What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-14 compared with 2020-05-15 · 109 added, 56 removed, 110 unchanged (60% of the section changed)

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and (iii) capitalizing on an improving housing market by originating mortgage loans.

The Company may need to adjust its strategy temporarily to respond to the changing economic circumstances resulting from the COVID-19 Pandemic.

The Company has adjusted its strategy to respond to the changing economic circumstances resulting from the COVID-19 pandemic.

Insurance Operations

5 unchanged sentences

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.

The following table shows the condensed financial results of the insurance operations for three months ended March 31, 2020 and 2019.

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 six months ended June 30, 2020 and 2019.

See Note 7 to the condensed consolidated financial statements.

Three months ended March 31

Three months ended June 30

(in thousands of dollars)

Six months ended June 30

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

5 unchanged sentences

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

Profitability in the three months ended March 31, 2020 has decreased due to a $3,888,000 decrease in gains on investments and other assets mostly attributable to decreases in gains on equity securities of $2,772,000 and decreases in gains on call and put option derivatives of $1,028,000.

These decreases were primarily the result of decreases in the fair value of these investments due to the recent downturn of the economy caused by the COVID-19 Pandemic.

Also contributing to the decrease in profitability was a $3,534,000 increase in death, surrenders and other policy benefits, a $1,287,000 increase in future policy benefits, a $326,000 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, and a $2,744,000 increase in selling, general and administrative expenses.

Profitability for the six months ended June 30, 2020 has decreased due to a $7,946,000 increase in death, surrenders and other policy benefits, a $4,920,000 increase in selling, general and administrative expenses, a $2,215,000 increase in future policy benefits, a $661,000 decrease 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, and a $231,000 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.

This decrease was partially offset by a $6,544,000 increase in insurance premiums and a $5,961,000 increase in net investment income.

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Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.

The following table shows the condensed financial results of the cemetery and mortuary operations for the three months ended March 31, 2020 and 2019.

As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited.

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 six months ended June 30, 2020 and 2019.

See Note 7 to the condensed consolidated financial statements.

Three months ended March 31

Three months ended June 30

(in thousands of dollars)

Six months ended June 30

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

4 unchanged sentences

Earnings before income taxes

Profitability in the three months ended March 31, 2020 has decreased due to a $1,158,000 decrease in gains on investments and other assets primarily attributable to a $821,000 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 and a decrease of $298,000 in gains on real estate sales.

This decrease was partially offset by a $363,000 increase in cemetery pre-need sales, a $287,000 increase in cemetery at-need sales, a $129,000 increase in mortuary at-need sales, and a $92,000 increase in net investment income.

Profitability in the six months ended June 30, 2020 has decreased due to a $1,031,000 decrease in gains on investments and other assets primarily attributable to a $746,000 decrease in gains on real estate sales, a $285,000 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.

Also contributing to the decrease in profitability was a $702,000 increase in selling, general and administrative expenses and a $159,000 increase in costs of goods sold.

This decrease was partially offset by a $831,000 increase in cemetery pre-need sales, a $428,000 increase in cemetery at-need sales, and a $220,000 increase in mortuary at-need sales.

Mortgage Operations

The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company (formerly known as Green Street Mortgage Services, Inc.), 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.

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.

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

For the three months ended March 31, 2020 and 2019, SecurityNational Mortgage originated 3,067 loans ($769,309,000 total volume) and 1,953 loans ($419,493,000 total volume), respectively.

For the three months ended March 31, 2020 and 2019, EverLEND Mortgage originated 86 loans ($22,885,000 total volume) and 40 loans ($9,008,000 total volume), respectively.

The following table shows the condensed financial results of the mortgage operations for the three months ended March 31, 2020 and 2019.

For the six months ended June 30, 2020 and 2019, SecurityNational Mortgage originated 8,105 loans ($2,037,850,000 total volume) and 4,605 loans ($1,021,464,000 total volume), respectively.

For the six months ended June 30, 2020

and 2019, EverLEND Mortgage originated 240 loans ($67,198,000 total volume) and 110 loans ($28,792,000 total volume), respectively.

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

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 six months ended June 30, 2020 and 2019.

See Note 7 to the condensed consolidated financial statements.

Three months ended March 31

Three months ended June 30

(in thousands of dollars)

Six months ended June 30

(in thousands of dollars)

% Increase (Decrease)

Revenues from external customers

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Included in other revenues is service fee income.

The increase in earnings for the three months ended March 31, 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 six months ended June 30, 2020 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

Mortgage Loan Loss Settlements

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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 March 31, 2020 and December 31, 2019, the balances were $3,429,000 and $4,046,000, respectively.

The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of June 30, 2020 and December 31, 2019, the balances were $4,786,000 and $4,046,000, respectively.

Mortgage Loan Loss Litigation

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Consolidation

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Total revenues increased by $18,115,000, or 29.5%, to $79,609,000 for the three months ended March 31, 2020, from $61,494,000 for the comparable period in 2019.

Contributing to this increase in total revenues was a $15,803,000 increase in mortgage fee income, a $3,359,000 increase in net investment income, a $3,264,000 increase in insurance premiums and other considerations, and a $779,000 increase in net mortuary and cemetery sales.

This increase in total revenues was partially offset by a $5,019,000 decrease in gains on investments and other assets and a $71,000 decrease in other revenues.

Insurance premiums and other considerations increased by $3,264,000, or 17.2%, to $22,291,000 for the three months ended March 31, 2020, from $19,027,000 for the comparable period in 2019.

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

Total revenues increased by $50,216,000, or 73.4%, to $118,662,000 for the three months ended June 30, 2020, from $68,445,000 for the comparable period in 2019.

Contributing to this increase in total revenues was a $40,422,000 increase in mortgage fee income, a $3,279,000 increase in insurance premiums and other considerations, a $3,264,000 increase in gains on investments and other assets, a $2,422,000 increase in net investment income, a $700,000 increase in net mortuary and cemetery sales, and a $129,000 increase in other revenues.

Insurance premiums and other considerations increased by $3,280,000, or 16.7%, to $22,925,000 for the three months ended June 30, 2020, from $19,645,000 for the comparable period in 2019.

This increase was primarily due to $2,880,000 from the acquisition of Kilpatrick Life in December 2019.

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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 $3,359,000, or 33.4%, to $13,400,000 for the three months ended March 31, 2020, from $10,042,000 for the comparable period in 2019.

This increase was primarily attributable to a $1,551,000 increase in mortgage loan interest ($580,000 due to the acquisition of Kilpatrick Life), a $1,243,000 increase in rental income from real estate held for investment ($506,000 due to the acquisition of Kilpatrick Life), a $421,000 increase in fixed maturity securities income ($471,000 due to the acquisition of Kilpatrick Life), a $146,000 increase in policy loan income ($136,000 due to the acquisition of Kilpatrick Life), a $128,000 decrease in investment

expenses ($114,000 increase due to the acquisition of Kilpatrick Life), a $87,000 increase in insurance assignment income, and a $14,000 increase in equity securities income.

Net investment income increased by $2,422,000, or 23.0%, to $12,963,000 for the three months ended June 30, 2020, from $10,541,000 for the comparable period in 2019.

This increase was primarily attributable to a $1,056,000 increase in mortgage loan interest ($486,000 due to the acquisition of Kilpatrick Life), a $691,000 increase in rental income from real estate held for investment, a $614,000 increase in fixed maturity securities income ($609,000 due to the acquisition of Kilpatrick Life), a $477,000 increase in insurance assignment income, a $151,000 increase in policy loan income ($133,000 due to the acquisition of Kilpatrick Life), and a $36,000 increase in equity securities income.

This increase was partially offset by a $443,000 decrease in interest on cash and cash equivalents, a $108,000 increase in investment expenses, and a $52,000 decrease in other investment income.

Net mortuary and cemetery sales increased by $700,000, or 17.5%, to $4,701,000 for the three months ended June 30, 2020, from $4,001,000 for the comparable period in 2019.

This increase was primarily due to a $468,000 increase in cemetery pre-need sales, a $140,000 increase in cemetery at-need sales, and a $92,000 increase in mortuary at-need sales.

Gains on investments and other assets increased by $3,264,000, or 318.2%, to gains of $2,238,000 for the three months ended June 30, 2020, from losses of $1,026,000 for the comparable period in 2019.

This increase in gains on investments and other assets was primarily due a $1,682,000 increase in gains on other assets mostly attributable to increases in the fair value of call and put option derivatives and a decrease in impairment losses on commercial real estate.

This increase in gains on investments and other assets was also due to a $1,633,000 increase in gains on equity securities ($303,000 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 $51,000 decrease in gains on fixed maturity securities.

Mortgage fee income increased by $40,422,000, or 122.7%, to $73,368,000, for the three months ended June 30, 2020, from $32,946,000 for the comparable period in 2019.

This increase was primarily due to a $28,222,000 increase in secondary gains from loans sold to third-party investors, a $7,512,000 increase in loan fees and interest income, and a $6,060,000 increase in the fair value of loans held for sale and loan commitments.

This increase in mortgage fee income was partially offset by a $1,372,000 increase in the provision for loan loss reserve.

Other revenues increased by $129,000, or 5.5%, to $2,467,000 for the three months ended June 30, 2020, from $2,338,000 for the comparable period in 2019.

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

Total benefits and expenses were $91,468,000, or 77.1% of total revenues, for the three months ended June 30, 2020, as compared to $63,821,000, or 93.2% 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 $5,340,000 or 34.0%, to $21,029,000 for the three months ended June 30, 2020, from $15,689,000 for the comparable period in 2019.

This increase was primarily the result of a $4,338,000 increase in death benefits ($2,305,000 due to the acquisition of Kilpatrick Life and $1,150,000 for COVID-19 related deaths), a $928,000 increase in future policy benefits ($1,000,000 due to the acquisition of Kilpatrick Life) and a $74,000 increase in surrender and other policy benefits ($284,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $47,000, or 1.5%, to $3,027,000 for the three months ended June 30, 2020, from $3,074,000 for the comparable period in 2019.

Selling, general and administrative expenses increased by $22,285,000, or 52.3%, to $64,871,000 for the three months ended June 30, 2020, from $42,586,000 for the comparable period in 2019.

This increase was primarily the result of a $13,385,000 increase in commissions, a $4,839,000 increase in personnel expenses, a $3,149,000 increase in other expenses, a $820,000 increase in costs related to funding mortgage loans, a $95,000 increase in depreciation on property and equipment, and a $58,000 increase in advertising expenses.

This increase was partially offset by a $61,000 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 $12,954,000 in commissions,

$3,099,000 in personnel expenses, and $3,04,000 in other expenses.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $484,000 in personnel expenses, $398,000 in other expenses, and $371,000 in commissions.

Interest expense increased by $99,000, or 5.5%, to $1,881,000 for the three months ended June 30, 2020, from $1,782,000 for the comparable period in 2019.

This increase was primarily due to an increase in interest expense on mortgage warehouse lines for loans held for sale.

Cost of goods and services sold-mortuaries and cemeteries decreased by $30,000, or 4.4%, to $660,000 for the three months ended June 30, 2020, from $690,000 for the comparable period in 2019.

This decrease was primarily due to a $32,000 decrease in cemetery pre-need sales and a $31,000 decrease in mortuary at-need sales.

This decrease was partially offset by a $33,000 increase in cemetery at-need sales.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Total revenues increased by $68,332,000, or 52.6%, to $198,271,000 for the six months ended June 30, 2020, from $129,939,000 for the comparable period in 2019.

Contributing to this increase in total revenues was a $56,225,000 increase in mortgage fee income, a $6,544,000 increase in insurance premiums and other considerations, a $5,781,000 increase in net investment income, a $1,480,000 increase in net mortuary and cemetery sales, and a $57,000 decrease in other revenues.

This increase in total revenues was partially offset by a $1,755,000 decrease in gains on investments and other assets.

Insurance premiums and other considerations increased by $6,544,000, or 16.9%, to $45,216,000 for the six months ended June 30, 2020, from $38,672,000 for the comparable period in 2019.

This increase was primarily due to $5,733,000 from the acquisition of Kilpatrick Life in December 2019.

See Note 15 to the condensed consolidated financial statements.

Net investment income increased by $5,781,000, or 28.1%, to $26,363,000 for the six months ended June 30, 2020, from $20,582,000 for the comparable period in 2019.

This increase was primarily attributable to a $2,607,000 increase in mortgage loan interest ($1,066,000 due to the acquisition of Kilpatrick Life), a $1,934,000 increase in rental income from real estate held for investment, a $1,035,000 increase in fixed maturity securities income ($1,080,000 due to the acquisition of Kilpatrick Life), a $564,000 increase in insurance assignment income, a $296,000 increase in policy loan income ($268,000 due to the acquisition of Kilpatrick Life), a $51,000 increase in equity securities income, and a $19,000 decrease in investment expenses ($118,000 increase due to the acquisition of Kilpatrick Life).

This increase was partially offset by a $644,000 decrease in interest on cash and cash equivalents ($116,000 increase due to the acquisition of Kilpatrick Life) and a $81,000 decrease in other investment income ($25,000 increase due to the acquisition of Kilpatrick Life).

Net mortuary and cemetery sales increased by $779,000, or 21.2%, to $4,458,000 for the three months ended March 31, 2020, from $3,679,000 for the comparable period in 2019.

Net mortuary and cemetery sales increased by $1,480,000, or 19.3%, to $9,159,000 for the six months ended June 30, 2020, from $7,679,000 for the comparable period in 2019.

This increase was primarily due to a $832,000 increase in cemetery pre-need sales, a $428,000 increase in cemetery at-need sales, and a $220,000 increase in mortuary at-need sales.

Gains on investments and other assets decreased by $5,019,000, or 277.8%, to losses of $3,212,000 for the three months ended March 31, 2020, from gains of $1,807,000 for the comparable period in 2019.

This decrease in gains on investments and other assets was primarily due a $3,592,000 decrease in gains on equity securities ($148,000 due to the acquisition of Kilpatrick Life) 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.

Gains on investments and other assets decreased by $1,755,000, or 224.7%, to losses of $974,000 for the six months ended June 30, 2020, from gains of $781,000 for the comparable period in 2019.

This decrease in gains on investments and other assets was primarily due a $1,959,000 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 $1,472,000 decrease in gains on other assets mostly attributable to decreases in the fair value of call and put option derivatives.

This decrease in gains on investments and other assets was partially offset by a $45,000 increase in gains on fixed maturity securities ($36,000 due to the acquisition of Kilpatrick Life).

Mortgage fee income increased by $15,803,000, or 64.6%, to $40,282,000, for the three months ended March 31, 2020, from $24,479,000 for the comparable period in 2019.

This decrease in gains on investments and other assets was also due to a $290,000 decrease in gains on other assets mostly attributable to decreases in the fair value of call and put option derivatives and a $5,000 decrease in gains on fixed maturity securities.

Mortgage fee income increased by $56,225,000, or 97.9%, to $113,650,000, for the six months ended June 30, 2020, from $57,425,000 for the comparable period in 2019.

This increase was primarily due to a $38,684,000 increase in secondary gains from loans sold to third-party investors, a $10,881,000 increase in loan fees and interest income, and a $8,542,000 increase in the fair value of loans held for sale and loan commitments.

This increase in mortgage fee income was partially offset by a $1,882,000 increase in the provision for loan loss reserve.

Other revenues decreased by $71,000, or 2.9%, to $2,390,000 for the three months ended March 31, 2020, from $2,461,000 for the comparable period in 2019.

This decrease was primarily attributable to a decrease in servicing fee revenue.

Total benefits and expenses were $78,135,000, or 98.1% of total revenues, for the three months ended March 31, 2020, as compared to $59,062,000, or 96.0% 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 $4,821,000 or 28.9%, to $21,516,000 for the three months ended March 31, 2020, from $16,695,000 for the comparable period in 2019.

This increase was primarily the result of a $3,330,000 increase in death benefits ($2,522,000 due to the acquisition of Kilpatrick Life), a $1,287,000 increase in future policy benefits ($929,000 due to the acquisition of Kilpatrick Life) and a $204,000 increase in surrender and other policy benefits ($277,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $387,000, or 12.4%, to $3,515,000 for the three months ended March 31, 2020, from $3,128,000 for the comparable period in 2019.

Other revenues increased by $57,000, or 1.2%, to $4,856,000 for the six months ended June 30, 2020, from $4,799,000 for the comparable period in 2019.

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

Total benefits and expenses were $169,603,000, or 85.5% of total revenues, for the six months ended June 30, 2020, as compared to $122,883,000, or 94.6% 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 $10,161,000 or 31.4%, to $42,545,000 for the six months ended June 30, 2020, from $32,384,000 for the comparable period in 2019.

This increase was primarily the result of a $7,668,000 increase in death benefits ($4,826,000 due to the acquisition of Kilpatrick Life and $1,150,000 for COVID-19 related deaths), a $2,215,000 increase in future policy benefits ($1,930,000 due to the acquisition of Kilpatrick Life) and a $278,000 increase in surrender and other policy benefits ($561,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $340,000, or 5.5%, to $6,542,000 for the six months ended June 30, 2020, from $6,202,000 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 $26,000 due to the acquisition of Kilpatrick Life.

Selling, general and administrative expenses increased by $13,349,000, or 36.0%, to $50,443,000 for the three months ended March 31, 2020, from $37,094,000 for the comparable period in 2019.

This increase was primarily the result of a $6,880,000 increase in commissions, a $3,689,000 increase in personnel expenses, a $2,430,000 increase in other expenses, a $601,000 increase in costs related to funding mortgage loans, and a $67,000 increase in depreciation on property and equipment.

This increase was partially offset by a $290,000 decrease in rent and rent related expenses and a $28,000 decrease in advertising expenses.

Selling, general and administrative expenses increased by $35,634,000, or 44.7%, to $115,313,000 for the six months ended June 30, 2020, from $79,679,000 for the comparable period in 2019.

This increase was primarily the result of a $20,265,000 increase in commissions, a $8,528,000 increase in personnel expenses, a $5,579,000 increase in other expenses, a $1,421,000 increase in costs related to funding mortgage loans, a $162,000 increase in depreciation on property and equipment, and a $30,000 increase in advertising expenses.

This increase was partially offset by a $351,000 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 $19,405,000 in commissions, $5,207,000 in personnel expenses, and $4,619,000 in other expenses.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $953,000 in personnel expenses, $543,000 in commissions, and $618,000 in other expenses.

Interest expense increased by $327,000, or 21.9%, to $1,819,000 for the three months ended March 31, 2020, from $1,492,000 for the comparable period in 2019.

This increase was primarily due to a $305,000 increase in interest expense on mortgage warehouse lines for loans held for sale.

Cost of goods and services sold-mortuaries and cemeteries increased by $189,000, or 29.8%, to $842,000 for the three months ended March 31, 2020, from $653,000 for the comparable period in 2019.

This increase was primarily due to a $87,000 increase in cemetery at-need sales, a $80,000 increase in cemetery pre-need sales, and a $22,000 increase in mortuary at-need sales.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $1,218,000 in personnel expenses, $959,000 in other expenses, and $915,000 in commissions.

Interest expense increased by $426,000, or 13.0%, to $3,700,000 for the six months ended June 30, 2020, from $3,274,000 for the comparable period in 2019.

This increase was primarily due to a $525,000 increase in interest expense on mortgage warehouse lines for loans held for sale offset by a decrease in interest on bank loans.

Cost of goods and services sold-mortuaries and cemeteries increased by $159,000, or 11.8%, to $1,502,000 for the six months ended June 30, 2020, from $1,344,000 for the comparable period in 2019.

This increase was primarily due to a $120,000 increase in cemetery at-need sales and a $48,000 increase in cemetery pre-need sales.

This increase was partially offset by a $10,000 decrease in mortuary at-need sales.

Liquidity and Capital Resources

2 unchanged sentences

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 three months ended March 31, 2020 and 2019, the Company's operations used cash of $63,771,000 and provided cash of $19,519,000, respectively.

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 six months ended June 30, 2020 and 2019, the Company's operations used cash of $109,562,000 and $40,726,000, respectively.

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

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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 $328,772,000 and $355,613,000 as of March 31, 2020 and December 31, 2019, respectively.

This represents 42.9% and 45.5% of the total investments as of March 31, 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 $348,260,000 and $355,613,000 as of June 30, 2020 and December 31, 2019, respectively.

This represents 42.7% and 45.5% of the total investments as of June 30, 2020 and December 31, 2019, 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 March 31, 2020, 2.15% (or $7,063,000) 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 June 30, 2020, 3.3% (or $11,630,000) 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.

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 March 31, 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 $443,627,000 as of March 31, 2020, as compared to $414,283,000 as of December 31, 2019.

Stockholders’ equity as a percent of total capitalization was 42.8% and 47.5% as of March 31, 2020 and December 31, 2019, respectively.

At June 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 $569,753,000 as of June 30, 2020, as compared to $414,283,000 as of December 31, 2019.

Stockholders’ equity as a percent of total capitalization was 39.1% and 47.5% as of June 30, 2020 and December 31, 2019, respectively.

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

1 unchanged sentence

The 2020 lapse rate to date has been approximately the same as 2019.

At March 31, 2020, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $70,563,000.

At June 30, 2020, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $71,161,000.

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 quarter 2020, the outbreak of COVID-19 has spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020.

During the first and second quarters 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.

2 unchanged sentences

Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing.

These measures have disrupted and will continue to disrupt businesses globally.

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.

7 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