

 

134,073

 

 

 

136,601

 

Deferred policy acquisition costs

 

 

85,681

 

 

 

84,567

 

Commissions and agent balances (net of allowances of $567 and $562)

 

 

10,697

 

 

 

1,864

 

Intangible assets

 

 

1,655

 

 

 

1,716

 

Deferred income tax assets, net

 

 

7,584

 

 

 

10,663

 

Other assets

 

 

25,507

 

 

 

27,511

 

Total assets

 

 

806,697

 

 

 

654,970

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

 

334,558

 

 

 

320,397

 

Policyholder account balances

 

 

88,947

 

 

 

93,051

 

Other policyholder liabilities

 

 

22,363

 

 

 

25,738

 

Policy dividend obligations

 

 

11,656

 

 

 

9,383

 

Reinsurance liabilities and payables

 

 

6,297

 

 

 

6,167

 

Long-term debt

 

 

15,037

 

 

 

10,294

 

Short-term debt

 

 

3,840

 

 

 

3,072

 

Other liabilities

 

 

15,318

 

 

 

14,678

 

Total liabilities

 

 

498,016

 

 

 

482,780

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $.001 par value, 30,000,000 shares authorized, 14,875,000 shares, issued and outstanding

 

 

15

 

 

 

 

Additional paid-in capital

 

 

132,818

 

 

 

 

Retained earnings

 

 

165,757

 

 

 

174,558

 

Accumulated other comprehensive income (loss)

 

 

10,091

 

 

 

(2,368

)

Total equity

 

 

308,681

 

 

 

172,190

 

Total liabilities and equity

 

$

806,697

 

 

$

654,970

 

 

See notes to interim condensed consolidated financial statements

1


Vericity, Inc.

Interim Condensed Consolidated Statements of Operations

(dollars in thousands, except earnings per share)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

24,424

 

 

$

22,360

 

 

$

73,304

 

 

$

65,462

 

Net investment income

 

 

4,177

 

 

 

3,817

 

 

 

11,678

 

 

 

11,281

 

Net realized investment (losses) gains

 

 

(213

)

 

 

12

 

 

 

736

 

 

 

133

 

Earned commissions

 

 

4,540

 

 

 

3,420

 

 

 

13,435

 

 

 

10,115

 

Insurance lead sales

 

 

1,650

 

 

 

1,838

 

 

 

4,529

 

 

 

6,143

 

Other income

 

 

39

 

 

 

36

 

 

 

180

 

 

 

193

 

Total revenue

 

 

34,617

 

 

 

31,483

 

 

 

103,862

 

 

 

93,327

 

BENEFITS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

16,243

 

 

 

13,484

 

 

 

48,573

 

 

 

40,075

 

Interest credited to policyholder account balances

 

 

900

 

 

 

929

 

 

 

2,538

 

 

 

2,718

 

Operating costs and expenses

 

 

23,554

 

 

 

18,232

 

 

 

60,817

 

 

 

53,260

 

Amortization of deferred policy acquisition costs

 

 

3,029

 

 

 

2,714

 

 

 

9,551

 

 

 

8,330

 

Other expenses

 

 

20

 

 

 

40

 

 

 

62

 

 

 

123

 

Total benefits and expenses

 

 

43,746

 

 

 

35,399

 

 

 

121,541

 

 

 

104,506

 

(Loss) income from operations before income tax

 

 

(9,129

)

 

 

(3,916

)

 

 

(17,679

)

 

 

(11,179

)

Income tax (benefit) expense

 

 

(591

)

 

 

(1,051

)

 

 

(307

)

 

 

(1,915

)

Net (loss) income

 

$

(8,538

)

 

$

(2,865

)

 

$

(17,372

)

 

$

(9,264

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma earnings per share for the periods

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Weighted average shares outstanding

 

 

14,875,000

 

 

 

14,875,000

 

 

 

14,875,000

 

 

 

14,875,000

 

Basic earnings per share

 

$

(0.57

)

 

$

(0.19

)

 

$

(1.17

)

 

$

(0.62

)

Diluted earnings per share

 

$

(0.57

)

 

$

(0.19

)

 

$

(1.17

)

 

$

(0.62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The pro forma earnings per common share—basic and diluted—presented on the above Consolidated Statements of Operations and Comprehensive Income (Loss) is intended to depict the impact of the Conversion because neither Vericity, Inc., nor the Predecessor, had, prior to the Conversion, any outstanding common shares. The above table presents the pro forma net loss and weighted average common shares outstanding used in the computation of earnings per common share and earnings per common share – assuming dilution.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to interim condensed consolidated financial statements

2


Vericity, Inc.

Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net (loss) income

 

$

(8,538

)

 

$

(2,865

)

 

$

(17,372

)

 

$

(9,264

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on investments

 

 

3,153

 

 

 

(1,156

)

 

 

12,459

 

 

 

(8,980

)

Total comprehensive income (loss)

 

 

3,153

 

 

 

(1,156

)

 

 

12,459

 

 

 

(8,980

)

Total comprehensive (loss) income

 

$

(5,385

)

 

$

(4,021

)

 

$

(4,913

)

 

$

(18,244

)

 

See notes to interim condensed consolidated financial statements

3


Vericity, Inc.

Interim Condensed Consolidated Statements of Changes in Equity

(dollars in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

COMMON STOCK

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

 

 

$

 

Common stock issued

 

 

15

 

 

 

 

Balance – end of period

 

$

15

 

 

$

-

 

 

 

 

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

 

 

$

 

Proceeds net of offering costs

 

 

132,818

 

 

 

 

Balance – end of period

 

$

132,818

 

 

$

 

 

 

 

 

 

 

 

 

 

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

 

 

(17,372

)

 

 

(9,264

)

Balance – end of period

 

$

165,757

 

 

$

179,141

 

 

 

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

(2,368

)

 

$

7,798

 

Other comprehensive income (loss) attributable to the Company

 

 

12,459

 

 

 

(8,980

)

Balance – end of period

 

$

10,091

 

 

$

(1,182

)

TOTAL STOCKHOLDERS' EQUITY

 

$

308,681

 

 

$

177,959

 

 

See notes to interim condensed consolidated financial statements

4


Vericity, Inc.

Interim Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(17,372

)

 

$

(9,264

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization and other non-cash items

 

 

1,228

 

 

 

1,305

 

Interest credited to policyholder account balances

 

 

2,538

 

 

 

2,718

 

Deferred income tax

 

 

(233

)

 

 

(1,943

)

Realized investment gains

 

 

(736

)

 

 

(133

)

Interest expense

 

 

803

 

 

 

316

 

Change in:

 

 

 

 

 

 

 

 

Trading securities

 

 

(268

)

 

 

(288

)

Accrued investment income

 

 

393

 

 

 

508

 

Reinsurance recoverable

 

 

2,528

 

 

 

3,851

 

Deferred policy acquisition costs

 

 

(1,114

)

 

 

(2,309

)

Commissions and agent balances

 

 

(263

)

 

 

211

 

Other assets

 

 

(3,447

)

 

 

(1,139

)

Insurance liabilities

 

 

8,499

 

 

 

2,924

 

Other liabilities

 

 

707

 

 

 

(1,282

)

Net cash (used) provided by operating activities

 

 

(6,737

)

 

 

(4,525

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Sales, maturities and repayments of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

74,202

 

 

 

53,097

 

Equity securities

 

 

 

 

 

10

 

Mortgage loans

 

 

2,439

 

 

 

785

 

Limited partnerships

 

 

152

 

 

 

3,323

 

Purchases of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

(71,012

)

 

 

(46,969

)

Short-term investments

 

 

(71,001

)

 

 

 

Mortgage loans

 

 

(4,508

)

 

 

(8,423

)

Limited partnerships

 

 

(38

)

 

 

 

Change in policyholder loans, net

 

 

(251

)

 

 

321

 

Other investments, net

 

 

(3,406

)

 

 

(3,599

)

Net cash (used) provided by investing activities

 

 

(73,423

)

 

 

(1,455

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering, net of underwriting commission and offering costs

 

 

140,572

 

 

 

 

Debt issued

 

 

9,934

 

 

 

13,371

 

Debt repaid

 

 

(5,226

)

 

 

(3,584

)

Deposits to policyholder account balances

 

 

346

 

 

 

498

 

Withdrawals from policyholder account balances

 

 

(6,861

)

 

 

(6,222

)

Net cash provided (used) by financing activities

 

 

138,765

 

 

 

4,063

 

Net increase (decrease) in cash and cash equivalents

 

 

58,605

 

 

 

(1,917

)

Cash and cash equivalents – beginning of period

 

 

20,984

 

 

 

11,766

 

Cash and cash equivalents – end of period

 

$

79,589

 

 

$

9,849

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

 

 

 

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

 

$

8,571

 

 

 

 

Registration costs included in other assets at December 31, 2018

 

 

7,739

 

 

 

 

 

See notes to interim condensed consolidated financial statements

5


Vericity, Inc.

Notes to Interim Condensed Consolidated Financial Statements

(dollars in thousands)

Note 1 – Summary of Significant Accounting Policies

Description of Business

Vericity, Inc. (the Company) 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 (Fidelity Life) and Efinancial, LLC.

Vericity, Inc. operates as a holding company and currently has 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 Vericity, Inc. and subsidiaries for the three and nine months ended September 30, 2019 and September 30, 2018 and at September 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.

6


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 the Form S-1.

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.  

Short-Term Investments

Short-term investments are classified as available-for-sale and are reported at fair value. Changes in fair value are reported as unrealized gains or losses and are a component of accumulated other comprehensive income (AOCI), net of applicable deferred income taxes. Fair value is based on quoted market prices, when available. When quoted market prices are not available, fair value is estimated by discounting fixed maturity securities cash flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality, by quoted market prices of comparable instruments, and by independent pricing sources. See Note 7 for further discussion on inputs and assumptions used to estimate fair value.

 

 

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

7


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.

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

 

 

8


The impact of adoption on the Interim Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and Interim Condensed Consolidated Balance Sheets as of September 30, 2019 were as follows:

 

 

 

Three Months Ended September 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

4,587

 

 

$

(47

)

 

$

4,540

 

Total revenue

 

 

34,664

 

 

 

(47

)

 

 

34,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

$

(9,082

)

 

$

(47

)

 

$

(9,129

)

Income tax (benefit) expense

 

 

(591

)

 

 

 

 

 

(591

)

Net (loss) income

 

$

(8,491

)

 

$

(47

)

 

$

(8,538

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

13,283

 

 

$

152

 

 

$

13,435

 

Total revenue

 

 

103,710

 

 

 

152

 

 

 

103,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

$

(17,831

)

 

$

152

 

 

$

(17,679

)

Income tax expense (benefit)

 

 

(307

)

 

 

 

 

 

(307

)

Net (loss) income

 

$

(17,524

)

 

$

152

 

 

$

(17,372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

ASSETS:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Commissions and agent balances

 

$

10,545

 

 

$

152

 

 

$

10,697

 

Deferred income tax assets, net

 

$

7,584

 

 

$

 

 

$

7,584

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

$

 

 

$

 

 

$

 

Equity

 

$

 

 

$

 

 

$

 

Retained earnings

 

$

165,605

 

 

$

152

 

 

$

165,757

 

 

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.

 

9


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 AOCI of fixed maturities available-for-sale are as follows:

 

 

 

September 30, 2019

 

Fixed maturities, available-for-sale

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

OTTI

Losses

 

U.S. government and agencies

 

$

16,308

 

 

$

2,272

 

 

$

 

 

$

18,580

 

 

$

 

U.S. agency mortgage-backed

 

 

40,295

 

 

 

1,136

 

 

 

(32

)

 

 

41,399

 

 

 

 

State and political subdivisions

 

 

20,643

 

 

 

2,137

 

 

 

(1

)

 

 

22,779

 

 

 

 

Corporate and miscellaneous

 

 

137,171

 

 

 

16,018

 

 

 

(707

)

 

 

152,482

 

 

 

 

Foreign government

 

 

131

 

 

 

37

 

 

 

 

 

 

168

 

 

 

 

Residential mortgage-backed securities

 

 

7,075

 

 

 

491

 

 

 

(13

)

 

 

7,553

 

 

 

(277

)

Commercial mortgage-backed securities

 

 

19,724

 

 

 

1,077

 

 

 

(3

)

 

 

20,798

 

 

 

 

Asset-backed securities

 

 

59,783

 

 

 

408

 

 

 

(223

)

 

 

59,968

 

 

 

 

Total fixed maturities, available-for-sale

 

$

301,130

 

 

$

23,576

 

 

$

(979

)

 

$

323,727

 

 

$

(277

)

 

 

 

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