For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
Results of Operations - Years Ended December 31, 2012 and 2011
The $16,758,237 decrease in cash is primarily due to the company investing these funds in fixed maturity securities, mortgage loans and other long-term investments (i.e., lottery receivables).
The $761,344 decrease in loans from premium financing is related to normal loan collections and our May 16, 2012 decision to discontinue offering premium finance contracts effective July 1, 2012.
Our shareholders’ equity as of December 31, 2012 and 2011 is summarized as follows:
The liquidity requirements of our life insurance company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2012 or 2011. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and Family Benefit Life’s annuity business is subject to variable interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.
As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 93%. As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%. Fixed maturity securities were 95% and 88% investment grade as rated by Standard & Poor’s as of December 31, 2012 and December 31, 2011, respectively. There were no equity securities in an unrealized loss position as of December 31, 2012 and December 31, 2011.
There was one loan more than 90 days past due as of December 31, 2012 with a remaining principal balance of $141,150. There were no mortgage loans in default as of December 31, 2012 and 2011 and there was no allowance for losses as of December 31, 2012 and 2011.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2012 and 2011 is summarized as follows:
The Company leases 6,769 square feet of office space pursuant to a five-year lease that began October 1, 2010 and leased 950 square feet of office space effective December 15, 2009 that terminated December 31, 2010. On June 17, 2010, the Company agreed to lease an additional 4,252 square feet of expansion office space whereby, effective October 1, 2010, the Company would lease for five years a combined 6,769 square feet. Under the terms of the home office lease, the monthly rent is $7,897 from October 1, 2010 through September 30, 2015. The Company incurred rent expense of $76,136 and $72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and other minor leases. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for 2013 and 2014 and $71,073 in 2015.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased to $3,100 per month for the period September 1, 2010 through August 31, 2015.