We own the 69,000 square foot office building in which our headquarters is located at 3750 West Deerfield Road, Riverwoods, Illinois. We currently lease approximately 6,600 square feet of the building to an outside tenant. The building is located on a 10-acre tract of land in a suburb northwest of Chicago. Approximately 9,600 square feet of office space remains available for lease or to accommodate any increase in our workforce.
This Form 10-K contains “forward-looking” statements that are intended to enhance the reader’s ability to assess our future financial and business performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. In addition, statements that refer to our future financial performance, anticipated growth, trends in our business and in our industry, and other characterizations of future events or circumstances are forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic, and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates, and beliefs with respect to, among other things, future events and financial performance. Except as required under the federal securities laws, we do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
our inability to manage future growth and integration of any businesses that we may acquire;
changes in industry trends and financial strength ratings assigned by nationally recognized rating organizations.
Our business primarily consists of the operations of Federal Life. Federal Life underwrites primarily life insurance and annuity products through approximately 1,000 independent insurance agents.
We invest our free cash flow and funds that support our regulatory capital, surplus requirements, and policy reserves in investment securities that are included in our insurance and corporate segments. We earn income on these investments in the form of interest on fixed maturity securities (bonds and mortgage-backed securities) and dividends (equity holdings). Investment income is recorded net of investment related expenses as revenue. The amount of net investment income that we recognize will vary depending on the amount of invested assets that we own, the types of investments we own, the interest rates earned, and the amount of dividends received on our investments.
For our fixed maturity securities available for sale as of December 31, 2018, the annual scheduled maturity payments through 2021, along with the average interest rate, are shown in the following schedule:
As these assets mature, or are pre-paid, the current average book yield on fixed maturity securities available for sale of 3.90% at December 31, 2018 is expected to decline due to reinvesting in a lower interest rate environment than the book yield of the maturing securities. The average book yield that we would expect to receive on reinvesting in similar types and similarly rated securities was 3.95% as of December 31, 2018, which is equivalent to the market yield on our investment portfolio as of December 31, 2018.
As of December 31, 2018, we had $221.4 million of insurance liabilities and policyholder and annuity account balances. Of this amount, $80.7 million represents contracts with guaranteed minimum crediting rates that are at the guaranteed minimum rate, as shown in the following schedule:
The reinvestment of scheduled payments and pre-payments at rates below the current average book yield will impact future operating results to the extent we are unable to reinvest at a rate at least equal to the crediting rate. For the year ended December 31, 2018, we also had $99.1 million of insurance liabilities representing participating contracts. The policyholder dividends for these contracts are determined annually, based on, among other factors, the experience, including investment experience, of the policies.
Our level of operating expenses affects our reported net income (loss). Our general operating expenses include expenses that vary based on the growth in our revenues. Policy acquisition costs vary with the amount of first year premium each period, and variable policy administration costs increase as our number of insurance policies in force increase. We also incur other expenses for projects and initiatives designed to increase growth or improve operational efficiency. Our expenses also include amounts spent on general and administrative expenses required to support our business operations, such as financial reporting, administration, information technology, and other costs. These expenses are fixed costs that do not vary directly with business growth.
The major components of operating revenues, benefits and expenses, and net (loss) income are as follows:
For the year ended December 31, 2018, revenues were $20.8 million compared to $23.0 million for the year ended December 31, 2017. This decrease of $2.2 million (9.5%) resulted from lower net insurance premiums and lower realized gains on investments. Net insurance revenues decreased by $0.8 million (6.3%) primarily due to lower direct and assumed premiums combined with increased ceded premiums in the Company’s life insurance products. Net investment income decreased by $95,000 (1.1%) as a result of lower income from Americana and lower yields on invested assets. Net realized investment gains decreased by $1.4 million (60.6%) due to fewer sales of mineral rights in Americana and lower gains on equities, partially offset by higher gains on bonds and derivatives.
Total benefits and expenses for the year ended December 31, 2018 were $25.6 million compared to $24.9 million for the year ended December 31, 2017, an increase of $0.7 million (3.0%). Policyholder benefits increased by $0.2 million (1.1%) and operating expenses increased by $1.1 million (14.2%) due to reorganization costs offset by a decrease in interest credited to policyholders of $82,000 (21.2%) and a decrease in amortization of DAC and deferred sales inducement costs of $0.5 million (22.0%).
For the year ended December 31, 2018, insurance revenues were $11.3 million compared to $12.1 million for the year ended December 31, 2017. This decrease of $0.8 million (6.3%) was due to lower direct and assumed premiums, as a result of the Company’s decision to terminate the FEGLI reinsurance program, effective September 30, 2018, combined with higher ceded premiums as a result of a new reinsurance treaty that became effective in October 2017.
For the year ended December 31, 2018, net realized investment gains were $0.9 million compared with net realized investment gains of $2.2 million for the year ended December 31, 2017. This decrease of $1.3 million (60.6%) was due mainly to fewer sales of mineral rights in Americana and lower realized gains on equity securities, partially offset by higher realized gains on bonds and derivatives.
For the year ended December 31, 2018, other revenues were $211,000 compared with $194,000 for the year ended December 31, 2017. This increase of $17,000 (8.8%) was due to higher fee income from our separate account business in 2018 due to higher average underlying asset values.
For the year ended December 31, 2018, interest credited was $0.3 million compared to $0.4 million for the year ended December 31, 2017. This decrease of $82,000 (21.2%) is mainly due to a larger reduction in reserves primarily as a result of fewer contracts in these product lines compared to the previous year.
The following table provides our average credited rate by product for the years ended December 31, 2018 and December 31, 2017:
For the year ended December 31, 2018, operating costs and expenses were $9.0 million compared to $7.9 million for the year ended December 31, 2017. This increase of $1.1 million (14.2%) was mainly a result of higher reorganizational costs, partially offset by lower general insurance expenses.
For the year ended December 31, 2018, amortization of deferred acquisition costs was $1.6 million compared to $2.1 million for the year ended December 31, 2017. This decrease of $0.5 million (22.0%) resulted primarily from slower amortization as a result of better lapse and mortality experience in certain life policy plans.
For the years ended December 31, 2018 and December 31, 2017, taxes licenses and fees remained flat at $0.7 million.
We apply our investment strategy and guidelines for purposes of monitoring compliance with our overall guidelines. Our investments are primarily owned by Federal Life and are maintained in compliance with insurance regulations. Critical guidelines of our investment plan include:
Asset concentration guidelines that limit the amount that we hold in any one issuer of securities;
Liquidity guidelines that limit the amount of illiquid assets that can be held at any time; and
Our internal investment staff manages our investment portfolios. We contract with investment management firms to provide overall assistance with certain types of investment products. This investment management firm reports to our Chief Executive Officer and to our Chief Financial Officer. On a quarterly basis, or more frequently if circumstances require, we review the performance of all portfolios with the Federal Life Board of Directors.
Every quarter we review all investments where the market value is less than the carrying value to ascertain if the impairment of the security’s value is other than temporary. The quarterly review is targeted to focus on securities with larger impairments and that have been in an impaired status for longer periods of time.
We also record capital appreciation/depreciation on our available for sale fixed maturity securities. The following table shows the change in equity from mark-to-market adjustments on our available for sale fixed maturity securities. The market value of our fixed income securities has decreased this year as a result of higher interest rates.
However, under Illinois insurance statutes, dividends may be paid only from surplus, excluding unrealized appreciation in value of investments, without prior approval. Dividends in excess of these amounts require advance approval of the Illinois Department of Insurance. There are no limitations on the amount of dividends that Federal Life’s subsidiaries can pay to Federal Life.
Federal Life is also required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus required by the Compiled Statutes of Illinois was $1.5 million at December 31, 2018. Federal Life’s statutory capital and surplus at December 31, 2018 was $24.9 million. Federal Life received $12.5 million in paid in surplus from its parent company after the Conversion and IPO were completed on December 11, 2018.
For the year ended December 31, 2018, we had a net increase in cash and cash equivalents of  $29.2 million compared with a net decrease of $4.3 million for the year ended December 31, 2017. The increase in cash was mainly due to higher cash provided from financing activities of $39.6 million compared with $10.7 million in 2017. Net cash proceeds received from issuance of common stock amounted to $32.3 million. Cash used in operating activities increased to $7.5 million from $6.0 million due to a larger net loss. Cash used in investing activities decreased to $2.9 million from $9.0 million mainly due to fewer purchases of fixed maturity securities.
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, or capital expenditures.