TEXAS REPUBLIC CAPITAL CORP – 10-Q – : Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Texas Republic Capital Corporation ("we" "us", "our", "TRCC" or the "Company")
was incorporated in May 2012 as a financial services holding company. We own and
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 Texas. As a life insurance
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 the
United States ("U.S. GAAP"). The preparation of these consolidated financial
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 (loss). 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 and Six Months Ended June 30, 2022 and 2021

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.

                                                 Three Months Ended June 30,           Six Months Ended June 30,
                                                  2022                 2021               2022              2021
Revenues
Premiums and other considerations            $      507,849       $      161,105     $       937,529      $ 330,721
Net investment income                               444,853              301,776             808,311        592,744
Net realized gains (losses) on investments             (669 )              7,554              17,635          6,679
Commission income                                    38,703               55,956              66,969         65,207
Total revenues                               $      990,736       $      526,391     $     1,830,444      $ 995,351




Total revenues increased by $464,345 and $835,093 for the three and six months
ended June 30, 2022 compared to the three and six months ended June 30, 2021.
These increases were primarily 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 increased net realized investment gains in 2022 compared to
2021. Also, there was a marginal 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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Expenses

Our expenses relate to operating a financial services holding company, a life
insurance company, and two insurance agencies.

Expenses were $1,365,938 and $2,842,507 for the three and six months ended June
30, 2022, increases of $365,223 and $714,043 from $1,000,715 and $2,128,464 for
the three and six months ended June 30, 2021, respectively. Significant expense
categories are discussed below.



Total Benefits and Claims - Increases to policyholder liabilities increased
benefits and claims expense by $141,686 and $316,352 for the three and six
months ended June 30, 2022 compared to the same period in the prior year.
Expenses were $472,155 and $1,028,568 for the three and six months ended June
30, 2022 and $330,469 and $712,216 for the three and six months ended June 30,
2021, respectively. The increases were 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 were increases in
benefit payments of $166,416 and $256,951 for the three and six months ended
June 30, 2022 compared to the same periods in the prior year.



Commissions - Commission expenses were $480,080 and $774,601 for the three and
six months ended June 30, 2022 compared to $150,185 and $323,329 for the three
and six months ended June 30, 2021, respectively. These increases are consistent
with the amounts of 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
$74,108 and $116,181 for the three and six months ended June 30, 2022 compared
to the same periods in the prior year. These increases are primarily related to
the increased costs associated with new employee hires, wage increases, and
increasing benefits costs consistent with the price increases seen due to
inflation pressures over the last year. The Company hired five new employees in
2022. Alternatively, the Company continues 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 the overall increases in salaries and employee benefits.



Other Expenses - Third-party administration fees increased $39,597 for the six
months ended June 30, 2022 compared to the same period in the prior year. That
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. Professional fees increased $52,877 for the six months ended
June 30, 2022 compared to the same period in the prior year.



Net Loss



The net loss was $1,012,063, or $(0.07) per share, for the six months ended June
30, 2022 compared to a net loss of $1,133,113 or $(0.08) per share, for the six
months ended June 30, 2021. For the three months ending June 30, the net loss
was $375,202 or $(0.03) per share in 2022 and $474,324 or $(0.03) per share in
2021. The improvement of the net loss for the three- and six- months ending June
30, 2022, was primarily attributable to the increases in revenues and expenses
described above.



The weighted average common shares outstanding and subscribed were 14,822,135
and 14,779,039 for the six months ended June 30, 2022 and 2021,
respectively. The weighted average common shares outstanding and subscribed were
14,839,075 and 14,779,352 for the three months ended June 30, 2022 and 2021,
respectively.

Financial Position - As of June 30, 2022 and December 31, 2021

Total assets of the Company decreased from $37,381,933 as of December 31, 2021
to $36,694,990 as of June 30, 2022, a decrease of $686,943. Assets that
increased or decreased materially in 2022 were fixed maturity securities,
mortgage loans, cash and cash equivalents, deferred policy acquisition costs,
and other assets. The Company received proceeds from payments or sales of
invested assets along with premium receipts from policies and continues to use 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. In
addition, deferred policy acquisition costs increased as the Company continues
to successfully sell more new business. Other assets increased due to the timing
of cash collections for transactions completed at the end of the quarter. The
cash was subsequently received in the following month after the quarter end.
Overall assets decreased though primarily due to the change in net unrealized
losses in the fixed maturity securities as interest rates have increased in the
market as a result of inflation and other economic factors.



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Total investments decreased by $1,493,629, or 5.9%. This decrease was due to
sells, payoffs, and maturities in the investment portfolio as well as the above
mentioned reduction in fixed maturity securities. The Company continues to
reinvest and deploy 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.



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 $658,518 from the prior year ended December 31, 2021. This 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 $381,652 at June 30, 2022 compared to December 31,
2021. That increase is primarily related to new sales production, increased
insurance volume, number of insureds covered, and the passage of time since
policy issuance.

Total shareholders' equity of the Company decreased from $6,611,969 as of
December 31, 2021 to $5,483,283 as of June 30, 2022, a decrease of $1,128,686.
The decrease is mainly due to a negative change of $1,104,013 in unrealized
losses in the investment portfolio at June 30, 2022 compared to December 31,
2021 because of interest rate increases in the market and the net loss for the
six months ended June 30, 2022. The Company began a rights offering during the
second quarter of 2022 and received $975,240 in proceeds from the issuance of
common stock during that period. Those proceeds plus the $12,150 of its treasury
shares issued in 2022 increased total shareholders' equity and helped offset the
decreases mentioned above.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through an
organizational offering, three private placement offerings, an intrastate public
stock offering, and a rights offering to existing shareholders only. Through
June 30, 2022, we received $21,322,225 from the sale of 15,029,637 shares and
incurred offering costs of $2,659,696. Since inception through December 31,
2018, the Company purchased 3,000 shares of the Company's common stock for
$15,000 held as treasury stock. Additionally, TRLIC has purchased another
111,000 shares of TRCC common stock at a cost of $118,210 since 2018. The shares
were purchased to compensate agents under TRLIC's Agent Stock Incentive Plan
("ASIP"). The Company has issued 16,080 treasury shares under the ASIP since
inception of the plan and another 44,000 treasury shares as part of employment
agreements and/or bonuses to employees. The remaining 50,920 shares held by
TRLIC and the 3,000 shares held by TRCC total 53,920 shares. These shares are
held as treasury shares in the consolidated financial statements.



We had cash and cash equivalents totaling $6,060,147 as of June 30, 2022. The
Company maintains cash and cash equivalents at multiple institutions. The
Federal Deposit Insurance Corporation insures interest and non-interest-bearing
accounts up to $250,000. Uninsured balances aggregate $5,069,727 as of June 30,
2022. Other funds are invested in mutual funds that invest in U.S. 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 previous offerings and current 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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