SECURITY NATIONAL FINANCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on the cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. The Company has adjusted its strategies to respond to the changing economic circumstances resulting from COVID-19. 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 Company’s life insurance sales force began using virtual and tele sales processes to market products. During the third quarter 2021, the life insurance sales force returned to in person sales, however, it continues to use virtual and tele sales where needed. Currently, approximately 75% of insurance operations office staff work 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 insurance operations for three and nine months ended September 30, 2022 and 2021. See Note 7 to the condensed consolidated financial statements. Three months ended September 30 (in thousands of dollars) Nine months ended September 30 (in thousands of dollars) 2022 2021 % Increase (Decrease) 2022 2021 % Increase (Decrease) Revenues from external customers Insurance premiums $ 26,237 $ 26,446 0 % $ 78,491 $ 74,755 5 % Net investment income 17,562 14,116 24 % 47,269 41,860 13 % Gains on investments and other assets (1,538 ) 931 (265 %) (1,697 ) 3,303 (151 %) Other 857 546 36 % 1,723 1,724 (7 %) Total $ 43,118 $ 42,039 3 % $ 125,786 $ 121,642 3 % Intersegment revenue $ 1,724 $ 1,757 (2 %) $ 5,496 $ 5,410 2 % Earnings before income taxes $ 4,234 $ 3,721 14 % $ 8,982 $ 11,110 (19 %) 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, 2022 decreased due to (a) a $5,000,000 decrease in gains on investments and other assets primarily due to a decrease in the fair value of equity securities, (b) a $3,911,000 increase in selling, general and administrative expenses, (c) a $1,620,000 increase in future policy benefits, (d) a $1,578,000 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, (e) a $1,268,000 increase in interest expense, and (f) an $2,000 decrease in other revenues, which were partially offset by (i) a $5,409,000 increase in net investment income, (ii) a $3,737,000 increase in insurance premiums and other considerations, (iii) a $1,821,000 decrease in death, surrenders and other policy benefits, (iv) a $198,000 decrease in intersegment interest expense and other expenses, and an (v) $86,000 increase in intersegment revenue. 53 Cemetery and Mortuary Operations The Company sells mortuary services and products through its nine mortuaries in Utah and three mortuaries in New Mexico. The Company also sells cemetery products and services through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. 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. During the third quarter of 2021, 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, 2022 and 2021. See Note 7 to the condensed consolidated financial statements. Three months ended September 30 (in thousands of dollars) Nine months ended September 30 (in thousands of dollars) 2022 2021 % Increase (Decrease) 2022 2021 % Increase (Decrease) Revenues from external customers Mortuary revenues $ 3,027 $ 2,191 38 % $ 9,899 $ 6,124 62 % Cemetery revenues 3,443 3,776 (9 %) 11,027 12,104 (9 %) Net investment income 681 826 (18 %) 1,917 1,297 48 % Gains (losses) on investments and other assets (640 ) (113 ) 466 % (1,615 ) 913 (277 %) Other 181 24 654 % 218 74 195 % Total $ 6,692 $ 6,704 0 % $ 21,446 $ 20,512 5 % Earnings before income taxes $ 901 $ 1,747 (48 %) $ 4,407 $ 6,718 (34 %) Profitability in the nine months ended September 30, 2022 decreased due to (a) a $2,528,000 decrease in gains on investments and other assets primarily attributable to a $579,000 decrease in gains on real estate sales and a $1,949,000 decrease in gains on equity securities classified as restricted assets and cemetery perpetual care trust investments primarily due to a decrease in the fair value of equity securities, (b) a $2,510,000 increase in selling, general and administrative expenses, (c) a $1,433,000 decrease in cemetery pre-need sales, (d) a $748,000 increase in costs of goods sold, and (e) a $173,000 increase in intersegment interest expense and other expenses, which were partially offset by (i) a $3,775,000 increase in mortuary at-need sales, (ii) a $620,000 increase in net investment income, (iii) a $356,000 increase in cemetery at-need sales, (iv) a $143,000 increase in other revenues (v) a $125,000 increase in intersegment revenues, (vi) a $54,000 decrease in interest expense, and (vii) an $8,000 decrease in amortization of deferred policy acquisition costs. 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. 54 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 8% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. In December 2021, the Company ceased operations in EverLEND Mortgage and merged its operations into SecurityNational Mortgage. Mortgage rates have followed the US Treasury yields up in response to the higher than expected inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance’. Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchase’, although not as significant as those in the refinance classification. For the nine months ended September 30, 2022 and 2021, SecurityNational Mortgage originated 8,886 loans ($2,837,349,000 total volume) and 14,898 loans ($4,157,704,000 total volume), respectively. For the nine months ended September 30, 2021, EverLEND Mortgage originated 260 loans ($85,368,000 total volume). In response to the COVID-19 pandemic, mortgage operations integrated employee work from home accommodations into its standard operating procedures. A large percentage of fulfillment employees are in office however the flexibility remains to accommodate in office or work from home functionality. The following table shows the condensed financial results of the mortgage operations for the three and nine months ended September 30, 2022 and 2021. See Note 7 to the condensed consolidated financial statements. Three months ended September 30 (in thousands of dollars) Nine months ended September 30 (in thousands of dollars) 2022 2021 % Increase (Decrease) 2022 2021 % Increase (Decrease) Revenues from external customers Secondary gains from investors $ 28,825 $ 55,441 (48 %) $ 103,220 $ 179,901 (43 %) Income from loan originations 7,069 11,457 (38 %) 26,463 33,382 (21 %) Change in fair value of loans held for sale (4,131 ) (259 ) (1495 %) (7,973 ) (8,320 ) 4 % Change in fair value of loan commitments (3,271 ) (381 ) (759 %) (2,843 ) (549 ) (418 %) Net investment income 360 151 138 % 583 408 43 % Gains on investments and other assets - 159 (100 %) 391 199 96 % Other 4,815 4,197 15 % 14,396 11,744 23 % Total $ 33,667 $ 70,765 (52 %) $ 134,237 $ 216,765 (38 %) Earnings before income taxes $ (8,437 ) $ 8,675 (197 %) $ (7,518 ) $ 27,348 (127 %) Included in other revenues is service fee income. Profitability for the nine months ended September 30, 2022 decreased due to (a) a $76,681,000 decrease in secondary gains from investors, (b) a $6,919,000 decrease in income from loan originations, (c) $2,294,000 decrease in the fair value of loan commitments, (d) a $911,000 increase in intersegment expenses, (e) a $217,000 decrease in intersegment revenues, and (e) a $32,000 increase in depreciation on property and equipment, which were partially offset by (i) a $37,978,000 decrease in commissions, (ii) a $4,918,000 decrease in other expenses, (iii) a $2,652,000 increase in other revenues, (iv) a $1,800,000 decrease in costs related to funding mortgage loans, (v) a $1,019,000 decrease in personnel expenses, (vi) a $1,154,000 decrease in advertising expenses, (vii) a $893,000 decrease in intersegment interest expense and other expenses, (viii) a $778,000 decrease in interest expense, (ix) a $347,000 increase in the fair value of loans held for sale, (x) a $282,000 decrease in rent and rent related expenses, (xi) a $192,000 increase in gains on investments and other assets, and (xii) $175,000 increase in net investment income. 55 Consolidated Results of Operations Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Total revenues decreased by $36,032,000, or 30.1%, to $83,477,000 for the three months ended September 30, 2022, from $119,509,000 for the comparable period in 2021. Contributing to this decrease in total revenues was a $37,650,000 decrease in mortgage fee income and a $3,156,000 decrease in gains on investments and other assets, a $208,000 decrease in insurance premiums and other considerations, which were partially offset by a $3,510,000 increase in net investment income, a $503,000 increase in net mortuary and cemetery sales, and a $969,000 increase in other revenues. Mortgage fee income decreased by $37,650,000, or 56.8%, to $28,608,000, for the three months ended September 30, 2022, from $66,258,000 for the comparable period in 2021. This decrease was primarily due to a $26,500,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market a $3,872,000 decrease in the fair value of loans held for sale, a $2,891,000 decrease in the fair value of loan commitments, and a $4,387,000 decrease in loan fees and interest income net of a decrease in the provision for loan loss reserve. Insurance premiums and other considerations decreased by $208,000, or 0.8%, to $26,238,000 for the three months ended September 30, 2022, from $26,446,000 for the comparable period in 2021. This decrease was primarily due to a decrease of $497,000 in renewal premiums which was partially offset by a $289,000 increase in first year premiums. Net investment income increased by $3,510,000, or 23.3%, to $18,603,000 for the three months ended September 30, 2022, from $15,093,000 for the comparable period in 2021. This increase was primarily attributable to a $3,437,000 increase in mortgage loan interest, a $610,000 increase in real estate income, a $521,000 increase in fixed maturity securities income, a $434,000 increase in interest on cash and cash equivalents, a $146,000 increase in income on other investments, and a $28,000 increase in equity securities income, which were partially offset by a $1,087,000 increase in investment expenses, a $563,000 decrease in insurance assignment income, and a $16,000 decrease in policy loan income. Net mortuary and cemetery sales increased by $503,000, or 8.4%, to $6,470,000 for the three months ended September 30, 2022, from $5,967,000 for the comparable period in 2021. This increase was primarily due to a $835,000 increase in mortuary at-need sales, which were partially offset by a $207,000 decrease in cemetery pre-need sales and a $125,000 decrease in cemetery at-need sales. Gains on investments and other assets decreased by $3,156,000, or 323.0%, to $2,179,000 in losses for the three months ended September 30, 2022, from $977,000 in gains for the comparable period in 2021. This decrease in gains on investments and other assets was primarily due to a $1,512,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, a $1,420,000 decrease in gains on other assets, and a $224,000 decrease in gains on fixed maturity securities. Other revenues increased by $969,000, or 20.3%, to $5,737,000 for the three months ended September 30, 2022, from $4,768,000 for the comparable period in 2021. This increase was primarily attributable to an increase in servicing fee revenue. Total benefits and expenses were $86,780,000, or 104.0% of total revenues, for the three months ended September 30, 2022, as compared to $105,366,000, or 88.2% of total revenues, for the comparable period in 2021. Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $1,213,000 or 5.1%, to $22,724,000 for the three months ended September 30, 2022, from $23,937,000 for the comparable period in 2021. This decrease was primarily the result of a $1,478,000 decrease in death benefits ($1,023,000 for COVID-19 related deaths), a $96,000 decrease in future policy benefits, which were partially offset by a $361,000 increase in surrender and other policy benefits. 56 Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $352,000, or 7.5%, to $5,062,000 for the three months ended September 30, 2022, from $4,710,000 for the comparable period in 2021. 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 $18,346,000, or 24.8%, to $55,657,000 for the three months ended September 30, 2022, from $74,003,000 for the comparable period in 2021. This decrease was primarily the result of a $13,765,000 decrease in commissions, a $2,597,000 decrease in other expenses, a $1,008,000 decrease in costs related to funding mortgage loans, a $729,000 decrease in personnel expenses, and $318,000 decrease in advertising expense, and a $153,000 decrease in rent and rent related expenses, which were partially offset by a $224,000 increase in depreciation on property and equipment. Interest expense increased by $329,000, or 18.2%, to $2,137,000 for the three months ended September 30, 2022, from $1,807,000 for the comparable period in 2021. This increase was primarily due to an increase of $423,000 in interest expense on bank loans, which was partially offset by a decrease of $94,000 in interest expense on mortgage warehouse lines for loans held for sale. Cost of goods and services sold-mortuaries and cemeteries increased by $292,000, or 32.2%, to $1,200,000 for the three months ended September 30, 2022, from $908,000 for the comparable period in 2021. This increase was primarily due to a $346,000 increase in mortuary at-need sales, which were partially offset by a $30,000 decrease in cemetery pre-need sales and a $24,000 decrease in cemetery at-need sales. Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Total revenues decreased by $77,448,000, or 21.6%, to $281,470,000 for the nine months ended September 30, 2022, from $358,918,000 for the comparable period in 2021. Contributing to this decrease in total revenues was a $85,431,000 decrease in mortgage fee income and a $7,335,000 decrease in gains on investments and other assets, which were partially offset by a $3,736,000 increase in insurance premiums and other considerations, a $6,205,000 increase in net investment income, a $2,698,000 increase in net mortuary and cemetery sales, and a $2,679,000 increase in other revenues. Mortgage fee income decreased by $85,431,000, or 41.8%, to $118,983,000, for the nine months ended September 30, 2022, from $204,414,000 for the comparable period in 2021. This decrease was primarily due to a $76,565,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market and a $6,919,000 decrease in loan fees and interest income net of a decrease in the provision for loan loss reserve, and a $2,294,000 decrease in the fair value of loan commitments, which were partially offset by a $347,000 increase in the fair value of loans held for sale. Insurance premiums and other considerations increased by $3,736,000, or 5.0%, to $78,491,000 for the nine months ended September 30, 2022, from $74,755,000 for the comparable period in 2021. This increase was due to an increase of $1,996,000 in renewal premiums due to the growth of the Company’s outstanding policies in recent years, particularly in whole life products, which resulted in more premium paying business in force and an increase of $1,740,000 in first year premiums as a result of increased insurance sales. Net investment income increased by $6,205,000, or 14.2%, to $49,769,000 for the nine months ended September 30, 2022, from $43,564,000 for the comparable period in 2021. This increase was primarily attributable to a $7,655,000 increase in mortgage loan interest, a $1,617,000 increase in income on real estate, a $544,000 increase in interest on cash and cash equivalents, a $446,000 increase in fixed maturity securities income, a $262,000 increase in income on other investments, a $37,000 increase in equity securities income, and a $33,000 increase in policy loan income, which were partially offset by a $3,800,000 increase in investment expenses and a $589,000 decrease in insurance assignment income. Net mortuary and cemetery sales increased by $2,698,000, or 14.8%, to $20,926,000 for the nine months ended September 30, 2022, from $18,228,000 for the comparable period in 2021. This increase was primarily due to a $3,775,000 increase in mortuary at-need sales and a $356,000 increase in cemetery at-need sales, which were partially offset by a $1,433,000 decrease in cemetery pre-need sales. 57 Gains on investments and other assets decreased by $7,335,000, or 166.2%, to $2,921,000 in losses for the nine months ended September 30, 2022, from $4,414,000 in gains for the comparable period in 2021. This decrease in gains on investments and other assets was primarily due to a $5,849,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, a $1,169,000 decrease in gains on other assets, and a $317,000 decrease in gains on fixed maturity securities. Other revenues increased by $2,679,000, or 19.8%, to $16,221,000 for the nine months ended September 30, 2022, from $13,542,000 for the comparable period in 2021. This increase was primarily attributable to an increase in servicing fee revenue. Total benefits and expenses were $275,599,000, or 97.9% of total revenues, for the nine months ended September 30, 2022, as compared to $313,742,000, or 87.4% of total revenues, for the comparable period in 2021. Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $201,000 or 0.3%, to $70,296,000 for the nine months ended September 30, 2022, from $70,497,000 for the comparable period in 2021. This decrease was primarily the result of a $2,910,000 decrease in death benefits ($2,339,000 for COVID-19 related deaths), which were partially offset by $1,620,000 increase in future policy benefits and a $1,089,000 increase in surrender and other policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,570,000, or 13.2%, to $13,511,000 for the nine months ended September 30, 2022, from $11,941,000 for the comparable period in 2021. 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 $40,698,000, or 18.2%, to $182,398,000 for the nine months ended September 30, 2022, from $223,096,000 for the comparable period in 2021. This decrease was primarily the result of a $38,089,000 decrease in commissions, a $3,311,000 decrease in other expenses, a $1,800,000 decrease in costs related to funding mortgage loans, a $532,000 decrease in rent and rent related expenses, and a $409,000 decrease in advertising expenses, which were partially offset by a $2,950,000 increase in personnel expenses and a $493,000 increase in depreciation on property and equipment. Interest expense increased by $437,000, or 8.2%, to $5,764,000 for the nine months ended September 30, 2022, from $5,327,000 for the comparable period in 2021. This increase was primarily due to a $1,215,000 increase in interest expense on bank loans, which was partially offset by decrease of $778,000 in interest expense on mortgage warehouse lines for loans held for sale. Cost of goods and services sold-mortuaries and cemeteries increased by $747,000, or 26.0%, to $3,628,000 for the nine months ended September 30, 2022, from $2,881,000 for the comparable period in 2021. This increase was primarily due to a $942,000 increase in mortuary at-need sales and a $42,000 increase in cemetery at-need sales, which were partially offset by and a $237,000 decrease in cemetery pre-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 sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees from mortgage loans held for sale that are sold to investors into the secondary market. It should be noted that current conditions in the financial markets and economy caused by COVID-19 may affect the realization of these expected cash flows. 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, debt service, and to meet current operating expenses. As of September 30, 2022, SecurityNational Mortgage was not in compliance with its warehouse line debt covenants, but received waivers or amendments from the warehouse banks. In the unlikely event the Company is required to repay the warehouse lines, the Company has sufficient cash and borrowing capacity to do so and to continue to fund its origination activities through other internal funding sources. 58 During the nine months ended September 30, 2022 and 2021, the Company’s operations provided cash of $109,318,000 and $128,891,000, respectively. The decrease in cash provided by operations from the nine months ended September 30, 2021 to those ended September 30, 2022 was due primarily to decreased proceeds from the sale 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. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs. Policyholders generally keep these policies in force and do not surrender them prior to 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 liquidating 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 matching. 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, which 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 also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale 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 amounted to $320,546,000 (at estimated fair value) and $259,005,000 (at estimated fair value) as of September 30, 2022 and December 31, 2021, respectively. This represented 34.7% and 31.5% of the total investments as of September 30, 2022, and December 31, 2021, 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, 2022, 2.2% (or $7,311,000) and at December 31, 2021, 3.9% (or $9,991,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are 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, 2022 and December 31, 2021, 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 $470,342,000 as of September 30, 2022, as compared to $551,054,000 as of December 31, 2021. Stockholders’ equity as a percent of total capitalization was 57.2% and 54.4% as of September 30, 2022 and December 31, 2021, respectively. Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2021 was 4.8% as compared to a rate of 5.9% for 2020. The 2022 lapse rate to date has been approximately the same as 2021. The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $90,667,000 and $82,823,000 as of September 30, 2022 and December 31, 2021, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities. 59 COVID-19 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 continues to closely monitor developments relating to COVID-19 and assessing its impact on the Company’s business. The continued uncertainty surrounding COVID-19 has had and continues to have a significant 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. Most monetary and fiscal interventions have been significantly curtailed. Like most businesses, COVID-19 has impacted the Company, including the temporary adoption of work from home arrangements and a restructuring of selling techniques for its products and services. The Company also experienced increased expenses for cleaning services of its offices. Throughout 2021 and 2022, the Company continued to adapt to the impact of COVID-19 and its related economic effects. 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 COVID-19 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.