The Company’s mortgage loan portfolio is comprised of residential properties with loan to appraised value ratios below 72%. Mortgage loans are carried at current book value. The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread.
Results of Operations - Years Ended December 31, 2018 and 2017
Our revenues are from the initial sales of insurance products and investment income from investments in fixed maturity available-for-sale securities, mortgages and other assets. We began selling insurance products in May 2017. Revenue included $363,515 and $304,163 from sales of life insurance for the twelve months ended December 31, 2018 and 2017, respectively. The Company also accepted annuity considerations of $1,838,464 and $1,398,041 during 2018 and 2017, respectively. Annuity considerations will generate revenue on investments but are not classified as revenue for GAAP reporting.
Our expenses relate to operating a financial services holding company, a life insurance company and an insurance agency.
Expenses were $1,994,508 for the year ended December 31, 2018, an increase of $257,712 from $1,736,796 for the year ended December 31, 2017.
Commissions - Commission expense increased $12,052 for the year ended December 31, 2018. The increase is consistent with the increased insurance sales compared to 2017.
Salaries and Wages - Salary expense increased $115,255 for the year ended December 31, 2018. The increase is due to the addition of staff in the third quarter of 2017 and the addition of salaried sales agents in the fourth quarter 2018. To a lesser degree moderate increases to existing salaries added to the variance.
The net loss was $1,227,436, or $(0.08) per share, for the year ended December 31, 2018 compared to a net loss of $1,335,583, or $(0.09) per share, for the year ended December 31, 2017. The $108,147 decrease in the net loss was primarily attributable to the increases of $251,586 and $54,921 in net investment income and commission income generated by agency operations, respectively. Somewhat offsetting the increases in revenue are increase in expenses described above. We expect our losses to increase in the future as we incur increased costs to grow the life insurance business. The weighted average common shares outstanding were 14,861,514 and 14,804,853 for the years ending December 31, 2018 and 2017, respectively. The total shares outstanding were 14,850,097 and 14,864,097 at December 31, 2018 and 2017, respectively.
Total assets of the Company increased from $15,343,968 as of December 31, 2017 to $15,732,993 as of December 31, 2018, an increase of $389,025 and was attributable to annuity sales in 2018.
The Company is investing the annuity deposits in fixed maturity securities, mortgages and other assets (lottery bonds). The increase in mortgages of $569,135 and lottery bonds of $449,461 are directly related to annuity deposits in Texas Republic Life Insurance Company. Mortgages of $875,895 were also acquired in the holding company. The increase of $4,290,468 in fixed maturity securities occurred both in the insurance company and at the holding company level as we try to maximize our investment earnings.
Policyholder liabilities include benefit reserves for both life and annuity policies, claim reserves, deposit funds and advance premiums. Policyholder liabilities increased $1,812,564 at December 31, 2018 compared to December 31, 2017. The increase is directly related to the increase of inforce life insurance and the liability for annuity deposits.
Since inception, our operations have been financed primarily through an organizational offering, three private placement offerings and an intrastate public stock offering. Through December 31, 2018, we received $20,346,985 from the sale of 14,867,097 shares and incurred offering costs of $2,659,696. During 2017 and 2016 we paid $5,000 and $10,000 for 1,000 and 2,000 shares of Company’s common stock that is held as treasury stock, respectively. Additionally, TRLIC has purchased 14,000 shares of TRCC common stock at a cost of $35,000 during 2018. The shares were purchased to compensate agents under TRLIC’s Stock Incentive Plan. The shares are held as treasury shares in the consolidated financial statements. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2012.
We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital expenditures for at least 12 months. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. TRLIC and TRLS may require additional capital as they continue to grow. As discussed above, the Company capitalized TRLIC with $3,000,000 cash during the third quarter of 2016. During 2018 the Company added additional capital of $2.75 million to TRLIC. The Company capitalized TRLS with $50,000 in the second quarter of 2017. The Company contributed an additional $100,000 to TRLS in 2018.
the ability and willingness of counterparties to our reinsurance arrangements to pay balances due to us;
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
We have audited the accompanying consolidated statements of financial position of Texas Republic Capital Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Costs that relate to and vary with the successful production of new business are deferred over the life of the policy. Deferred acquisition costs (“DAC”) consist of commissions and policy issuance, underwriting and agency expenses. DAC expenses are amortized primarily over the premium-paying period of life policies and as profit emerge on annuity products. Amortization uses the same assumptions as were used in computing liabilities for future policy benefits.
Sales inducement costs (“SIC”) are related to policy bonuses issued on some of the Company’s annuity products. SIC is deferred at the issuance of the policy and amortized over the shorter of the bonus period or the life of the policy based on the expected future profits of the business. The amount deferred is based on the difference between the fund value with the bonus and the fund value without the bonus. There was $164,316 and $79,866 of SIC deferred at December 31, 2018 and December 31, 2017, respectively. For the twelve months ended December 31, 2018 there was $104,603 of SIC deferred and $20,153 of SIC amortized. There was $79,866 of SIC deferred during the twelve months ended December 31, 2017. There was no SIC amortized in 2017.
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus applicable bonus and interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.24% to 5.00%.
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12). This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts. ASU 2018-12 revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value, simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected term of the related contracts rather than based on gross profits and enhancing disclosure requirements. While this ASU is effective on January 1, 2021, the transition date (the remeasurement date) is January 1, 2019. Early adoption of this ASU is permitted. The Company is in process of evaluating the impact this guidance will have on our consolidated financial statements.
As of December 31, 2018, 33 of the 37 fixed maturity securities in a loss position had a fair value to amortized cost ratio equal to or greater than 90%. The four fixed securities that were below 90% were at 80% or higher. The 36 securities in a less than 12-month loss position had an average fair value to amortized cost ratio of 96%. The single issue in a loss position greater than 12-months had a fair value to amortized cost ratio of 81% and 92% as of December 31, 2018 and December 31, 2017, respectively. Two fixed maturity securities with a par value of $250,000 are below investment grade as rated by Standard and Poor’s as of December 31, 2018 and December 31, 2017.
Based on management’s review, the Company experienced no other-than-temporary impairments during the years ended December 31, 2018 and 2017.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2018 and 2017 are summarized as follows:
Cash and Cash Equivalents, Accrued Investment Income and Advances and Notes Receivable
The Company’s mortgage loan portfolio is comprised of residential properties with loan to appraised value ratios below 72%. The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread.
Property and equipment as of December 31, 2018 and 2017 is summarized as follows:
The Company and its subsidiaries have no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2015 through 2018 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures non-interest-bearing accounts up to $250,000. Uninsured balances aggregate $534,014 as of December 31, 2018. The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
The Company entered into a lease with a third-party lessor in 2014 for utilization of office space in Austin, Texas. The lease agreement ended September 30, 2017. The Company also paid a pro rata share of the operating expenses of the building.
The Company entered into a new 62-month lease agreement with a third-party lessor in 2017 for utilization of office space in Austin, Texas. The lease agreement ends November 30, 2022. The lease required a deposit in the amount of $7,109 and abated the first two month’s rent. The monthly rental payments are $4,864 for the first twelve months after abatement. The Company also pays a pro rata share of the operating expenses of the building. Rent expense was $80,967 under the new agreement for the twelve months ended December 31, 2018 and $56,946 under the two agreements for the twelve months ended December 31, 2017. Total future minimum lease payments and a pro rata share of the buildings operating expenses to be paid under the current non-cancellable lease agreement are $82,487 in 2019, $84,036 in 2020, $85,585 in 2021 and $78,485 in 2022.
TRLIC is domiciled in Texas and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the TDI. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
The statutory net loss for TRLIC was $897,619 and $563,881 for the years ended December 31, 2018 and 2017, respectively. The statutory capital and surplus of TRLIC was $4,201,803 and $2,352,437 as of December 31, 2018 and 2017, respectively.
TRLIC is subject to Texas laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the TDI. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity for TRLIC to pay a dividend to TRCC.