TEXAS REPUBLIC CAPITAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
was incorporated in
operate insurance subsidiaries: a life insurance company, a life insurance
agency, and a property & casualty insurance agency. We sell and issue life
insurance products and annuity contracts as part of the insurance company. As an
insurance provider, we collect premiums and annuity considerations in the
current period to pay future benefits to our policy and contract holders.
Currently, we only issue our products in the state of
agency and a property & casualty insurance agency, we sell and place insurance
products for other insurance carriers. If our life insurance company does not
offer products that suit our client's needs, then we can meet their needs
through other carrier products sold by our life agency. In addition, we have
ability to cross-sell all current and prospective client's property and casualty
insurance through the other agency, or the possibility of driving growth for the
Company in other markets where participants are not seeking life insurance. The
agencies collect commissions on the sale of those products.
We also realize revenues from our investment portfolio, which is a key component
of our operations. The revenues and funds we collect as premiums and annuity
considerations from policyholders are invested to ensure future benefit payments
under the policy contracts. Life insurance companies earn profits on the
investment spread, which reflects the investment income earned on the premiums
and annuity considerations paid to the insurer between the time of receipt and
the time benefits are paid out under our policies and contracts. Changes in
interest rates, changes in economic conditions and volatility in the capital
markets can all impact the amount of earnings that we realize from our
investment portfolio.
The Company continues to incur overall losses since inception. These losses were
fully expected, planned for, and fell within an expected range when considering
the necessary start-up, infrastructure, distribution, and policy issuance costs
of a new life insurance company. These losses have resulted from the costs
incurred while raising capital and starting a new company, which involves
investing in people, technology, infrastructure, marketing, brand awareness,
distribution channels, regulatory and filing fees, legal costs, and other
overhead expenses related to our operations. We expect to continue to incur
operating losses until we achieve a volume of in-force life insurance policies
that provides premiums and the associated investment income which are sufficient
to cover our operating costs.
In addition, the Company is aware that the evolving COVID-19 pandemic may impact
the Company's results of operations, although the magnitude in not known at this
time. The Company has not yet experienced any uptick in claim experience or
significant adverse conditions to operations due to COVID-19.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in
("
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, and expenses. On a continuing basis, we
evaluate our estimates and assumptions.
We base our estimates on historical experience and on various other factors that
we believe are reasonable under the circumstances. The results of these
estimates form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following accounting policies, judgments and estimates are the most
critical to the preparation of our consolidated financial statements.
Investments
Fixed maturity securities are comprised of bonds that are classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, net of applicable income taxes, reported in accumulated other
comprehensive income. The amortized cost of fixed maturity securities
available-for-sale is generally adjusted for amortization of premium and
accretion of discount.
Interest income, as well as the related amortization of premium and accretion of
discount, is included in net investment income under the effective yield method.
The amortized cost of fixed maturity securities available-for-sale is written
down to fair value when a decline in value is considered to be
other-than-temporary.
The Company evaluates the difference between the cost or amortized cost and
estimated fair value of its investments to determine whether any decline in
value is other-than-temporary in nature. This determination involves a degree of
uncertainty. If a decline in the fair value of a security is determined to be
temporary, the decline is recorded as an unrealized loss in shareholders'
equity.
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If a decline in a security's fair value is considered to be
other-than-temporary, the Company then determines the proper treatment for the
other-than-temporary impairment. For fixed maturity securities
available-for-sale, 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; and 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.
The assessment of whether a decline in fair value is considered temporary or
other-than-temporary includes management's judgment as to the financial position
and future prospects of the entity issuing the security. It is not possible to
accurately predict when it may be determined that a specific security will
become impaired. Future adverse changes in market conditions, poor operating
results of underlying investments and defaults on mortgage loan payments could
result in losses or an inability to recover the current carrying value of the
investments, thereby possibly requiring an impairment charge in the future.
Likewise, if a change occurs in the Company's intent to sell temporarily
impaired securities prior to maturity or recovery in value, or if it becomes
more likely than not that the Company will be required to sell such securities
prior to recovery in value or maturity, a future impairment charge could result.
If an other-than-temporary impairment related to a credit loss occurs with
respect to a bond, the Company amortizes the reduced book value back to the
security's expected recovery value over the remaining term of the bond. The
Company continues to review the security for further impairment that would
prompt another write-down in the value.
Purchases and sales of securities are recorded on a trade-date basis. Interest
earned on investments is recorded on the accrual basis and is included in net
investment income.
The Company's mortgage loan portfolio is comprised entirely of residential
properties with loan to appraised value ratios below 90%. Mortgage loans are
carried at amortized book value. A mortgage loan allowance has been established
for any unforeseen losses using an industry approach. While we utilize our best
judgment and information available, the ultimate adequacy of this allowance is
dependent upon a variety of factors beyond our control, including the
performance of the residential mortgage loan portfolio, the economy and changes
in interest rates. Our allowance for possible mortgage loan losses consists of
specific valuation allowances established for probable losses on specific loans
and a portfolio reserve for probable incurred losses but not for specifically
identified loans. The fair values for mortgage loans are estimated using
discounted cash flow analysis. The discount rate used to calculate fair values
was indexed to the LIBOR yield curve adjusted for an appropriate credit spread.
We consider mortgage loans on real estate impaired when, based on current
information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the mortgage loan agreement. Impairment is measured on a
loan-by-loan basis. Factors that we consider in determining impairment include
payment status, collateral value of the real estate subject to the mortgage loan
and the probability of collecting scheduled principal and interest payments when
due. Mortgage loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired.
The Company's other long-term investments are comprised of lottery prize cash
flows holdings held at amortized cost. These investments are categorized as
other long-term investments in the statement of financial position and are
assignments of the future rights from lottery winners purchased at a discounted
price. Payments on these investments are made by state run lotteries.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and money market instruments.
Deferred Policy Acquisition Costs
Costs that relate to and vary with the successful production of new business are
deferred over 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
profits emerge on the annuity products, using the same assumptions as were used
in computing liabilities for future policy benefits.
Deferred Sales Inducement Costs
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 bonus period on a straight-line basis. The amount deferred is
based on the difference between the fund value with the bonus and the fund value
without the bonus.
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Policyholders' Account Balances
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 1.55% to 5.125%.
Future Policy Benefits
Future policy benefit reserves have been computed by the net level premium
method with assumptions as to investment yields, mortality and withdrawals based
upon the Company's experience. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amount of
policy liabilities and the increase in future policy benefit reserves.
Management's judgments and estimates for future policy benefit reserves provide
for possible unfavorable deviation. Actual experience may emerge differently
from that originally estimated. Any such difference would be recognized in the
current year's consolidated statement of operations.
Recently Adopted and Issued Accounting Pronouncements
Please refer to the applicable paragraphs in Note 1 of the Notes to Consolidated
Financial Statements.
Income Taxes
We account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets ("DTAs") and deferred tax liabilities
("DTLs") for the expected future tax consequences of events that have been
included in the financial statements. Under this method, we determine DTAs and
DTLs on the basis of the differences between the financial statement and tax
bases of assets and liabilities by using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect of a change in
tax rates on DTAs and DTLs is recognized in income in the period that includes
the enactment date.
We recognize DTAs to the extent that we believe that these assets are more
likely than not to be realized. In making such a determination, we consider all
available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax-planning
strategies, carryback potential if permitted under the tax law, and results of
recent operations. If we determine that we would be able to realize our DTAs in
the future in excess of their net recorded amount, we would make an adjustment
to the DTA valuation allowance, which would reduce the provision for income
taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a
two-step process in which (1) we determine whether it is more likely than not
that the tax positions will be sustained on the basis of the technical merits of
the position and (2) for those tax positions that meet the more-likely-than-not
recognition threshold, we recognize the largest amount of tax benefit that is
more than 50 percent likely to be realized upon ultimate settlement with the
related tax authority.
Results of Operations - Years Ended
Revenues
Revenues are primarily from life insurance premium income and investment income.
Realized gains and losses on investment holdings can significantly impact
revenues from period to period.
December 31 , December 31,
2021 2020
Premiums and other considerations
Net investment income
1,200,035 879,482 Net realized investment gains (losses) 61,177 (85,411 ) Commission income 215,758 243,459 Total revenues$ 2,176,460 $ 1,586,722
Total revenues increased by
increase was a result of increased new policy sales and additional investment
income earned through further investments in fixed maturity securities, mortgage
loans, and other long-term investments. In addition, we had net realized
investment gains in 2021 compared to net realized losses in 2020. Also, there
was a small reduction in commission income compared to the prior year which
slightly offset the revenue growth. The Company also accepted annuity
considerations during 2021 and 2020. Annuity considerations contribute to
additional net investment income through increased investments but are not
classified as premiums and other considerations under total revenues for GAAP
reporting.
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Table of Contents Expenses
Our expenses relate to operating a financial services holding company, a life
insurance company, and two insurance agencies.
Expenses were
expense categories are discussed below.
Total Benefits and Claims - Claims and benefit expenses were
The increase of
benefits and increase in interest credited to policyholders. This increase is to
be expected based on new sales production, increased insurance volume, number of
insureds covered, and the passage of time since policy issuance. Also, benefit
payments can significantly impact expenses from period to period. There was a
small increase in benefit payments in 2021 compared to 2020.
Commissions - Commission expenses were
months ended
is consistent with new business issued and renewal commissions paid on
previously issued business, net of any applicable commission recaptured. The
commission in the first year of policy issuance is typically significantly
greater than the subsequent years.
Salaries and Employee Benefits - Salary and employee benefits expense decreased
the reduction of team members in 2021, including moving salaried sales agents
back to commission basis only. We also saved money on the first full year of the
new employees' benefits plan that was switched to in late 2020. In addition, we
chose to use more external consultants as opposed to hiring new employees for
certain tasks and roles. That decision allowed us to save on benefit costs,
payroll taxes, other employee overhead expenses, and allowed us to pay for their
time as needed.
Other Expenses - Third-party administration fees decreased
ended
administrators in early 2020. We incurred one-time conversion costs from the new
administrator in 2020 as well as paid both the new and old administrators for a
few months during the transition that year. Professional fees increased
for the year ended
additional public accounting firm fees, consulting actuarial fees, and the
external consultants mentioned above in the salaries and employee benefits
section.
Net Loss
The net loss was
31, 2021
ended
attributable to the increase in revenues described above offset slightly by the
net increase in expenses.
The weighted average common shares outstanding were 14,781,325 and 14,767,922
for the years ending
Financial Position - As of
Total assets of the Company increased from
to
was primarily attributable to new sales production in 2021. Assets that
increased or decreased materially in 2021 were fixed maturity securities,
mortgage loans, other long-term investments, cash and cash equivalents, deferred
acquisition costs, and other assets.
Total investments increased by
both a result of new premium and annuity considerations received as well as the
additional investment of outstanding cash and cash equivalents into higher
yielding investments as we try to maximize our net investment income to boost
total revenues. As a result, cash and cash equivalents decreased by
for the year ended
bearing cash equivalent accounts.
In addition, the Company sold fixed maturity securities at net realized gains
and received proceeds from prepayments, maturities, and sinking fund payments
from fixed maturity securities and other long-term investments to allocate more
funds into mortgage loan investments at higher investment yields. Mortgage loans
increased by
of the investment portfolio should provide meaningful increases to net
investment income over the upcoming years. Similarly, new cash receipts from
annuity considerations and premiums plan to be allocated in a similar manner to
maximize total revenues. We continue to invest our excess cash in higher
yielding investments as suitable options become available.
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The Company also recognized an increase in deferred acquisition costs as a
result of the new sales production in 2021. Other assets that materially
increased were federal income taxes recoverable on taxes withheld from cash
receipts on other long-term investment payments and intangible assets. The
federal income taxes recoverable balance, which is included in the other assets
line on the consolidated statements of financial position, is 100% recoverable
via tax refunds from the
capitalization of our internally developed software, and that increase in 2021
is somewhat offset by the decrease in prepaid assets in 2021 compared to 2020,
where a majority of those costs resided in the 2020 financial statements.
Policyholder liabilities include benefit reserves for both life and annuity
policies, claim reserves, deposit funds and advance premiums. Policyholder
liabilities increased
2020
in-force life insurance as well as an increase in claim reserves.
Total shareholder equity of the Company decreased from
31, 2020
decrease is mainly due to the net loss from operations of
decreased due to the reduction of net other comprehensive income by
which is due to the recognition of net realized gains and the decrease in net
unrealized gains in our fixed maturity securities portfolio compared to the
prior year. The Company also issued
increased total shareholder equity.
Liquidity and Capital Resources
Since inception, our operations have been financed primarily through an
organizational offering, three private placement offerings and an intrastate
public stock offering. Through
the sale of 14,867,097 shares and incurred offering costs of
inception through
Company's common stock for
has purchased another 111,000 shares of TRCC common stock at a cost of
since 2018. The shares were purchased to compensate agents under TRLIC's Agent
Stock Incentive Plan ("ASIP"). The Company has issued 8,930 treasury shares
under the ASIP since inception of the plan and another 39,000 treasury shares as
part of two employment agreements and/or bonuses to employees. The remaining
63,070 shares held by TRLIC and the 3,000 shares held by TRCC total 66,070
shares. These shares are held as treasury shares in the consolidated financial
statements.
We had cash and cash equivalents totaling
The Company maintains cash and cash equivalents at multiple institutions. The
accounts up to
31, 2021
government securities. We monitor the solvency of all financial institutions in
which we have funds to minimize the exposure for loss. The Company has not
experienced any losses in such accounts.
Capital provided from the public offering will provide a considerable amount of
operating funds for current and future operations of TRCC. The operations of
TRLIC should provide ample cash flows from premium income and investment income
to meet operating requirements once a sufficient book of business has been
established, or new policy sales are turned off, whichever happens first. Life
insurance contract liabilities are generally long term in nature and are
generally paid from future cash flows. The operations of TRLS and AIS should
provide sufficient cash flows from commission income to meet their operating
requirements. TRLS and AIS are also less capital intensive than TRLIC since it
does not retain any of the policy risks or capital requirements.
We believe that our existing cash and cash equivalents will be sufficient to
fund our anticipated operating expenses and capital expenditures for at least
the next 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. We are not aware of any commitments or unusual events that could
materially affect our capital resources. We are not aware of any current
recommendations by any regulatory authority which, if implemented, would have a
material adverse effect on our liquidity, capital resources or operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements. The
forward-looking statements are made pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, and include estimates and
assumptions related to economic, competitive and legislative developments.
Forward-looking statements may be identified by words such as "expects,"
"intends," "anticipates," "plans," "believes," "estimates," "will" or words of
similar meaning; and include, but are not limited to, statements regarding the
outlook of our business and financial performance. These forward-looking
statements are subject to change and uncertainty, which are, in many instances,
beyond our control and have been made based upon our expectations and beliefs
concerning future developments and their potential effect upon us.
There can be no assurance that future developments will be in accordance with
our expectations, or that the effect of future developments on us will be as
anticipated. These forward-looking statements are not a guarantee of future
performance and involve risks and uncertainties. There are certain important
factors that could cause actual results to differ, possibly materially, from
expectations or estimates reflected in such forward-looking statements.
These factors include among others:
• general economic conditions and financial factors, including the
performance and fluctuations of fixed income, equity, real estate,
credit capital and other financial markets;
• differences between actual experience regarding mortality, morbidity,
persistency, surrenders, investment returns, and our pricing assumptions
establishing liabilities and reserves or for other purposes;
• the effect of increased claims activity from natural or man-made
catastrophes, pandemic disease, or other events resulting in
catastrophic loss of life;
• inherent uncertainties in the determination of investment allowances and
impairments and in the determination of the valuation allowance on the
deferred income tax asset;
• investment losses and defaults;
• competition in our product lines;
• attraction and retention of qualified employees and agents;
• ineffectiveness of risk management policies and procedures in
identifying, monitoring and managing risks;
• the availability, affordability and adequacy of reinsurance protection;
• the effects of emerging claim and coverage issues;
• the cyclical nature of the insurance business;
• interest rate fluctuations;
• changes in our experiences related to deferred policy acquisition costs;
• the ability and willingness of counterparties to our reinsurance
arrangements and derivative instruments to pay balances due to us;
• rating agencies' actions;
• domestic or international military actions;
• the effects of extensive government regulation of the insurance
industry;
• changes in tax and securities law;
• changes in statutory or U.S. generally accepted accounting principles
("GAAP"), practices or policies;
• regulatory or legislative changes or developments;
• the effects of unanticipated events on our disaster recovery and
business continuity planning;
• failures or limitations of our computer, data security and
administration systems;
• risks of employee error or misconduct;
• the introduction of alternative healthcare solutions;
• the assimilation of life insurance businesses we acquire and the sound
management of these businesses;
• the availability of capital to expand our business; and
• Coronavirus Disease impact on the economic environment.
It is not our corporate policy to make specific projections relating to future
earnings, and we do not endorse any projections regarding future performance
made by others. In addition, we do not publicly update or revise forward-looking
statements based on the outcome of various foreseeable or unforeseeable
developments.
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