TEXAS REPUBLIC CAPITAL CORP – 10-Q – : 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 Significant Judgments and Estimates
Our management's 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
United States
statements 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 evaluate our deferred income tax assets, which partially offset our deferred
tax liabilities, for any necessary valuation allowances. In doing so, we
consider our ability and potential for recovering income taxes associated with
such assets, which involve significant judgment. Revisions to the assumptions
associated with any necessary valuation allowances would be recognized in the
financial statements in the period in which such revisions are made.
Results of Operations - Three Months 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.
March 31 , March 31,
2022 2021
Premiums and other considerations
Net investment income
363,458 290,968 Net realized investment gains (losses) 18,304 (875 ) Commission income 28,266 9,251 Total revenues$ 839,708 $ 468,960
Total revenues increased by
compared to the quarter ended
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 2022 compared to net realized losses in 2021. Also, there was a small
increase in commission income compared to the prior year. The Company also
accepted annuity considerations during 2022 and 2021. 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
of
Significant expense categories are discussed below.
Total Benefits and Claims - Increases to policyholder liabilities increased
benefits and claims expense by
2022
increase is primarily due to increases in future policy benefits and benefit
payments. Those two increases are to be expected based on new sales production,
increased insurance volume, number of insureds covered, and the passage of time
since policy issuance. This coincides with the decrease in interest credited to
policyholders as the Company looks to sell more life products and less annuity
policies. Also, benefit payments can significantly impact expenses from period
to period. There was an increase in benefit payments in 2022 compared to 2021.
Commissions - Commission expenses were
months ended
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 increased
the prior year. The increase is primarily related to the increased costs
associated with wage increases and increasing benefits costs consistent with the
price increases seen due to inflation pressures over the last year. In addition,
we chose to use more external consultants as opposed to hiring new employees for
certain tasks and roles. This decision allows us to save on benefit costs,
payroll taxes, other employee overhead expenses, and allows us to pay for their
time as needed. This decision has helped to reduce increases in salaries and
employee benefits.
Other Expenses - Third-party administration fees increased
months ended
increase was due to new sales production and the continued growth of our book of
business. Professional fees continue to be one of the larger contributing
expenses to the overall total expenses. The professional fees continue to
increase due to 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
three months ended
primarily attributable to the increases and decreases in revenues and expenses
described above.
The weighted average common shares outstanding were 14,805,194 and 14,778,725
for the three months ended
Financial Position - As of
Total assets of the Company decreased from
to
increased or decreased materially in 2022 were fixed maturity securities,
mortgage loans, and cash and cash equivalents. The Company received proceeds
from payments or sales of invested assets along with premium receipts from
policies. The Company used a majority of those funds to invest in new mortgage
loans to increase the overall investment yield of the portfolio and to increase
net investment income. Overall assets decreased primarily due to the change in
net unrealized gains in the fixed maturity securities as interest rates have
increased in the market.
Total investments increased by
additional investments made in new mortgage loans. However, it was offset by the
above mentioned reduction in fixed maturity securities. As a result, cash and
cash equivalents decreased as well as we invested more of our cash into higher
yielding invested assets as we try to maximize our net investment income to
boost total revenues. All non-operating cash is held in interest bearing cash
equivalent accounts.
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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
reallocation 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.
Policyholder liabilities include benefit reserves for both life and annuity
policies, claim reserves, deposit funds and advance premiums. Policyholder
liabilities increased by
2021
insurance volume, number of insureds covered, and the passage of time since
policy issuance.
Total shareholders' equity of the Company decreased from
The decrease is due to reduced unrealized gains in the investment portfolio at
in the market. It also decreased by the net loss for the quarter. The Company
also issued
shareholders' 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
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 44,000 treasury shares as
part of two employment agreements and/or bonuses to employees. The remaining
58,070 shares held by TRLIC and the 3,000 shares held by TRCC total 61,070
shares. These shares are held as treasury shares in the consolidated financial
statements.
We had cash and cash equivalents totaling
Company maintains cash and cash equivalents at multiple institutions. The
accounts up to
2022
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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