We currently lease approximately 10,131 square feet office space at 2900 South 70th Street, Suite 400, Lincoln, Nebraska 68506. This lease was executed October 17, 2013 and expires on January 31, 2024. We executed an amendment to the above lease for the additional 2,876 square feet of office space in Suite 450 on October 23, 2015, which expired on May 31, 2017.
As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.
We have not been able to obtain and assimilate all information required to complete the required independent audit of our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth in Item 8 of this Report are unaudited. As we undertake and complete the audit process, certain adjustments may be required which may result in material changes to our financial position, results of operations and the discussion and analysis presented below.
Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Item 1A. Risk Factors.”
Our accounting and reporting policies are in accordance with generally accepted accounting principles (GAAP) in the United States of America. Preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is a summary of our significant accounting policies and estimates. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Report.
Our principal investments are in fixed maturities. Fixed maturities, which are classified as available-for-sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). We utilize external independent third-party pricing services to determine the fair values on investment securities available-for-sale. We have processes, and controls in place to review prices received from service providers for reasonableness and unusual fluctuations in prices. In the event that a price is not available from a third-party pricing service, we pursue external pricing from brokers. Generally, we pursue and utilize only one broker quote per security. In doing so, we solicit only brokers which have previously demonstrated knowledge and experience of the subject security.
Incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to a life insurance contract acquisition transaction and would not have been incurred by us had the contract acquisition not occurred, are capitalized, to the extent recoverable, and amortized over the life of the life insurance premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.
We compared the carrying value of our identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 2017, the sum of the future discounted cash flows exceeded the carrying value of the indefinite-lived intangible assets. The assumptions and estimates used to determine future values are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our revenue forecasts.
A discussion of new accounting standards is provided in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
Premium revenue: Premium revenue decreased primarily due to the ceding of premiums to US Alliance and Optimum RE of $336,000. The decrease was also due to GAAP accounting for premiums from our Accumulator life insurance product (our primary product). We recognize 100% of the first year payments received for our Accumulator life insurance products as premiums earned when due. In subsequent years, 50% of the payments received on the Accumulator life insurance products are applied toward the traditional life insurance premium and the other 50% of the payments received are applied towards the annuity premium which is recognized as deposits to policyholder account balances and included in future insurance policy benefits rather than in revenues. These decreases were offset by an increase in production of $42,000.
The increase in investment income was due primarily to the increased size of our bond portfolio. Management was more aggressive in investing excess cash during late 2016, resulting in larger invested assets and interest income in 2017. Effective September 30, 2017, American Life entered into a coinsurance agreement with US Alliance to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. This transaction resulted in American Life disposing of approximately $6,700,000 of bonds to finance the transaction. As a result, the fourth quarter of 2017 saw a slight decrease in interest income. Policy loan interest and miscellaneous investment income is included in the “Other” line item above.
Loss on equity method investment: The decrease in investment loss for equity method investments was due to the final valuation by a third party of Midwest’s investment in First Wyoming in 2016. The original investment in First Wyoming was $810,500. The preliminary valuation prepared for us by the third party was determined to be $642,150 which resulted in a loss of $168,350 for the year ended December 31, 2015. The final valuation by the third party valued First Wyoming at $221,430 resulting in the $420,720 loss for the year ended December 31, 2016. There was no loss on equity method investments for the year ended December 31, 2017.
Net realized gains (losses) on investments: The slight increase was due primarily to improved market conditions on sale of bonds offset by the sale of one bond for a loss of $32,000 and other smaller losses which were realized on the sale of bonds for the coinsurance transaction mentioned above.
Death and other benefits: Death and other benefits increased due primarily the cash value of surrendered claims, increase in paid claims, and an increase in incurred but not reported and pending claims. Death benefits are expected to continue at current levels on our older block of business as a result of the age of the block. We maintain policy reserves to offset the effect of all claims. We expect overall death claims and other benefits to decrease as a result of the coinsurance agreement between American Life and US Alliance to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. American Life has a 94% retention rate for all policies which is above the industry average.
Interest credited: Interest credited decreased due to the coinsurance agreement between US Alliance and American life effective September 30, 2017 to cede 100% of the Great Plains Life and First Wyoming Life blocks of business. The interest credit portion attributed to the coinsurance agreement was $59,000. Interest rates of the deposit-type contracts was reduced from 5.75% to 4.0% in the third quarter of 2017 which also attributed to the decrease. These decreases were offset by the increase in the deposit-type contract liability.
Salaries and benefits: The decrease was due to the reduction of personnel in 2017. We expect further salary and benefit reductions of approximately $220,000 in 2018 compared to 2017 and $200,000 in 2019 compared to 2018 due to former employees and cost cutting efforts at the end of 2017. The reductions were offset by a one-time recruiting fee and the increase in vacation accrual.
Goodwill impairment: During our goodwill analysis in 2016, we determined that we were required to impair the entire balance of $1,129,824.
Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities, with smaller holdings in equity securities, real estate held for investment, policy loans, and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.
Decreases in fixed maturity securities primarily resulted from the sale of bonds to fund the coinsurance transaction between American Life and US Alliance to cede 100% of the Great Plains Life’s and the First Wyoming Life’s blocks of business effective September 30, 2017.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2017 and 2016.
Reflecting the quality of securities maintained by us, 97.6% of all fixed maturity securities were investment grade as of December 31, 2017 and 2016. Due to the low interest rate environment, we have invested in bonds with “A” ratings at the time the investment was made.
Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.
At December 31, 2017, the Company had cash and cash equivalents totaling $951,527. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for at least twelve months when combined with the liquidity associated with our investment portfolio. However, most of the Company’s liquid assets are held in an insurance subsidiary and under existing insurance law, the subsidiary cannot make significant payments up to the parent company, which is the Company. Accordingly, unless the Company is able to raise substantial additional capital in the near term, its ability to continue as a going concern will be in jeopardy. Management has been seeking to raise additional capital in order to help fund the liquidity issues that the Company faces, but cannot assure that such additional capital will be raised in 2018. The Company has based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect.
Aside from raising capital, which has funded the vast majority of our operations, premium income, deposits to policyholder account balances, and investment income are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to meet future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.
Management’s focus is on raising additional capital from outside investors. We cannot assure that additional capital will be raised, or if raised, on terms that will be economical to us. Unless we are able to successfully issue substantial additional equity capital, our ability to continue as a going concern will be in substantial jeopardy.
We have not been able to obtain and assimilate all information required to complete the required independent audit of our financial statements for the fiscal year ended December 31, 2017. Hence our financial statements set forth in this Item 8 are unaudited. As we undertake and complete the audit process, certain adjustments may be required to be made which may result in material changes to our financial position and results of operations presented below. When our audited financial statements are completed, they will be filed under an amendment to this Report on Form 10-K.
The unaudited consolidated financial statements are included as a part of this report beginning on page.