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 have also subleased office space for a satellite office in Kearney, Nebraska, beginning in June, 2012 which we closed and cancelled in January 2015. Great Plains entered into a lease on October 4, 2013 for office space in Mitchell, South Dakota, which expires on November 30, 2016.
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," along with any supplements in Part II below.
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 an intrastate offering in the State of Nebraska.
On June 20, 2010, American Life acquired Capital Reserve in exchange for a cash payment of approximately $1.9 million. This transaction added approximately a like amount of assets to American Life. Capital and surplus of Capital Reserve as of December 31, 2014 and 2013 was $1,332,771 and $1,259,746, respectively. Capital Reserve generated a $123,940 and $115,884 net loss for the years ended December 31, 2014 and 2013, respectively.
acquisition of Capital Reserve, American Life also coinsured a block of life insurance business from Capital Reserve’s former parent corporation in a separate transaction. The purchase price for this block of business was approximately $375,000. This transaction added more than $70,000 in annual revenues to American Life’s operations, as well as approximately $3.5 million of new assets and $3.2 million of policy liabilities to our balance sheet.
During the third quarter of 2011, we obtained control of an entity we previously had a noncontrolling interest in, Security Capital Corp. (Security Capital), an Arkansas corporation formerly known as Arkansas Security Capital Corporation. Security Capital was a development stage company that had not conducted operations apart from raising capital. Security Capital was acquired by Midwest on August 5, 2014, through a share exchange described below.
We commenced our third party administrative (“TPA”) services in 2012 by first offering the services to our wholly-owned subsidiary and other consolidated entities. Later, we expanded our services to other non-consolidated entities as an additional revenue source. These agreements, for various levels of administrative services on behalf of each company, generate fee income for us. Services provided to each company vary based on its needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources.
Additionally, we have investments in development stage entities. These equity securities approximate carrying value and are invested in privately-held holding companies. These securities have no active trading. The fair value for these securities is determined through the use of unobservable assumptions about market participants. These companies are regularly bringing new investors into their entities at or above the prices paid by us. Accordingly, we have asserted that a willing market participant would purchase the security for the same price as we paid until such time as the development stage company commences operations.
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, does 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 compared the carrying value of our identifiable indefinite-lived intangible assets to the sum of the future discounted cash flows. As of December 31, 2014, 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.
Investment income, net of expenses: The components of net investment income for 2014 and 2013 are as follows:
The significant decrease for the year ended December 31, 2014 was primarily due to losses on equity method investments incurred in First Wyoming, Pacific Northwest, and Hot Dot (through September 30, 2014). We do not expect to incur such losses in 2015 for Pacific Northwest. Interest from mortgage loans on real estate, income from real estate investments, policy loan interest, and miscellaneous investment income is included in the “Other” line item above.
Net realized gains on investments: Net realized gains on investments for 2014 was $346,304 compared to $5,736 in 2013. We sold our investment in Northern Plains for a realized gain of $90,812 and our investment in Hot Dot for a realized gain of $251,102.
Death and other benefits: Death benefits increased significantly in 2014 compared to 2013 due to a settlement of litigation on one policy issued by Old Reliance where the settlement amount was $205,000 as well as an increase in accrued claims of $46,000 due to the increase in pending claims and twelve month analysis of claims incurred. Management believes it underwriting to be conservative and notes that virtually all claims incurred relate to older blocks of business acquired in the Old Reliance transaction, many of which are offset by policy reserves held. We also incurred an increase in surrender benefits of $252,000 primarily due to policies that held policy loans converting to Extended Term Insurance and Reduced Paid-Up Insurance and the outstanding loans being extinguished.
Increase in benefit reserves: The decrease in benefit reserves reflects the decline in new business for 2014 which was partially offset by the maturity of our in-force block of business as well as the effect of the structure of the initial life insurance policy sold by American Life and Great Plains as indicated above.
Salaries and benefits: The significant increase in 2014 primarily relates to new hires assigned to the Company’s marketing activities for $279,000 plus benefits. These marketing-related salaries were transitioned to commission in January 2015.
Other expenses: Our other operating expenses during 2014 increased significantly compared to 2013 due to fees of $249,000 related to routine regulatory examinations that were conducted by agencies from the states of Arizona, Missouri, and Wyoming as required by state statutes, higher professional and related fees of $167,000 associated with the Exchange Agreement with Great Plains and Security Capital, and higher deposit-type interest expense due to the higher outstanding balances.
Loss attributable to noncontrolling interests: We owned approximately 60% of the capital stock of Security Capital, and approximately 25.7% of Great Plains through August 5, 2014. At which time Great Plains and Security Capital were acquired by us. A loss of ($460,920) recorded through the acquisition date compared to the loss of ($267,481) for 2013 reflects the increased loss attributable to Great Plains.
Net loss attributable to Midwest Holding Inc.: The significant increase in the net loss for 2014 compared to 2013 was primarily to due to lower revenue, including a decline in premium revenue, increased claims and expenses, along with losses of entities acquired by us in 2014, and by the costs associated with the Exchange Agreement and state examinations.
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, mortgage loans on 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 as of December 31, 2014 and 2013.
Increases in fixed maturity securities primarily resulted from additional purchases made by American Life and Great Plains Life during 2014.
Reflecting the high quality of securities maintained by us, 99.4% and 99.2% of all fixed maturity securities were investment grade as of December 31, 2014 and December 31, 2013, respectively. Due to the low interest rate environment, we have invested in bonds with “A” or “BBB” ratings.
We hold a diversified portfolio of investments that primarily includes cash, bonds, stocks, mortgage loans on real estate, held for investment, real estate, held for investment, and notes receivable. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.
We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management.
Since inception, our operations have been financed primarily through the sale of voting common stock and preferred stock. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2003. We expect significant losses for several years.
Net cash used by operating activities was $2,334,238 for 2014. The primary sources of cash from operating activities were primarily due to the amounts receivable from reinsurers. The primary uses of cash from operating activities were from payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $1,302,128. The primary source of cash was from sales of available for sale securities, the sale of equity securities carried at cost and the sale of the short-term investments. Offsetting this source of cash was our purchases of investments in available-for-sale securities, the net change in policy loans and the purchase of property and equipment. Net cash provided by financing activities was $2,568,435. The primary source of cash was receipts on deposit-type contracts and issuance of preferred stock. These were offset by transfers from noncontrolling interest and small repurchases of common stock.
At December 31, 2014, we had cash and cash equivalents totaling $2,310,047. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2015. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than they currently expect. The growth of our insurance subsidiaries is uncertain and will require additional capital if they continue to grow.
As a “smaller reporting company” we are not required to provide the table of contractual obligations required pursuant to this Item.