Management Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet
Texas Republic Capital Corporation("we" "us", "our", "TRCC" or the "Company") was incorporated in May 2012as 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 consist of bonds classified as
available for sale and are carried at fair value with unrealized capital gains and
losses, net of applicable income taxes, reported in accumulated other
overall result (loss). The amortized cost of fixed-maturity securities
available for sale is generally adjusted for premium amortization and
increase in 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. 22
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 upsell 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. 23
Policyholder 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 of Note 1 of the Notes to
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
Revenue is derived primarily from life insurance premium income and investment income.
Capital gains and losses realized on investments can have a significant impact
income 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 $ 330,721Net 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 $ 995,351Total revenues increased by $464,345and $835,093for the three and six months ended June 30, 2022compared 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. 24
Table of Contents Expenses
Our expenses relate to the operation of a financial services holding company, life insurance
insurance company and two insurance agencies.
$1,365,938and $2,842,507for the three and six months ended June 30, 2022, increases of $365,223and $714,043from $1,000,715and $2,128,464for 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 $141,686and $316,352for the three and six months ended June 30, 2022compared to the same period in the prior year. Expenses were $472,155and $1,028,568for the three and six months ended June 30, 2022and $330,469and $712,216for 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 $166,416and $256,951for the three and six months ended June 30, 2022compared to the same periods in the prior year. Commissions - Commission expenses were $480,080and $774,601for the three and six months ended June 30, 2022compared to $150,185and $323,329for 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 $74,108and $116,181for the three and six months ended June 30, 2022compared 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 $39,597for the six months ended June 30, 2022compared 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 $52,877for the six months ended June 30, 2022compared 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, 2022compared to a net loss of $1,133,113or $(0.08)per share, for the six months ended June 30, 2021. For the three months ending June 30, the net loss was $375,202or $(0.03)per share in 2022 and $474,324or $(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, 2022and 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, 2022and 2021, respectively.
Financial situation – As of
Total assets of the Company decreased from
$37,381,933as of December 31, 2021to $36,694,990as 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. 25
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 $658,518from 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 provisions for both life and annuity benefits
policies, claims reserves, cash deposits and premium advances. Insured
liabilities increased by
the volume of insurance, the number of insured persons covered and the time that has elapsed since
Total shareholders' equity of the Company decreased from
$6,611,969as of December 31, 2021to $5,483,283as of June 30, 2022, a decrease of $1,128,686. The decrease is mainly due to a negative change of $1,104,013in unrealized losses in the investment portfolio at June 30, 2022compared to December 31, 2021because 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 $975,240in proceeds from the issuance of common stock during that period. Those proceeds plus the $12,150of its treasury shares issued in 2022 increased total shareholders' equity and helped offset the decreases mentioned above.
Cash 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 $21,322,225from 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 $15,000held as treasury stock. Additionally, TRLIC has purchased another 111,000 shares of TRCC common stock at a cost of $118,210since 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 $6,060,147as of June 30, 2022. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporationinsures interest and non-interest-bearing accounts up to $250,000. Uninsured balances aggregate $5,069,727as 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 has no off-balance sheet arrangements.
SPECIAL NOTE REGARDING 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. 27