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 (the “Securities Act”), 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 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, many 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 “Item 1A. Risk Factors” above.
At the closing of the Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock (“Series C Preferred Stock”) to Xenith for $1,500,000, which was ranked senior to our voting common stock on liquidation with a preference of $1.00 per share. Annual dividends of 8% of the Series C Preferred Stock liquidation preference were payable by us. Prior to conversion on June 18, 2019, and at any time after June 28, 2025, Xenith could have required us to redeem the Series C Preferred Stock at the liquidation preference (plus accrued dividends) or fair market value, whichever was greater. The Preferred Stock voted along with the voting common stock on an “as converted” basis. Also, holders of Preferred Stock voting as a separate Series were entitled to elect five of the Company’s eight members of its Board of Directors. On June 18, 2019, all of the Series C Preferred Stock shares were converted, at Xenith’s election, into 72,854,474 shares of our voting common stock at approximately $0.02 per share. All accrued dividends were waived.
The Agreement further provided that Xenith could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election could also to be converted into voting common stock at the price of $0.02 per share. Xenith loaned an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000. The additional loans were converted, at Xenith’s election, into 898,538,525 shares of our voting common stock on June 18, 2019. All interest on the notes through June 18, 2019, was waived and was accounted for as a capital contribution to Midwest.
Following the closing of the Agreement, we began implementation of a new business plan whose primary purpose is to leverage technology and reinsurance to distribute competitive insurance products through third-party marketing organizations.
Our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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.
American Life has a long-term investment policy aimed at protecting capital and earning attractive risk adjusted returns while maintaining compliance with Nebraska’s insurance investment laws. Our investments are managed by our senior management team, who have many years of asset management experience. Trades are cleared through a common broker after competitive prices are solicited.
On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment, trading and financial activities. 1505 Capital has been engaged as the financial advisor for American Life, Ironbound and SDA.
Our investment portfolio has expanded in 2019 to include a broader class of fixed maturities (including collateralized loan obligations, corporate, asset-backed and mortgage-backed securities), mortgage loans, derivatives and other investments. 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 accumulated other comprehensive income (loss). Mortgage loans are carried and book value which is also used for their fair value in the consolidated balance sheets. Derivatives are carried at fair market value with the realized gains or losses recorded in realized gains (losses) on the comprehensive income statement. 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.
Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due. Amounts received as payment for annuities and/or non-traditional contracts such as interest sensitive whole life 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 statement of cash flows. Through our reinsurance grants, revenues are earned through ceding commissions which are capitalized and our independent consulting actuary determines the amounts to be recognized in income over the period of the annuity contracts.
A discussion of certain new accounting standards is provided in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
We also reinsured our existing legacy block of insurance business through a reinsurance agreement with a third party reinsurer in exchange for a ceding commission of $3.5 million as described below (the “Legacy Reinsurance”). In addition, American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2019. We purchased and installed comprehensive new technology during the fourth quarter of 2018 and we began selling our first MYGA product in late January 2019 through the IMOs.
American Life began selling its first MYGA and FIA products during 2019 that resulted in gross premiums of $145,747,737 and $15,616,831, respectively, for the year ended December 31, 2019 on a statutory basis. For GAAP, such premiums are considered deposits and are not shown as premium income.
Under statutory accounting principles, the MYGA and FIA premiums are treated as premium revenue. Under Generally Accepted Accounting Principles (“GAAP”) these products are defined as deposit-type contracts; therefore, the premium revenue under statutory accounting principles is accounted under GAAP as deposit-type liabilities on our balance sheet and are never recognized in our income statement.
Investment income, net of expenses: The components of net investment income for 2019 and 2018 were as follows:
Net realized gains on investments: The net realized gains increased primarily due to not having to sell bonds to cover operating expenses in 2019 compared to 2018 when market conditions were poor prior to the Xenith infusion of capital. Also, the Federal Reserve Bank decreased interest rates which resulted in improvement in bond prices in 2019. Our unrealized losses were $1,818,014 at December 31, 2018. In 2019 we had $619,584 of realized gains. Management determined in the fourth quarter of 2019 to sell bonds that were in gain positions. We do not believe we will need to sell investments at a loss in the future.
Miscellaneous income: Miscellaneous income increased due to the consolidation of 1505 Capital, our investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by a decrease in TPA fees. We had only one customer for whom we performed these services during 2019. TPA fees earned during the year ended December 31, 2019 and 2018 were $48,300 and $89,240, respectively.
Net Loss: The change in net loss for continuing operations increased primarily due by increases in our salaries and benefits, the decrease in investment income caused by the transfer of assets on business ceded to Ironbound and SDA These were offset by the release of $2,410,054 of deferred ceding commission into income due to 79% indemnity coinsurance being converted to assumptive by Unified, the additional amortization of deferred gains related to the Ironbound and SDA transactions, an increase in our miscellaneous income due to the consolidation of 1505 Capital, the decrease in our interest credited due to the Ironbound and SDA transaction, and an increase in our realized gains.
The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade asset-backed securities, and debt securities, and mortgages, The Company has modified its investment strategy to purchase larger position securities with increased yields. The duration of our new investments will be less than ten years for the majority of those investments. 1505 Capital provides investment and related asset management services to the Company under an Investment Management Agreement approved by the Nebraska Department of Insurance in 2019. 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 as of December 31, 2019 and 2018.
Increases in fixed maturity securities primarily resulted from the sale of our new MYGA and FIA products during 2019:
The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based
Net cash used for operating activities was $2,457,176 for December 31, 2019, which was comprised primarily by an increase in policy liabilities of $2,963,219 primarily due to the increase in deposit-type contracts ceded to reinsurers, an increase in our other assets and liabilities due to a payable for securities of $4,745,339 and an increase in deferred coinsurance ceding commission due to the Ironbound and SDA transaction of $3,678,196 , partially offset by the amounts recoverable from reinsurers of $7,478,880 and accrued investment income of $1,310,492. Net cash used for investing activities was $117,890,852. The primary source of cash used was from our purchase of investments from sales of the MYGA and FIA products of $139,139,215. Offsetting this use of cash was our sale of investments in available-for-sale securities of $21,858,018. Net cash provided by financing activities was $161,231,666. The primary source of cash was net receipts on the MYGA and FIA products.