As a “smaller reporting company,” we are not required to provide disclosure pursuant to this Item.
All such forward-looking statements speak only as of the date of this Form 10-K. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We presently conduct our business through our sole life insurance subsidiary, American Life & Security Corp. (“American Life”). In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. For the years ended December 31, 2016 and 2015, we generated approximately $3.5 million and $3.4 million in premium revenue, respectively.
We have incurred losses since inception that resulted primarily from costs incurred while raising capital and establishing and operating American Life and other entities. We expect to continue to incur operating losses until American Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.
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, 2016, 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.
Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below. Unless the context requires otherwise, all references compare 2016 to 2015.
Premium revenue: Premium revenue increased primarily due to the inclusion of $322,000 of premiums attributable to the acquisition of First Wyoming in late 2015; such premiums of $49,000 were only recognized for two months in 2015. This increase was offset by our decision to significantly reduce new life insurance policy sales in 2015 and selling efforts in 2016 in order to preserve the regulatory capital and surplus of American Life. We expect to have limited production of new insurance business in 2017 in order to continue to preserve surplus, although new sales resulted in $75,000 of new annual premium written in the fourth quarter of 2016. The essential flat revenue number was also due to GAAP accounting for premiums from our Accumulator life insurance product (our primary product). 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 and 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 in revenues.
Investment income, net of expenses: The components of net investment income for 2016 and 2015 are as follows:
The increase in investment income was due to increased size of our bond portfolio using a part of the $2.4 million of cash received from our acquisition of Northstar in early 2016, the consolidation of First Wyoming Life and its investment income of $122,000 for the full year of 2016 compared to $22,000 which only included two months in 2015. Policy loan interest, real estate investments, and miscellaneous investment income is included in the “Other” line item above.
Loss on equity method investment: The increase in investment loss for equity method investments was due to the final valuation by a third party of Midwest’s investment in First Wyoming. The original investment in First Wyoming was $810,500. The preliminary valuation prepared for us by the third party was determined to be $642,150 which resulted in a loss of $168,350 for the year ended December 31, 2015. The final valuation by the third party valued First Wyoming at $221,430 resulting in the $420,720 loss for the year ended December 31, 2016, offset by the gain as discussed above.
Miscellaneous income: Miscellaneous income decreased due to our TPA fee income decline as we acquired two companies in 2015 and 2016 for whom we were performing TPA services. We have three customers for whom we performed these services. We do not expect such service to be a significant source of future revenue. Fees earned during the years ended December 31, 2016 and 2015 were $63,500 and $154,670, respectively.
Interest credited: Interest credited increased as a result of the increase in the annuity deposits and the inclusion of First Wyoming Life which added $950,000 of annuity deposits and $49,000 of interest credited for the full year of 2016 compared to $7,000 for only two months of 2015.
Increase in benefit reserves: The decrease in benefit reserves reflects the decrease in new business written and the increase in surrenders. These decreases were offset by the inclusion of First Wyoming Life which added $72,000 for the full year of 2016 compared to $15,500 for only two months in 2015 and the maturity of our in-force block of business.
Amortization of deferred acquisition costs: The decline was due primarily to the decline in new business written in the first nine months of 2016 to conserve capital and surplus. New business was written in the fourth quarter of 2016 of $75,000 of annual premiums.
Goodwill impairment: During our goodwill analysis, we determined that we needed to impair the whole balance of $1,129,824.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2016 and 2015.
At December 31, 2016, we had cash and cash equivalents totaling $661,545. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for at least twelve months when combined with the level of maturing securities and the liquidity associated with our investment portfolio. The Company is also looking to raise additional capital in 2017. The Company has based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than they currently expect. Our surplus notes for $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. Due to the nature of surplus notes a repayment cannot be made without the prior approval of the Nebraska regulators and they have not approved any repayment to date.