We were a development stage company until American Life commenced insurance operations in 2009. We have incurred significant net losses since inception in 2003 totaling approximately $23.7 million through December 31, 2015. These losses have resulted primarily from costs incurred while raising capital and establishing and operating American Life. We expect to continue to incur operating losses until we achieve a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.
From our inception, we have raised approximately $18.0 million through sales of shares of voting common stock and convertible non-voting preferred stock in several private placements exempt from registration under Section 4(2) of the Securities Act of 1933 and pursuant to an intrastate offering in the State of Nebraska.
In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. Capital and surplus contributed to American Life was approximately $10.6 million as of December 31, 2015, capital and surplus of American Life at that date was approximately $2.5 million. At December 31, 2015 and 2014, American Life generated approximately $2.4 million and $2.9 million in premium revenue, respectively.
In January 2011, we completed the private sale of 74,159 shares of our Series A Preferred Stock to certain investors in Latin America. The net proceeds of this sale, after expenses, were approximately $415,750. These proceeds were used to further capitalize our insurance operations, for working capital and for general corporate purposes.
In 2011, we acquired all of the issued and outstanding capital stock of Old Reliance, an Arizona-domiciled life insurance company. American Life merged into Old Reliance following the purchase, with the surviving company changing its name to American Life & Security Corp. and domiciled in Arizona. In the transaction, the sole shareholder of Old Reliance received: (i) approximately $1.6 million in cash, (ii) $500,000 in the form of a surplus debenture issued by American Life, and (iii) 150,000 shares of our voting common stock.
During the third quarter of 2011, we obtained control of an entity in which we previously had a noncontrolling interest in, Security Capital Corp. (“Security Capital”), an Arkansas corporation. Security Capital was a development stage company that had not conducted operations apart from raising capital. Security Capital was acquired by us on August 5, 2014, through a share exchange described below.
On July 21, 2014, we consummated an exchange agreement with Great Plains and Security Capital in order to acquire the outstanding shares of each company held by their shareholders (other than those shares already held by us.) The Great Plains shareholders received approximately 1.298 shares of our voting common stock for each share of Great Plains common stock held and the Security Capital shareholders received approximately 0.162 shares of our voting common stock for each share of Security Capital common stock held. On August 5, 2014, Great Plains and Security Capital were merged into us. We issued a total of 4,767,400 voting common shares pursuant to these transactions.
On March 15, 2016, we acquired Northstar Financial Corp., a Minnesota corporation (“Northstar”) pursuant to an agreement dated December 18, 2015 and Northstar became a wholly-owned subsidiary of ours. We exchanged 1.27 shares of our voting common stock for each share of Northstar common stock, or approximately 4,198,250 shares. Northstar’s primary asset as of its purchase date was cash of approximately $2.2 million.
The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the income statement as an other-than-temporary impairment. As it relates to debt securities, if we do not expect to recover the amortized basis, do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. We recognize the credit loss portion through earnings in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.
We performed the first step of the goodwill quantitative analysis to determine if the fair value of the reporting unit was in excess of the carrying value. As of December 31, 2015, the fair value of each of our reporting units exceeded the carrying value of the net assets assigned to that unit; therefore we were not required to perform further testing for impairment. Management's determination of the fair value of each reporting unit incorporates peer company price to earnings multiples and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections. Determining the fair value of goodwill is considered a critical accounting estimate because of its sensitivity to market based economics. In addition, any allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements variability in market conditions and key assumptions or subjective measurements used to estimate and allocate fair value are reasonably possible and could have a material impact on our consolidated financial statements.
Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. We have no uncertain tax positions that we believe are more-likely-than not that the benefit will not to be realized.
Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statements of Cash Flows.
Premium revenue: Premium revenue declined primarily due to the accounting treatment for renewal premiums on our Accumulator of approximately $500,000 and surrenders of $287,000. These decreases were offset by new premiums written of $158,000 and First Wyoming Life premiums of $50,000 due to the merger of First Wyoming. 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. 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 revenues. Premiums on our other insurance products are recognized as earned when due. Production of new life premium decreased significantly because actuarial development and regulatory approval of American Life’s new life insurance products took a significant amount of time, as well as decreased agents due to our low levels of capital and surplus. We have limited production of new business to preserve surplus of American Life, First Wyoming Life and Great Plains Life.
Miscellaneous income: Miscellaneous income decreased primarily due to lower TPA fee income due to our divestment of our interest in Northern Plains and Hot Dot in 2014. The decrease was also due to the acquisition of First Wyoming and the recognition of First Wyoming TPA fees only through October 27, 2015.
The increase in investment income was primarily due to the increased size of our bond portfolio, the consolidation of First Wyoming Life investment income following the acquisition of First Wyoming, the losses from equity method investments decreased due to changing prior year treatment for the investment in Pacific Northwest Corporation from cost to equity method of accounting which brought our investment to zero at December 31, 2014, and the divestment of our interest in Hot Dot, Inc. These increases were offset by the market value adjustment to our equity method investment in First Wyoming of $198,760 due to the merger of First Wyoming. Interest income from real estate investment, policy loan interest, and miscellaneous investment income is included in the “Other” line item above. The decrease in “Other” was primarily due to the decrease in interest income from real estate investments.
Death and other benefits: Death benefits decreased primarily due to a lawsuit settlement in 2014 of $205,000 for American Life which did not recur and the decrease in overall claims. Death benefits continue to be paid out primarily on the Old Reliance block of business.
Interest credited: Interest credited increased was a result of the increase in the deposit-type liability owed to the policyholders as described above.
Amortization of deferred acquisition costs: This decline is a result of fewer policies written in 2014 and 2015 as discussed above.
Other operating expenses: Other operating expenses decreased due to non-recurring higher professional fees associated with the acquisition of Great Plains Financial and Security Capital in 2014, as well as fees related to routine regulatory examinations occurring in 2014 conducted by agencies from the states of Arizona, Missouri, and Wyoming as required by state statues. The decreases were offset professional fees associated with the acquisition of First Wyoming and the fees incurred for proposed acquisition of Northstar.
Net Loss: The decrease in net loss was primarily due to the gain on the acquisition of First Wyoming, higher investment income, a decrease in reserves, lower salary expense, net gains on investments, and a reduction in other operating expenses, offset by a decline in premium revenue.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2015 and 2014.
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 fixes 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 dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. The Company attempts to mitigate its 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.
Since inception, our operations have been financed primarily through the sale of voting common stock and preferred stock. Our operations have generated significant operating losses since we were incorporated in 2003. We expect significant losses for several years.