Total equity decreased from $31.4 million at December 31, 2017 to $21.0 million as of
September 30, 2018. This decrease in equity of $10.3 million (32.9%) was due to a total comprehensive loss of $10.3 million comprised of a net loss of $3.4 million and other comprehensive loss
of $6.9 million. The other comprehensive loss for the period was mostly due to the reversal of unrealized gains on our fixed maturity securities available for sale.
Liquidity and Capital Resources
Our principal sources of
funds are from premium revenues, investment income, and proceeds from the sale and maturity of investments. The Companys primary uses of funds are for payment of life policy benefits, contractholder withdrawals on annuity contracts, new
business acquisition costs for our insurance operations (commissions, underwriting, and issue costs), general operating expenses, and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through
investment income and maturities, to provide for the payment of policy benefits and contractholder withdrawals.
We expect to use a significant portion of
the net proceeds from our IPO to support the growth of our business. Based on our current business plan, we expect that projected cash flows from operations, as well as the net proceeds from the IPO, will provide us with sufficient liquidity to fund
our anticipated growth for at least the next several years. However, if our growth exceeds our expectations or we have unanticipated capital requirements to support our growth, we may have to raise additional capital or take other steps to support
our premium writings, including obtaining additional reinsurance. If we cannot obtain adequate capital or reinsurance on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business,
financial condition, and results of operations could be adversely affected.
We are members of the Federal Home Loan Bank of Chicago (FHLBC).
As a member we are able to borrow on a collateralized basis from the FHLBC. We own FHLBC common stock with a book value of $10,000, which allows us to borrow from the FHLBC. Interest on borrowed funds is charged at variable or fixed rates
established from time to time by the FHLBC based on the interest rate option selected at the time of the borrowing. There were no borrowings from FHLBC during either 2018 or 2017.
Federal Lifes ability to pay dividends to the Company is limited by the insurance laws of the State of Illinois. All shareholder dividends are subject
to notice filings with the Illinois Insurance Director. The maximum amount of dividends that can be paid by Illinois life insurance companies to shareholders without 30 days prior notice to the director of the Illinois Department of Insurance is the
greater of (i) statutory net income for the preceding year or (ii) 10% of statutory surplus as of the preceding
year-end.
However, under Illinois insurance statutes, dividends may be paid only from surplus, excluding unrealized appreciation in value of investments, without prior
approval. Dividends in excess of these amounts require advance approval of the Illinois Department of Insurance. There are no limitations on the amount of dividends that Federal Lifes subsidiaries can pay to Federal Life.
Federal Life is a party to service and cost sharing agreements with Americana and FED Mutual Financial Services, Inc. pursuant to which certain costs and
expenses incurred by Federal Life on behalf of Americana and FED Mutual Financial Services, Inc. are allocated to such entities and paid to Federal Life. During the year ended December 31, 2017, Americana paid $50,000 and FED Mutual Financial
Services, Inc. paid $6,000 to Federal Life for such services. During the three and nine month periods ended September 30, 2018, Americana paid $12,500 and $37,500 and FED Mutual Financial Services, Inc. paid $1,500 and $4,500 to Federal Life
for such services. All related party transactions eliminate in consolidation.
Federal Life is also required to hold minimum levels of statutory capital
and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus required by the Compiled Statutes of Illinois was $2.0 million at December 31, 2017. Federal Lifes statutory capital and surplus at
December 31, 2017 was $14.9 million.
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