What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-17 compared with 2020-11-13 · 63 added, 115 removed, 102 unchanged (64% of the section changed)

13 unchanged sentences

In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.

The following table shows the condensed financial results of the insurance operations for three and nine months ended September 30, 2020 and 2019.

The following table shows the condensed financial results of the insurance operations for three months ended March 31, 2021 and 2020.

See Note 7 to the condensed consolidated financial statements.

Three months ended September 30

(in thousands of dollars)

Nine months ended September 30

Three months ended March 31

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

5 unchanged sentences

Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”).

Profitability for the nine months ended September 30, 2020 has increased due to a $10,478,000 increase in insurance premiums and other considerations, a $10,054,000 increase in net investment income, a $2,236,000 increase in intersegment revenue, a $686,000 increase in gains on investments and other assets primarily due to a decrease in the fair value of equity securities due to the recent downturn of the economy caused by the COVID-19 Pandemic offset by a decrease in impairment losses on commercial real estate, a $100,000 increase in other revenues, and a $238,000 decrease in interest expense.

This increase was partially offset by a $14,456,000 increase in death, surrenders and other policy benefits, a $5,907,000 increase in selling, general and administrative expenses, a $1,127,000 increase in future policy benefits, and a $980,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019.

See Note 15 to the condensed consolidated financial statements.

This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and selling, general and administrative expenses.

Profitability for the three months ended March 31, 2021 has increased due to a $3,707,000 increase in gains on investments and other assets primarily due to an increase in the fair value of equity securities, a $2,783,000 decrease in future policy benefits, a $1,059,000 increase in insurance premiums and other considerations, a $994,000 increase in intersegment revenue, a $980,000 decrease in selling, general and administrative expenses, a $887,000 increase in net investment income, a $253,000 decrease in interest expense, an $85,000 increase in other revenues, and a $59,000 decrease in intersegment interest expense and other expenses.

This increase was partially offset by a $4,912,000 increase in death, surrenders and other policy benefits and a $131,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

Cemetery and Mortuary Operations

6 unchanged sentences

The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.

The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine months ended September 30, 2020 and 2019.

The following table shows the condensed financial results of the cemetery and mortuary operations for the three months ended March 31, 2021 and 2020.

See Note 7 to the condensed consolidated financial statements.

Three months ended September 30

(in thousands of dollars)

Nine months ended September 30

Three months ended March 31

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

4 unchanged sentences

Earnings before income taxes

Profitability in the nine months ended September 30, 2020 has increased due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, an $867,000 increase in mortuary at-need sales, and an $82,000 increase in net investment income.

This increase was partially offset by a $997,000 decrease in gains on investments and other assets primarily attributable to a $564,000 decrease in gains on real estate sales and a $433,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 Pandemic, an $801,000 increase in selling, general and administrative expenses, and a $357,000 increase in costs of goods sold.

Profitability in the three months ended March 31, 2021 has increased due to a $1,458,000 increase in gains on investments and other assets primarily attributable to a $649,000 increase in gains on real estate sales and an $810,000 increase in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments, an $827,000 increase in cemetery pre-need sales, a $398,000 increase in cemetery at-need sales, a $259,000 increase in mortuary at-need sales, a $69,000 decrease in amortization of deferred policy acquisition costs, a $48,000 decrease in interest expense, a $25,000 increase in net investment income, a $19,000 decrease in intersegment interest expense and other expenses, and a $17,000 increase in other revenues.

This increase was partially offset by a $242,000 increase in selling, general and administrative expenses, a $258,000 increase in costs of goods sold, and a $26,000 decrease in intersegment revenues.

Mortgage Operations

2 unchanged sentences

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 and unaffiliated financial institutions.

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.

2 unchanged sentences

These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

For the nine months ended September 30, 2020 and 2019, SecurityNational Mortgage originated 14,462 loans ($3,708,810,000 total volume) and 7,817 loans ($1,792,058,000 total volume), respectively.

For the nine months ended

September 30, 2020 and 2019, EverLEND Mortgage originated 400 loans ($115,519,000 total volume) and 185 loans ($48,494,000 total volume), respectively.

During the COVID-19 pandemic, the demand for mortgage loans has remained steady.

For the three months ended March 31, 2021 and 2020, SecurityNational Mortgage originated 5,361 loans ($1,415,821,000 total volume) and 3,067 loans ($769,309,000 total volume), respectively.

For the three months ended March 31, 2021 and 2020, EverLEND Mortgage originated 110 loans ($34,020,000 total volume) and 86 loans ($22,885,000 total volume), respectively.

During the COVID-19 pandemic, the demand for mortgage loans has increased.

The Company has seen most markets increase their demand for new homes and refinances on existing homes.

The Company has transitioned 90% of its processes to a work from home environment.

The largest hurdle that the Company faces is being able to process all applications in a timely manner.

The following table shows the condensed financial results of the mortgage operations for the three and nine months ended September 30, 2020 and 2019.

The following table shows the condensed financial results of the mortgage operations for the three months ended March 31, 2021 and 2020.

See Note 7 to the condensed consolidated financial statements.

Three months ended September 30

(in thousands of dollars)

Nine months ended September 30

Three months ended March 31

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

Income from loan originations

Secondary gains from investors

Income from loan originations

Change in fair value of loans held for sale

Change in fair value of loan commitments

Net investment income

2 unchanged sentences

Included in other revenues is service fee income.

The increase in earnings for the nine months ended September 30, 2020 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

The increase in earnings for the three months ended March 31, 2021 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

This increase in earnings is primarily attributable to a $41,798,000 increase in secondary gains from investors, a $1,622,000 increase in other revenues, and a $1,208,000 increase in income from loan originations.

This increase was partially offset by a $16,264,000 increase in commissions, by a $7,328,000 decrease in the fair value of loans held for sale, a $2,960,000 decrease in the fair value of loan commitments, a $5,666,000 increase in personnel expenses, a $2,548,000 increase in other expenses, a $1,008,000 increase in intersegment interest expense, a $981,000 increase in costs related to funding mortgage loans, a $735,000 increase in advertising expenses, a $308,000 increase in interest expense, and a $252,000 increase in rent and rent related expenses.

Mortgage Loan Loss Settlements

1 unchanged sentence

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, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.

Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1.

Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.

The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of March 31, 2021 and December 31, 2020, the balances were $2,204,983 and $20,583,618, respectively.

Consolidation

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Total revenues increased by $70,825,000, or 94.0%, to $146,205,000 for the three months ended September 30, 2020, from $75,380,000 for the comparable period in 2019.

Contributing to this increase in total revenues was a $58,824,000 increase in mortgage fee income, a $4,231,000 increase in net investment income, a $3,934,000 increase in insurance premiums and other considerations, a $1,845,000 increase in net mortuary and cemetery sales, a $1,320,000 increase in gains on investments and other assets, and a $671,000 increase in other revenues.

Insurance premiums and other considerations increased by $3,934,000, or 19.8%, to $23,766,000 for the three months ended September 30, 2020, from $19,832,000 for the comparable period in 2019.

This increase was primarily due to $2,715,000 from the acquisition of Kilpatrick Life in December 2019.

See Note 15 to the condensed consolidated financial statements.

This increase was also due to an 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 $4,231,000, or 40.4%, to $14,709,000 for the three months ended September 30, 2020, from $10,478,000 for the comparable period in 2019.

This increase was primarily attributable to a $2,360,000 increase in mortgage loan interest ($545,000 due to the acquisition of Kilpatrick Life), a $740,000 increase in rental income from real estate held for investment ($52,000 due to the acquisition of Kilpatrick Life), a $628,000 increase in fixed maturity securities income ($719,000 due to the acquisition of Kilpatrick Life), a $710,000 increase in insurance assignment income, a $151,000 increase in policy loan income ($133,000 due to the acquisition of Kilpatrick Life), and a $52,000 increase in equity securities income.

This increase was partially offset by a $334,000 decrease in interest on cash and cash equivalents and a $76,000 increase in investment expenses.

Net mortuary and cemetery sales increased by $1,845,000, or 52.3%, to $5,371,000 for the three months ended September 30, 2020, from $3,526,000 for the comparable period in 2019.

This increase was primarily due to a $737,000 increase in cemetery at-need sales, a $647,000 increase in mortuary at-need sales, and a $461,000 increase in cemetery pre-need sales.

Gains on investments and other assets increased by $1,320,000, or 254.0%, to gains of $800,000 for the three months ended September 30, 2020, from losses of $520,000 for the comparable period in 2019.

This increase in gains on investments and other assets was primarily due a $787,000 increase in gains ($338,000 due to the acquisition of Kilpatrick Life) on other assets mostly attributable to a decrease in impairment losses on commercial real estate.

This increase in gains on investments and other assets was also due to a $619,000 increase in gains on equity securities ($149,000 due to the acquisition of Kilpatrick Life) mostly attributable to increases in the fair value of these equity securities.

Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income.

This decrease in gains on investments and other assets was partially offset by a $86,000 decrease in gains on fixed maturity securities.

Mortgage fee income increased by $58,824,000, or 148.0%, to $98,560,000, for the three months ended September 30, 2020, from $39,736,000 for the comparable period in 2019.

This increase was primarily due to a $43,054,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $13,412,000 increase in loan fees and interest income, and a $3,515,000 increase in the fair value of loans held for sale and loan commitments.

This increase in mortgage fee income was partially offset by a $1,157,000 increase in the provision for loan loss reserve.

Other revenues increased by $671,000, or 28.8%, to $2,997,000 for the three months ended September 30, 2020, from $2,326,000 for the comparable period in 2019.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Total revenues increased by $43,050,000, or 54.1%, to $122,659,000 for the three months ended March 31, 2021, from $79,609,000 for the comparable period in 2020.

Contributing to this increase in total revenues was a $32,717,000 increase in mortgage fee income, a $5,172,000 increase in gains on investments and other assets, a $1,484,000 increase in net mortuary and cemetery sales, a $1,724,000 increase in other revenues, a $1,059,000 increase in insurance premiums and other considerations, and an $894,000 increase in net investment income.

Insurance premiums and other considerations increased by $1,059,000, or 4.8%, to $23,350,000 for the three months ended March 31, 2021, from $22,291,000 for the comparable period in 2020.

This increase was due to an 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 $894,000, or 6.7%, to $14,294,000 for the three months ended March 31, 2021, from $13,400,000 for the comparable period in 2020.

This increase was primarily attributable to a $1,047,000 increase in insurance assignment income, a $431,000 increase in mortgage loan interest, and a $36,000 increase in equity securities income.

This increase was partially offset by a $258,000 decrease in interest on cash and cash equivalents, a $137,000 increase in investment expenses, a $111,000 decrease in rental income from real estate held for investment, a $101,000 decrease in fixed maturity securities income, an $11,000 decrease in income on other investments, and a $2,000 decrease in policy loan income.

Net mortuary and cemetery sales increased by $1,484,000, or 33.3%, to $5,942,000 for the three months ended March 31, 2021, from $4,458,000 for the comparable period in 2020.

This increase was primarily due to an $827,000 increase in cemetery pre-need sales, a $398,000 increase in cemetery at-need sales, and a $259,000 increase in mortuary at-need sales.

Gains on investments and other assets increased by $5,172,000, or 161.0%, to gains of $1,960,000 for the three months ended March 31, 2021, from losses of $3,212,000 for the comparable period in 2020.

This increase in gains on investments and other assets was primarily due a $1,318,000 increase in gains on other assets mostly attributable to increases in the the fair value of call and put option derivatives.

This increase in gains on investments and other assets was also due to a $3,878,000 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 partially offset by a $23,000 decrease in gains on fixed maturity securities.

Mortgage fee income increased by $32,717,000, or 81.2%, to $72,999,000, for the three months ended March 31, 2021, from $40,282,000 for the comparable period in 2020.

This increase was primarily due to a $41,798,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market and a $1,208,000 increase in loan fees and interest income net of an increase in the provision for loan loss reserve.

This increase in mortgage fee income was partially offset by a $7,328,000 decrease in the fair value of loans held for sale and a $2,960,000 decrease in the the fair value of loan commitments.

Other revenues increased by $1,724,000, or 72.2%, to $4,114,000 for the three months ended March 31, 2021, from $2,390,000 for the comparable period in 2020.

This increase was primarily attributable to an increase in servicing fee revenue.

Total benefits and expenses were $107,621,000, or 73.6% of total revenues, for the three months ended September 30, 2020, as compared to $70,620,000, or 93.7% of total revenues, for the comparable period in 2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $5,421,000 or 32.7%, to $21,976,000 for the three months ended September 30, 2020, from $16,555,000 for the comparable period in 2019.

This increase was primarily the result of a $6,089,000 increase in death benefits ($2,290,000 due to the acquisition of Kilpatrick Life and $2,045,000 for COVID-19 related deaths) and a $420,000 increase in surrender and other policy benefits ($279,000 due to the acquisition of Kilpatrick Life).

This increase was partially offset by a $1,088,000 decrease in future policy benefits ($166,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $763,000, or 21.9%, to $4,240,000 for the three months ended September 30, 2020, from $3,477,000 for the comparable period in 2019.

Selling, general and administrative expenses increased by $30,334,000, or 63.5%, to $78,142,000 for the three months ended September 30, 2020, from $47,808,000 for the comparable period in 2019.

This increase was primarily the result of a $21,048,000 increase in commissions, a $5,412,000 increase in personnel expenses, a $2,347,000 increase in other expenses, a $1,140,000 increase in costs related to funding mortgage loans, a $245,000 increase in advertising expenses, a $94,000 increase in depreciation on property and equipment, and a $48,000 increase in rent and rent related expenses.

Most of these increases are attributable to the mortgage segment due to

the increase in mortgage loan originations and refinancings, most notably $38,936,000 in commissions, $3,904,000 in personnel expenses, $2,254,000 in other expenses, and $251,838 in advertising expenses.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $490,000 in personnel expenses, $382,000 in other expenses, and $171,000 in commissions.

Interest expense increased by $284,000, or 13.7%, to $2,363,000 for the three months ended September 30, 2020, from $2,079,000 for the comparable period in 2019.

Total benefits and expenses were $106,304,000, or 86.7% of total revenues, for the three months ended March 31, 2021, as compared to $78,135,000, or 98.1% 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 $2,128,000 or 9.9%, to $23,644,000 for the three months ended March 31, 2021, from $21,516,000 for the comparable period in 2020.

This increase was primarily the result of a $4,904,000 increase in death benefits (approximately $4,100,000 for COVID-19 related deaths) and a $7,000 increase in surrender and other policy benefits.

This increase was partially offset by a $2,783,000 decrease in future policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $62,000, or 1.8%, to $3,577,000 for the three months ended March 31, 2021, from $3,515,000 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 $25,714,000, or 51.0%, to $76,157,000 for the three months ended March 31, 2021, from $50,443,000 for the comparable period in 2020.

This increase was primarily the result of a $16,175,000 increase in commissions, a $5,652,000 increase in personnel expenses, a $1,874,000 increase in other expenses, a $981,000 increase in costs related to funding mortgage loans, a $796,000 increase in advertising expenses, and a $251,000 increase in rent and rent related expenses.

Most of these increases are

attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $16,264,000 in commissions, $5,666,000 in personnel expenses, $2,548,000 in other expenses, $735,000 in advertising expenses, and $252,000 in rent and rent related expenses.

Interest expense increased by $7,000, or 0.4%, to $1,826,000 for the three months ended March 31, 2021, from $1,819,000 for the comparable period in 2020.

This increase was primarily due to an increase of $308,000 in interest expense on mortgage warehouse lines for loans held for sale.

This increase was partially offset by a $301,000 decrease in interest expense on bank loans collateralized by real estate held for investment.

Cost of goods and services sold-mortuaries and cemeteries increased by $198,000, or 28.2%, to $899,000 for the three months ended September 30, 2020, from $701,000 for the comparable period in 2019.

This increase was primarily due to an $85,000 increase in mortuary at-need sales, a $61,000 increase in cemetery at-need sales, and a $51,000 increase in cemetery pre-need sales.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Total revenues increased by $139,156,000, or 67.8%, to $344,475,000 for the nine months ended September 30, 2020, from $205,319,000 for the comparable period in 2019.

Contributing to this increase in total revenues was a $115,048,000 increase in mortgage fee income, a $10,478,000 increase in insurance premiums and other considerations, a $10,011,000 increase in net investment income, a $3,325,000 increase in net mortuary and cemetery sales, and a $729,000 increase in other revenues.

This increase in total revenues was partially offset by a $435,000 decrease in gains on investments and other assets.

Insurance premiums and other considerations increased by $10,478,000, or 17.9%, to $68,983,000 for the nine months ended September 30, 2020, from $58,505,000 for the comparable period in 2019.

This increase was primarily due to $8,560,000 from the acquisition of Kilpatrick Life in December 2019.

See Note 15 to the condensed consolidated financial statements.

Net investment income increased by $10,011,000, or 32.2%, to $41,072,000 for the nine months ended September 30, 2020, from $31,061,000 for the comparable period in 2019.

This increase was primarily attributable to a $4,967,000 increase in mortgage loan interest ($1,611,000 due to the acquisition of Kilpatrick Life), a $2,674,000 increase in rental income from real estate held for investment ($145,000 due to the acquisition of Kilpatrick Life), a $1,663,000 increase in fixed maturity securities income ($1,799,000 due to the acquisition of Kilpatrick Life), a $1,273,000 increase in insurance assignment income, a $447,000 increase in policy loan income ($401,000 due to the acquisition of Kilpatrick Life), and a $102,000 increase in equity securities income.

This increase was partially offset by a $978,000 decrease in interest on cash and cash equivalents ($120,000 increase due to the acquisition of Kilpatrick Life), a $81,000 decrease in other investment income ($25,000 increase due to the acquisition of Kilpatrick Life), and a $56,000 increase in investment expenses ($169,000 increase due to the acquisition of Kilpatrick Life)

Net mortuary and cemetery sales increased by $3,325,000, or 29.7%, to $14,531,000 for the nine months ended September 30, 2020, from $11,206,000 for the comparable period in 2019.

Cost of goods and services sold-mortuaries and cemeteries increased by $258,000, or 30.6%, to $1,100,000 for the three months ended March 31, 2021, from $842,000 for the comparable period in 2020.

This increase was primarily due to a $163,000 increase in cemetery pre-need sales, a $58,000 increase in cemetery at-need sales, and a $37,000 increase in mortuary at-need sales.

Gains on investments and other assets decreased by $435,000, or 166.4%, to losses of $174,000 for the nine months ended September 30, 2020, from gains of $261,000 for the comparable period in 2019.

This decrease in gains on investments and other assets was primarily due a $1,340,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, due to the recent downturn of the economy caused by the COVID-19 Pandemic.

Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income.

This decrease in gains on investments and other assets was also due to a $91,000 decrease in gains on fixed maturity securities.

This decrease was partially offset by a $996,000 increase in gains on other assets mostly attributable to a decrease in impairment losses on commercial real estate held for sale.

Mortgage fee income increased by $115,049,000, or118.4%, to $212,210,000, for the nine months ended September 30, 2020, from $97,161,000 for the comparable period in 2019.

This increase was primarily due to a $84,781,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $20,604,000 increase in loan fees and interest income, and a $12,704,000 increase in the fair value of loans held for sale and loan commitments.

This increase in mortgage fee income was partially offset by a $3,040,000 increase in the provision for loan loss reserve.

Other revenues increased by $729,000, or 10.2%, to $7,854,000 for the nine months ended September 30, 2020, from $7,125,000 for the comparable period in 2019.

This increase was primarily attributable to an increase in servicing fee revenue.

Total benefits and expenses were $277,223,000, or 80.5% of total revenues, for the nine months ended September 30, 2020, as compared to $193,503,000, or 94.2% of total revenues, for the comparable period in 2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $15,582,000 or 31.8%, to $64,521,000 for the nine months ended September 30, 2020, from $48,939,000 for the comparable period in 2019.

This increase was primarily the result of a $13,757,000 increase in death benefits ($6,744,000 due to the acquisition of Kilpatrick Life and $3,338,000 for COVID-19 related deaths), a $1,127,000 increase in future policy benefits ($2,096,000 due to the acquisition of Kilpatrick Life) and a $699,000 increase in surrender and other policy benefits ($840,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,103,000, or 11.4%, to $10,782,000 for the nine months ended September 30, 2020, from $9,679,000 for the comparable period in 2019.

This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs and $152,000 due to the acquisition of Kilpatrick Life.

Selling, general and administrative expenses increased by $65,969,000, or 51.7%, to $193,456,000 for the nine months ended September 30, 2020, from $127,487,000 for the comparable period in 2019.

This increase was primarily the result of a $41,313,000 increase in commissions, a $13,941,000 increase in personnel expenses, a $7,926,000 increase in other expenses, a $2,561,000 increase in costs related to funding mortgage loans, a $256,000 increase in depreciation on property and equipment, and a $275,000 increase in advertising expenses.

This increase was partially offset by a $303,000 decrease in rent and rent related expenses.

Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $40,244,000 in commissions, $9,111,000 in personnel expenses, and $6,873,000 in other expenses.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $1,707,000 in personnel expenses, $1,341,000 in other expenses, and $1,086,000 in commissions.

Interest expense increased by $710,000, or 13.3%, to $6,063,000 for the nine months ended September 30, 2020, from $5,353,000 for the comparable period in 2019.

This increase was primarily due to a $1,001,000 increase in interest expense on mortgage warehouse lines for loans held for sale offset by a $260,000 decrease in interest on bank loans collateralized by real estate held for investment.

Cost of goods and services sold-mortuaries and cemeteries increased by $357,000, or 17.4%, to $2,402,000 for the nine months ended September 30, 2020, from $2,045,000 for the comparable period in 2019.

This increase was primarily due to a $182,000 increase in cemetery at-need sales, a $99,000 increase in cemetery pre-need sales, and a $76,000 increase in mortuary at-need sales.

Liquidity and Capital Resources

3 unchanged sentences

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, 2020 and 2019, the Company's operations used cash of $164,589,000 and $62,866,000, respectively.

This decrease was due primarily to originations of mortgage loans held for sale.

During the three months ended March 31, 2021 and 2020, the Company's operations provided cash of $100,976,000 and used cash of $63,771,000, respectively.

This increase was due primarily to sales of mortgage loans 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.

7 unchanged sentences

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 $344,677,000 and $355,613,000 as of September 30, 2020 and December 31, 2019, respectively.

This represents 42.74% and 45.5% of the total investments as of September 30, 2020 and December 31, 2019, respectively.

Bonds owned by the insurance subsidiaries and classified as fixed maturity securities available for sale carried at estimated fair value amounted to $279,268,000 (at estimated fair value) and $294,384,000 (at estimated fair value) as of March 31, 2021 and December 31, 2020, respectively.

This represents 35.8% and 38.0% of the total investments as of March 31, 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, 2020, 3.6% (or $12,269,000) and at December 31, 2019, 2.2% (or $7,633,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which were considered non-investment grade.

At March 31, 2021, 4.1% (or $11,460,000) 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, 2020 and December 31, 2019, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $682,332,000 as of September 30, 2020, as compared to $414,283,000 as of December 31, 2019.

Stockholders’ equity as a percent of total capitalization was 37.7% and 47.5% as of September 30, 2020 and December 31, 2019, respectively.

At March 31, 2021 and December 31, 2020, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $517,841,000 as of March 31, 2021, as compared to $561,811,000 as of December 31, 2020.

Stockholders’ equity as a percent of total capitalization was 52.5% and 47.0% as of March 31, 2021 and December 31, 2020, respectively.

Lapse rates measure the amount of insurance terminated during a particular period.

1 unchanged sentence

The 2021 lapse rate to date has been approximately the same as 2020.

At September 30, 2020, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $74,881,000.

At March 31, 2021, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $75,104,000.

The life insurance subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.

COVID-19 Pandemic

During the first and second quarters of 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020.

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 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors.

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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 risks described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “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.

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, such as business travel restrictions and remote work arrangements.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis