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EX-31.1 - EXHIBIT 31.1 - Investors Heritage Capital Corpex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Investors Heritage Capital Corpex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Investors Heritage Capital Corpex31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2015


 

000-01999

(Commission file number)

 

INVESTORS HERITAGE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

KENTUCKY

 

61-6030333

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

200 Capital Avenue,

Frankfort, Kentucky 40602

(Address of principal executive offices)

 

(502) 223-2361

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     

 ☐

Accelerated filer   ☐

Non-accelerated filer

 ☐ (Do not check if a smaller reporting company)

Smaller reporting company  

            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐   No ☒

 

 
1

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Capital Stock par value $1.00 per share

(Title of Class)

 

Number of outstanding shares as of May 15, 2015 - 1,123,166.033

 

 
2

 

 

CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 
   

Page

ITEM 1.

Condensed Consolidated Financial Statements

4

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

ITEM 4.

Controls and Procedures

34

     
     
     
 

PART II – OTHER INFORMATION

 
     

ITEM 1.

Legal Proceedings

35

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

ITEM 3.

Defaults Upon Senior Securities

35

ITEM 4.

Mine Safety Disclosures

35

ITEM 5.

Other Information

35

ITEM 6.

Exhibits

35

     
     

SIGNATURES

 

36

     

EXHIBIT 31.1

 

37

EXHIBIT 31.2

 

39

EXHIBIT 32

 

41

 

 

 
3

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

ITEM 1. Condensed Consolidated Financial Statements

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

 

   

March 31,

   

December 31,

 

 

 

2015

   

2014

 
ASSETS                

Investments:

               

Securities available-for-sale, at fair value:

               

Fixed maturities (amortized cost: $399,540,804 and $403,596,261)

  $ 430,771,661     $ 430,117,478  

Equity securities (cost: $6,476,827 and $6,331,436)

    7,682,294       7,405,819  

Mortgage loans on real estate

    32,416,577       29,459,436  

Policy loans

    6,716,387       6,665,493  

State-guaranteed receivables

    7,759,795       7,917,379  

Other invested assets

    3,396,033       3,270,848  

Total investments

    488,742,747       484,836,453  

Cash and cash equivalents

    5,675,143       1,870,867  

Accrued investment income

    4,452,620       5,190,740  

Due premiums

    3,156,373       3,217,136  

Deferred acquisition costs

    17,484,035       17,847,907  

Value of business acquired

    279,625       301,037  

Leased property under capital leases

    655,027       555,251  

Property and equipment

    971,150       1,000,120  

Cash value of company-owned life insurance

    12,528,527       12,441,833  

Other assets

    2,564,656       2,041,050  

Amounts recoverable from reinsurers

    56,199,042       55,910,993  

Total assets

  $ 592,708,945     $ 585,213,387  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Policy liabilities:

               

Benefit reserves

  $ 490,752,576     $ 490,126,730  

Unearned premium reserves

    7,927,412       7,812,972  

Policy claims

    2,635,852       2,821,106  

Liability for deposit-type contracts

    3,405,196       3,432,793  

Reserves for dividends and endowments and other

    398,205       391,439  

Total policy liabilities

    505,119,241       504,585,040  

Deferred federal income tax liability

    9,351,389       7,785,450  

Obligations under capital leases

    645,799       553,028  

Notes payable

    2,611,875       2,508,576  

Accrued pension liability

    4,995,939       5,141,442  

Other liabilities

    6,534,506       4,103,365  

Total liabilities

    529,258,749       524,676,901  
                 

STOCKHOLDERS' EQUITY

               

Common stock (shares issued: 1,123,980 and 1,123,980)

    1,123,980       1,123,980  

Paid-in surplus

    8,908,243       8,908,243  

Accumulated other comprehensive income

    15,946,390       12,704,319  

Retained earnings

    37,471,583       37,799,944  

Total stockholders' equity

    63,450,196       60,536,486  

Total liabilities and stockholders' equity

  $ 592,708,945     $ 585,213,387  

 

See notes to condensed consolidated financial statements.

 

 
4

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 

REVENUE

               

Premiums and other considerations

  $ 14,726,746     $ 15,232,486  

Premiums ceded

    (3,364,065 )     (3,355,650 )

Net premiums

    11,362,681       11,876,836  
                 

Investment income, net of expenses

    5,223,812       5,078,982  

Net realized gains (losses) on investments

    158,828       (3,806 )

Other income

    350,441       337,872  

Total revenue

    17,095,762       17,289,884  
                 

BENEFITS AND EXPENSES

               

Death and other benefits

    11,724,062       11,021,044  

Guaranteed annual endowments

    103,396       103,810  

Dividends to policyholders

    84,285       83,383  

Increase in benefit reserves and unearned premiums

    1,273,496       1,978,691  

Acquisition costs deferred

    (1,388,344 )     (1,751,981 )

Amortization of deferred acquisition costs

    1,633,163       1,787,601  

Commissions

    897,364       1,306,860  

Other general and administrative expenses

    2,865,069       2,828,181  

Total benefits and expenses

    17,192,491       17,357,589  
                 

LOSS BEFORE FEDERAL INCOME TAXES

    (96,729 )     (67,705 )
                 

PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES

               

Current

    80,037       26,587  

Deferred

    (104,219 )     (40,128 )

Total federal income taxes

    (24,182 )     (13,541 )
                 

NET LOSS

  $ (72,547 )   $ (54,164 )
                 

BASIC AND DILUTED NET LOSS PER SHARE

  $ (0.06 )   $ (0.05 )
                 

DIVIDENDS PER SHARE

  $ 0.21     $ 0.20  

 

See notes to condensed consolidated financial statements.

 

 
5

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 
                 

NET LOSS

  $ (72,547 )   $ (54,164 )
                 

OTHER COMPREHENSIVE INCOME:

               

Change in net unrealized gains on available-for-sale securities:

               

Unrealized holding gains arising during period

    4,999,552       7,168,195  

Reclassification adjustment for losses (gains) included in income

    (158,828 )     3,806  

Adjustment for effects of deferred acquisition costs

    (119,053 )     (191,144 )

Net unrealized gains on investments

    4,721,671       6,980,857  

Change in defined benefit pension plan:

               

Amortization of actuarial net loss in net periodic pension cost

    190,558       97,603  
                 

Other comprehensive income before income taxes

    4,912,229       7,078,460  
                 

Income tax expense

    1,670,158       2,406,676  
                 

OTHER COMPREHENSIVE INCOME, NET OF TAXES

    3,242,071       4,671,784  
                 

COMPREHENSIVE INCOME

  $ 3,169,524     $ 4,617,620  

 

See notes to condensed consolidated financial statements.

 

 
6

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

 

                   

Accumulated

                 
                   

Other

           

Total

 
   

Common

   

Paid-in

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Stock

   

Surplus

   

Income

   

Earnings

   

Equity

 
                                         

BALANCE, JANUARY 1, 2014

  $ 1,128,583     $ 8,908,243     $ 6,751,991     $ 36,858,451     $ 53,647,268  
                                         

Net loss

    -       -       -       (54,164 )     (54,164 )

Other comprehensive income, net

    -       -       4,671,784       -       4,671,784  

Cash dividends

    -       -       -       (244,554 )     (244,554 )

BALANCE, MARCH 31, 2014

  $ 1,128,583     $ 8,908,243     $ 11,423,775     $ 36,559,733     $ 58,020,334  
                                         

BALANCE, JANUARY 1, 2015

  $ 1,123,980     $ 8,908,243     $ 12,704,319     $ 37,799,944     $ 60,536,486  
                                         

Net loss

    -       -       -       (72,547 )     (72,547 )

Other comprehensive income, net

    -       -       3,242,071       -       3,242,071  

Cash dividends

    -       -       -       (255,814 )     (255,814 )

BALANCE, MARCH 31, 2015

  $ 1,123,980     $ 8,908,243     $ 15,946,390     $ 37,471,583     $ 63,450,196  

 

See notes to condensed consolidated financial statements.

 

 
7

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
                 
                 

NET CASH PROVIDED BY OPERATING ACTIVITIES

  $ 1,619,414     $ 3,479,426  
                 

INVESTING ACTIVITIES

               

Purchases of available-for-sale securities

    (8,820,837 )     (7,791,620 )

Sales of available-for-sale securities

    3,201,808       449,727  

Maturities of available-for-sale securities

    9,618,212       6,700,321  

Acquisitions of mortgage loans on real estate

    (4,820,513 )     (732,640 )

Payments of mortgage loans on real estate

    1,868,887       341,863  

Payments of state-guaranteed receivables

    298,260       298,260  

Net change in payable (receivable) for securities

    2,047,167       95,091  

Net additions in other investments

    (176,079 )     (75,317 )

Net additions to property and equipment

    (203,665 )     (120,267 )
                 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

    3,013,240       (834,582 )

FINANCING ACTIVITIES

               

Receipts from universal life policies credited to policyholder account balances

    1,061,173       1,295,052  

Return of policyholder account balances on universal life policies

    (1,992,850 )     (2,013,943 )

Payments on notes payable

    (849,876 )     (817,548 )

Proceeds from notes payable

    953,175       813,142  
                 

NET CASH USED IN FINANCING ACTIVITIES

    (828,378 )     (723,297 )

INCREASE IN CASH AND CASH EQUIVALENTS

    3,804,276       1,921,547  

Cash and cash equivalents at beginning of period

    1,870,867       4,143,291  

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 5,675,143     $ 6,064,838  

 

See notes to consolidated financial statements.

 

 
8

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

 

NOTE 1 - Nature of Operations 

Investors Heritage Capital Corporation is the holding company of Investors Heritage Life Insurance Company; Investors Heritage Printing, Inc., a printing company; Investors Heritage Financial Services Group, Inc., an insurance marketing company; is the sole member of At Need Funding, LLC, a limited liability company that provides advance funding of funerals in exchange for the irrevocable assignment of life insurance policies from other nonaffiliated companies; and is the sole member of Heritage Funding, LLC, a limited liability company that invests in various business ventures. These entities are collectively hereinafter referred to as the “Company”. In excess of 99% of Investors Heritage Capital’s consolidated revenue is generated by Investors Heritage Life.

 

Our principal operations involve the sale and administration of various insurance and annuity products, including, but not limited to, participating and non-participating whole life, limited pay life, universal life, annuity contracts, credit life, credit accident and health and group insurance policies. The principal markets for the Company’s products are in Kentucky, North Carolina, Georgia, Indiana, Michigan, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia.

 

NOTE 2 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2014, as included in our Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Management has evaluated all events subsequent to March 31, 2015 through the date that these financial statements have been issued.

 

NOTE 3 – New Accounting Pronouncements

All new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected to have a material impact to the consolidated financial statements.

 

 
9

 

 

NOTE 4 – Investments

Investments in available-for-sale securities are summarized as follows:

 

           

Gross

   

Gross

         

March 31, 2015

 

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities:

                               

U.S. government obligations

  $ 27,058,920     $ 1,136,850     $ -     $ 28,195,770  

States and political subdivisions

    37,179,634       6,168,220       10,673       43,337,181  

Corporate

    221,515,492       18,149,584       595,008       239,070,068  

Foreign

    63,756,771       3,670,266       518,776       66,908,261  

Asset-backed securities

    1,432,996       20,269       -       1,453,265  

Mortgage-backed securities (MBS):

                               

Commercial MBS

    7,705,874       413,781       -       8,119,655  

Residential MBS

    40,891,117       2,796,344       -       43,687,461  

Total fixed maturity securities

    399,540,804       32,355,314       1,124,457       430,771,661  

Equity securities:

                               

U.S. agencies

    707,900       -       -       707,900  

Mutual funds

    318,284       38,002       -       356,286  

Corporate common stock

    5,450,643       1,325,475       158,010       6,618,108  

Total equity securities

    6,476,827       1,363,477       158,010       7,682,294  

Total

  $ 406,017,631     $ 33,718,791     $ 1,282,467     $ 438,453,955  

 

           

Gross

   

Gross

         

December 31, 2014

 

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities:

                               

U.S. government obligations

  $ 28,063,178     $ 820,997     $ 16,164     $ 28,868,011  

States and political subdivisions

    38,021,271       5,985,975       -       44,007,246  

Corporate

    224,299,411       15,669,733       930,632       239,038,512  

Foreign

    63,792,040       2,934,542       751,369       65,975,213  

Asset-backed securities

    1,432,996       33,501       -       1,466,497  

Mortgage-backed securities (MBS):

                               

Commercial MBS

    7,869,355       266,831       -       8,136,186  

Residential MBS

    40,118,010       2,507,809       6       42,625,813  

Total fixed maturity securities

    403,596,261       28,219,388       1,698,171       430,117,478  

Equity securities:

                               

U.S. agencies

    707,900       -       -       707,900  

Mutual funds

    318,284       40,038       -       358,322  

Corporate common stock

    5,305,252       1,157,718       123,373       6,339,597  

Total equity securities

    6,331,436       1,197,756       123,373       7,405,819  

Total

  $ 409,927,697     $ 29,417,144     $ 1,821,544     $ 437,523,297  

 

 
10

 

 

The following table summarizes, for all securities in an unrealized loss position as of the balance sheet dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.

 

   

March 31, 2015

   

December 31, 2014

 
           

Gross

   

Number

           

Gross

   

Number

 
   

Estimated

   

Unrealized

   

of

   

Estimated

   

Unrealized

   

of

 
   

Fair Value

   

Loss

   

Securities

   

Fair Value

   

Loss

   

Securities

 

Fixed Maturities:

                                               

Less than 12 months:

                                               

States and political subdivisions

  $ 739,328     $ 10,673       1     $ -     $ -       -  

Corporate

    9,069,557       330,560       6       12,473,068       508,818       7  

Foreign

    5,981,173       258,603       4       10,374,173       310,267       7  

Residential MBS

    -       -       -       16,862       6       1  

Greater than 12 months:

                                               

U.S. government obligations

    -       -       -       7,736,774       16,164       1  

Corporate

    3,985,662       264,448       3       3,828,887       421,814       3  

Foreign

    4,899,184       260,173       2       4,724,455       441,102       2  

Total fixed maturities

    24,674,904       1,124,457       16       39,154,219       1,698,171       21  
                                                 

Equities:

                                               

Less than 12 months:

                                               

Corporate common stock

    574,114       97,184       8       527,614       103,438       4  

Greater than 12 months:

                                               

Corporate common stock

    165,471       60,826       4       525,865       19,935       4  

Total equities

    739,585       158,010       12       1,053,479       123,373       8  
                                                 

Total

  $ 25,414,489     $ 1,282,467       28     $ 40,207,698     $ 1,821,544       29  

 

As of March 31, 2015, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 90% and the equity securities had a fair value to cost ratio equal to or exceeding 69%. As of December 31, 2014, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio equal to or greater than 78%.

 

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value. For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters ended March 31, 2015 or 2014.

 

 
11

 

 

Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2015, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

 

Net unrealized gains for investments classified as available-for-sale are presented below, net of the effect on deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized.

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 

Net unrealized appreciation on available-for sale securities

  $ 32,436,324     $ 27,595,600  

Adjustment to deferred acquisition costs

    (830,703 )     (711,650 )

Deferred income taxes

    (10,745,911 )     (9,140,543 )

Net unrealized appreciation on available-for sale securities

  $ 20,859,710     $ 17,743,407  

 

The amortized cost and fair value of fixed maturity securities at March 31, 2015, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Available-for-Sale

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 

Due in one year or less

  $ 8,830,253     $ 9,030,285  

Due after one year through five years

    84,073,704       92,683,476  

Due after five years through ten years

    180,399,260       190,895,214  

Due after ten years

    52,812,115       60,644,458  

Due at multiple maturity dates

    73,425,472       77,518,228  

Total

  $ 399,540,804     $ 430,771,661  

 

Proceeds for the quarters ended March 31, 2015 and 2014 from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 

Proceeds from sales and maturities

  $ 12,820,020     $ 7,150,048  

Gross realized gains

    160,792       21,672  

Gross realized losses

    (1,964 )     (25,478 )

 

 
12

 

 

The table below shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities for the quarters ended March 31, 2015 and 2014.

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 

Change in unrealized investment gains:

               

Available-for-sale:

               

Fixed maturities

  $ 4,709,640     $ 6,860,197  

Equity securities

    131,084       311,804  

Net realized investment gains (losses):

               

Available-for-sale:

               

Fixed maturities

  $ 90,859     $ -  

Equity securities

    67,969       (3,806 )

 

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At March 31, 2015 and December 31, 2014, these required deposits had a total fair value of $23,640,234 and $23,951,372, respectively.

 

The Company also engages in commercial and residential mortgage lending. As of March 31, 2015, investments in commercial and residential properties comprised 38.2% and 61.8%, respectively, of the Company’s mortgage portfolio. At December 31, 2014, investments in commercial and residential properties comprised 41.9% and 58.1%, respectively, of the Company’s mortgage portfolio.

 

All commercial mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

 

The Company purchases residential mortgage loans through the secondary market. Each mortgage loan opportunity is reviewed individually, considering both the value of the underlying property and the credit worthiness of the borrower. We are utilizing a third party servicer to administer these loans.

 

As of March 31, 2015 and December 31, 2014, there were no non-performing loans, loans on nonaccrual status, loans 90 days past due or more, loans in process of foreclosure, or restructured loans. The Company experienced no mortgage loan defaults during the quarters ended March 31, 2015 and 2014.

 

 
13

 

 

The Company’s investments in mortgage loans, by state, are as follows:

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 

Florida

  $ 5,401,368     $ 6,047,236  

California

    5,078,618       4,806,451  

Illinois

    4,631,248       3,392,446  

Texas

    3,485,045       2,290,700  

Kentucky

    3,440,569       3,492,854  

Georgia

    2,710,588       3,123,530  

Ohio

    1,777,594       1,805,093  

Arizona

    1,145,494       927,600  

Tennessee

    978,461       1,054,671  

Indiana

    625,664       95,434  

West Virginia

    433,772       440,725  

Pennsylvania

    383,560       -  

Nevada

    376,000       -  

North Carolina

    358,466       359,308  

Missouri

    267,324       267,996  

New Jersey

    251,423       252,612  

South Carolina

    242,707       248,815  

Colorado

    224,666       225,772  

Massachusetts

    219,363       239,399  

Idaho

    170,680       174,433  

Kansas

    136,172       136,442  

Utah

    77,795       77,919  

Total

  $ 32,416,577     $ 29,459,436  

 

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At March 31, 2015, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

 

   

Amortized

   

Fair

 
   

Cost

   

Value

 

Due in one year or less

  $ 739,517     $ 755,505  

Due after one year through five years

    2,476,155       2,750,467  

Due after five years through ten years

    3,011,141       3,859,923  

Due after ten years

    1,532,982       2,284,232  

Total

  $ 7,759,795     $ 9,650,127  

 

 
14

 

 

 

The amortized cost of state-guaranteed receivables, by state, is summarized as follows:

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 

New York

  $ 3,579,778     $ 3,694,805  

Massachusetts

    1,953,718       1,969,570  

Georgia

    1,447,195       1,467,774  

Pennsylvania

    305,144       299,851  

Texas

    231,722       227,649  

California

    171,233       188,131  

Ohio

    71,005       69,599  

Total

  $ 7,759,795     $ 7,917,379  

 

Major categories of net investment income are summarized as follows: 

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 

Fixed maturities

  $ 4,637,808     $ 4,709,081  

Equity securities

    63,291       51,637  

Mortgage loans on real estate

    558,396       303,876  

Policy loans

    118,740       116,929  

State-guaranteed receivables

    140,675       143,795  

Other

    60,652       57,057  

Gross investment income

    5,579,562       5,382,375  

Investment expenses

    355,750       303,393  

Net investment income

  $ 5,223,812     $ 5,078,982  

 

NOTE 5 – Fair Values of Financial Instruments

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction.  The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction.  Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

 

The Company holds fixed maturities and equity securities that are measured and reported at fair market value on the balance sheet. The Company is also required to disclose fair value estimates for other financial instruments not required to be carried at market value on the balance sheet. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

 

 
15

 

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

 

Valuation of Investments Reported at Fair Value in Financial Statements

 

The Company’s Level 1 investments include equity securities that are traded in an active exchange market, as well as one U.S. agency equity security whose value is set by government statute.

 

The Company’s Level 2 investments include fixed maturities with quoted prices that are traded less frequently than exchange-traded instruments or instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes the majority of our fixed maturities, where fair values are obtained from a nationally recognized, third-party pricing service.

 

The Company’s Level 3 investments include financial instruments whose value cannot be obtained through a pricing service and must be determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category currently includes one private equity investment where independent pricing inputs were not able to be obtained. For fixed maturities that may fall within this level, the Company utilizes the assistance of its third-party investment advisor to estimate the fair value based on non-binding broker quotes and internal models using unobservable assumptions about market participants. For the private equity investment, the Company establishes fair value based on the most recent trading activity as well as a review of the underlying financial statements of the entity.

 

 
16

 

 

The following table presents the Company’s fair value hierarchy for those financial instruments measured and reported at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.

 

   

March 31, 2015

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturities:

                               

U.S. government obligations

  $ -     $ 28,195,770     $ -     $ 28,195,770  

States and political subdivisions

    -       43,337,181       -       43,337,181  

Corporate

    -       239,070,068       -       239,070,068  

Foreign

    -       66,908,261       -       66,908,261  

Asset-backed securities

    -       1,453,265       -       1,453,265  

Mortgage-backed securities:

                               

Commercial MBS

    -       8,119,655       -       8,119,655  

Residential MBS

    -       43,687,461       -       43,687,461  

Total fixed maturities

  $ -     $ 430,771,661     $ -     $ 430,771,661  
                                 

Equity securities:

                               

U.S. agencies

  $ 707,900     $ -     $ -     $ 707,900  

Mutual funds

    356,286       -       -       356,286  

Corporate common stock

    6,266,108       -       352,000       6,618,108  

Total equity securities

  $ 7,330,294     $ -     $ 352,000     $ 7,682,294  

 

   

December 31, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturities:

                               

U.S. government obligations

  $ -     $ 28,868,011     $ -     $ 28,868,011  

States and political subdivisions

    -       44,007,246       -       44,007,246  

Corporate

    -       239,038,512       -       239,038,512  

Foreign

    -       65,975,213       -       65,975,213  

Asset-backed securities

    -       1,466,497       -       1,466,497  

Mortgage-backed securities:

                               

Commercial MBS

    -       8,136,186       -       8,136,186  

Residential MBS

    -       42,625,813       -       42,625,813  

Total fixed maturities

  $ -     $ 430,117,478     $ -     $ 430,117,478  
                                 

Equity securities:

                               

U.S. agencies

  $ 707,900     $ -     $ -     $ 707,900  

Mutual funds

    358,322       -       -       358,322  

Corporate common stock

    5,955,597       -       384,000       6,339,597  

Total equity securities

  $ 7,021,819     $ -     $ 384,000     $ 7,405,819  

 

 
17

 

 

 

The following table provides a summary of changes in fair value of our Level 3 financial instruments reported at fair value for the quarters ended March 31, 2015 and 2014.

 

   

Quarter Ended March 31,

 
   

2015

   

2014

 

Corporate common stock:

               

Beginning balance

  $ 384,000     $ 384,000  

Transfers into Level 3

    -       -  

Transfers out of Level 3

    -       -  

Purchases

    -       -  

Sales

    -       -  

Total gains or losses:

               

Included in earnings

    -       -  

Included in other comprehensive income

    (32,000 )     -  

Ending balance

  $ 352,000     $ 384,000  

 

The Company experienced no transfers between Level 1 and Level 2 during the quarters ended March 31, 2015 or 2014. The Company experienced no transfers between Level 2 and Level 3 during the quarters ended March 31, 2015 or 2014. Transfers in and/or out of Level 3 are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

 

The unrealized gains (losses) on Level 3 investments are recorded as a component of accumulated other comprehensive income (loss), net of tax, in accordance with required accounting for our available-for-sale portfolio.

 

 
18

 

 

Financial Instruments Disclosed, but not Carried, at Fair Value

 

The following disclosure presents the carrying values and estimated fair values of the Company’s financial instruments disclosed, but not carried, at fair value as of March 31, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

 

   

March 31, 2015

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                                       

Mortgage loans on real estate:

                                       

Commercial

  $ 12,390,295     $ 13,050,138     $ -     $ -     $ 13,050,138  

Residential

    20,026,282       22,180,264       -       -       22,180,264  

Policy loans

    6,716,387       6,716,387       -       -       6,716,387  

State-guaranteed receivables

    7,759,795       9,650,127       -       9,650,127       -  

Other invested assets

    3,396,033       3,396,033       -       -       3,396,033  

Cash and cash equivalents

    5,675,143       5,675,143       5,675,143       -       -  

Accrued investment income

    4,452,620       4,452,620       -       -       4,452,620  

Cash value of company-owned life insurance

    12,528,527       12,528,527       -       -       12,528,527  
                                         

Liabilities:

                                       

Policyholder deposits (Investment-type contracts)

    52,964,159       55,662,540       -       -       55,662,540  

Policy claims

    2,635,852       2,635,852       -       -       2,635,852  

Obligations under capital leases

    645,799       645,799       -       -       645,799  

Notes payable

    2,611,875       2,611,875       -       -       2,611,875  

 

   

December 31, 2014

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                                       

Mortgage loans on real estate:

                                       

Commercial

  $ 12,961,492     $ 13,693,557     $ -     $ -     $ 13,693,557  

Residential

    16,497,944       18,392,927       -       -       18,392,927  

Policy loans

    6,665,493       6,665,493       -       -       6,665,493  

State-guaranteed receivables

    7,917,379       9,719,006       -       9,719,006       -  

Other invested assets

    3,270,848       3,270,848       -       -       3,270,848  

Cash and cash equivalents

    1,870,867       1,870,867       1,870,867       -       -  

Accrued investment income

    5,190,740       5,190,740       -       -       5,190,740  

Cash value of company-owned life insurance

    12,441,833       12,441,833       -       -       12,441,833  
                                         

Liabilities:

                                       

Policyholder deposits (Investment-type contracts)

    53,318,598       55,486,262       -       -       55,486,262  

Policy claims

    2,821,106       2,821,106       -       -       2,821,106  

Obligations under capital leases

    553,028       553,028       -       -       553,028