SECURITY NATIONAL FINANCIAL CORP. Discussion and analysis by management of the financial position and operating results. (form 10-Q)

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Overview



The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue to focus on: (i)
increased attention to "niche" insurance products, such as the Company's funeral
plan policies and traditional whole life products; (ii) emphasis on cemetery and
mortuary business; and (iii) capitalizing on an improving housing market by
originating mortgage loans. The Company has adjusted its strategy to respond to
the changing economic circumstances resulting from the COVID-19 pandemic.



Insurance Operations



The Company's life insurance business includes funeral plans and
interest-sensitive life insurance, as well as other traditional life, accident
and health insurance products. The Company places specific marketing emphasis on
funeral plans through pre-need planning.



A funeral plan is a small face value life insurance policy that generally has
face coverage of up to $30,000. The Company believes that funeral plans
represent a marketing niche that is less competitive because most insurance
companies do not offer similar coverage. The purpose of the funeral plan policy
is to pay the costs and expenses incurred at the time of a person's death. On a
per thousand-dollar cost of insurance basis, these policies can be more
expensive to the policyholder than many types of non-burial insurance due to
their low face amount, requiring the fixed cost of the policy administration to
be distributed over a smaller policy size, and the simplified underwriting
practices that result in higher mortality costs.



In response to the COVID-19 pandemic, the life insurance sales force began using
virtual and tele sales processes to market its products. This past quarter, the
life insurance sales force returned to in person sales, however, it continues to
use virtual and tele sales where needed. Currently, the insurance operations has
approximately 75% of its office staff working in the office with the flexibility
for hybrid-remote or completely remote working arrangements as needed.



The following table presents the summary financial results of insurance operations for the three and nine months ended. September 30, 2021 and 2020. See Note 7 to the condensed consolidated financial statements.


                                                Three months ended                               Nine months ended
                                                   September 30                                     September 30
                                            (in thousands of dollars)                        (in thousands of dollars)
                                                                  % Increase                                       % Increase
                                      2021           2020         (Decrease)           2021          2020          (Decrease)
Revenues from external customers
Insurance premiums                 $   26,446      $ 23,767                  11 %    $  74,755     $  68,983                  8 %
Net investment income                  14,116        14,240                  (1 %)      41,860        40,074                  4 %
Gains (losses) on investments
and other assets                          931           860                   8 %        3,303            71               4552 %
Other                                     546           394                  39 %        1,724         1,127                 53 %
Total                              $   42,039      $ 39,261                   7 %    $ 121,642     $ 110,255                 10 %
Intersegment revenue               $    1,757      $  2,953                 (41 %)   $   5,410     $   5,677                 (5 %)
Earnings before income taxes       $    3,721      $  4,807                
(23 %)   $  11,110     $   5,408                105 %



Intersegment revenues are primarily interest income from the warehouse line for
loans held for sale provided to SecurityNational Mortgage. Profitability for the
nine months ended September 30, 2021 has increased due to a $5,772,000 increase
in insurance premiums and other considerations, a $3,232,000 increase in gains
on investments and other assets primarily due to an increase in the fair value
of equity securities and a decrease in impairment losses on real estate held for
sale, a $1,785,000 increase in net investment income, a $1,459,000 decrease in
selling, general and administrative expenses, a $596,000 increase in other
revenues, a $164,000 decrease in interest expense, a $96,000 decrease in
intersegment selling, general and administrative expenses, and an $18,000
decrease in intersegment interest expense and other expenses. This increase was
partially offset by a $5,370,000 increase in death, surrenders and other policy
benefits, a $1,177,000 increase in amortization of deferred policy acquisition
costs and value of business acquired primarily due to an increase in the average
outstanding balance of deferred policy and pre-need acquisition costs, a
$606,000 increase in future policy benefits, and a $267,000 decrease in
intersegment revenue.



                                       51




Cemeteries and morgues operations



The Company sells mortuary services and products through its eight mortuaries in
Utah. The Company also sells cemetery products and services through its five
cemeteries in Utah and one cemetery in San Diego County, California. At-need
product sales and services are recognized as revenue when the services are
performed or when the products are delivered. Pre-need cemetery product sales
are deferred until the merchandise is delivered and services performed.
Recognition of revenue for cemetery land sales occurs when 10% of the purchase
price is received.


In response to the COVID-19 pandemic, the cemetery and mortuary's pre-need sales
force began using virtual selling processes to market its products and services
including some in home sales as local regulations permitted. This past quarter,
the sales force returned mostly to in home sales, however, it continues to use
virtual selling where needed. Currently, the cemetery and mortuary operations
office staff works in the office with the flexibility for hybrid-remote or
completely remote working arrangements as needed.



The following table shows the condensed financial results of the cemetery and
mortuary operations for the three and nine months ended September 30, 2021 and
2020. See Note 7 to the condensed consolidated financial statements.



                                                                                                       Nine months ended
                                            Three months ended September 30                               September 30
                                               (in thousands of dollars)                           (in thousands of dollars)
                                                                        % Increase                                       % Increase
                                      2021              2020            (Decrease)           2021           2020         (Decrease)
Revenues from external customers
Mortuary revenues                  $     2,191       $     2,112                    4 %   $    6,124      $  5,560                  10 %
Cemetery revenues                        3,776             3,260                   16 %       12,104         8,970                  35 %
Net investment income                      826               168                  392 %        1,297           445                 191 %
Gains (losses) on investments
and other assets                          (113 )             (67 )                 69 %          913          (244 )               474 %
Other                                       24                23                    4 %           74            85                 (13 %)
Total                              $     6,704       $     5,496                   22 %   $   20,512      $ 14,816                  38 %
Earnings before income taxes       $     1,747       $     1,322           
       32 %   $    6,718      $  2,976                 126 %



Profitability in the nine months ended September 30, 2021 has increased due to a
$2,441,000 increase in cemetery pre-need sales, a $1,157,000 increase in gains
on investments and other assets primarily attributable to a $955,000 increase in
gains on real estate sales and a $203,000 increase in the fair value of equity
securities classified as restricted assets and cemetery perpetual care trust
investments, a $851,000 increase in net investment income, a $693,000 increase
in cemetery at-need sales, a $564,000 increase in mortuary at-need sales, a
$113,000 decrease in interest expense, a $69,000 decrease in intersegment
interest expense and other expenses, and an $18,000 decrease in amortization of
deferred policy acquisition costs. This increase was partially offset by a
$1,637,000 increase in selling, general and administrative expenses, a $479,000
increase in costs of goods sold, a $38,000 decrease in intersegment revenues,
and a $10,000 decrease in other revenues.



Mortgage Operations



The Company's wholly owned subsidiaries, SecurityNational Mortgage and EverLEND
Mortgage Company, are mortgage lenders incorporated under the laws of the State
of Utah and approved and regulated by the Federal Housing Administration (FHA),
a department of the U.S. Department of Housing and Urban Development (HUD),
which originate mortgage loans that qualify for government insurance in the
event of default by the borrower, in addition to various conventional mortgage
loan products. SecurityNational Mortgage and EverLEND Mortgage originate and
refinance mortgage loans on a retail basis. Mortgage loans originated or
refinanced by the Company's mortgage subsidiaries are funded through loan
purchase agreements with Security National Life, Kilpatrick Life and
unaffiliated financial institutions.



The Company's mortgage subsidiaries receive fees from borrowers that are
involved in mortgage loan originations and refinancings, and secondary fees
earned from third party investors that purchase the mortgage loans originated by
the mortgage subsidiaries. Mortgage loans originated by the mortgage
subsidiaries are generally sold with mortgage servicing rights released to
third-party investors or retained by SecurityNational Mortgage. SecurityNational
Mortgage currently retains the mortgage servicing rights on approximately 58% of
its loan origination volume. These mortgage loans are serviced by either
SecurityNational Mortgage or an approved third-party sub-servicer.



For the nine months ended September 30, 2021 and 2020, SecurityNational Mortgage
originated 14,898 loans ($4,157,704,000 total volume) and 14,462 loans
($3,708,810,000 total volume), respectively. For the nine months ended September
30, 2021 and 2020, EverLEND Mortgage originated 260 loans ($85,368,000 total
volume) and 400 loans ($115,519,000 total volume), respectively.



Record low mortgage interest rates that prevailed during the third quarter of
2020 and into the first quarter of 2021 trended higher through the second and
third quarters of 2021. Production volumes remained strong in the second and
third quarters of 2021, particularly for purchase mortgage transactions but were
below those experienced during the earlier low interest rate period. The work
from home accommodations made by necessity in 2020 as a result of COVID-19 have
been integrated into 2021 standard operating procedures. A larger percentage of
fulfillment employees are in office in 2021 compared to 2020, however the
flexibility remains to accommodate in office or work from home functionality.



                                       52




The following table presents the condensed financial results of mortgage transactions for the three and nine months ended. September 30, 2021 and 2020. See Note 7 to the condensed consolidated financial statements.


                                               Three months ended                              Nine months ended
                                                  September 30                                    September 30
                                           (in thousands of dollars)                       (in thousands of dollars)
                                                                 % Increase                                      % Increase
                                     2021          2020          (Decrease)          2021          2020          (Decrease)
Revenues from external customers
Secondary gains from investors     $  55,441     $  70,628                (22 %)   $ 179,901     $ 151,216                 19 %
Income from loan originations         11,457        22,627                (49 %)      33,382        44,309                (25 %)
Change in fair value of loans
held for sale                           (259 )       1,404               (118 %)      (8,320 )       4,231               (297 %)
Change in fair value of loan
commitments                             (381 )       3,901               (110 %)        (549 )      12,454               (104 %)
Net investment income                    151           300                (50 %)         408           553                (26 %)
Gains on investments and other
assets                                   159             7               2171 %          199             -                100 %
Other                                  4,197         2,581                 63 %       11,744         6,641                 77 %
Total                              $  70,765     $ 101,448                (30 %)   $ 216,765     $ 219,404                 (1 %)
Earnings before income taxes       $   8,675     $  32,454                (73 %)   $  27,348     $  58,868                (54 %)




Included in other revenues is service fee income. Profitability for the nine
months ended September 30, 2021 has decreased due to a $13,304,000 increase in
personnel expenses, a $13,003,000 decrease in the fair value of loan
commitments, a $12,551,000 decrease in the fair value of loans held for sale, a
$10,926,000 decrease in income from loan originations, a $9,741,000 increase in
commissions, a $4,434,000 increase in other expenses, a $826,000 increase in
advertising expenses, a $663,000 increase in costs related to funding mortgage
loans, a $563,000 increase in rent and rent related expenses, a $145,000
decrease in net investment income, and a $89,000 decrease in intersegment
revenues. This decrease was partially offset by a $28,685,000 increase in
secondary gains from investors, a $5,103,000 increase in other revenues, a
$459,000 decrease in interest expense, a $213,000 decrease in intersegment
interest expense, a $199,000 increase in gains on investments and other assets,
and a $70,000 decrease in depreciation on property and equipment.



Mortgage Loss Settlements



Future mortgage loan losses can be extremely difficult to estimate. However,
management believes that the Company's reserve methodology and its current
practice of property preservation allow it to estimate its potential losses on
mortgage loans sold. The estimated liability for indemnification losses was
included in other liabilities and accrued expenses and, as of September 30, 2021
and December 31, 2020, the balances were $2,408,233 and $20,583,618,
respectively.



Consolidation


Three months ended September 30, 2021 Compared to the three months ended September 30, 2020

Total revenues decreased by $26,696,000, or 18.3%, to $119,509,000 for the three
months ended September 30, 2021, from $146,205,000 for the comparable period in
2020. Contributing to this decrease in total revenues was a $32,302,000 decrease
in mortgage fee income. This decrease was partially offset by a $2,679,000
increase in insurance premiums and other considerations, a $1,771,000 increase
in other revenues, a $596,000 increase in net mortuary and cemetery sales, a
$384,000 increase in net investment income, and a $176,000 increase in gains on
investments and other assets.



Mortgage fee income decreased by $32,302,000, or 32.8%, to $66,258,000 for the
three months ended September 30, 2021, from $98,560,000 for the comparable
period in 2020. This decrease was primarily due to a $15,187,000 decrease in
secondary gains from mortgage loans sold to third-party investors into the
secondary market, a $11,170,000 decrease in loan fees and interest income net of
a decrease in the provision for loan loss reserve, a $4,282,000 decrease in the
fair value of loan commitments, and a $1,663,000 decrease in the fair value
of
loans held for sale.



Insurance premiums and other considerations increased by $2,679,000, or 11.3%,
to $26,446,000 for the three months ended September 30, 2021, from $23,767,000
for the comparable period in 2020. This increase was due to a $1,676,000
increase in first year premiums as a result of increased insurance sales and a
$1,003,000 increase in renewal premiums due to the growth of the Company in
recent years, particularly in whole life products, which resulted in more
premium paying business in force.



Net investment income increased by $384,000, or 2.6%, to $15,093,000 for the
three months ended September 30, 2021, from $14,709,000 for the comparable
period in 2020. This increase was primarily attributable to a $309,000 increase
in rental income from real estate held for investment, a $254,000 decrease in
investment expenses, a $220,000 increase in insurance assignment income, a
$123,000 increase in mortgage loan interest, a $35,000 increase in income on
other investments, and a $16,000 increase in interest on cash and cash
equivalents. This increase was partially offset by a $523,000 decrease in fixed
maturity securities income, a $35,000 decrease in policy loan income, and a
$15,000 decrease in equity securities income.



Net mortuary and cemetery sales increased by $596,000, or 11.1%, to $5,968,000
for the three months ended September 30, 2021, from $5,372,000 for the
comparable period in 2020. This increase was primarily due to a $740,000
increase in cemetery pre-need sales and a $79,000 increase in mortuary at-need
sales. This increase was partially offset by a $223,000 decrease in cemetery
at-need sales.



                                       53





Gains on investments and other assets increased by $176,000, or 22.0%, to
$977,000 for the three months ended September 30, 2021, from $801,000 for the
comparable period in 2020. This increase in gains on investments and other
assets was primarily due to a $569,000 increase in gains on other assets and a
$216,000 increase in gains on fixed maturity securities. This increase in gains
on investments and other assets was partially offset by a $609,000 decrease in
gains on equity securities mostly attributable to decreases in the fair value of
these equity securities.



Other revenues increased by $1,771,000, or 59.1%, to $4,768,000 for the three
months ended September 30, 2021, from $2,997,000 for the comparable period in
2020. This increase was primarily attributable to an increase in servicing
fee
revenue.


Total benefits and expenses were $105,366,000, or 88.2% of total revenues, for
the three months ended September 30, 2021, as compared to $107,621,000, or 73.6%
of total revenues, for the comparable period in 2020.



Death benefits, surrenders and other policy benefits, and future policy benefits
increased by an aggregate of $1,961,000 or 8.9%, to $23,937,000 for the three
months ended September 30, 2021, from $21,976,000 for the comparable period in
2020. This increase was primarily the result of and a $2,592,000 increase in
future policy benefits. This increase was partially offset by a $552,000
decrease in death benefits (including, approximately, a $501,000 decrease in
COVID-19 related deaths) and a $79,000 decrease in surrender and other policy
benefits.


Amortization of deferred policy and pre-need acquisition costs and value of
business acquired increased by $470,000, or 11.1%, to $4,710,000 for the three
months ended September 30, 2021, from $4,240,000 for the comparable period in
2020. This increase was primarily due to an increase in the average outstanding
balance of deferred policy and pre-need acquisition costs.



Selling, general and administrative expenses decreased by $4,139,000, or 5.3%,
to $74,003,000 for the three months ended September 30,2021, from $78,142,000
for the comparable period in 2020. This decrease was primarily the result of a
$8,993,000 decrease in commissions, a $678,000 decrease in costs related to
funding mortgage loans, and a $104,000 decrease in depreciation on property and
equipment. This decrease was partially offset by a $3,422,000 increase in
personnel expenses, a $2,073,000 increase in other expenses, an $84,000 increase
in advertising expenses, and a $57,000 increase in rent and rent related
expenses.



Interest expense decreased by $556,000 or 23.5%, to $1,807,000 for the three
months ended September 30, 2021, from $2,363,000 for the comparable period in
2020. This decrease was primarily due to a decrease of $543,000 in interest
expense on mortgage warehouse lines for loans held for sale and a $13,000
decrease in interest expense on bank loans.



Cost of goods and services sold-mortuaries and cemeteries increased by $9,000,
or 1.0%, to $908,000 for the three months ended September 30, 2021, from
$899,000 for the comparable period in 2020. This increase was primarily due to a
$33,000 increase in cemetery at-need sales and a $27,000 increase in mortuary
at-need sales. This increase was partially offset by a $51,000 decrease in
cemetery pre-need sales.



Nine months ended September 30, 2021 Compared to the nine months ended September 30, 2020



Total revenues increased by $14,443,000, or 4.2%, to $358,918,000 for the nine
months ended September 30, 2021, from $344,475,000 for the comparable period in
2020. Contributing to this increase in total revenues was a $5,772,000 increase
in insurance premiums and other considerations, a $5,689,000 increase in other
revenues, a $4,588,000 increase in gains on investments and other assets, a
$3,698,000 increase in net mortuary and cemetery sales, and a $2,492,000
increase in net investment income. This increase was partially offset by a
$7,796,000 decrease in mortgage fee income.



Mortgage fee income decreased by $7,796,000, or 3.7%, to $204,414,000, for the
nine months ended September 30, 2021, from $212,210,000 for the comparable
period in 2020. This decrease was primarily due to a $12,551,000 decrease in the
fair value of loans held for sale, a $13,003,000 decrease in the fair value of
loan commitments, and a $10,927,000 decrease in loan fees and interest income
net of a decrease in the provision for loan loss reserve. This decrease in
mortgage fee income was partially offset by a $28,685,000 increase in secondary
gains from mortgage loans sold to third-party investors into the secondary
market.



Insurance premiums and other considerations increased by $5,772,000, or 8.4%, to
$74,755,000 for the nine months ended September 30, 2021, from $68,983,000 for
the comparable period in 2020. This increase was due to a $4,243,000 increase in
first year premiums as a result of increased insurance sales and a $1,529,000
increase in renewal premiums due to the growth of the Company in recent years,
particularly in whole life products, which resulted in more premium paying
business in force.



Net investment income increased by $2,492,000, or 6.1%, to $43,564,000 for the
nine months ended September 30, 2021, from $41,072,000 for the comparable period
in 2020. This increase was primarily attributable to a $1,874,000 increase in
mortgage loan interest, a $1,054,000 increase in insurance assignment income, a
$434,000 decrease in investment expenses, a $413,000 increase in rental income
from real estate held for investment, a $63,000 increase in income on other
investments, and a $16,000 increase in equity securities income. This increase
was partially offset by a $1,069,000 decrease in fixed maturity securities
income, a $231,000 decrease in interest on cash and cash equivalents, and a
$62,000 decrease in policy loan income.



Net mortuary and cemetery sales increased by $3,698,000, or 25.4%, to
$18,228,000 for the nine months ended September 30, 2021, from $14,530,000 for
the comparable period in 2020. This increase was primarily due to an $2,441,000
increase in cemetery pre-need sales, a $693,000 increase in cemetery at-need
sales, and a $564,000 increase in mortuary at-need sales.



Gains on investments and other assets increased by $4,588,000, or 2644.8%, to
gains of $4,414,000 for the nine months ended September 30, 2021, from losses of
$174,000 for the comparable period in 2020. This increase in gains on
investments and other assets was primarily due a $2,217,000 increase in gains on
equity securities mostly attributable to increases in the fair value of these
equity securities. This increase in gains on investments and other assets was
also due to a $2,035,000 increase in gains on other assets mostly attributable
gains on real estate and mortgage loans. This increase in gains on investments
and other assets was also due to a $336,000 increase in gains on fixed maturity
securities.



                                       54





Other revenues increased by $5,689,000, or 72.4%, to $13,542,000 for the nine
months ended September 30, 2021, from $7,853,000 for the comparable period in
2020. This increase was primarily attributable to an increase in servicing
fee
revenue.


Total benefits and expenses were $313,742,000, or 87.4% of total revenues, for
the nine months ended September 30, 2021, as compared to $277,223,000, or 80.5%
of total revenues, for the comparable period in 2020.



Death benefits, surrenders and other policy benefits, and future policy benefits
increased by an aggregate of $5,976,000 or 9.3%, to $70,497,000 for the nine
months ended September 30, 2021, from $64,521,000 for the comparable period in
2020. This increase was primarily the result of a $5,609,000 increase in death
benefits (including, approximately, $2,922,000 for COVID-19 related deaths) and
a $606,000 increase in future policy benefits. This increase was partially
offset by a $239,000 decrease in surrender and other policy benefits.



Amortization of deferred policy and pre-need acquisition costs and value of
business acquired increased by $1,159,000, or 10.8%, to $11,941,000 for the nine
months ended September 30, 2021, from $10,781,000 for the comparable period in
2020. This increase was primarily due to an increase in the average outstanding
balance of deferred policy and pre-need acquisition costs



Selling, general and administrative expenses increased by $29,640,000, or 15.3%,
to $223,096,000 for the nine months ended September 30, 2021, from $193,456,000
for the comparable period in 2020. This increase was primarily the result of a
$12,863,000 increase in personnel expenses, a $9,837,000 increase in
commissions, a $4,674,000 increase in other expenses, a $1,247,000 increase in
advertising expenses, a $663,000 increase in costs related to funding mortgage
loans, and a $519,000 increase in rent and rent related expenses. This increase
was partially offset by a $163,000 decrease in depreciation on property and
equipment.



Interest expense decreased by $736,000, or 12.1%, to $5,327,000 for the nine
months ended September 30, 2021, from $6,063,000 for the comparable period in
2020. This decrease was primarily due to a $459,000 decrease in interest expense
on mortgage warehouse lines for loans held for sale and a $277,000 decrease in
interest expense on bank loans.



Cost of goods and services sold-mortuaries and cemeteries increased by $479,000,
or 20.0%, to $2,881,000 for the nine months ended September 30, 2021, from
$2,402,000 for the comparable period in 2020. This increase was primarily due to
a $189,000 increase in cemetery pre-need sales, a $183,000 increase in cemetery
at-need sales, and a $107,000 increase in mortuary at-need sales.



Liquidity and capital resources



The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity or sale of
investments. The mortgage subsidiaries realize cash flow from fees generated by
originating and refinancing mortgage loans, and fees earned from mortgage loans
held for sale that are sold to investors into the secondary market. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term and
adequate to pay current policyholder claims, annuity payments, expenses related
to the issuance of new policies, the maintenance of existing policies, and debt
service, and to meet current operating expenses. It should be noted that current
conditions in the financial markets and economy caused by the COVID-19 pandemic
may affect the cash flows of the Company.



During the nine months ended September 30, 2021 and 2020, the Company’s operations provided liquidity of $ 128,891,000 and used money from $ 164,589,000, respectively. This increase is mainly attributable to sales of mortgages held for sale.



The Company's liability for future policy benefits is expected to be paid out
over the long-term due to the Company's market niche of selling funeral plans.
Funeral plans are small face value life insurance that will pay the costs and
expenses incurred at the time of a person's death. A person generally will keep
these policies in force and will not surrender them prior to a person's death.
Because of the long-term nature of these liabilities, the Company is able to
hold to maturity its bonds, real estate, and mortgage loans, thus reducing the
risk of having to liquidate these long-term investments as a result of any
sudden changes in their fair values.



The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held to maturity in the portfolio to help in this
timing. The Company purchases short-term investments on a temporary basis to
meet the expectations of short-term requirements of the Company's products. The
Company's investment philosophy is intended to provide a rate of return that
will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.



The Company's investment policy is to invest predominantly in fixed maturity
securities, real estate, mortgage loans, and warehousing of mortgage loans on a
short-term basis before selling the loans to investors in accordance with the
requirements and laws governing the life insurance subsidiaries. Bonds owned by
the insurance subsidiaries and classified as fixed maturity securities available
for sale carried at estimated fair value amounted to $264,562,000 (at estimated
fair value) and $294,384,000 (at estimated fair value) as of September 30, 2021
and December 31, 2020, respectively. This represents 30.9% and 38.0% of the
total investments as of September 30, 2021 and December 31, 2020, respectively.
Generally, all bonds owned by the life insurance subsidiaries are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are six categories used for rating bonds. At September 30, 2021, 4.5% (or
$11,780,000) and at December 31, 2020, 4.2% (or $12,418,000) of the Company's
total bond investments were invested in bonds in rating categories three through
six, which were considered non-investment grade.



The Company is subject to risk-based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At September 30, 2021
and December 31, 2020, the life insurance subsidiaries were in compliance with
the regulatory criteria.



                                       55




The Company's total capitalization of stockholders' equity, bank and other loans
payable was $559,903,000 as of September 30, 2021, as compared to $561,811,000
as of December 31, 2020. Stockholders' equity as a percent of total
capitalization was 53.0% and 47.0% as of September 30, 2021 and December 31,
2020, respectively.


Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2020 was 5.9% as compared
to a rate of 9.8% for 2019. The 2021 lapse rate to date has been approximately
the same as 2020.


TO September 30, 2021, the statutory capital and the combined surplus of the Company’s life insurance subsidiaries have been $ 74,042,000. Life insurance subsidiaries cannot pay a dividend to its parent company without the approval of state insurance regulators.


COVID-19 Pandemic


During 2020, the outbreak of COVID-19 had spread worldwide and was declared a
global pandemic by the World Health Organization on March 11, 2020. COVID-19,
and its variants, pose a threat to the health and economic well-being of the
Company's employees, customers, and vendors. The Company is closely monitoring
developments relating to the ongoing COVID-19 pandemic and assessing its impact
on the Company's business. The continued uncertainty surrounding the COVID-19
pandemic has had and continues to have a major impact on the global economy and
financial markets. Governments and businesses have taken numerous measures to
try to contain the virus and its variants, which include the implementation of
travel bans, self-imposed quarantine periods, social distancing, and various
mask and vaccine mandates. These measures have disrupted and will continue to
disrupt businesses globally. Governments and central banks have reacted with
significant monetary and fiscal interventions designed to stabilize the economic
conditions.



Like most businesses, COVID-19 has impacted the Company. However, the Company
cannot, with any certainty predict the severity or duration with which COVID-19
will impact the Company's business, financial condition, results of operations,
and cash flows. To the extent the COVID-19 pandemic adversely affects the
Company's business, financial condition, and results of operations, it may also
have the effect of heightening many of the other Company risks. These
uncertainties have the potential to negatively affect the risk of credit default
for the issuers of the Company's fixed maturity debt securities and individual
borrowers with mortgage loans held by the Company.



The Company has implemented risk management, business continuity plans and has
taken preventive measures and other precautions, including some remote work
arrangements. Such measures and precautions have enabled the Company to continue
to conduct business.

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